Wall Street and the Economy

By Ron Beasley:

I was watching CNBC today as the market took another plunge.  Even the talking heads on that business network found it impossible to be upbeat. Steven Pearlstein thinks they have a good reason to be down beat because:

This Recession, It's Just Beginning

So much for that second-half rebound.

Truth be told, that was always more of a wish than a serious forecast, happy talk from the Fed and Wall Street desperate to get things back to normal.

It ain't gonna happen. Not this summer. Not this fall. Not even next winter.

This thing's going down, fast and hard. Corporate bankruptcies, bond defaults, bank failures, hedge fund meltdowns and 6 percent unemployment. We're caught in one of those vicious, downward spirals that, once it gets going, is very hard to pull out of.

Only this will be a different kind of recession -- a recession with an overlay of inflation. That combo puts the Federal Reserve in a Catch-22 -- whatever it does to solve one problem only makes the other worse. Emerging from a two-day meeting this week, Fed officials signaled that further recession-fighting rate cuts are unlikely and that their next move will be to raise rates to contain inflationary expectations.

Since last June, we've seen a fairly consistent pattern to the economic mood swings. Every three months or so, there's a round of bad news about housing, followed by warnings of more bank write-offs and then a string of disappointing corporate earnings reports. Eventually, things stabilize and there are hints that the worst may be behind us. Stocks regain some of their lost ground, bonds fall and then -- bam -- the whole cycle starts again.

So how did we get into this mess?  A few months ago in the post Wall Street ≠ Economy I wrote the following:

We have constantly been told that the American economy is strong. An increasing number of Americans know this just isn't so. The problem is that Wall Street has come to equal the economy in the minds of policy makers. For a majority of Americans this is simply not the case. In fact Wall Street has become part of the problem. The once noble purpose of Wall Street has been replaced by something that more closely resembles a Ponzi Scheme. The value of stocks seems to have little or no relation to the economy that most Americans experience. If you notice "stimulus" plans are usually designed to restore confidence - keep stock prices up. Once again the Federal Reserve is lowering the interest rates to prop stocks up. The last time this was done it resulted in a sub Ponzi Scheme - the housing bubble which did what it was intended to do, run up the market. Of course like all Ponzi schemes it couldn't last for ever and didn't.

We have reached a point where the Fed can no longer lower interest rates so the market plunges and the suffering has spread to the investor class - Wall Street itself is now seeing the "real" economy. 

Comments

[carol]

My great grandmother (1905-2006) died with ridiculous amounts of money, given that she spent many years without a husband, and had only worked for about 15 years of her life (as a bank teller and hotel manager). She gave me some financial advice which I have taken to heart:

Put all of your money in CDs and bonds. Don't give a dime to Wall Street.

She was also, of course, a big believer in money in jars around the house type of thing. I am too. She also religiously donated to charity. I try to do what I can.

I feel a certain kinship with her now; that we too, must be extra careful in today's turbulent economic atmosphere. I don't think it's over exaggerating to say that this may be viewed by history as the second Depression. That's what it's starting to feel like to me anyway.