THE COMING WEEKS will not be pretty for the world’s financial markets. While attention in the United States has been focused on Wall Street and government interventions to save large financial companies from collapse, the effects of the crisis on economies around the world have been equally disturbing.
On Thursday, The Associated Press labeled the current problems as “the worst global financial crisis since the Great Depression.” Treasury Secretary Henry Paulson has spent recent weeks rushing from one meeting to the next, desperately trying to plug leaks in the crumbling dikes that hold financial chaos in check.
At the center of it all is the massive over-investment of the world’s financial system in dicey American home mortgages. When the housing bubble burst and the foreclosures began, mortgage companies found themselves taking possession of property whose real value had fallen far below its value on the original paper. Assets that had been the foundation for the illusion of a housing boom vanished overnight.
The losses affect not only mortgage companies, but a wide range of companies and individuals whose investments included those companies and mortgage-backed bonds. Beyond that, the resulting loss in the value of stocks and the retrenchment by banks trying to stay solvent is putting pressure on many companies that depend on the availability of loans for expansion or for short-term operating expenses. Where those companies can find money to borrow, they are being hit with higher and higher interest rates. That puts a drag on production and job-creation.
It is a not a formula for a quick recovery.
When Sen. John McCain said that the fundamentals of the American economy are sound, he was hooted down and accused of being clueless on matters of the economy. The statement has become one of the more damaging moments in his campaign.
But McCain was not wrong. The United States, even though it is undergoing a terrible financial crisis, remains a wealthy nation with a skilled, productive work force. The primary things that are lacking at the moment are the same things that were lacking at the beginning of the Great Depression — cash and confidence.
Paulson has been doing his best to supply the cash, and the federal intervention has been having a moderating effect on the financial earthquake.
What is still lacking is the confidence.
People — from hourly workers to chief executive officers — are not going to begin to regain their confidence until the stock market, the primary engine for investment in business, stops its slide and begins to steadily regain some of the ground it has lost.
If that happens, the financial aftershocks that are shaking the globe will begin to diminish.
Patrick S. Kelley
Editorial Page Editor
Bjnemp (anonymous) says...
Here's a first: I totally agree with you, Patrick. Well said.
September 21, 2008 at 10:34 a.m. ( permalink | suggest removal )
create (anonymous) says...
I agree with you too, Pat. But I can only shake my head and question, "What took them so long?" Now we all have to help out.
It's not that we didn't see the mortgage meltdown coming. Foreclosures have been taking place on a fairly large scale for two years now. Subprime mortgages have been running rampant and offered to people who barely had the income to pay rent let alone manage a mortgage, pay for upkeep, pay insurance and property taxes too. Did any of these brokers take the time to counsel these people? Did they care? Did anyone try to explain to these people what would happen eventually with an ARM? Did any of these brokers try to convince people to buy something within their price range?
I don't know about anyone else, but my mailbox has been filled to brimming with come-ons every day for years. Low interest. No interest. No money down. In the meantime, brokers who were making all these home sales to low-income people were laughing all the way to the bank.
Now what is it going to take for us as individuals when we want to buy a car or some other big ticket item that requires some financing? The interest rates are going to soar. I'm just glad my car is paid for and the occasional fix keeps me going.
No one looks for the life preservers as long as the yacht is sailing on smooth waters. But the chop got intense and now we must all help bail water.
September 21, 2008 at 11:34 a.m. ( permalink | suggest removal )
goodoleboy (anonymous) says...
There are about 3-4 major issues that will face the next president and could very well make or break this nation in a great many ways. I am not going to turn this into a presidential debate but I will say that whoever gets the job is going to go down as a messiah or another Bush.
September 21, 2008 at 12:46 p.m. ( permalink | suggest removal )