Here you geniuses can get a really big laugh over this one:
No final act in sight for U.S. financial crisis
By Alex Berenson Published: September 14, 2008
A lot of smart people have tried to call the bottom on Wall Street this year.
So far, they have all been wrong.
Since the financial crisis first hit in August 2007, markets - and the financial industry - have gone through a series of swoons, each more dizzying than the last.
Last week, the crisis reached a new pitch, as Lehman Brothers, the fourth-largest U.S. investment bank, struggled to avoid joining Bear Stearns on the trash heap, and shares of Washington Mutual, the largest savings and loan, fell briefly below $2.
Now even Wall Street's professional optimists have given up predicting exactly when their industry might stabilize. One senior executive at a top investment bank suggested recently that there was no ending in sight to the crisis.
Until now, the cataclysm in the banking and securities industry has damaged but not derailed the rest of the economy. Economists generally predict that the United States will grow slowly over the next few months but avoid a deep recession, especially if oil prices fall farther, easing pressure on consumers, and exports remain strong.
But as the Wall Street crisis moves into its second year, the risks to the overall economy are increasing. The economy grew during the first half of the year, but businesses are cutting jobs and consumers are reducing spending. In August, the unemployment rate reached 6.1 percent, compared with 4.7 percent less than a year ago.
Until the worst turmoil on Wall Street ends, the economy will struggle, said Sung Won Sohn, an economist at California State University, Channel Islands, in Camarillo, California, who studies financial markets.
"Until and unless we have financial markets stabilize, I don't think we will see a meaningful recovery in housing, and therefore in the economy," Sohn said. He said he expected economic growth to remain close to zero through the middle of 2009 before finally beginning to accelerate.
Steven Wieting, the United States economist for Citigroup, said: "We're describing the U.S. economy as recessionary."
Wieting and other economists say that the Federal Reserve and the government have few good options left to ease the pressure on financial firms or the economy. The Fed has already cut short-term interest rates to 2 percent, below the rate of inflation, and the government has offered consumers and businesses $150 billion in tax rebates and cuts this year.
The Fed has also taken several measures to buoy the financial industry, such as allowing more banks access to low-interest, short-term loans. Yet Wall Street continues to struggle through the aftereffects of the biggest speculative bubble in history.
Financial services companies have cut more than 100,000 jobs this year, according to Challenger, Gray & Christmas, an executive placement firm, and deeper layoffs may come this fall.
Yet the picture may not be entirely bleak. When the chaos finally ends, Wall Street will almost certainly be smaller and more risk-averse. That change could eventually put the economy on firmer footing.
The crisis appears to mark the end of a bubble in the financial markets that has lasted nearly two decades. The speculation began in technology stocks in the 1990s and turned to real estate, commodities and private equity buyouts this decade. Along the way it powered the New York City economy and helped drive income inequality nationally.
While the stock market has not been as frenzied this decade as it was at the end of the 1990s, rampant speculation took over many other financial markets, Wieting said. "In the last couple of years, financial activity became less related than we've seen before to real economic developments," he said.
Now Wall Street is reeling, as a significant fraction of the speculative real estate loans that banks made during the boom years are underwater. Because banks have limited capital to absorb losses, investors worry that those losses will overwhelm them.
The problem has been worsened by the financial instruments that banks hedge funds and insurance companies have created to swap loans and risk with one another. In theory, those products can help investors and companies diversify risk, but they are nearly impossible to value.
"Investors just don't know what these assets are worth," said Ed Yardeni, president of Yardeni Research. "There's no transparency. It's totally up to management to decide what these assets are worth and tell their accountants."
For example, Lehman said last week that it had $20 billion in tangible equity- money that would theoretically be available to its shareholders if Lehman had to be liquidated. But those same shareholders valued Lehman at only $2 billion as of Friday, proof that they do not have confidence in the way Lehman has calculated its assets. |
