In January, we posted the question "Is Depression Looming?" Today, we answer the question.
The unfortunate answer is no, it's arrived. At least technically.
Our economic system depends largely on faith and credit, and unfortunately, without the former, the latter means nothing. That faith we have in the US governement's ability to preserve and protect the economy is shaken, and stirred.
Unfortunately, the only things that have prevented a full collapse of our system into a strong depression are the Iraq/Afghan wars and the Economic Stimulus money sent to our citizens. Offsetting those checks, to everyone's dismay, is the rise in fuel and food prices.
There has been considerable discussion about the ability of the Federal Deposit Insurance Corporation (FDIC) to meet its obligations with respect to depositor insurance with a number of banks at high risk. Fortunately, FDIC is in very good shape. Most people don't understand the
Wall Street initially took poorly to the repeatedly bad news from banks, GSE's and other companies, but rebounded when a special Senate hearing was convened on short notice by Banking Committee Chairman Christopher Dodd (D-CT). In those hearings, FED Chairman Ben Bernanke, SEC Chairman Christopher Cox and Treasury Secretary Henry Paulson testified about their joint plan to protect Freddie Mac and Fannie Mae.
Considerable discussion in the House of Representatives and on the Senate floor last week also drove many fearful speculators from the market, affording a temporary respite from seemingly persistent increases in oil futures. Congress must act and soon, to prevent such speculation as the only means of keeping oil prices reasonably low.
While some companies, such as Johnson & Johnson (JNJ, Fortune 500) reported increased second quarter profits, GM is cutting thousands of jobs, reducing inventory production, cutting plans for new vehicle models, and reducing their truck operations considerably.
The Dollar has been dropping significantly, with the Euro rising to $1.60381, its highest rate ever against the Dollar.
Unemployment continues to rise and will do so without something to create employment. Current talk on Capitol Hill is for a new stimulus, but one intended to spend money on domestic infrastructure projects. While this is a great concept we fully support, in reality, such a program is a slow one and will not create jobs in the short term.
Wachovia and other major banks are presently in deep trouble as well, with high numbers of mortgages held on their books failing. There being a very tight credit market and rapidly falling property values, the bank really cannot foreclose on many failing mortgage or real property guaranteed loans on their books.
Despite new regulations by the Federal Reserve Board, the concensus is "too little, too late", as government sponsored enterprises Freddie Mac and Fannie Mae, which collectively hold about half the mortgage debt in the nation. Though widely praised, the reforms appear to lack a system of verification to ensure that banks do not make risky loans and try to pass them through the securitization process.
Some reforms require Congressional action which is expected to happen this week. Without swift and sound action, the effects of the economic stimulus will be fully consumed by fuel price increase by October. The effect of military spending will be further offset by the ravaging effects of midwest flooding and delivery costs on food, making it impossible for many Americans to afford to live a reasonable, not extravagant life. Foreclosures would rise as more and more citizens default on mortgages, and businesses default on loans.
With a lack of faith in banks, fear of foreclosure, shareholder concerns and a general air of nervousness in our financial system, in our opinion, we have arrived. This is an economic depression by any standard of measure.
Keeping in mind at October 9th, 2007 saw the DOW at over 14,000. Today, it is below 11,500, a more than 2,500 point drop in nine months.
Depressions have a terrible consequence in their cures. Usually large scale wars or collapse of governments. What happens next is up to Washington, bank management and business leaders and the public. If the public keeps faith, things will cure, but if faith continues to rock, any number of things could happen.
Stay tuned. No matter what happens, it's going to be a bumpy ride.
