Posted by: Marshall Sponder | March 7, 2008

The Economy is out of control and melting down fast

I had my eye on Wall Street today as I saw the Dow Jones Industrial Index plummet below 12,000 and read about the loss of 63,000 jobs in January 08.

Last night I read Paul Krugman’s OP-ED on Krugman: The Economy and wrote about it here at The Analytics Guru – but that article was more focused on what the politicians need to do who are running for office.

Today, it had gone further than this, and Krugman talks about what is happening in a post on his blog titled What is to be done? the entire Economy is essentially, acting out of control and no one is quite sure what to do about it – or if anything much can be done at this point.

Paul Krugman cites Tim Geithner’s talk(the president of the New York Fed, who is at the center of the hurricane) on the current financial situation, via Mark Thoma.

I read Geithner’s talk and this stuck out to me:

“…As is often the case during periods of rapid change, more significant concentrations of risk were present than was apparent at the time. Banks and investment banks sold insurance against what seemed like low probability events, but did so at what even at the time seemed like low prices. And on the assets they retained, these same institutions purchased insurance from financial guarantors and other firms that were exposed to the same risks.”

“…In effect, some major banks and investments banks made the choice to follow the market down as underwriting practices eroded. They took on more exposure to low probability but extremely adverse events, despite the potential consequences of getting caught when the music stopped. And even though the largest firms were able to move quickly to protect themselves as conditions worsened, those actions had significant negative effects on market functioning and liquidity.”

Krugman translated all of this to common language that means:

“….Geithner talks in central bankerese, so you have to do some translation, but it’s really quite frightening:

The current episode has a basic dynamic in common with all past crises. As market participants have moved to reduce exposure to further losses, to step on the brake, the brake became the accelerator, amplifying the shock. Measured risk has increased more quickly than many institutions have been able reduce it, and attempts to reduce it have added to volatility and downward pressure on prices, further increasing measured exposure to risk … The rational actions taken by even the strongest financial institutions to reduce exposure to future losses have caused significant collateral damage to market functioning. This, in turn, has intensified the liquidity problems for a wide range of bank and nonbank financial institutions.

That’s pretty close to saying that the financial markets are melting down.

Geithner then goes on to describe the policy measures being taken. And here’s the thing: I don’t think it’s just me, the actions sound trivial compared with the problem. He more or less admits that credit markets are worsening faster than the Fed can cut rates, so that money is effectively getting more expensive, not cheaper; the other measures he describes sound minor. Rearranging deck chairs — that may be too strong, but it’s pretty unreassuring.

So what should be done? I’m not sure (and I’m thinking about it, hard.)

For now, I’d just say that this is really, really scary.”

Yeah, you can say that again (and I’m sure he will).

Here’s the thing – I think the world economy is now a “house of cards” kept afloat by easy liquidity and credit – now that both are unavailable, the entire system is beginning to collapse.

No one seems to know what to do – or even if they did, has the political will to do it.

This year and next will be very interesting, and very painful, I suspect, for many people. Even now the New York Times has updated their story from earlier today regarding the loss of 63,000 jobs in January 08 to Sharp Drop in Jobs Adds to Grim Picture of U.S. Economy.

“…WASHINGTON — The worst fears of consumers, investors and Washington officials were confirmed on Friday, as deepening paralysis on Wall Street collided with stark new evidence of falling employment and a likely recession.

Back Story With David Leonhardt (mp3)

In a report that was far worse than most analysts had expected, the Labor Department estimated that the nation lost 63,000 jobs in February. It was the second consecutive monthly decline, and the third straight drop for private-sector jobs.

And listen to this:

“….Though monthly payroll data are notoriously volatile and subject to revision, the jobs report was so bleak that many of the few remaining optimists on Wall Street threw in the towel and conceded that the United States was already in a recession. “

This sounds worse than a recession, though.

“…The Fed’s problem is that its main weapons against a downturn — lower interest rates and easier money — are ill suited to a crisis that stems from collapsing confidence about credit quality.”

And in an article titled End to the Good Times (Such as They Were) in the New York Times, the author, David Leonhardt says:

“…If history is a reliable guide, the recession of 2008 is now unavoidable.”

Yes, the Economy is in free fall and no one knows what to do or where it’s going to land.

It seems to me, with this data and more to follow, there labor market will continue to deteriorate and there will be a lot of reductions from State and Local Governments, not so much from the Federal Government, though.

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Responses

  1. America’s economy will soon be totally capsized: many shipwrecked people will have to start over, and like what happened in the great depression others will jump from windows and highway overpasses. For many it will represent a new beginning, a new chance to start all over again. It’ll also put an end to the BS we’ve been forced to endure since the 1950’s when a few major corporations conspired to remove trolleys from public transportation. 1965, when the silver was taken out of our money. 1969, when housewives began to HAVE TO enter the workforce part-time which led to the present day scenario where both husband and wife must work to stay financially afloat. And 1976 when the petrodollar concept failed to get US companies to build electric cars. And just recently, when General Motors scrapped its electric car program to concentrate on building Hummers and Escapades.

    http://dave-lucas.blogspot.com/2008/03/pop-goes-economy.html


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