The rescue brigade has finally arrived, but does it know what to do? And isn't it already too late?
January 14, 2008
David Olive
Business Columnist
The economic rescue brigade finally arrived in something like full force last week, about a year after experts dismissed warnings of a U.S. economic downturn with global consequences, and five months after world credit markets were thrown into turmoil by the collapse of the U.S. housing boom.
It has not been an edifying sight.
Stephen Harper, the Canadian prime minister, announced a $1 billion assistance fund for one-industry towns hard hit by forestry mill closings – a trend, and a hardship, that's been evident for more than two years now. The premiers promptly responded that the sum wasn't sufficient. Ontario's all-important auto sector alone could swallow up that bailout sum. With its output largely exported to the U.S., it will be in grim shape by year's end if, as expected, tapped-out American consumers cut back sharply on vehicle purchases.
U.S. president George W. Bush was said last week to be contemplating a grandly titled economic stimulus package, probably to be unveiled at the time of his Jan. 28 state of the union address. Like most non-military challenges faced by Bush, the tonic will likely be more tax cuts, further eroding America's alarmingly weak fiscal status, and putting still more downward pressure on the greenback, already worth a humble $1.49 to the euro.
Nancy Pelosi, speaker of the U.S. House of Representatives, declared last week that the U.S. Congress has a stimulus package of its own in the works. It will, with luck, see the light of day in March or so, emerge from conference committee with the U.S. Senate filled with pork projects that will justify Bush's decision to veto it in June.
Hillary Clinton, more attentive to grassroots economic anxiety than most of her presidential rivals, in a year when 1.8 million U.S. "subprime" mortgages will "reset" at much higher monthly payments than the teaser rates that inflated the housing bubble starting in 2003, last week presented her own rescue package. It's skewed to low-income and middle-class Americans, and provides more genuine assistance to hundreds of thousands of people faced with foreclosure on their homes, in contrast with the minimalist distressed-homeowner bailout proposed by Bush late last year. But Clinton's initiative won't become reality until some months after she takes the presidential oath of office, should it come to that, which takes us into the spring of 2009.
Not to be outdone, Ben Bernanke, chairman of the U.S. Federal Reserve Board, made one of his periodic appearances last week to allow, once again, that all does not appear quite right with the economy but that he and his fellow Fed governors are loath to over-react. Although, yes, they are monitoring the same danger signals that have unsettled the rest of us. Or maybe not, since the ever cautious Gentle Ben, while strongly hinting at another half-point cut to the federal funds rate at the Fed's next meeting Jan. 29-30, couldn't say that the further rate cuts Wall Street pines for are on the way, given that with soaring fuel and food prices, inflation is still a worry.
Resolute for drift, Bernanke was at his most declarative, in a speech last Thursday, when he asserted that the economic climate is "uncertain." He gets top marks for consistency, this being his helpful prognosis for the past year, with points off, admittedly, for being in denial until last week that the housing-market collapse would infect the broader economy with malaise.
You were wondering about those danger signals?
Last week alone, major U.S. retailers disclosed that they had a lousy holiday season, the worst in five years, excepting Wal-Mart Stores Inc., which wisely held a fire sale of inventory to prop up volume. The U.S. Labor Department reported a spike in the jobless rate, to 5 per cent, accompanied by the bleak prediction of some economists that a rate of more than 6 per cent is in store by year-end.
Goldman Sachs Group Inc. became the latest Wall Street investment house to forecast a recession for the world's largest economy – a cheerier outlook, to be sure, than Merrill Lynch & Co.'s insistence that "recession is no longer a forecast but a present-day reality."
And in the piling-on department, economists at the United Nations last week reported on the "clear and present danger" to a global economy from the U.S. slowdown, a sentiment echoed last week by David Dodge, outgoing Bank of Canada governor, who warned of collateral damage for Canada from the U.S. slump. And many bankers worldwide still aren't lending, Bernanke noted, because the financial system remains "fragile," along with the prospects of continued employment for those bank and brokerage CEOs yet to report their multibillion-dollar writeoffs on soured subprimes.
