From the July 6, 2008 Sunday Times (London)
July 7, 2008
by Irwin Stelzer
Grim, grimmer and grimmest. That runs the complete gamut of the sentiment on Wall Street and, indeed, in much of the country as we Americans closed our shops last Thursday for a long weekend. A recent Goldman Sachs report wailed: “The economy is fundamentally weak . . . financial markets remain fragile . . . unemployment is still rising . . . housing has not yet stabilised.”
At least for a few days the relentless rise in oil prices, fall in share prices, rise in food costs and other bad news wasn’t, as youngsters say, “in your face”, as the markets closed and the 24-hour financial television news services switched to softer, less newsy programming. So for a few days the battalions of sorrows that have been descending on the economy were forgotten.
On Friday we celebrated our declaration of willingness to fight hard to liberate ourselves from the British yoke — no taxation without representation, and freedom from a king who, among other things, “has erected a multitude of New Offices, and sent hither swarms of Officers to harass our people, and eat out their substance”. Nothing much has changed on that score, except that it is Washington politicians rather than the British monarch doing the eating.
With the possible exception of Al Gore, one of the nation’s largest consumers of electricity (he uses 24 times as much as the average family), nobody much cared that our celebration probably created one of the largest carbon footprints on the planet as millions of us barbecued hot dogs and hamburgers, and others hopped into our 4x4s and drove to the beach or to visit relatives. Still, America’s share of worldwide carbon emissions is about in line with our share of worldwide GDP, so we can console ourselves that per unit of output we are no dirtier than our severest critics.
Indeed, since President George Bush will use tomorrow’s G8 meeting to urge his reluctant colleagues to keep their word on aid to Africa and the fight to stamp out Aids, and to join America in supporting a successful completion of the Doha trade-opening round, we Americans can permit ourselves a feeling of moral superiority after a decade in which many of our allies used us as their favourite piñata.
Americans generally count their blessings on a holiday such as this, but tomorrow comes a return to harsh reality — which goes something like this. The stock market is in bear territory, with shares down some 20% from their October highs. Car sales are at a 10-year low, General Motors’ shares are selling at levels not seen since the 1950s, and there is noise on Wall Street that GM, Ford and Chrysler might be running into liquidity crises as cash flow shrivels — though all three insist they have enough cash and credit lines to ride out the downturn. It will take time to shut down the factories turning out 4x4s and rev up output at plants producing smaller cars. There won’t be as much profit from each vehicle, but at least cars will move off dealers’ lots.
News on the housing front is not much better. Housing starts have fallen in half from their January 2006 peak. The National Association of Home Builders’ index is at an all-time low; inventories of unsold houses remain high; and foreclosures are rising. This news probably falls in the grimmest category, although Treasury officials are claiming that the problem is regional, rather than national, with the bulk of foreclosures and price drops concentrated in California, Nevada (mostly
Las Vegas) and Florida. Average prices in Manhattan continue to rise, driven in part by foreigners — with every euro buying close to $1.60, property in New York seems a bargain to Europeans.
Perhaps most important of all is the jobs market, because consumers’ attitudes are shaped by their prospects of holding on to their jobs, or getting new ones if they are laid off. Last week’s jobs report was about in line with expectations, which means that the good news is that the bad news wasn’t worse. Non-farm payrolls dropped by 62,000 in June, and earlier reports of lost jobs were revised upward by 52,000. Since December, non-farm payrolls are down by 438,000. More bad news is likely, since claims for unemployment compensation are also rising. The only glimmer of light is that the unemployment rate remains at 5.5%, not high by historic standards.
What distinguishes the merely grim from the grimmest school is the length of the tunnel through which they are seeing light. The grimmest are waiting for more bad news. The merely grim believe most of the bad news has already been revealed and that future write-offs in the financial sector will not be anything like we have seen in the past — or what is in store for Britain. As the week ended, shares in financial-sector firms began a tentative recovery.
Merrill Lynch is probably going to post losses for the second quarter, and might need new capital, but can sell its interests in Black Rock or Bloomberg to raise the odd billion. Lehman Brothers, the most troubled of the investment banks, with shares down about 70% for the year, believes it has stemmed its best employees’ rush for the exits by distributing shares to all staff, the shares to vest in three years.
All in all, as Treasury secretary Hank Paulson told an audience at Chatham House, financial institutions in America and Britain have managed to raise capital equal to 95% and 96% of their recognised losses, respectively. That might be more significant in the US, where it is widely believed that banks have recognised more of their dicey loans than have banks in Britain.
This, too, shall pass. Americans are deeply displeased with the performance of the president and Congress — only 13% of those polled had confidence in Bush and 6% in Congress — and are unhappy about their own economic prospects. However, 81% still believe America “has the best system of government in the world”. Brenda O’Brien, a professional at the Snell & Wilmer law firm in Phoenix, where the property boom has come crashing to a halt, put it best: “Hey, we’re Americans. We’ll get through this.”
So we will — if we survive our Fourth of July binge on junk food and beer.
Irwin Stelzer is a Senior Fellow and Director of Economic Policy Studies for the Hudson Institute. He is also the U.S. economist and political columnist for The Sunday Times (London) and The Courier Mail (Australia), a columnist for The New York Post, and an honorary fellow of the Centre for Socio-Legal Studies for Wolfson College at Oxford University. He is the founder and former president of National Economic Research Associates and a consultant to several U.S. and United Kingdom industries on a variety of commercial and policy issues. He has a doctorate in economics from Cornell University and has taught at institutions such as Cornell, the University of Connecticut, New York University, and Nuffield College, Oxford.
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