"Charlie" AKA Charles Schwab just came out with a really fantastic article about The Crisis we are experiencing. I would like to give you a synopsis of the information that Mark Riepe (Senior Vice President) had to share.
First, he compared now with the Great Depression.
Gross domestic product growth: GD -27%, Today +1
Industrial production: GD -52%, Today -2%
Unemployment rate high: GD 25%, Today 6%
U.S. exports: -66%, Today +15%
Consumer Price Index: GD -27%, Today +4%
Money Supply: GD -29%, Today +3%
Jobless Recovery
After the last recession, corporations were fairly tightfisted about overhiring during the recent expansion. As a result, there are fewer jobs to cut. As a result, unemployment shouldn't get out of control.
Fiscal Policy
As opposed the the policies of the 1920's and 30's, policy makers are more willing to step up to the plate with federal dollars when the economy shows signs of weakening, and over a short period, this is a viable solution. ("The increase in the GDP growth from 0.9% in the first quarter of this year to 2.8% in the second quarter is an example of what the fiscal stimulus can do.")
It is agreed that continually commiting to deficit spending will have negative, long term consequences, more permanent fixes can now be put into place.
Globalization
Globalization has had a negative connotation of late, but remember, we need trade in order to flourish. In the 1930's, the Smoot-Hawley Tariff Act, which was intended to stop imports, did very well, dropping imports 65%. However, as a result, U.S exports dropped 66%. Not much of a gain. Since December, U.S. exports have risen 15%, offsetting a weak domestic demand. It is of some concern that other countries will be able to absorb U.S. exports, but it isn't likely that we will have a 2/3 drop in trade.
The FDIC
FDIC insurance is critical in preventing the huge number of banks failing in the 1930's from happening again. This is needed for public confidence in our banking system. The recent, temporary increase to $250,000 should help boost that confidence. Our European neighbors are taking similar steps.
Money Supply
When the Federal Reserve constricted the money supply in the 1930's, it caused a 29% drop in supply. As a result, the Consumer Price Index declined 27%. This happened to Japan in the 1990's. What this really means is that as a business purchases raw materials and invests in turning those raw materials into a product, the market price for that products declines. The business then, cannot make a profit. This is when the economy and the stock market starts hurting. In today's economy, the Feds are pumping large sums of money into the system to ensure its liquidity.
Housing Near the Bottom
While there is a perfect storm of how we got here, the bursting of the housing bubble is most certainly the root cause. In other words, the road to recovery is the stability of the housing market. There has been a steady decline in the magnitude of the losses. Inventories of new homes have stabilized and builders are careful about new construction.
Emergency Economic Stabilization Act
The intent is to allow qualified buyers to get a loan and purchase a home. As the feds purchase hard to value securities, it should loosen up the banks abilities to raise capital and start lending again.
Now, there are many more details in this article, and I would suggest you go to www.schwabinsights.com/2008_10/economy.html to read it for yourself. I thought it to be very informative.
Windermere Dunnigan Realtors
4215 Freeport Blvd
Sacramento CA 95822
Direct phone 916 425-9715
Office phone 916 454-5753
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