What the hell is up with the economy?

I definitely do NOT predict it ending by Q2 this year.  Not this year either.  Hopefully next year.  Things look really bad.  The credit crisis is doing exactly what people thought it would do, and consumption has really dropped off.  What's going on in Iceland hopefully doesn't spread to any major countries.  If that happens there could be trade wars as countries block imports.  That is kind of the worse-case scenario floated by some investment banks; slowing demand in emerging markets prompts currency devaluations and trade blockades, which would basically destroy the worldwide economy.  It happened right before the depression with Smoot-Hawley.  I don't think the US would make that mistake again, but other countries might when faced with violent protests.  A while ago I know I said that a Depression-like situation was extremely unlikely.  It's not so unlikely any more.  We're already at 7+ levels of unemployment, and it's not getting better soon.  Hopefully we don't peak higher than 10%.  Credit spreads are still enormous, which means it is very hard for businesses to get financing and hire people.  There's not really much the Obama team can do about this directly - they have to try and address it by building confidence in the economy in general with the stimulus plan.

Contributed by guest columnist Dime $ack

WABOO...

Guest columnist Dime $ack:

Well, this is good news for the govt, cause now the FDIC won't have to pony up for the deposits. JPMorgan bought all those from the govt, along with WM's crappy mortgage portfolio. They immediately wrote the mortgage portfolio down 20%. So they are not expecting many of those mortgages to get repaid.

Depositors and people who bank with WM will be fine. All I see in my crystal ball is a bunch of Wamu branches either closing or becoming Chase branches, and most of the jobs in Seattle going away. I feel bad for the employees, and feel lucky that I didn't pursue a Wamu job after school, but that company really messed up. You can blame their ex-CEO and all their VPs and other execs. They pursued a really risky strategy, ignored the risks, and lost. Very stupid. Common stock holders are already wiped - bond and preferred equity holders are about to be.

Besides that my crystal ball is useless. I was expecting the markets to really go down this morning because the bailout stalled, but I think they are basically expecting congress to get something done despite last nights shenanigans. The McCain posturing was totally counterproductive, and the republicans clearly don't understand what a complete credit meltdown could mean (who really knows if that would happen, but there's a pretty good chance the only reason it hasn't is because of this bailout). We're not really bailing out the banks at this point, we're bailing out ourselves. If credit markets completely freeze I would expect there to be a deep economic contraction with lots of job losses. Just think - no companies (big or small) could get loans to finance their operations. Imagine a small business that buys inventory for Christmas, sells it, and pays back the loan. There will be no loan for that company to get, so they won't do any business for Christmas. No hiring employees, no buying advertising, no purchases of any business services. Imagine that on a very large scale.

Right now congressmen are quibbling over equity stakes and exec comp limits. Some want insurance on the securities instead of purchasing them outright. I think some of this stuff is nonsense - and it could complicate things more. Sure, go ahead and try to limit exec comp but really this is pennies compared to 700B.

I think the congressmen are hearing from their constituents - who also have no idea what this bailout really entails - that they don't want to bail out Wall St. You can read comments on NYTimes and blogs everywhere where people are pissed. They make it sound like we're just giving 700B to a bunch of greedy bankers. We're really buying some crap securities from many banks all over the world to try and get the financial system moving and keep it from locking itself down.

Again, it's impossible to know what will happen under any scenario. All I know is having the credit markets shut down would be very bad - mostly for low income people who would probably lose their jobs, and don't have anything saved to begin with.

Dime $ack out.