A Grim Forecast

From: http://www.newsweek.com/

By: Howard Fineman

I’ve been talking to some plugged-in moneymen who own a company distinguished by several virtues: it’s based in the less volatile Midwest and a Scotsman runs it. They dumped real estate years ago and never got involved in the derivatives craze.

So they are worth listening to, and what they told me was sobering--words the next president needs to hear, and realities the two contenders aren’t fully acknowledging. There’s a smattering of good news, but most of it is pretty grim. A summary:

Unemployment in the U.S. could reach at least 10 percent in the next couple of years. That is a powerful and politically explosive number. The highest post-war percentage was 10.8 in 1982, just before a mid-term election that decimated the GOP in the House. Other post-war highs include 8.8 percent in 1975, during the dismal Gerald Ford Interregnum; and 7.7 percent in 1992, a few months before Bill Clinton wiped out President George H.W. Bush. The point is that whoever winds up in the White House will have to brace himself for the unpopularity that comes with rising unemployment-not to mention the extra burdens that could be placed on the federal budget by extended unemployment pay.

High unemployment means a tough recession, which, in turn, means a global economic slowdown, the extent and duration of which is hard to predict. America will muddle through, so will Europe as will the economies of Brazil, Russia, India and China, known collectively as the BRICs. It’s the smaller, poorer and newly “democratic” countries that will suffer most, with difficult-to-forecast political consequences.

The credit squeeze has just reached Main Street now, and the pain and ripple effects are just beginning. The latest example: GMAC, seeking to maintain its own creditworthiness, has decreed that it will only offer auto loans to customers with a credit score over 700. “It’s back to the 50s,” one of my money-manager friends told me, “back when the saying was that `banks only lend to people who don’t need it.’”

A piece of good news: The government will eventually make money on the real-estate-backed securities it is buying to resell under the Treasury’s new Troubled Assets Relief Program. “There is a lot of good stuff in there,” said one executive, “a lot of good commercial real estate that got mixed with the bad.” But it will take years to recoup it all.

Evidence mounts that the U.S. no longer controls its own economic destiny, and is increasingly at the mercy of foreign investors, especially the little-understood but crucial new role of Sovereign Wealth Funds. The failure of Hank Paulson’s initial bailout plan is the proof of their power. The Treasury had hoped that the SWFs would express a willingness to snap up whatever assets the government was planning to buy, or were encouraging foreigners to purchase. No way. “When Paulson put that dog dish down, the dogs didn’t come running,” is the way one executive put the matter. “So Paulson had to go to Plan B”-the direct infusion of federal cash into banks. In a typical case of American can-do (or overcorrection), the feds forced the banks to take the cash: it wasn’t optional, as it was over in London.

The leading SWFs are sitting on nearly $3 trillion in cash and other liquid assets-and yet, so far, they are refusing to dive in. “The fact is, they could have fixed all of this but did not want to risk it,” said one of the executives I talked to. “They’re as scared as everybody else.” It’s not quite clear who all the leading players are, but three key ones are China, Abu Dhabi and Dubai. China is especially leery, I was told, because a recent $3 billion investment in one American investment house had gone sour. “They bought in at $30 a share and it’s down to $9 and that fact is all over the papers in China,” said one moneyman. “A leader there can’t risk another headline like that.” The Arabs are just as skittish. “There is really no better place for them to put their money than here, but they want a better price.”

At some point, the federal debt (which could reach a trillion this year) and the national debt (over $10 trillion) are going to threaten the strength (such as it is) of the U.S. dollar unless we get a handle on them and reverse the trend lines.

The $53 trillion credit default swap market-the castle in the sky of the global economy-was something that my friends didn’t want to discuss. For one, the concepts and instruments are so complicated; for another, major dislocations in that market are simply too scary for anyone to contemplate-and are so “global” that no one government or alliance of governments are big enough to control the beast.

So, to Barack Obama and John McCain: good luck!

Blogger comment:

1- The poor next American president you are really screwed up. Major problems and collapsing world economy. Meanwhile, if you succeed you could be the best president America had. The world want to see how you lead and how to get the markets working again. How to take us from recession to expanding economy. How can you fix the health care and the entitlements programs. I am willing to help the next president with Taman Health Plan whoever he is. But my condition is he has to show me and my people how he would spread democracy peacefully to the Arab and Muslim worlds and how intelligently will dissolve extremism.

2-Howard Fineman who is a real fine man I watch him regularly, and I get my best information from journalists since they give you the main points and present you the complicated economics in a simple language. In every branch of science even the best in this science they will tell you we are still learning. Economics is particularly a science that people still learning. After decades we are still do not know if the western capitalism is well suited to this complicated markets. It is very likely in the first few weeks of the new presidency we all have to sit together and find out what can work fairly to all of us.

3- If you would have such conference we would not listen to two or three of the best but will get all the data and numbers related to economics, all the bits of information related and all the ideas of all smart people. We will not let them go home until they give us the best consensus they can reach. Then the president put it up to the media so people can challenge it then corrected again and come up with the best version. A humble thinker is the one who will reach the best thought that is somewhere hiding in the universes. A simple idea like the wheels was there non knew about it until someone found it and applied it. If you try to find the best thought by talking to only to 2-3 famous economists you will miss the innovations that commonly started from those entrepreneurs that are hiding under the ground. The best of idea can be bought and its discoveror rewarded by having his name acknowledge.