Thursday, September 18, 2008

Economic Fundamentals

The Wall Street Journal has an interesting piece today, entitled "Worst Crisis Since '30s, With No End Yet in Sight":

The financial crisis that began 13 months ago has entered a new, far more serious phase.

Lingering hopes that the damage could be contained to a handful of financial institutions that made bad bets on mortgages have evaporated. New fault lines are emerging beyond the original problem -- troubled subprime mortgages -- in areas like credit-default swaps, the credit insurance contracts sold by
American International Group Inc. and others. There's also a growing sense of wariness about the health of trading partners.
The article continues with the explanation for the economic turmoil, found in the deceleration of consumer credit and financial markets through "deleveraging, or the unwinding of debt."

While things are not likely to improve soon,
the piece ends with a surprisingly upbeat assessment of the market's economic fundamentals:

One pleasant mystery is why the crisis hasn't hit the economy harder -- at least so far. "This financial crisis hasn't yet translated into fewer...companies starting up, less research and development, less marketing," Ivan Seidenberg, chief executive of Verizon Communications, said Wednesday. "We haven't seen that yet. I'm sure every company is keeping their eyes on it."

At 6.1%, the unemployment rate remains well below the peak of 7.8% in 1992, amid the S&L crisis.

In part, that's because government has reacted aggressively. The Fed's classic mistake that led to the Great Depression was that it tightened monetary policy when it should have eased. Mr. Bernanke didn't repeat that error. And Congress moved more swiftly to approve fiscal stimulus than most Washington veterans thought possible.

In part, the broader economy has held mostly steady because exports have been so strong at just the right moment, a reminder of the global economy's importance to the U.S. And in part, it's because the U.S. economy is demonstrating impressive resilience, as information technology allows executives to react more quickly to emerging problems and - to the discomfort of workers - companies are quicker to adjust wages, hiring and work hours when the economy softens.
This is exactly the relatively solid economic foundation John McCain referred to in his recent statement suggesting that "the fundamentals of our economy are strong."

So, we're having a tremendous financial shakeout on Wall Street, but Main Street's still doing reasonable well due to the American economy's size, diversity, and resilience.

Things may indeed get worse, although financial markets closed today on a euphoric note, as the Dow Jones industrials surged to a 410-point gain as
buyers raced back into securities, almost wiping out yesterday's 449-point loss.

Meanwhile, members of the radical left are not only cheering Wall Street's crisis, but they're endorsing the collapse of American financial institutions for poliltical gain.
Harold Meyerson boasts, for example:

Wall Street is vanishing before our eyes. And by the measure of their contribution to America's economic strength and well being, both Reagan-age government and Wall Street's investment banks plainly deserve to die.
Cernig at Crooks and Liars has gone absolutely mad in ejaculatory glee at the current crisis:

I believe that the U.S. and other governments must do what they must to save us all from the excesses of “laissez fair” financial markets that were self-rigged in favor of a few insiders out to asset-strip and make hay while the sun shone. The alternative is too horrid to contemplate.
Well, what's too horrid?

It probably would have been better for AIG to have been sold to a private concern than taken over by taxpayers. But, of course, both Meyerson and Cernig WANT a total financial collapse of the U.S. economy so they can better justify a neo-Stalinist nationalization under a Barack Obama adiministration, one that would make the last few days look like a PTA bakesale.

The hope,
for left partisans, is to create a "new, new deal" should they be given the reins of power come January:

Obama offers hope for a “new new Deal” for America’s working families in the midst of a crisis much different from, but in many ways just as serious, as Americans faced in the ’30s.
Of course, the economic difficulties are not "as serious" as the 1930s, when Americans saw 25 percent unemployment, thousands of banks collapsed, and the nation experienced nearly a decade of hard-times before economic demand surged with the productive mobilization of World War II.

Note, as well, that Zachary argued today that the distinction between pure laissez-faire and state-regulatory centralism is simplistic in a modern economy based on legal a framework of contracts and property rights, and that regulatory structures that worked well in earlier downturns may not be suited for the needs of a high-tech and highly diversified economy like today's. Thus, a heavily state-centric regulatory solution to the current crisis may be problematic, as we are no longer in an economic environment analogous to the New Deal era, notwithstanding the hope of left-wing partisans to recreate one..


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