Friday, July 27, 2007

Economic cross-currents

A political storm is moral theatre, a nation coming to terms with error -- not a simple policy error, but moral error, a betrayal of core national values, a challenge to the constitution, a falling short in national solidarity -- which the body politic attempts to correct in a restructuring of political elites and power.

Powerful political storms almost always have an economic component, as background if not as a central element. Economic pain motivates some large part of the body politic to pay attention.

A remarkable aspect of the Bush Presidency has been the absence of serious economic pain. That all the gains of economic growth have gone exclusively to corporate profits and to the very wealthy has been a critical part of the context of dissatisfaction. That Bush policies have increased gas prices (and, not incidentally, energy company profits) has not gone unnoticed.

But, low unemployment has kept the intensity of economic dissatisfaction bounded, even while unhappiness about Iraq and Katrina and corruption have simmered.

A truly "perfect" storm will have a nasty economic component. See those dark economic clouds on the horizon? "The greenback has never been further out of favour on currency markets. The Federal Reserve tracks the dollar's value against a weighted basket of seven currencies that are commonly traded beyond their respective borders. This index, regarded as a good gauge of financial-market sentiment about the dollar, has fallen to an all-time low"

Financial crisis just one 'Bear-like' event away: "A global financial shock is just one 'Bear-like' event away, economist Mark Zandi warned Thursday, giving it a one-in-five chance. In the current 'high level of angst' following the collapse of two Bear Stearns funds, the uncertainty caused by another hedge-fund failure could cause investors to freeze, he said. Zandi, chief economist for Moody's, said he expects significant declines in home sales and prices in coming months to further erode mortgage credit quality. About half of the structured securities owned by hedge funds are in the riskiest tranches of complicated derivatives based on the subprime mortgages that are going sour quickly, he said. If there is a global financial crisis, he said he expected the Federal Reserve would ease, but questioned how effective it would be in restoring confidence in the U.S. financial system."

"Rough ride for U.S. stocks; selloff resumes"

Krugman had an excellent column on the origins of the present crisis is housing, oil and credit. And,he draws the political connection:
"what’s really striking is ... the current angst ... over two things that I thought had been obvious for a long time: the magnitude of the housing slump and the persistence of high oil prices. . . "

Over the last couple of years a peculiar conviction emerged among some analysts — mainly, for some reason, among those with right-wing political leanings — that the housing bubble was a myth and that the real bubble was in oil prices. . .

I didn’t think many people believed this stuff, but the market’s sudden freakout over housing and oil suggests that I was wrong.

Anyway, now reality is settling in. And there’s one more thing worth mentioning: the economic expansion that began in 2001, while it has been great for corporate profits, has yet to produce any significant gains for ordinary working Americans. And now it looks as if it never will.

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