Category: Recession

Merrill Lynch Bear Says this Will be Ugly

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A prominent bear, Merril Lynch economist David Rosenberg, is saying that will be the worst one since the 1970s.

I think that it will be worse, because we are in a debtor economy, and bills will be coming due sooner, rather than later.

In fact, I think that some of the indicators may show it to be more profound than that of the 1930s.

Here’s why:

  • In the 1930s, we were a net exporter of oil, now we are a net importer of oil.
  • In the 1930s, the rest of the industrialized world was still suffering from the shocks of WWI, which had left the US largely unscathed.
  • The US was running a trade surplus.
  • The Federal government was running a budget surplus.
  • The amount of leverage and risk are far higher now than in 1930.
  • The US industrial base has been decimated over the past 35 years.
  • Consumer savings is non-existent.
  • We have crushing defense expenditures.
  • The dollar is overvalued, meaning that we will be experiencing a foreign exchange driven inflation.

Note, however, that but I’m an engineer, not an economist, dammit*!

*I love it when I get to go all Doctor McCoy!!!

Economics Update: OMFG Edition

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First, of course, the Fed cut it’s Federal Funds Rate by 75 basis points, the biggest cut since 1984, and it did so a week before its regular meeting, which it hasn’t done since 911.

The US markets recovered after the rate cut, but still they were down by over 1% for the day.

I think that Paul Krugman’s analysis of this is accurate, Bernanke used to be the head of his department at Princeton, so I would assume that he knows him pretty well.

Basically, Bernanke is concerned about the Japanese slow down of the 1990s, when monetary tools simply stopped working:

What was so disturbing about Japan was the way monetary policy became ineffective; by the later 1990s the short-term interest rate was up against the ZLB — the “zero lower bound.” This is alternatively known as the “liquidity trap.” And once you’re there, conventional monetary policy can do no more, because interest rates can’t go below zero.

There was a lot of discussion of various unconventional monetary things you could do. But the best answer was not to get there in the first place. A 2004 paper co-authored by Bernanke argued that the ZLB could and should be avoided by “maintaining a sufficient inflation buffer and easing preemptively as necessary”.

In terms of corporate profits, Bank of America took a major hit, with profits dropping 95% as a result of $5 billion dollar writedown, and its, “tier 1 capital ratio – a key measure of its ability to absorb losses – stood at 6.87 percent at the end of the year, down from 8.22 percent in the previous quarter, due to its purchase of LaSalle Bank and lower net income during the second half of last year.”

Wachovia took an 89% hit on profits, “due to a $1.7 billion reduction in the value of certain portfolios and $1.5 billion set aside to cover bad loans”.

More real estate and derivatives.

And while we are on the topic of real estate and derivatives, bond insurer Ambac is looking for a buyer. If they take monopoly money, I’m game, but only if it’s less than one whole game.

Otherwise, the deal just does not make financial sense.

Of course, the one thing that we can be sure of is that if George W. Bush speaks, the market will tank, so, of course, they are talking again, and saying that they are looking at increasing the stimulus package beyond the $150 billion originally proposed.

My guess is that there is a “Bush Ranger” out there who wants a special tax break just for him.

Of course, we are already beginning to see the allocation of blame, aka “blamestorming”, with EU Economic and Monetary Affairs Commissioner Joaquin Almunia saying that this problem is a result of excessive US trade deficit…..Ummmm…Well Duh!!!!…Though that whole deregulation of markets thing isn’t working either.

And on the housing front, California loan defaults reach have reached a 15-year high in Q4 2007, up 114% from the same time in 2006. Foreclosures are up 421.2% from 2006.

WSJ Saying that this Recession Could Be Nasty

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Though, of course, the author, Justin Lahart, hedges about whether we will actually have a recession (My take is that we’ve been in one for some time, and that we have been experiencing a recession like living standards, based on percentage of population employed, since 2001)

His Article uses terms like, “on track to be at least as bad as the five most catastrophic financial crises to hit industrialized countries since World War II”, and makes reference to Japan’s “lost decade” in the mid 1990s.

The idea that this is going to be a bad one is hitting the mainstream.