WSJ:The Economy Is Fine
Must read of the day with key points highlighted:
Beneath every dollar of counterparty risk, and every swap, derivative, or leveraged loan, is a real economic asset. The only way credit troubles could spread to take down the entire system is if the economy completely fell apart. And that only happens when government policy goes wildly off track.
In the Great Depression, the Federal Reserve allowed the money supply to collapse by 25%, which caused a dangerous deflation. In turn, this deflation caused massive bank failures. The Smoot-Hawley Tariff Act of 1930, Herbert Hoover’s tax hike passed in 1932, and then FDR’s alphabet soup of new agencies, regulations and anticapitalist government activity provided the coup de grace. No wonder thousands of banks failed and unemployment ballooned to 20%.
But in the U.S. today, the Federal Reserve is extremely accommodative. Not only is the federal funds rate well below the trend in nominal GDP growth, but real interest rates are low and getting lower. In addition, gold prices have almost quadrupled during the past six years, while the consumer price index rose more than 4% last year.
These monetary conditions are not conducive to a collapse of credit markets and financial institutions. Any financial institution that goes under does so because of its own mistakes, not because money was too tight. Trade protectionism has not become a reality, and while tax hikes have been proposed, Congress has been unable to push one through.
Which brings up an interesting thought: If the U.S. financial system is really as fragile as many people say, why should we go to such lengths to save it? If a $100 billion, or even $300 billion, loss in the subprime loan world can cause the entire system to collapse, maybe we should be working hard to build a better system that is stronger and more reliable.
Pumping massive amounts of liquidity into the economy and pumping up government spending by giving money away through rebates may create more problems than it helps to solve. Kicking the can down the road is not a positive policy.
The irony is almost too much to take. Yesterday everyone was worried about excessive consumer spending, a lack of saving, exploding debt levels, and federal budget deficits. Today, our government is doing just about everything in its power to help consumers borrow more at low rates, while it is running up the budget deficit to get people to spend more. This is the tyranny of the urgent in an election year and it’s the development that investors should really worry about. It reads just like the 1970s.
The good news is that the U.S. financial system is not as fragile as many pundits suggest. Nor is the economy showing anything other than normal signs of stress. Assuming a 1.5% annualized growth rate in the fourth quarter, real GDP will have grown by 2.8% in the year ending in December 2007 and 3.2% in the second half during the height of the so-called credit crunch. Initial unemployment claims, a very consistent canary in the coal mine for recessions, are nowhere near a level of concern.
Wouldn’t it be great if we had politicians that actually understood this subject!
January 28, 2008 - 02:25 PM on January 28th, 2008
[...] Read the rest of this great post here [...]
January 28, 2008 - 02:28 PM on January 28th, 2008
If everything is fine, they why are leaders in BOTH parties rushing to put an “economic stimulus” package out as quickly as possible?
What’s the rush if there’s no problem?
I sense a total disconnect with the troubles of the low and middle classes, on the parts of many conservatives.
January 28, 2008 - 02:33 PM on January 28th, 2008
Because they are trying to buy votes cheaply with more borrowed money. I won’t dispute there is plenty (fundamentally) wrong, but I’ll argue that most if not all of it is due to mismanagement by corruption and incompetency by the politicians we trusted with power and who have betrayed America.
January 28, 2008 - 02:43 PM on January 28th, 2008
3=
January 28, 2008 - 02:48 PM on January 28th, 2008
Bush is trying to “buy votes”?
For what? He doesn’t have to run for anything anymore.
January 28, 2008 - 02:53 PM on January 28th, 2008
What would the incentive be for Bush to push this thing, if he thought the economy was doing fine?
Why tarnish his idea/image/legacy of a good economic record with an unnecessary economic public bailout unless he felt it was actually needed?
Seriously, there is a reality-disconnect that some conservatives (not bush and congressional republicans on this one issue, though) have with the lower and middle classes.
You guys say everything is great, when everyone knows it isn’t.
January 28, 2008 - 03:13 PM on January 28th, 2008
Not Bush. The korrupt (Democrite-led) Congress.
January 28, 2008 - 03:23 PM on January 28th, 2008
Well, it is a bi-partisan agreement reached by the sec. of tres. and the congress.
Watch, Bush will use the SOTU to take credit for the Stimulus Package.
He’s giving checks to low and middle class Americans…he will take credit for it.
Who wouldn’t?!
January 28, 2008 - 03:31 PM on January 28th, 2008
[...] Right Voices wrote an interesting post today on WSJ:The Economy Is FineHere’s a quick excerpt Must read of the day with key points highlighted: Beneath every dollar of counterparty risk, and every swap, derivative, or leveraged loan, is a real economic asset. The only way credit troubles could spread to take down the entire system is if the economy completely fell apart. And that only happens when government policy goes wildly off track. In the Great Depression, the Federal Reserve allowed the money supply to collapse by 25%, which caused a dangerous deflation. In turn, this deflation [...]
