beaconchurches

updated 6:55 p.m. CT, Sun., Jan. 13, 2008
WASHINGTON - The unemployment rate leaps to a two-year high, record numbers of people are forced from their homes and Wall Street nose-dives again. Such is the fallout from a housing meltdown that threatens to slingshot the country into a recession.

The big economic question these days is whether the weakening economy will survive the strains or collapse under them.

The odds have grown that the economy will slip into a recession. At the beginning of last year, many economists put that chance at less than 1-in-3; now an increasing number says it has climbed to around 50-50. Goldman Sachs, the biggest investment bank on Wall Street even thinks a recession is inevitable this year.

Hopeful it can be avoided, President Bush and the Democrat-controlled Congress are exploring economic rescue measures, including possible tax rebates. Federal Reserve Chairman Ben Bernanke pledged to lower interest rates as needed.

The idea is to induce people to boost spending, especially on big-ticket items such as homes and cars, and revitalize economic activity.

To stave off recession, the Fed appears anxious to slash interest rates another half-point, if not more. That will further weaken the dollar and raise the costs of the imports to which we have become addicted. While all this is bad news for the Republicans, it is worse news for the republic. As we save nothing, we must borrow both to pay for the imported oil and foreign manufactures upon which we have become dependent.

We are thus in the position of having to borrow from Europe to defend Europe, of having to borrow from China and Japan to defend Chinese and Japanese access to Gulf oil, and of having to borrow from Arab emirs, sultans and monarchs to make Iraq safe for democracy.

We borrow from the nations we defend so that we may continue to defend them. To question this is an unpardonable heresy called "isolationism."

And the chickens of globalism are coming home to roost.

We let Europe to get away with imposing value-added taxes averaging 15 percent on our exports to them, while they rebate that value-added tax on their exports to us. Thus, the euro has almost doubled in value against the dollar in the Bush years, as NATO Europe begins to bail out on Iraq and Afghanistan.

We sat still as Japan protected her markets and dumped high quality goods into ours and China undervalued its currency to suck jobs, technology and factories out of the United States. Now, China and Japan have $2 trillion in cash reserves. The Arabs have an equal amount of petrodollars. Both are headed here to spend their depreciating dollars snapping up U.S. assets – banks, ports, highways, defense contractors.

America, to pay her bills, has begun to sell herself to the world.

Its balance sheet gutted by the subprime mortgage crisis, Citicorp got a $7.5 billion injection from Abu Dhabi and is now fishing for $1 billion from Kuwait and $9 billion from China. Beijing has put $5 billion into Morgan Stanley and bought heavily into Barclays Bank.

Merrill-Lynch, ravaged by subprime mortgage losses, sold part of itself to Singapore for $7.5 billion and is seeking another $3 billion to $4 billion from the Arabs. Swiss-based UBS, taking a near $15 billion write-down in subprime mortgages, has gotten an infusion of $10 billion from Singapore.

Bain Capital is partnering with China's Huawei Technologies in a buyout of 3Com, the U.S. company that provides the technology that protects Pentagon computers from Chinese hackers.

This self-indulgent generation has borrowed itself into unpayable debt. Now the folks from whom we borrowed to buy all that oil and all those cars, electronics and clothes are coming to buy the country we inherited. We are prodigal sons, and the day of reckoning approaches.

January 19, 2008
Seeking Tools to Calm a Market
By JULIE CRESWELL
Dow 6,000 or Dow 14,000?

It depends on whom you ask.

A week of gut-wrenching losses in the stock market ended on Friday with the Dow Jones industrial average falling 59.91 points, to 12,099.30. That modest decline capped a four-day 678-point plunge that left Wall Street traders and everyday investors wondering if the worst was over — or yet to come.

David W. Tice, a renowned bear, said Friday that the Dow would sink to 6,000 by the end of the year as the country slides into a recession.

But Abby Joseph Cohen, the superbull at Goldman Sachs, maintained that the Dow would roar back to finish 2008 at a level 22 percent higher — 14,750 is the number — as the economy perks up later in the year.

While their views diverge, both strategists agreed on one point: The wild ride is far from over. In whiplash trading, the Dow has fallen 14 percent from its peak in October. While the market has taken deeper dives in the past — it plummeted 37.8 percent from January 2000 to October 2002, for example — volatility is approaching its highest levels in several years.

