Wednesday, July 16, 2008

The Downturn

OK, so I don't usually feel like posting on the "state of the economy" except as it relates to specific interests of mine (competitiveness, etc.), but it seems necessary to at least provide news updates. If you haven't been paying attention, the economy is looking increasingly bad with every passing day. Now the hopes that this recession may not even happen or that it may be relatively painless are pretty much restricted to the President during his press conference , and the absolutely repugnant comments of McCain's economic advisor, Phil Graham, who provides the obvious solution - "we're a nation of whiners"!

1 - Mortgage lending giants Freddie Mac and Fannie Mae are in trouble. According to, they've lost 80% of their stock value in the last year, and Washington is panicking (Freddie and Fannie are pseudo-public corporations... I'm not sure what the deal is specifically, but the federal government has a big hand in what they do). Bernanke assures us they have enough capital that they won't fail, but that doesn't do much for consumer and investor confidence right now.

2 - Banks are starting to fail across the country - in addition to the massive collapse of Bear Stearns that cost a good friend of mine his job - IndyMac, a California based bank, has recently collapsed. And to provide a little bit of perspective, IndyMac is the second larges bank failure since the Great Depression - and technically speaking this recession hasn't even started yet!

3 - Bernanke is justifiably pessimistic in his Congressional testimony this week, and his statements are causing a slump in the dollar. However, most of his pessimism revolves around high inflation , something that economists do not like to see doing a duet with a slowing economy. I heard part of his testimony on NPR, and I think it's sensible - he said that he's not concerned about the solvency of the vast majority of banks... we're not going to see wave after wave of bank failures like we did in 1932 in response to the 1929 crash and subsequent economic contraction. Bernanke said he's more afraid of the possibility that banks won't be able to or won't want to provide the capital that the economy needs to keep growing. The sub-prime crisis made bankers extremely skiddish about risk. If bankers don't take risks, they won't extend credit, and if they won't extend credit the economy won't grow.

4 - Summer isn't nearly up, so oil price relief shouldn't come any time soon (although it shouldn't go too much higher, either... unless we get into another dumbass war).

5 - Robert Samuelson - an excellent columnist for the Post - puts a positive spin on all this, by pointing out that consumer confidence isn't at all in line with our relatively mild unemployment rate (a more technical and diplomatic version of Graham's "we're a nation of whiner's" argument) - but this rubs me the wrong way because the low consumer confidence is the whole point! Low consumer confidence signals weak demand, and if demand is weak you can expect that unemployment rate to tick up in the near future. Samuelson does raise very scary points about international confidence in their investments in the U.S.. If you know me well, you already know my fears about that.

Are we crashing? No. Is this going to be a cake-walk? That's a definite no as well. This recession will be a memorable one - it's not going to be the easy, two-quarter slump that a lot of people thought it might be. But it doesn't have to be a crisis. It will become a crisis if it gets compounded by:

- A war in Iran that drives up the price of oil
- International investors withdrawing their investment from the U.S. economy in response to (1.) the weak dollar, (2.) poor performance of U.S. assets, (3.) continuing budget deficits.
- Continuing inflation

I think all bets are off if we get into a war with Iran or if inflation hits near double-digits. This could get really bad. Hopefully we pull out of this. We may - I'm not macroeconomist, so I can't assign probabilities to any of these things. We just need to tread carefully for a while.


Richard Jennings said...

Lots of scary stuff yes but I do see hope. Despite the stats I do see so many high paying jobs posted on employment sites -

I see 100K, 150K and 200K jobs, I also see people getting loans and venture capitalists making investments..all is not losy

dkuehn said...

Yes, I'm sure those six figure jobs are very encouraging for GM and Ford employees working on SUV lines right now...

as for loans and venture capitalists... you do realize we're in a credit crunch, right? you do realize that the heart of all this is that people AREN'T getting the loans they could get five or ten years ago? I'm sure some great, fantastic deals are going through, and that's fine... but its not the big picture.

I am skeptical of the "gloom and doom" scenarios too, but I think the evidence you present is a little sparse.