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My personal musings about anything that gets on my radar screen--heavily dominated by politics.

2007-09-10

On The Economy 

Friday's job number was, to say the least, a disappointment. When analysts are predicting the creation of 120,000 or so jobs, and it turns out that the economy lost about 4,000 in the month of August, well . . . .that's disappointing.

When you couple that with the spectacular volatility on Wall Street lately, and the "crisis" in the credit industry, you start to think that maybe the "softness" in the housing sector (from the last twelve months" may just have a little bigger effect on the overall economy than anybody really hopes.

And, of course, I think the reason is consumer uncertainty in an economy that is, more or less, predicated on the idea of living through credit. Let me illustrate the point.

For about the last three years my sister-in-law has complained bitterly about the sorry state of the economy. And no matter how much data I had available to counter her belief, she would not let go of the "fact" that the economy was very weak. It turns out, she had financed her house on an ARM, and every time the Federal Reserve Bankers met and raised the prime lending rate, her mortgage payment would go up. So, over the course of more than two years, the increase in her main expense was far outstripping her ability to keep up, or to find an alternative. To her, the economy looked very weak, indeed.

Well, now with all the recent foreclosures and the collapse of CityWide and everything else, the news is getting to the mainstream consumer that there's a problem with the credit markets, which could effect every payment you make on the first of the month. And that's not good.

How much would it help my sister's state of mind to see her mortgage payment go down a little bit? Enormously. And I believe that huge numbers of consumers and investors feel te same way.

So what's the solution? I echo Larry Kudlow:

If central bankers would come to their analytical senses, they would appreciate that today’s financial panic is itself sufficient reason to slash the Fed funds target rate by at least a full percentage point from today’s 5.25 percent to something around 4 percent. New cash needs to be poured into the liquidity parched banking system. Such a move would be a much-needed injection of confidence into a rattled marketplace.

I'm no economist, but I've been watching these things very closely for the last several years, and Larry Kudlow is CERTAINLY an economist. And everything I've seen points to the need for the Fed to cut rates, and cut rates fast.

Now, it just remains to be seen if these problems in the economy are enough to spur the Fed to act.

P.S. The unemployment rate is still only 4.6%, incomes are up, inflation is down, and the Dow is still up almost 20% from where it was one year ago. There is still great evidence that the economy is strong. I'd just like to keep it that way.

P.P.S. By the way, the correct political spin to all of this is: For four years, in the wake of the destruction of billions of dollars in this economy on 9/11, not to mention all the people busy creating wealth who perished on that day, this economy--thanks to the tax cuts that the President put in place--this economy was remarkably strong. America has generated record federal treasury receipts and created 8.2 million new jobs during that amazing run.

Now, a mere nine months after the Democrats take power in the Congress, the threat of tax increases has lessended American confidence, and the promise of spending increases from the Democrats has increased anxiety in a credit-driven economy, and the engine of American commerce has, effectively, taken a severe body blow.

If THIS is the record of change the Democrats want to build their laurels on, then America should hope for, work for, and create, the anti-Change.
Posted by: Michael / 9/10/2007 12:20:00 AM

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