The Standard & Poor’s 500-stock index fell 8.06 points Friday, to 1,325.19, and is down 9.75 percent so far in 2008.

The Nasdaq composite index declined 6.88 points Friday, to 2,340.02, and is down 11.77 percent so far in 2008.

Amid steep drops in the housing market, huge losses at Wall Street banks, rising energy prices and growing fears about a recession, this year is shaping up to be a tough one for the faint-of-heart.

“The R-word is really scaring investors,” said Leon Rousso, a certified financial planner in Ventura, Calif. “I’ve been holding hands and comforting people to get through this and not to panic.”

Yet some analysts warn the news could get much uglier. Earnings forecasts “have gone down quite dramatically” this year, said Michael Thompson, a managing director at Thomson Proprietary Research.

Analysts, already bracing for a wave of weak fourth-quarter earnings, have doubled their loss estimates since the year began. They now expect S.& P. 500 companies to report a 20 percent drop in earnings for the final three months of 2007, down from estimates of a 10 percent decline just three weeks ago.

The current financial crisis was precipitated by a bubble in the US housing market. In some ways it resembles other crises that have occurred since the end of the second world war at intervals ranging from four to 10 years.

However, there is a profound difference: the current crisis marks the end of an era of credit expansion based on the dollar as the international reserve currency. The periodic crises were part of a larger boom-bust process. The current crisis is the culmination of a super-boom that has lasted for more than 60 years

China, India and some of the oil-producing countries are in a very strong countertrend. So, the current financial crisis is less likely to cause a global recession than a radical realignment of the global economy, with a relative decline of the US and the rise of China and other countries in the developing world.

US slides into dangerous 1930s 'liquidity trap'
By Ambrose Evans-Pritchard in Davos
Last Updated: 12:29am GMT 25/01/2008
The United States is sliding towards a dangerous 1930s-style "liquidity trap" that cannot easily be stopped by drastic cuts in interest rates, Nobel economist Joseph Stiglitz has warned.

The Fed did not panic. It has a disaster to avert
"The biggest fear is that long-term bond rates won't come down in line with short-term rates. We'll have the reverse of what we've seen in recent years, and that is what is frightening the markets," he told the Daily Telegraph, while trudging through ice and snow in Davos.

Stiglitz is worried about the level of long-term interest rates
"The mechanism of monetary policy is ineffective in these circumstances. I'm not saying it won't work at all: it will help the banking system but the credit squeeze is going to go on because nobody trusts anybody else. The Fed is pushing on a string," he said.

The grim comments came as markets continued to suffer wild gyrations, reacting to every sign of contagion spreading to Europe, Asia, and emerging markets. Wall Street has begun to stabilize on talk of a rescue for the embattled bond insurers, MBIA and Ambac. The Fed's 75 basis point rate cut allows the banks to replenish their balance sheet by borrowing at short-term rates and lending longer term, playing the credit 'carry trade', hence the 9pc rise in the US financials index yesterday. But confidence remains fragile.

Professor Stiglitz, former chair of the White House Council of Economic Advisers, said it takes far too long for monetary policy to work its magic. This will not gain much traction in the midst of a housing crash. "People have been drawing home equity out of the houses at a rate of $700bn or $800bn a year. It's been a huge boost to consumption, but that game is now up. House prices are going to continue falling, and lower rates won't stop that this point," he said.

"As a Keynesian, I'd say the biggest back for the buck in terms of immediate stimulus would be unemployment assistance and tax rebates for the poor. That will feed through quickly, but set against the magnitude of the problem, even a fiscal stimulus package of $150bn is not going to be enough," he said "The distress is going to be very severe. Around 2m people have lost all their savings," he did...

... the global downturn may already have acquired an unstoppable momentum, requiring months or even years to purge the excesses from the bubble.

Professor Stiglitz blamed the whole US economic establishment for failing to regulate the housing and credit markets adequately, allowing huge imbalances to build up. "The Federal Reserve and the Bush Administration didn't want to hear anything about these problems. The Fed has finally got around to closing the stable door (on subprime lending), but the after the horse has already bolted," he said.