Thursday, January 17, 2008

More Fun with Finanical Crisis

For the best overview of the role of finance capital in Britain today, see John Lancaster's piece in the London Review of Books. At one point he asks a friend in finance about the effects of the crisis. His friend says it's a much-needed "correction."

So we’ll have to stop running around spending money like drunken sailors,’ I said.

‘Well, drunk sailors tend to be spending their own money,’ Tony said. ‘By contemporary standards they’re quite prudent.’

For a not-as-funny overview of recent American events, here's the economist Dean Baker's summary:
Citigroup continues to rank at the top in dollar losses from the housing market meltdown. It has now set aside $23.2 billion in loss reserves. This sum is a bit less than 20 percent of the company's current market value of $134 billion. Of course, its market value was more than twice as high before investors discovered how deeply involved it was in the subprime mortgage market. The safest bet in this story is that there will be more big write downs to come as falling house prices cause the epidemic of bad debt to spread.

The other major banks are also being hit, even if not quite as hard. Citigroup has already announced that it is laying off almost 10 percent of its workforce. With a sharp reduction in employment at the major banks, Wall Street and New York's economy are likely to feel the pain.

Even those keeping their jobs are likely to have less money to spend. The stock prices of all the major banks and brokerage houses are down sharply, leading to a tremendous loss of wealth for those in the industry. The value of Morgan Stanley's stock has fallen by $30 billion from its year ago levels, Merrill Lynch's decline has been worth almost $40 billion, and Citigroup's plunge has destroyed $147 billion of market value. While investors all over the world own stakes in these companies, these declines will be disproportionately felt in the New York area. Especially since there is almost certainly more on the way.

Watch the New York housing market. Real house prices in the New York City area more than doubled in the decade from 1996 to 2006, driven in large part by the extraordinary boom on Wall Street. With the boom turning into a colossal bust, the NYC real estate market looks quite vulnerable.

The weak December retail sales data released yesterday confirmed the reports from the chain stores last week. Consumers are beginning to cut back in a big way. There seems to be no way around the conclusion that this was a very weak holiday season. Comparing year over year nominal sales growth figures even understates the weakness somewhat since inflation has been higher in 2007 than it had been in prior years in this decade.

The inflation data released this week must have the Fed worried. Core inflation continues to creep up with the core inflation rate over the last three months reaching 2.7 percent. While this is still a very modest inflation rate by any reasonable standard, it is above the 2.0 percent rate that Chairman Bernanke would like the Fed to target. Furthermore, it looks like there is more inflation in the pipeline as non-fuel import prices are finally reflecting the decline in the dollar, rising at a 4.8 percent annual rate over the last quarter.

The Fed will have to be prepared to accept slightly higher inflation if it continues on its path of lowering rates. In this regard, it is worth noting that a 50 basis point cut in the federal funds rate will push it below the 4.0 percent overnight rate set by the ECB. If the ECB holds and the Fed continues to lower, then the dollar is almost certain to drop further against the euro.
For more fun and games, see the Guardian's slam of the Facebook founders, big venture cap libertarian haters of multiculturalism. I heart Facebook - world's lowest brain-power form of human interaction ever invented - unless I think about it. Which this piece made me do. Facebook incessantly packages mass mailings as individual appeals - Anna asks you What Serial Killer are You? - but actually Anna asked 20 people, and did so because she couldn't access the application until she did. The Skip button is a dummy.

I'm sure this is connected to the financial meltdown.

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