Thursday, December 06, 2007

Economics Post!

I have economics degree from American University (go Eagles!) so I try to keep up with the latest economic news and I tend to view business and commerce through a more objective economist's viewpoint (well, I try anyway). Sometimes this is helpful and sometimes not so much...

Anyway, I read a really good, concise, easy to understand article in the WSJ just now on our current economics situation- credit crisis, slumping growth and all that. A subscription is required to read it (for now anyway). But go buy the dead tree version- you'll thank me.

Here is a juicy quote:

What's with all the gloom about the U.S. economy? The problem is that we have two problems. One is that the economy is slouching toward recession or, at best, slow growth. It's the consequence of falling house prices, higher energy prices, flagging consumers and shrinking profits.

The other is that the market for credit, the lifeblood of a modern economy, isn't functioning well. That problem is amplifying the pain caused by the first.

Just a few weeks ago, a lot of folks were arguing that the worst was behind us. Housing was still ailing. But after a big wallop, markets for credit seemed to be moving toward normalcy. The Federal Reserve ended its Oct. 31 meeting declaring that the "upside risks to inflation roughly balance the downside risks to growth." If Fed officials truly believed that then, they no longer do. They'll likely cut interest rates again on Tuesday. Only the most optimistic observers expect the U.S. economy to rebound quickly from its fourth-quarter slump. The argument now is between those forecasters who expect growth to be so slow in early 2008 that the unemployment rate climbs a little, and those who see a recession in which it climbs more.

In ordinary times, this would be unpleasant, but not so frightening. The Fed knows how to treat this condition: cut interest rates.

Sure, it's tough to get the timing right. And administering the remedy is more complicated with the dollar drooping and inflation returning to the Fed's agenda for the first time in years. Still, this is a familiar disease. Although the Fed has not and cannot abolish the business cycle, the U.S. has suffered from recession only 16 months in the past 25 years. (In the quarter-century before that, there were 64 months of recession.)

But these aren't ordinary times.

For years, banks and investors lent freely. They took big risks for surprisingly little reward (known as "low risk premiums" in the patois of the trade). Now, they're shunning risk. Big banks are reluctant to lend even to each other for more than a few days, and are hoarding cash. In a symptom that the financial fever hasn't broken, interest rates for one- and three-month loans among banks are up sharply. The Fed and the European Central Bank are now forced to consider the economic equivalent of alternative medicine.

"History," Alan Greenspan warned back in August 2005, "has not dealt kindly with the aftermath of prolonged periods of low risk premiums." He wasn't right about everything (and, yes, he may have contributed to today's problems by keeping rates so low for so long). But he was right about that.

Just a friendly update on today's world from your friendly neighborhood, amateur economist/PR blogger.

You may now return your attention to tonight's game between the great Chicago Bears and lowly Washington Redskins.
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