The economy is slowing down. The under 40 crowd has no real life experience to relate to the word “recession.” Its effects are not understood. An early sign is insufficient government tax revenues. California has a 10 billion dollar budget shortfall. How do you cut back 10% when you have already spent it? The cuts for schools, police and fire department will be felt slowly.
Countrywide is being bought out by Bank of America who gave them a two billion cash infusion last August. They figured why not buy the cow, they already paid for the milk. Their purchase would make sense at a market bottom. At a near top, it sounds more like suicide. Two dollars a share would have been a reasonable price. Seven dollars a share is shear lunacy! Another loser in play, Washington Mutual is talking to JP Morgan. Common sense suggests that neither deal is prudent. This sort of speculation reflects a complete lack of financial responsibility on the banks part, towards their shareholders.
Post Script Note added 1/14/04: [Countrywide's purchase in lieu of bankruptcy keeps six million homeowners with Countrywide mortgage payments out of bank limbo.]
American Express seems to be having problems. Wasn’t that card supposed to solve all our financial needs? Another company, Merrill Lynch claims 15 billion in losses. Give them a couple of weeks, that number will get bigger; they have a decimal point rolling around on the floor. All of this has happened in the span of four months. The "R" word is sneaking up on the economy. Most people don’t comprehend what is beginning to unfold, they have no clue. The surf is up, but this wave may be a tad too big to ride.
The amazing part of this mess, is the size of the many different problems facing the economy. The scale is beyond belief. 100 billion here, 100 billion there, and no one has lost a dime. The Fed will probably lower the Fed funds rate again. They are not creating money. If everyone wanted to draw their cash out of the bank, there is not enough printed currency. The Fed is delivering money to the banks so that the depositors can stuff their mattresses with the cash. Naturally the bank sells assets to raise cash and this reduces the cash a bank has available for new loans. This results in a contraction of the money supply. The bank borrows from the Fed to cover cash they can't raise until they sell the asset. To put it another way, it’s a run on the bank. The Fed’s logic behind this action is the hope that the market turns around soon, then things can go back to the way they were. Unfortunately three to four months more of what we have now, the game could be over.
The unforeseen problem just appearing is the credit card conundrum. If a client is over their limit and you cut them off from further purchases, what incentive do they have to pay on their bill? The card user doesn’t have to file for bankruptcy to avoid paying a credit card bill. No payment for 10 years wipes the debt off of their credit report. Credit card debt is unsecured debt. So the card issuer has a fine line to look at, either “Cut and run” or “Extend more credit.” “Cut and run,” looks like what has to eventually happen. The end result could be massive losses.
Then we have the Don Quixote of finance, Ben Bernanke, who’s going to lower the Fed’s fund rate and save the country from certain destruction. It kind of reminds me of an Inspector Clouseau, Pink Panther movie. Whatever worked, worked for all the wrong reasons.
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