January 29, 2008 - 11:41 AM on January 29th, 2008
MY WISH: That all those big money people, including politicians, would go completely broke with no means of income or credit cards and survive. Actually have to go to the grocery store,count what you have in the buggy, then pull a couple items out because not enough money. would have to actually go to the gas pump, get $10.00 at a time, just to make sure you don’t go bust before next payday. Make all those payment arangments for Utilities that never get caught up. Yeah, then maybe have the electric turned off for a while. Don’t have cableTV, can’t afford the luxury. You know feel the worry and pain of the working class. Watch their family go without the things needed for living. And I bet some of you reading this don’t know the feeling and think I’m exaggerating. Guess what, everyone I work with and live around is in that boat. Survial not living. (PS. go to MSN right now…I’m going to plan my winter getaway Caribbean Cruise, how about you. yeah right)
January 29, 2008 - 09:38 PM on January 29th, 2008
Hey Sue, you say cable is a luxury yet you have the internet? Both are extras..they are not essentials to running a household..checking out library books is free. Movie rentals at the library run about $1.00 per movie.
If you have no credit cards, consider yourself lucky..if you aren’t making the utilities without a credit card payment, can you imagine the hole you would be in if you had that extra payment? Have you taken steps to make sure that you aren’t losing heat? Do you turn the thermostat down when you aren’t home? Is it down when you go to bed? Little things like that stretch that budget and keep money in your pocket
Groceries? Are you taking out essentials or are you taking out the junk? A glass of water is far healthier than pop or juice boxes. Frozen cans of OJ over the carton go just as far..veggies over junk..saves you money and makes for a healthier family.
Laundry- Was in cold water.. Can some of the items be air dried rather than put in the dryer?
How many unnecessary car rides do you go on? Start paying attention everytime you jump in that car.
After getting mad about my response, take the time to review some receipts from the grocery store..check to see if you have drafts in the windows and doors..check to see how much junk food you have in those cupboards..go over your gasoline usage..try turning the heat down during your sleeping hours (put extra blankets on the beds if need be) and turn it down if you are gone during the day…All these things will save you money..
You don’t mention what type of work you do..what type of education do you have?
Does your employer offer education assistance? If so, do whatever it takes to take advantage of it..
People don’t aspire to be poor..try figuring out what you can do to bring yourself up to those rich peoples level..begrudging them their money is a waste of energy.
January 30, 2008 - 01:30 AM on January 30th, 2008
I have a unique approach to running short on money. I go out and figure out a way to earn more. Funny how being productive instead of a couch potato will cause that to happen. It takes next to nothing to sell things on Ebay. It costs next to nothing to open a Cafepress.com t-shirt shop. It costs next to nothing to run a website. I do ALL of the above. Some months I spend more time on some than on others, but I KNOW that all of them are there and I use them when necessary.
BTW I’ve been in all of those situations that you describe and then some. Try being the oldest child of a union coal miner who is out on a wild cat strike for the 4th week in 3 months who has to help his parents figure out how to stretch the VERY meager savings they have an indefinite amount of time. My savings account from my allowance and mowing lawns and other odd jobs had to help pay the bills one year. Or worse the same situation only in a severe Ohio winter when the contract has ended and no agreement is in sight with the savings already severely depleted by the numerous wildcat strikes that always seemed to happen during the 12 months prior to the contract expiring. One year the UMWA was out on strike from December until April with no strike benefits, no unemployment benefits, little to no AFDC, and minimal foodstamps. Workers on strike do not qualify for Unemployment benefits.
January 30, 2008 - 01:34 AM on January 30th, 2008
BTW the best line I’ve heard on this topic is that the quickest way to get on your feet is to get off your A$$.
January 30, 2008 - 07:03 AM on January 30th, 2008
I have one wish, that TROLLS like Sue actually have to work for a living, rather than be paid by Soros to troll the internet.
January 30, 2008 - 07:16 AM on January 30th, 2008
Well said Pam. Now I’m going to add my 2 cents worth. FAO is right. Get off your ass. Years ago as a single Mom I not only worked full time but I typed student papers, ran a newspaper route, waitressed on Saturday and even gave blood 4 times a year for $25. I had a Pinto (cheap Ford car) I owned 4 years after payoff and was fortunate enough to have found a program that helped me buy a house (albeit a small one.) I never took government subsidies, never complained when others my age were getting ahead but remained happy with what I did have and strived for more.
Life is not a given. You get what you work for and in the U.S. we have plenty of opportunity. All you have to do is quit whining and start working.