Add $100 oil to billions in bank write-offs and it should come as no surprise that the word “recession” is being heard with increased frequency. As is the view that circumstances have combined to neuter the Fed, making it powerless to use its monetary policy weapon to prevent a downturn.
It’s not the write-offs that have nerves on edge so much as it is the inability of the chiefs of the major banks to come close to estimating the magnitude of the problem.
Departing CEOs Stan O’Neill and Charles O. “Chuck” Prince III, leaving Merrill Lynch and Citigroup, respectively, so underestimated their firms’ exposure to losses from subprime and related lending that investors have come to believe that enough shoes to fill Imelda Marcos’ closets have yet to drop.
The nation’s banks will sooner or later have to write down the value of these assets, perhaps to the tune of $600 billion to $800 billion, seriously impairing their ability and willingness to lend to even credit-worthy firms and consumers, including to prime borrowers seeking mortgages.
With credit crunched, fewer factories and office buildings will get built, fewer jobs created, fewer cash registers filled with credit card receipts. This will add to the downward pull already exerted by the slumping housing market, which has brought consumer confidence to a two-year low. Little wonder that forecasters are lowering their estimates of 2008 growth.
Not to worry: Ben Bernanke and the Federal Reserve Board’s monetary policy committee will ride to the rescue with still another stimulative cut in interest rates. Except that it might not. That’swhere $100 oil comes in.
Rising fuel prices are creating inflationary pressures as all industries that rely on oil either to move their trucks and planes, or as inputs in manufacturing petrochemical products, begin to raise prices.
At the same time, food prices are rising at an annual rate of something like 6 percent. Corn prices have doubled this year, wheat prices have soared, milk and dairy product prices are at their highest level in nominal terms since the beginning of World War II, and Procter & Gamble has announced price increases on several products, most notably the Folgers coffee that bankers and lawyers are scarfing down during their all-night hunts for some cure for their self-inflicted wounds — and not incidentally some way to save their year-end bonuses from the 10-15 percent cuts now being penciled in.
Most noticeable of all when we carve into the almost 70 million turkeys that will decorate our tables on Thanksgiving and Christmas is a 50-cent-per-pound jump in the price of the gobblers; that will add about $500,000,000 to the cost of the festivities.
Then there is the small problem of the sinking dollar. Its six-year decline seems to be accelerating. That stimulates exports but also makes imported goods more expensive and frightens away foreign investors who have no desire to acquire dollar-denominated assets that are sinking in value. Those investors are already switching out of dollars and into higher-yielding assets in other currencies.
Had enough gloom and doom? Then consider this. The job market remains strong enough to keep unemployment low. Productivity rose at the robust annual rate of 4.9 percent in the third quarter, causing labor costs to fall. Core inflation remains low. Personal incomes continue to rise. The World Economic Forum ranks America No. 1 in competitiveness, up from sixth last year.
The International Monetary Fund expects the world economy to growat close to 5 percent, which bodes well for U.S. exports.
And Bernanke, while at the same time warning of downside risks to any projection, told the Joint Economic Committee late last week that “most businesses appeared to enjoy relatively good access to credit, … the overall economy remained resilient in recent months” and that he expects growth to resume in the second half of 2008 after a “sluggish” first half.
Besides, a recession might be the least bad of the possible outcomes of our current troubles, according to John Makin, economist at the American Enterprise Institute.
In his latest epistle he writes, “The cost of avoiding recession after the biggest housing bubble in American history has burst is too high. It will involve rewards to those who took excessive risks that will only result in more underpricing of risk in the future, and therefore larger bubbles and, ultimately, a more unstable economy that underperforms expectations. … The positive economic aspect of the U.S. housing bubble collapse is that it will lead to a recession.”
That’s why economics is called the dismal science.
Examiner columnist Irwin Stelzer is a senior fellow and director of The Hudson’s Institute’s Center for Economic Policy.
