Monday, March 17, 2008

Panic! at Wall Street

So I wanted to take 10 min this afternoon (I am a workin man after all) and give my quick take on the economic mess we are facing.

Yes, its the banks' fault-The lending organizations that loan-sharked and speculated their way into the sub-prime mess were gambling with what they thought was house money. Turns out their risky lending practices have outpaced the market's ability to correct for them. The mess got so complicated that larger financial institutions such as Bear Sterns were buying commodities based on sub-prime mortgages. The commodities either made it difficult to determine how much of their value lied in sub-prime mortgages, or the banks didn't do their homework. They relied on the commodities "triple-a rating."

Triple A Rating-This either means something or it doesn't. This rating gave banks the idea that they were investing in something steady. Clearly that was a mistake.

Where to now?
I'm no economist (thank god), but everything I've watched/listened/read from PBS, to WSJ, to NY Times, points to an uncertain and grim future for the economy. Why? Basically two things are competing at once. The cost of consumer good across the board are going up. That means oil and food are heading north, these prices push the cost of consumer goods up, these costs going up is pushing the dollar downward. The weak dollar is a translation of the diminishing value of American wealth. At other times, most recently in 2001 when the markets looked ready to dip after 9/11, the answer was the open the spickets of easy cash, otherwise known as credit. The Fed keeps cutting rates, but since banks have every little confidence in each other, they are making credit harder to come by for the consumer. That means consumers can't spend the economy back to growth. Their dollars are worth too little and their credit is dry.

The Politics
This helps Senators Obama and Clinton and hurts John McCain, potentially in a big way. McCain wants this election to be about national security and Iraq. It will be difficult to keep the public's attention there if they are worried about home foreclosure and their job security. McCain needs to prove he knows something about the economy and somehow he'd manage it differently that President Bush. Who rightly or wrongly will be blamed if the economy is further in the tank.

The Policy

Congressional action will be necessary before this turns uglier. The $600 many are about to receive won't help this situation, because again we can't spend our way out of this. Perhaps its time for a federal public works program to stimulate job growth, and fair government spending. Perhaps a special bond program allowing the government back some of the tremendous debt in the financial markets without dipping into tax payer funding. If our involvement in Iraq continues that perhaps war bonds to pay for the incredible cost of this conflict.

The bottom line is we are going to need creative solutions and fast, because once again. It's the economy, stupid.

No comments: