As dramatic and potentially damaging the US financial problems are, it’s the impact on the US economy that remains the main game.
US economic growth isn’t as strong as previously estimated and is weakening. This week we will probably get the first 100,000 monthly job loss in the US since the 2001 recession, plus more news on weak house prices and more financial pain.
The $US700 bailout has been agreed on, subject to any last minute grandstanding.
Warren Buffett turned out to be a major positive last week when he swooped on Goldman Sachs and took a major equity stake.
He also spoke to leading members of Congress to urge them to approve the bailout.
But even he couldn’t stave off the depressing impact of a bank freeze on lending and a growing belief of a possibly terrible disaster if the $US700 billion bailout fails.
But here are a couple of quotes from the new book on Warren Buffett called Snowball, by Alice Schroeder that show that as early as March of this year, when Bear Stearns was rescued by JPMorgan, with a $US29 billion loan from the Fed, he could see worse to come, especially for the US economy.
It’s of interest that while he could see through the mists of confusion at the time, many others in the US, from Government and regulator to participant and investor, couldn’t or wouldn’t.
What squares the circle is that last Friday, our time, JP Morgan rescued Washington Mutual, America’s largest Savings and Loan after a 10 day, $US16.7 billion run sank it.
The first is from the second except on the Financial Times website
"Seventeen years later, in the weeks after the US investment bank Bear Stearns had to be rescued, Buffett reflected on his own close encounter with a meltdown on Wall Street: “The speed with which fear can spread – nobody has to have an account at Bear Stearns, nobody has to lend them money. It’s a version of what I went through at Salomon, where you were just inches away all the time from, in effect, and an electronic run on the bank. Banks can’t stand runs.
"The Federal Reserve hasn’t bailed out investment banks before, and that was what I was sort of pleading back there in 1991 with Salomon. If Salomon went, who knows what kind of dominoes would set off. I don’t have good answers to what the Fed should do. Some parts of the market are pretty close to paralysed. They don’t want contagion to spread to what they would regard as otherwise sound institutions: if Bear fails and two minutes later, people worry that Lehman fails, and two minutes after that they worry that Merrill will fail, and it spreads from there."
And this other quote from the book, taken from a review published in the Weekend edition of the FT: It’s Buffett speaking after the rescue of Bear Stearns:
"It could all end on a dime if they flooded the system with enough liquidity”, he tells Schroeder, “but there are consequences to doing that. If dramatic enough, the consequences would be the immediate expectation of huge inflation. A lot of things would happen that you might not like. The economy is definitely tanking. It’s not my game, but if I had to bet one way or another – everyone else says a recession will be short and shallow, but I would say long and deep.”
And that is what is gathering pace in the US right now: a "long and deep" recession; a forecast made six months ago!
The rescue bailout package is now being sliced and diced by politicians more interested on the part of the Republicans in avoiding blame for the disaster and rediscovering some ideological objection to government involvement in the economy; this from a bunch of gainsayers who have presided over the greatest debasement of the US dollar since the Bush tax cuts started in 2001-02.
The US deficit has ballooned, and before the bailout, was heading past $US500 billion in the 2009 year.
The Democrats aren’t any better. They took time out this week to negotiate a massive spending bill with the same people now opposing the bailout.
That bill will fund the Pentagon and defence, allow oil drilling in US offshore waters in the Lower 48 states and will allocate tens of billions of dollars for pet spending projects for all members of the Congress, from the lower house and the Senate collectively.
It will keep the money going for the US Government over the next six months while the Administration changes, but it won’t do a thing to tackle the biggest and most immediate problem: the imploding US financial system.
After the financial system, it’s the economy that needs attention: very soon, as early as this Friday, the rising cost of the slump and the impact of the failing financial system, will be seen in a sharp rise in US unemployment last month.
Estimates from a Reuter’s survey suggest that the number of jobless could have risen 100,000 or more last month, which would take the losses so far to over 700,000 and accelerating.
Revisions to previous months could boost that figure. The unemployment rate is tipped to remain at 6.1%, but economists missed that sharp rise in July to that level, so it could very well happen again.
Friday saw a sharp cut in the annual rate of growth in the US economy in the second quarter.
The third estimate put the annual rate at 2.8%, down from the surprisingly high 3.3% in the second estimate, but still above the initial stab in the dark of 1.9%.
While better than the contr