Oh, and Moody's Investor Service, the credit agency, said Thursday that the Triple A rating on U.S. government debt in place since 1917 is in jeopardy because of out-of-control government spending on health care and social security.
And then everyone went out for a nice lunch.
If there appears to be a marked lack of urgency on the part of the rescue brigade, we have to be a bit forgiving since none of the rescuers appears overly consumed with confidence about exactly what needs to be done. What might seem obvious to you, chatting up pub patrons about the local shuttered pulp mill, or watching them tow away a friend's trailer home, is not so obvious to the trained economist. What's generally known among that group is that nothing much they might try would work, and that we're in for a certain amount of unavoidable pain.
"However much the Fed cuts rates between now and the spring," economist Brian Bethune of Global Insights told the New York Times last week, "the die is cast for a pretty rough six months and a very high risk of recession."
We should think of the coming economic misery as restorative, counsels Hank Paulson, the U.S. treasury secretary, who said last week of the housing crisis that a correction is "inevitable and necessary" and that "there is no single or simple solution that will undo the excesses of the last few years."
Mistakes were made. Some people will lose their jobs and their homes – a class of people that does not include the lax regulators, including Bernanke and especially his predecessor, Alan Greenspan, whose easy money policies and non-supervision of predatory lenders enabled the forces of an unfettered market to turn the housing industry into a global economic powder keg.
It wouldn't be fair either to identify culprits or experiment with drastic forms of assistance for people let down by the system since, after all this time, the folks in charge still aren't quite sure what they're dealing with.
Or so conceded Bernanke colleague Donald Kohn, the Fed's vice-chairman, in a speech. "We cannot say more than we know," Kohn said last week, "and we should strive to avoid giving people the impression that we know more than we do."
Oh, no need for striving on that score. Your cluelessness towers over you.
http://www.thestar.com/Business/article/293660
January 14, 2008
David Olive
Business Columnist
The economic rescue brigade finally arrived in something like full force last week, about a year after experts dismissed warnings of a U.S. economic downturn with global consequences, and five months after world credit markets were thrown into turmoil by the collapse of the U.S. housing boom.
It has not been an edifying sight.
Stephen Harper, the Canadian prime minister, announced a $1 billion assistance fund for one-industry towns hard hit by forestry mill closings – a trend, and a hardship, that's been evident for more than two years now. The premiers promptly responded that the sum wasn't sufficient. Ontario's all-important auto sector alone could swallow up that bailout sum. With its output largely exported to the U.S., it will be in grim shape by year's end if, as expected, tapped-out American consumers cut back sharply on vehicle purchases.
U.S. president George W. Bush was said last week to be contemplating a grandly titled economic stimulus package, probably to be unveiled at the time of his Jan. 28 state of the union address. Like most non-military challenges faced by Bush, the tonic will likely be more tax cuts, further eroding America's alarmingly weak fiscal status, and putting still more downward pressure on the greenback, already worth a humble $1.49 to the euro.
Nancy Pelosi, speaker of the U.S. House of Representatives, declared last week that the U.S. Congress has a stimulus package of its own in the works. It will, with luck, see the light of day in March or so, emerge from conference committee with the U.S. Senate filled with pork projects that will justify Bush's decision to veto it in June.
Hillary Clinton, more attentive to grassroots economic anxiety than most of her presidential rivals, in a year when 1.8 million U.S. "subprime" mortgages will "reset" at much higher monthly payments than the teaser rates that inflated the housing bubble starting in 2003, last week presented her own rescue package. It's skewed to low-income and middle-class Americans, and provides more genuine assistance to hundreds of thousands of people faced with foreclosure on their homes, in contrast with the minimalist distressed-homeowner bailout proposed by Bush late last year. But Clinton's initiative won't become reality until some months after she takes the presidential oath of office, should it come to that, which takes us into the spring of 2009.
