Friday, March 14, 2008

CNN, George Bush, & the Economy: Some Thoughts After A Day at the Mechanic

So I have been delaying getting my breaks repaired and some other regular maintenance on my car. The main reason is because it takes up my time and my money. Man, did getting my breaks repair take time, and not only did it take a lot of money, I also got the chance to watch CNN for 5 hours.

In college I actually majored in International Economics (new fact for many StrangeCulture readers, I'm sure). And so I am actually pretty interested in our contemporary economic situation. Not just because it effects my life, your life, etc. but also simply because like Oscar caliber films, the dismal science of economics interests me.

So today, I was lucky enough to catch CNN on a day that was filled with economic woes, success, and discussions.

It started out with an announcement that inflation for last month was flat (which is great news under the circumstances of ridiculously high inflation in 2007, of which I've heard estimated around 17%, which is simply not healthy growth at all, which the Fed normally tries to keep around 2.9%.)

Then Bush gave his speech to the Economic Club of New York. It was a pretty good speech, especially by Bush standards. And it was pretty entertaining to be watching it in a car dealership service lounge where it was like watching a high-stakes football game where everyone was rooting for the loosing team. There were definitely some people who's blood pressure started elevating.

While I'm sure many people will have different feelings about various aspects of his speech, I appreciated his discussion of why he does not encourage reactionary measures taken on the part of Washington to save people from ome foreclosure through debt forgiveness, subsidizing mortgage notes, etc. Although Bush did not say we were in or headed towards a recession, the fact of the matter is that part of the functionality of the business cycle (pictured Econ 101 style, left) and recession is the role of price adjustment. Sometimes, prices are simply too high, as we saw in the run away inflation of 2007. Runaway inflation tends to cause devaluation of currency, that is best corrected by lowering of prices. While Bush mainly focused on the legality of getting involved in debt forgiveness and buying up foreclosed homes to maintain their value, the fact of the mater is that many homes, in many areas simply might be over-valued. (Think about how the trend to flip-houses certainly aided in rising home prices, by creating a new shock in demand for purchasing homes).

(Later in the day Ben Bernanke, Fed Chairman, did speak later in the day at the National Community Reinvestment Coalition's annual meeting and he outlined ways to help eliminate problems in the sub-prime industry, but his suggestions are small relative to ideas others have thrown around)

Then there started to word of huge bad things going on with Bear Stearns (NYSE: BSC) one of the largest investment banking firms in the world. A company who I've followed a little extra since a friend of mine worked there after college. And suddenly due to major liquidity problems, largely accredited to the "credit crunch" and their involvement in investing in sub-prime housing. The Federal Reserve came to the rescue, along with competitor JP Morgan Chase, and today the stock just kept on dropping and dropping, eventually dropping 27 points (-47%). This is no good.

Oh, and gas prices reached record highs, with people in California and Hawaii paying as much as $4 a gallon. (Much of this is attributed to a weaker dollar, which means OPEC nations controlling oil are not increasing production, and so our need for oil, means we have to pay more for it in international markets...this then attributes to more inflation).

Then there were democratic responses to Bush's speech, and way to many clips shown over and over again, with other random CNN stories through out, including economic stories like people on the verge of foreclosure committing arson on their own houses for insurance money and the effects of a struggling economy creating riots in various places in the world, especially more developed Africa areas where economies are crumbling with inflation and the inability to get basic need.

It all was dismal.

The facts are that there is major conflict in the American economy, and it's hard to know how much Washington DC and the Fed should react, and in which ways. However they react, or don't react will have an effect for the United States and the world, short term and long-term.

When I listen to the people around me getting their car fixed, the overall climate was that the stimulus package wouldn't cover the loss of income due to rising gas prices, lost jobs, foreclosed houses, or repair their bitter mistrust in President Bush or the United States current condition.

And the whole system is generally a mess because short-term the government and the fed are doing everything they can to eliminate a recession. I appreciate that, I really do. But, I think there governmental powers can only do so much at this point. Again...the Business Cycle.

Now, the business cycle doesn't create short-term comfort, but it's cyclical nature of troughs and peaks is a standard way things have gone in the United States over the course of it's relatively short existence. And Federal Reserve tools are relatively limited (adjust the money supply or adjust the federal funds rate). And the Feds two tools are relatively powerless because our economy is facing two conflicting problems. Economic slow-down AND inflation. Lowering interest rates is supposed to stimulate the economy AND it creates inflation. Raising the interest rates will slow down inflation BUT will also slow down the economy. (I feel like cost of gas and transportation is the easiest way to explain these conflicting problems, although I realize and understand it's a compound issue that goes beyond oil prices.)

What's the Fed to do?

Normal recommendations from StrangeCulture involve movies, websites, and fiction. But today I have new recommended reading. There's a short book that's incredibly insightful called The Fabulous Decade: Macroeconomic Lessons from the 1990s by Alan S. Blinder and Janet L. Yellen. This book was published summer 2001 just months before the September 11 attacks. A point when the economy was past it "peak" in that portion of the business cycle. Yet it covers an important time in America, the 1990s, a time when America had it's longest stretch of economic growth without recession or depression.

I think in the past couple of decades, especially after "The Fabulous Decade" of the 90s, we became dependent upon the government to guide us in a path of continual economic growth. And while this is a great goal, challenges do and will arise in America and the global economy. There is ways to minimize the economic and social damages, but not eliminate economic downturns.

Anyways, it was an interesting day. I did my part to stimulate the economy, getting serviced at my American car service department. Here's to hoping I won't have to stimulate the economy that way for awhile.


Anonymous said...

I'm glad you blogged about this.

I never had to pay that munch attention to the economy until I started my latest job. I still don't understand it all, but I am starting to grasp some aspects.

It's been very interesting to see how the media have been covering this. Some say all the TALK about the "R" word is just scaring people. TV producers/anchors really love covering "bad news" stories. They're a lot more fun than "postive news." It's probably not good to get all you financial advice from "The Today Show." RC knows WAY MORE about the economy than Meredith Vierra.

I'm glad this is adding another issue to the presidential campaigns. I would hate for this election to just be about Iraq. I think Americans are realizing that there are a A LOT of challenges facing our country, not just the war.

general125 said...

Great post RC.

Maybe if the government would take responsibility for my bad financial decisions by doing things like making my mortgage payment for me, America would be better off?

This is why I'm a strong advocate of centrally planned economy. Down with the Bourgeois!!!!!

Anonymous said...

You are like the smartest person I know. hmmmm....

nate said...

Thanks...not being an economics major, that was easy for me to read, and made sort of confirmed a hunch. I had a few questions.

1) Is that business cycle primarily limited to the U.S. and capitalism?
2) It seems clear that the Fed isn't our savior, but I have heard that their actions with Chase in the bear sterns situation saved us from another great depression. What's your take on that?
3) What are your thoughts on the constitutionality of the Federal Reserve and it's intrinsic connection with Washington?

Like I said, I know hardly anything about this stuff. If you want, you could email me with your thoughts, and anyone else who might have good answers for me.