It is Still the Economy, Stupid

Barack Obama and his dud economic team, aided and abetted by a largely clueless media, continue to indulge the fantasy that the so-called stimulus plan “worked” and that recovery is just over the horizon. I wish that was true but other recent developments indicate that the fledgling recovery is going to get smothered in its crib. Not good news.

The next shoe to drop is the collapse of the commercial real estate market bubble. Today’s Washington Post has the story:

A mortgage crisis like the one that has devastated homeowners is enveloping the nation’s office and retail buildings, and few places are likely to be hit as hard as Washington.

The foreclosure wave is likely to swamp many smaller community banks across the country, and many well-known properties, including Washington’s Mayflower Hotel and the Boulevard at the Capital Centre in Largo, are at risk, industry analysts say.

The new round of financial pain, which some had anticipated but hoped to avoid, now seems all but certain. “There’s been an enormous bubble in commercial real estate, and it has to come down,” said Elizabeth Warren, chairman of the Congressional Oversight Panel, the watchdog created by Congress to monitor the financial bailout. “There will be significant bankruptcies among developers and significant failures among community banks.”

Remember, this is happening in Washington, a city normally considered recession proof because you have so many people sucking on Uncle Sam’s tit. What happens when these small banks go under? They’ll be snapped up by larger banks, which means we are back to the business of creating financial monsters that are “too big to fail.” Think this will create more jobs? Nope.

Then we have Ben Bernanke’s move last night to boost the Fed discount rate charged to banks. The Financial Times reports:

The attempt by the 11-month risky asset bull run to navigate an inevitable hurdle got off to an inauspicious start on Friday.

Stocks and commodities stumbled in Asian trading and the dollar found favour after traders were caught off guard by the US Federal Reserve’s announcement that it would raise the discount rate it charged banks.

However, a more stoic response from New York traders saw Wall Street reverse early losses and hit a four week high.

“As the marketplace digests what the real implication of the [Fed’s] move is, it will realise it is less of a negative than people thought last night,” said Craig Peckham, equity trading strategist at Jefferies & Company.

The Fed was at pains to point out that the move did not mean it had changed its outlook for the economy or monetary policy. But some investors remained wary that the decision represented an important step in its exit from the liquidity measures deemed crucial in supporting assets during the past year.

“The fact that this was done not at a scheduled meeting and after the [market] close are likely indications that the Fed does not want this interpreted as a change in the overall policy outlook,” said Don Rissmiller at Strategas.

Check out Larry Doyle’s take at Sense on Cents. Please understand that Bernanke’s move will make it more attractive for investors to buy U.S. dollars. A good thing, right? Not really. This ultimately will make credit more difficult to get, not easier. This also is likely to lead to higher interest rates for folks trying to get a mortgage. That means that even fewer people will be able to get a loan to buy a house. If people are not buying houses and condos then they are not also buying new furnishings, appliances and electronics.

And how about exports? It will cost more to buy US goods (that’s because the dollar has risen in value). That could discourage tourists coming to the U.S. and will likely lead to a higher trade deficit. Because our dollar is up in value we can, in theory, buy more foreign goods. All of this is likely to fuel an inflationary cycle.

Of course why should Barack Obama know anything about how the private sector works? He’s been on the public tit most of his life. With only a brief stint at a law firm, the rest of his life has been spent living off of the public funds in one fashion or another. I understand why he does not understand, but that does not make our nation more secure economically. Still troubled waters ahead.