A significant spike in GDP that does not mean recession over.
By Daniel at 25 October, 2009, 10:35 pm
As the media looks forward to news in hopes of a budding recovery consumers are still panicked. GDP should show signs of expansion in the 3rd quarter and slow growth due to Federal Government expenditures. Even if that is the case and we do see a significant spike in GDP that does not mean recession over. There might be signs of growth for corporate America as they have cut jobs or merged to create a “global power player.” There will be growth in government spending no doubt and governmental job creation. However, on the small business front don’t expect too much growth as PCE and PII possibly showing continued signs of weakness. Weakness in the overall private sector job hiring and retention will continue, as small businesses can’t compete for government backed enterprises. Worst, the American dream is disappearing for millions as they watch their savings, houses, and job security all wither away.
Circumstances surrounding the U.S. financial crisis have traumatized confidence in money and capital markets worldwide. Crucial are Federal Reserve and U.S. Treasury’s prescriptive measures needed to sustain U.S. economic growth and price stability. Artificially keeping interest rates at 0.25 percent has been the apparent answer from the Federal Reserve. While cutting short-term interest rates does stimulate economic growth keeping rates low also can have negative implications. The Fed funds interest rate should never be lower than 2.25 percent (personal opinion). Since “easy money” policies tend to lead to a missallocation of resources and gets many in trouble.
Chairman Bernanke has failed to consider the interdependence of any reckless measures taken and potential disorder in global economic expansion. Losses arising from the complex, ostensibly creative, financial products developed in the U.S. have continued to erode balance sheets of “super banks” and fortune 500 companies. Banks refusing to mark down their assets to current market values continues to chip away at the foundation of achieving genuine economic recovery.
Hugely profitable Wall Street banks and runaway special interests have in part been a party to insufficient responsibility to investors and the American public. Coupled with excessive leveraged bets, a high-risk game of cat and mouse, which has been aggravated by lax oversight by regulatory agencies (enforcing rules or prosecuting wrongdoers) and asinine policy decisions by the U.S. Federal Reserve. Markets have continued on the march up with no significant pullback in sight.
Global market growth has been made possible through technological advances, the globalization of both physical output and financial markets, and the resulting deregulation or lack of transparency of these markets. From a regulatory point of view, it was the passage of the 99’ Financial Services Modernization Act, which did not initially bring into focus the political and economic implications of deregulation. Most importantly, this sweeping legislation in the end revoked the Glass-Seagull Act, which separated commercial and investment banking operations. Prior to the FSMA, commercial banks, investment banks and insurance companies had been separate, and they had oversight from separate regulators.
The ever-increased reliance on derivatives in financial markets specifically the credit default swaps should by default include a careful weighing of their use. Aggressive marketing and lax regulatory oversight drove the rush into derivatives. Further fueling the derivatives market was falling interest rates. After Greenspan took over as Fed chairman he continued to cut interest rates, which was great news for Wall Street banks and borrowers. This allowed banks to rake in hundreds of billions in profits as they could borrow close to zero percent and turn around and loan that money out at 6-7 percent.
When derivatives are misrepresented, it usually creates less than desirable leverage and thus can have destructive penalties as witnessed in the “crash” of 2008. Wall Street has created and sold $600 trillion in financial derivatives globally, much of that is headed for default, especially since financial institutions lack the cash flow from their underlying assets. While few on the street or in the media want to admit to this, the deleverging and subsequent drop in over-valued asset prices is inevitable.
Impressions one might gather from these events is how could the U.S. financial system end up in such confusion, panic and uncertainty? It was a breakdown at every step of the way, regulators included. Furthermore, many banks are still holding swaps and backdoor deals off record books. Reckless behavior has essentially destroyed the capacity of the banking system to provide funding to businesses, particularly smaller firms who need short term financing provided by the money markets as funding day-to-day operations. Consumers are extremely over leveraged and it will take many years if not a decade to deleverage successfully. This is not something that can just be solved overnight; it is going to be painful and will result in slow economic growth.
We are facing a disaster of monumental proportions, exceeding the tragedies of all former calamities combined. Regardless of how many czars the President puts in power we should expect nothing to change because we have the same people in power that were there a decade ago. The entire Obama Administration is made up of a large portion of Ex-Clinton hangovers. The revolving door from Wall Street into government must be closed. While we need someone who understands the financial markets, we need someone who will look out for the American people. (will NEVER happen) Thought process from government and our elusive central bank has been that it’s not really that bad; it’s going to be contained. There was a lot of denial and refusal to deal with the issues.
This is one of those pivot points in American history. One where we know there is something fundamentally broken. And we can’t fix it with a new agency or a pay czar; the old system must be rebuilt on solid foundation. The titans of the finance world no longer carry any downside risk. There is no longer a perception of bankruptcy if managers make bonehead mistakes. There needs to be fundamental changes made, require these companies to make fundamental changes and demand accountability and responsibility. Until government wakes up and realizes that the Federal Reserve is the problem nothing will change.
We will only be subject to even more irrational price changes and boom to bust cycles of economic growth. The airwaves and papers will flood with cautious optimism, always having that thought of a recovery coming just around the corner. The holidays will pass and we will be right back at square one with nothing to show for. To really recover, we must allow the market to restructure the economy, allow asset prices to adjust to economic reality, the corrupt to fail, the “too big to fail” broken up, and short-term interest rates to rise. Efficient market that have rules that are followed and ENFORCEABLE do work, and provide the greatest chance of economic prosperity.
- ImpendingDoom
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