Stock Market Falling

As if all the really bad news concerning the corruption of the Bush regime coming out of Washington wasn’t enough to depress us all, the economy seems to be taking a turn for the worse. The stock market has finally caught wind of the potential disaster that the collapsing housing market could do. Here’s today’s news from MarketWatch:
U.S. stocks close with stiff losses; Dow off 281 points – MarketWatch

We need to keep a close eye on this story. The so-called “real” economy, factories, farms and so on is doing reasonably well: profits there are healthy and there seems to be no sign of imminent decline. The only clouds emerging are the slowing in hiring and the steady loss of consumer confidence. These are not substantial enough yet for us to worry about recession, but they are enough to cause mild concern about a slower economy from here on out.

Of much more concern is the credit market. There has been a sudden spate of financial trouble in the credit markets all due to the drop in house prices. The domino effect of falling home prices has led to rising defaults by individual borrowers; which led to losses at the so-called sub-prime lending institutions [usually not regular banks, but marginal players like American Home Mortgage Inc.] Because these marginal lenders sold off their mortgages to other financial institutions like investment banks and insurance companies, the losses have started to affect those companies as well. So a cascade of losses is moving through Wall Street. This would not be a problem except for the fact that these organizations are a source of credit [i.e. they lend to] businesses and smaller banks around the country. If they pull back from lending those companies and smaller banks will find it hard not to reduce their operations. Ultimately the entire economy could be slowed by a lack of credit. This is a classic “credit squeeze”, and could force the economy into recession.

We are not there yet. The markets are roiled and uncertain right now and it is reasonable to expect them to stay that way for a while. The Fed will have to monitor the situation closely and step in provide assistance when needed.

All this means that we have hit turbulence: the stock market will bounce around; interest rise will rise a little; home prices will continue to fall for a year or more; job growth will fade to nothing; and profits will decline. Whether the economy as a whole slips into recession will be determined by the effectiveness of economic policy. At the moment fiscal policy is a mess: the Bush regime has no effective policy at all, although running a deficit right now is a good thing; and the Fed has been worrying about inflation too much to loosen its grip.

The markets will be looking for re-assurance. They won’t find it just yet. So the bumpy ride will continue.

As I said: watch this one closely.