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Wednesday, July 16, 2008

No Sh*t, Sherlock.

The USA Today runs a piece that suggests that maybe today's current economic woes are the result of America flying high (in both senses of the word) on growth fueled by Americans, American companies and American institutions taking on higher and higher levels of debt. There's only one response for that sort of keen insight at this late point in the game: Well, duh:
If it wasn't clear before Tuesday, it is now: This is no ordinary economic crisis, and it won't be over anytime soon. In fact, problems are multiplying. A year ago, the financial virus seemed confined to subprime mortgages, loans given to those with less-than-perfect credit. Now, much of the banking system appears rickety, and the U.S. economy has slowed to a crawl. But thanks to robust demand from still-growing countries such as China, the prices of commodities from oil to food have soared — hitting Americans from the gas pump to the grocery checkout.

"There's no hope of an early recovery at this point," says economist Kenneth Rogoff of Harvard University. "The best-case scenario is we have a long but mild recession — and that's the best-case scenario."

The root of the economic problem remains the fallout from the imploding housing bubble.

For nearly a decade, consumers grew accustomed to the idea of ever-rising home prices. Housing-related prosperity boosted consumption, as consumers tapped home-equity loans for cash to pay for everything from new cars to college for the kids. As the boom roared on, regulators stood on the sidelines, convinced that the magic of the market would sort out any problems.

"It seemed too good to be true, and it was. Absolutely (today) is payback
," says Rogoff, former chief economist of the International Monetary Fund....

...Forecasters at investment bank Morgan Stanley, for example, expect the economy to shrink for six months beginning in the fourth quarter. Gross domestic product will expand by a barely perceptible 1% in the second quarter of 2009 before hitting its stride in the second half of the year, they say.

Between now and then, the business pages won't make for happy reading. The economy is going through what analysts call "deleveraging," a fancy way of saying debt repayment. During the housing boom, Americans and their financial institutions borrowed way too much money. Now the bills are coming due — economywide. And that's what is making things so tough in so many different ways.

"It's not like your standard business cycle recession. … The trouble with this deleveraging recession is it's self-reinforcing. … I don't like to be pessimistic, but the relentless flow of bad news is just something we're going to have to get used to," says George Magnus, senior economic adviser for UBS in London.

How bad might it get? Perennial doomsayer Nouriel Roubini, who calls this "by far the worst financial crisis since the Great Depression," predicts stocks will fall 40% from their peaks. That translates into a Dow of 8568 — a level not seen since 2003.

Others are more sanguine. Habitual bull Abby Joseph Cohen of Goldman Sachs predicts the market will move up by year's end.

Meanwhile, get used to parts of the American patrimony being sold off to foreign investors, who now have the cash that U.S. institutions lack. This week, it was Anheuser-Busch, maker of Budweiser beer, being sold to a Belgian company. Earlier this month, the Chrysler building in New York went to an investment fund based in Abu Dhabi.

But it's the banking sector that likely will see the most significant activity. The housing crisis has left financial institutions with deeply wounded balance sheets, as the mortgage securities they hold have turned out to be worth far less than once believed.
Unfortunately for us, "perennial doomsayer Nouriel Roubini" has been spot on about nearly everything having to do with this crisis for years now.

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