- May 25, 2002
- Professional Status
- Certified Residential Appraiser
What's the problem?
It's simple. America - the country and the people - has lived high on the hog for decades on borrowed money. Now we're in the slop and someone has to clean up the mess.
Under normal circumstances Washington would spend money to help the economy. Or reduce taxes. Or hand people cash. Sometimes there'd be a combination of all those remedies.
But right now moves like those would increase the already-disturbing federal deficit. And that in turn would hurt the dollar, which has been limping along for years.
A weaker dollar could drive away foreign investors in our government's debt. Those investors have been the salvation of our failing financial institutions.
Worse, if foreigners shun America's debt markets American companies and the US government would have to pay higher yields to borrow money.
That's the same danger if the Fed cuts interest rates too aggressively.
Current Fed Chairman Ben Bernanke, who speaks to Congress today, is already seen as soft on inflation.
Years ago, when he was still a Princeton professor, Bernanke was quoted as saying he'd simply run the printing presses if the US economy needed a boost.
That's one of those loose-lipped moments that Bernanke probably now regrets.
Investors are just not going to feel confident putting their money into a country where the Fed chairman thinks it's OK to inflate his way out of an economic crisis.
But these first weeks of the New Year haven't been a time for big thoughts.
The financial markets are too busy grappling with micro-problems - like declining corporate profits, banks with new woes and investors who are unable to cope.
According to Thomson First Call, Wall Street now expects earnings for the 500 companies in the Standard & Poor's index to be a scant 0.3 percent higher for 2007.
Back in October the gain was expected to be 7.7 percent; just two weeks ago the profit increase was seen as 1.2 percent.
By the time you read this, even that 0.3 percent gain will probably disappear.
One of the reasons is that nobody really knows how bad the situation is with our banks, most of which haven't even begun to estimate their losses from subprime mortgages, much less anything else.
A new estimate is that once the recession hits, a bank like Citigroup might have to increase its write-downs for bad consumer loans 10 times.
Last August I wrote that Americans were managing to pay their credit card bills even though home mortgage defaults were rising.
Apparently that's no longer true.
Experts are now worried that Americans will be unable to pay credit card bills and other debt because they can no longer tap into their home equity.
And that gets me to the last point.
With so much going on, is it any surprise that $49 billion went into the relative safety of money market funds last week? That's more than 10 times the average over the past month.