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The Econo Miss

by Archives January 22, 2008

The past three weeks have not been a great start to the year. The White House plan to inject some much-needed cash into the economy is probably too late and comes on the heels of a very ugly week for stock markets.
George W. Bush’s fiscal stimulus, announced on Jan. 18, was a valiant effort to stave off an already looming recession. The question is no longer whether there is a recession, but rather how long it will last and how deep it will cut. The $140 to $150 billion hoped-for plan is one per cent of the GDP and aims to help increase consumer and business spending through tax rebates for families and financial incentives expected to encourage business investment. The plan is to be broad-based, temporary and effective immediately. The sober announcement, however, did little to ease fears and anxieties of recession and the markets remain volatile.
The benchmark S&P index was at its worst in five years; it closed 5.4 per cent down on the week at 1,325.19. The American markets aren’t the only ones taking a turn for the worse, there is pressure on every stock exchange. Hong Kong, China and Europe are beginning to show strain and breakdown. Investors all over the world are checking their daily quotes and watching the subsequent carnage from collapsed stocks.
Citigroup, Merrill Lynch and JPMorgan Chase all took losses of billions of dollars in investments and loans surrounding United States home loans. Merrill Lynch had the biggest three month loss in history and it was more than double of what analysts expected. These losses cut into the banks’ earnings and subsequently decreased their ability to lend money to consumers and businesses. If that wasn’t enough, American Express and Citigroup are reporting an increase in delinquencies on credit card use.
The housing market in the States continues to freefall. Even the once lucrative and booming housing markets such as those in California and Florida are in bad shape – both have entered into a bust state. They share large inventories of unsold houses, and sales have decreased 36 per cent in California and 30 per cent in Florida. This is not good news against a national average of a 20 per cent decrease. In addition to national recession, analysts are also predicting regional recessions which will hit some regions badly and leave other relatively unscathed.
The United States government’s actions on counteracting deflation and recession come too late. Cutting interest rates is one way to stimulate some business investment and spending, but it usually takes from six to nine months to affect the economy. The proposed tax rebates will put some money into the hands of the American consumer but whether they will spend it will remain to be seen. Judging from the last couple of months, in the face of recession, Americans will be buckling down and holding onto their dollars with a tight fist.

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