The Recesssion Metastasizes To The Bone

There are a lot of pieces of data about what is happening to the economy, perhaps too many to make any sense of them.

In the last day or so, two stand out. One is tha Treasury Secretary Henry Paulson may elect to drive down interest rates for new home buyers, perhaps as low as 4.5%, using Fannie Mae (FNM) and Freddie Mac (FRE) as his instruments. Any observer would look at the news and say that Treasury can finally see that saving banks will not solve the problems of the economy. Working from the top down has been a failure.

The other more frightening bit of information is that Goldman Sachs (GS) believes that the nation lost 400,000 jobs last month. Most economists have that number close to 300,000. Goldman is saying unemployment is moving toward 7%. There is no data from the business or financial sectors to indicate that any jobs are being created. A look at the headlines reads a bleeding out of more jobs, sometimes tens of thousands a day. That leaves out all of the small companies cutting back. Those never make the evening news, but, in total, the destruction of entrepreneurial ventures may be going on at record rates.

Manufacturing, retail sales, and consumer spending are falling so fast that the effect is geometric now. This means that intervention is going from being a solution with fair prospects to one which is approaching futility. The government could be criticized for putting money into the economy too slowly, but it may be that the timing would not have mattered. The circle of jobs destroying housing destroying consumer spending destroying jobs may be too powerful.

A lot of analysts say that this recession will be worse than any other since WWII. It should not be lost on people that the federal government did not sit on the sidelines in 1974 and 1981. It could not do enough to keep GDP from shrinking and joblessness from rising to 10% or so. Another way to look at it is that some downturns are so vicious that they cannot be prevented by huge infusions of capital and better regulation.

The new administration will continue to try to "save" the economy, the housing market, and jobs. At the core of getting elected to national office is the promise that the world will get better. It is like telling a child that it is OK that is father is out of a job.

The solution to the problem is simple and it may be a long way off. At some point everything will be so cheap that businesses and consumers will start buying even if they have little access to money. Homes will become ludicrous bargains. So will cars and airplane trips to Florida. Businesses will be able to buy goods and services for unprecedented prices which have not been seen for decades. Businesses will hire because they can get employees for a fraction of what they paid them in 2006 and 2007.

It is impossible to predict if despair will turn into mayhem, a confusion of the system where businesses begin to fail are astonishing rates and people cannot find work of any kind.

But, it will have to get close to that before the economy finds a bottom

Douglas A. McIntyre