BUSINESS NEWS: Whine not wine is Politically Correct by Doc Werlin

Since cracks then earth quakes convulsed the economy starting in the summer of 2007, pundits have actively debated about both the depth of the financial downturn and its duration. Over $300 billion dollars has been written down to date. Ultimately, losses could exceed $ One trillion dollars. “It is the economy stupid” seems to be on everybody’s lips.

The collective American wallet that for a generation was buoyed by rising asset prices and financial innovations has been zipped up. Consumer spending that represents about 70% of the gross domestic demand has slowed to a trickle because of the following:

• Housing bust
  
• Credit crunch
  
• Higher food and fuel costs
  
• Weakening labor market
  
• Low Saving Rate
  
• Declining Disposable Income

Both the Treasury Department and the Federal Reserve have taken unprecedented steps to contain the financial meltdown. The actions and statements of Secretary of the Treasury Paulson and Federal Reserve Chairman Bernanke undermine Alan Greenspan’s optimism:

• The markets left to their own devices can hedge and shift risk to those best able to assess risk
  
• The market can discipline decision making

To the contrary, mounting evidence shows that “irrational exuberance” encouraged irresponsible leverage, blind reliance on the judiciousness of the rating agencies, and investments in highly toxic derivative securities. Paulson and Bernanke have taken many unprecedented steps to stop the downward financial cycle and arrest inflation:

• Lent money directly to the investment banks.
  
• Permitted them to post collateral for Fed loans, including hard-to-sell financial instruments backed by mortgages
  
• Gave Fannie Mae and Freddie Mac direct access to the Fed
  
• Promulgated sweeping regulatory changes to shore up mortgage lending practices
  
• Altered the power and scope of regulatory bodies
  
• Encouraged massive liquidity infusions to beleaguered institutions

Critics worry that the nation’s mortgage problems could spill over to credit card loans, high yield debt market, and ultimately cause severe credit crunch for Main Street.

Paul Volker, the former Chairman of the Federal Reserve from 1979-1987, roundly criticized the central bank’s extraordinary response to the financial crisis in an address before the Economic Club of New York. “The Federal Reserve took actions that extended to the very edge of its lawful and implied power, transcending certain long embedded central banking principles and practices.”

Volker believes that a currency draws its strength from the balance sheet of the central bank. He decries the Fed’s sacrifice of the quality of its own balance sheet. In June 2007, Treasury securities constituted 92% of the Fed's earning assets in stark comparison to today’s 54%.

What is the origin of the current economic downturn?

The origins of this crisis lie in the biggest asset bubble in history. Financial markets have already suffered arguably their biggest shock since the Great Depression.

What has prevented a full blown economic tailspin?

• Congress quickly initialed a fiscal stimulus program
• The Fed slashed interest rates.
  
• The Federal Reserve has extended a safety net to investment banks, mortgage institutions and Government Sponsored Enterprises—Freddie Mac and Fannie Mae
  
• Global demand, coupled with a weak dollar, is boosting American exports.

What is the Main Fear?

The main fear is that exporters, such as the Gulf States or the Asian bloc countries that peg their currencies to the greenback will suffer a combination of reduced demand and high inflation. Simply stated, the American downturn could become a world depression.

How will the United States Recession impact the next president?

• Big domestic reforms, such as expanding health-care coverage, will become more difficult
• With a fragile economy, the Democrats, if they get in, may have to rethink their plan to roll back George Bush's tax cuts. Thus, exacerbating our huge budget deficits.

Will Populism and Protectionism Return?

"Raise less corn and more hell," Mary Elizabeth Lease harangued Kansas farmers during America's Populist era 1890 campaign.

Many Americans worry that our country is on the wrong track. The momentum to re-regulate financial markets, punish the oil industry, credit-card firms or indeed any other malefactors of great wealth has grown. Protectionist sentiment has strong underpinnings.

In conclusion, Bernanke and Paulson have toiled relentlessly over the past twelve months to stem the leaks in the financial dikes. Bernanke commented that “The financial turmoil is ongoing, and our efforts today are concentrated on helping the financial system return to more normal functioning,” “It is not too soon, however, to begin to think about the steps we might take to reduce the incidence and severity of future crises.”