This is a guest post by Darrol Stanley, DBA, professor of finance.
The U.S. economy is in a “once-in-a-century” crisis said former Federal Reserve Chairman Alan Greenspan on the September 14, 2008, episode of ABC show “”This Week with George Stephanopoulos”” Well, I finally found the compelling reason to make good on my offer to write a blog for GBR. Typical for the Washington crowd, it became quite clear during the interview that Greenspan had determined that “it’s not my fault; it’s the other guy.”
Here is a man who might have caused a Greenspan-Bush depression, saying that the housing bubble was caused by the repackaging of the loans as securities and their sale to investors by unscrupulous bankers. Of course, he did not address his responsibility as Fed Chairman to monitor and, if necessary, modify such banking activities. Many, including myself, firmly believe that he clearly helped inflate housing by keeping targeted short-term rates too low for too long, which encouraged reckless lending and borrowing.
The Fed is the regulator of bank holding companies as well as the lender of last resort. The Fed could have
well exercised, even if they chose to continue low short-term rates, discipline to the financial community in questioning loan quality. They could have further emphasized their displeasure by becoming far more selective in the discounting of loans among a host of other actions.
The Fed chose, however, to do nothing as the financial system became clearly “Irrationally Exurbant for Increased Risk without Increased Return.”
Now we are in the midst of an implosion of the entire system with Bear Stearns, Fannie Mae, and Freddie Mac gone but still alive only through government bailouts (which implies the doubling of the debt of the U.S. government!). As this is being written, Lehman Brothers is going under. The prominent securities firm was established in 1850 and survived multiple U.S. financial crises such as the Panic of 1907 and the Great Depression. It appears that it will not survive the Panic of 2008.
These were the financial headlines from the New York Times for the last couple days:
Big Insurer Gets Lifeline as Markets Fall (A.I.G.)
Lehman Files for Bankruptcy; Merrill is Sold
Nation’s Financial Industry Gripped By Fear
The mess in the financial sector will have yet additional negative impact on the industrial sector.
Barron’s said it all in their September 1, 2008, cover: “Look Out Below!” Writer Andrew Bary noted that with the economy slowing and credit more scarce, more disasters are likely at debt-laden companies. This list of
possible industrial failures, unfortunately, is far too long to be noted here.
The Two Clowns (John McCain and Barack Obama) seem to be in complete denial of the situation. They simply fail to adequately address the issue with any true plan of action—that is, when they speak of the issue at all. I believe a review of both of their official websites (johnmccain.com and barackobama.com) under the heading of issues leaves little comfort for all Americans.
Most Americans believe that something is fundamentally wrong and that we are moving in the wrong direction. Hence, Americans more than ever want change, regardless of which presidential candidate they support.
But the endgame message is clear: you must take care of yourself.
I strongly suggest that you read my two most recent articles in the Graziadio Business Report to aid you in
taking care of yourself.
It is my firm belief that they will help you in this most difficult of economic times.