Not to be outdone, Ben Bernanke, chairman of the U.S. Federal Reserve Board, made one of his periodic appearances last week to allow, once again, that all does not appear quite right with the economy but that he and his fellow Fed governors are loath to over-react. Although, yes, they are monitoring the same danger signals that have unsettled the rest of us. Or maybe not, since the ever cautious Gentle Ben, while strongly hinting at another half-point cut to the federal funds rate at the Fed's next meeting Jan. 29-30, couldn't say that the further rate cuts Wall Street pines for are on the way, given that with soaring fuel and food prices, inflation is still a worry.
Resolute for drift, Bernanke was at his most declarative, in a speech last Thursday, when he asserted that the economic climate is "uncertain." He gets top marks for consistency, this being his helpful prognosis for the past year, with points off, admittedly, for being in denial until last week that the housing-market collapse would infect the broader economy with malaise.
You were wondering about those danger signals?
Last week alone, major U.S. retailers disclosed that they had a lousy holiday season, the worst in five years, excepting Wal-Mart Stores Inc., which wisely held a fire sale of inventory to prop up volume. The U.S. Labor Department reported a spike in the jobless rate, to 5 per cent, accompanied by the bleak prediction of some economists that a rate of more than 6 per cent is in store by year-end.
Goldman Sachs Group Inc. became the latest Wall Street investment house to forecast a recession for the world's largest economy – a cheerier outlook, to be sure, than Merrill Lynch & Co.'s insistence that "recession is no longer a forecast but a present-day reality."
And in the piling-on department, economists at the United Nations last week reported on the "clear and present danger" to a global economy from the U.S. slowdown, a sentiment echoed last week by David Dodge, outgoing Bank of Canada governor, who warned of collateral damage for Canada from the U.S. slump. And many bankers worldwide still aren't lending, Bernanke noted, because the financial system remains "fragile," along with the prospects of continued employment for those bank and brokerage CEOs yet to report their multibillion-dollar writeoffs on soured subprimes.
Oh, and Moody's Investor Service, the credit agency, said Thursday that the Triple A rating on U.S. government debt in place since 1917 is in jeopardy because of out-of-control government spending on health care and social security.
And then everyone went out for a nice lunch.
If there appears to be a marked lack of urgency on the part of the rescue brigade, we have to be a bit forgiving since none of the rescuers appears overly consumed with confidence about exactly what needs to be done. What might seem obvious to you, chatting up pub patrons about the local shuttered pulp mill, or watching them tow away a friend's trailer home, is not so obvious to the trained economist. What's generally known among that group is that nothing much they might try would work, and that we're in for a certain amount of unavoidable pain.
"However much the Fed cuts rates between now and the spring," economist Brian Bethune of Global Insights told the New York Times last week, "the die is cast for a pretty rough six months and a very high risk of recession."
We should think of the coming economic misery as restorative, counsels Hank Paulson, the U.S. treasury secretary, who said last week of the housing crisis that a correction is "inevitable and necessary" and that "there is no single or simple solution that will undo the excesses of the last few years."
Mistakes were made. Some people will lose their jobs and their homes – a class of people that does not include the lax regulators, including Bernanke and especially his predecessor, Alan Greenspan, whose easy money policies and non-supervision of predatory lenders enabled the forces of an unfettered market to turn the housing industry into a global economic powder keg.
It wouldn't be fair either to identify culprits or experiment with drastic forms of assistance for people let down by the system since, after all this time, the folks in charge still aren't quite sure what they're dealing with.
Or so conceded Bernanke colleague Donald Kohn, the Fed's vice-chairman, in a speech. "We cannot say more than we know," Kohn said last week, "and we should strive to avoid giving people the impression that we know more than we do."
Oh, no need for striving on that score. Your cluelessness towers over you.
http://www.thestar.com/Business/article/293660
