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Bernard Madoff, convicted of running an $65 billion Ponzi scheme, was sentenced to 150 years in jail. What’s your take on his punishment?
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It's historic, it's dramatic and it will avert a threatened financial meltdown. The government's plan to take over banks' bad debt will pour much needed lubricant into a credit market that's seizing up.
But it probably won't turn around the U.S. economy. A comprehensive government plan to isolate billions in bad, or at least dubious, mortgage debt and free the wheels of commerce reduces the odds of an economic contraction that lasts for two or more consecutive quarters -- a recession by anyone's definition. It won't spark a strong recovery. We expect GDP growth to be very weak next quarter and chalk up no more than a 1% gain in all of 2009.
All the fundamental weaknesses remain. Overall consumer spending lacks any oomph, and is likely to shrink in the coming quarter. And because energy and food prices are still elevated by historical standards, they will continue to eat up a bigger share of income than usual. That leaves less available money for spending on autos, apparel, home furnishings, travel and leisure and all kinds of other goods and services.
Wage gains lag inflation, so most Americans find they can't buy as much with their paychecks today as they did a year ago. And while disposable personal income has grown in real terms -- after wringing out inflation -- it hasn't been by much: a mere 1% increase this year.
What's more, consumers are buried in debt. By the end of this year, they'll owe a total of $2.6 trillion on credit card, auto and other loans, not counting mortgages. That's nearly $8,500 for every man, woman and child in the country. Credit card debt alone is nearing $1 trillion -- an average of about $8,200 per credit-card-holding household.
Meanwhile, more and more folks are out of jobs. By early next year, unemployment will hit 6.5% or so, and the number of net jobs lost each month will get worse before it gets better. The economy won't begin to add net jobs until late next year.
The housing market is still a huge negative. The massive federal takeover of mortgage-backed debt will help bring about a bottom sooner rather than later, as clearer market values are established, foreclosure rates stabilize and the number of mortgage workouts increases. But the big steps Uncle Sam is prepared to take won't eliminate the huge overhang of unsold homes, won't prevent further declines in home sales prices and won't give back to consumers the equity they have lost.
Don't expect any lift from business spending, either. Business managers are becoming even more cautious, and capital spending won't grow at all next year. Tighter credit will make it tougher even for businesses that want to expand. As we outlined in last week's Kiplinger Letter, Main Street banks -- although largely unscathed by Wall Street's meltdown -- will nevertheless keep a tighter hold on their purse strings in coming months.
Even the brightest star in the economic firmament -- exports -- is dimming. Weaker global markets mean they won't grow as swiftly in the coming year. We expect slowdowns in European economies, Japan and Canada to shave a percentage point or so from growth in U.S. sales overseas next year, holding it at roughly 7%, compared to an 8% increase this year.
Federal spending will push higher, of course, as the government absorbs the bad debt. But the red ink it will spill in the effort won't provide a direct economic kick. In fact, the increase in the budget deficit diminishes the odds of tax cuts or other fiscal stimuli. And state and local governments, suffering from lower tax receipts, won't do anything to pick up the slack. They'll be forced to cut back themselves.
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POSTED BY: RENGAM CHANDRAN (September 24, 2008 10:52 AM)
Mr. Knight Kiplinger and the U.S. Government Treasury are ABSOLUTELY INCORRECT. A FOOL AND HIS MONEY ARE SOON PARTED FOR GOOD. A SMART GOVERNMENT TREASURY WILL STEP BACK AND BITE THE BULLET AND LET THE FINANCIAL GAME PLAY OUT INSTEAD OF THROWING GOOD MONEY AFTER BAD AND IMMATURE DECISION MADE BY THE TREASURY.
POSTED BY: Todd Meier (September 29, 2008 01:31 PM)
Wow, I imagine our founding fathers are turning over in their graves and Karl Marx is doing handsprings of joy. The greed of some bank executives and some gov't officials have now forced us to correct a capitalistic problem with a socialistic cure...my stomach hurts.
POSTED BY: Tim (October 01, 2008 07:15 AM)
I agree RonR, it's incredible to imagine the callous disregard for the future of this country; however, we americans have a large part of the blame. Zero to negative savings rates, over extension of credit, taking on mortgages we couldn't afford. Corporate america is an easy target, because we don't want to blame ourselves for being reckless about the future of our country. The truth is, people chose to spend, spend, spend and much of it on credit versus saving. People could have just as easily invested in the greed of corporate america versus propping up the greed of america by paying for it on credit. but hey, it is never our fault, it is always their fault.
Yup, Jerome, it was their fault for the "$2.6 trillion on credit card, auto and other loans...", us poor taxpayers didn't continue to consciously swipe the cards and sign the dotted lines for more credit. It was their fault for making the credit and loans easy to get, because we cannot possibly be responsible enough to save us from ourselves and know not to spend more than we make, to read the fine print, and to know not to get into something we can't afford or understand. Heck, they were the ones who made debt tought by increasing interest rates on credit and charging punishing fees, which we complained about because we wanted to charge more and keep balances on our credit cards. Yes, it is indeed their fault, they were the greedy ones and we were the victims, because we weren't conscious enough to save and not go into debt. They are to blame, because we had nothing to do with creating the market for these greedy wall street criminals by taking out subprime, alt-a, interest only, arm, option arm mortgages, heloc's, and mortgages we couldn't afford.
what do we get while those greedy tycoons get golden parachutes? we get $300b in homeowner bailout to keep us in our homes that we couldn't afford to begin with, cries to be included in the $700b rescue/bailout package to keep more people in homes they couldn't afford to begin with, because they are the bad ones and we are the innocent victims in all of this.
Yes, there should be criminal charges for reckless abandon, RonR, but how would we imprison the vast majority of Americans?
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