Please sir, can I have some more,” whine the Oliver Twists on Wall Street. More interest rate cuts from the Federal Reserve Board‘s monetary policy committee, a bigger portion of stimulus from the president and Congress, more direct relief for the housing market, a bail out of bond insurers — you name it, and investors and bankers want more of it.
Except for write-downs: The increased recognition of losses that nervous auditors are demanding is the one thing the bankers don’t want any more of piled onto their plates.
This desire for more doesn’t result from any recent period of deprivation: Year-end bonuses, although frequently paid in bank shares rather than cash, have been relatively generous. Rather, it is that toilers in the financial services sector see lean times ahead.
Worse still, the U.S. economy seems to be in dire shape. Desmond Lachman, an economist at the American Enterprise Institute, expects “a more painful recession and one of longer duration than the nine months characterizing the average post-war recession,” rather than one that is “relatively mild by historical standards,” as Goldman Sachs’ economists are predicting.
Treasury Secretary Hank Paulson says “the worst is just beginning” in the subprime mortgage market. “More Economists Signal Recession,” headlines The Wall Street Journal.
Nor will the rest of the world be unaffected by America’s woes. The Financial Stability Forum (a group of leading central bankers) expects “further shocks … a prolonged readjustment which could be difficult.”
We know three things, or think we do: Credit is more difficult to come by, both for businesses and consumers; the housing sector is in disarray, with foreclosures and inventories of unsold units rising, and prices falling; and the U.S. economy is, at minimum, slowing, and possibly already in recession.
Hence the investment bankers’ demands for “more.” Ben Bernanke must cut interest rates, and the President must meet the demands of Senate Democrats to enhance the $168 billion stimulus package he signed last week.
Really? Consider each of those certainties in turn. To those who moan about a credit crisis, Warren Buffett, the legendary Sage of Omaha, has this to say, “Money is available and it’s really quite cheap.” What he calls the “dumb money” might have stopped chasing risky investments, but cash is readily available for sound deals and to sound creditors.
As for the housing market, that it is troubled there is no doubt. But perhaps not as much as we have been led to believe. Interest rates are falling, government agencies have gained permission to be more active in the mortgage markets, lenders have agreed to renegotiate terms with hard-pressed subprime borrowers, and many local markets are doing quite well. And the two most widely respected indicators of house prices can’t agree whether prices have dropped or remained more or less stable.
Finally, we come to the question of the condition of the U.S. economy. Most economists and Wall Street analysts differ only between those who say a recession is already under way, and those who say we have hit a period of zero growth.
All, or almost all, seem to agree that hard times are here, that the overly indebted consumer has taken or will soon take to the sidelines, that businesses will as a consequence begin laying off staff and cutting expenditures.
But do you believe economists and pundits, or the guys out there producing and selling things? Jurgen Hambrecht is CEO of BASF, a giant manufacturer with 90,000 employees and sales of well over €50 billion, garnered by selling hundreds of thousands of products to a wide variety of industries.
He tells the press that he does not foresee a U.S. recession, and that “I am glad to say that businessin general does not show the panicking approach of the financial industry. … I am sleeping well at night.”
Hambrecht is not alone. Executives at General Electric, Honeywell, Procter & Gamble, and Kraft Foods are among the many who claim that their businesses have never been better, that sales and profits are up, and that bookings are strong. The more cautious add, “so far.”
If the economy is indeed stronger than high oil prices, housing woes, and slower job growth would lead us to believe, and, if inflation is the looming threat that it increasingly seems to be, perhaps policymakers would do well to turn a deaf ear to the bankers who clamor for “more.” Better to stand pat until recent rate cuts and the new stimulus package take effect later this year.
Examiner Columnist Irwin Stelzer is a senior fellow and director of The Hudson’s Institute’s Center for Economic Policy.
