Wall Street's Meltdown

by John M. Curtis
(310) 204-8700

Copyright September 16, 2008
All Rights Reserved.                    

              Wall Street’s roller coaster continued to spook investors, as the Dow Jones Industrial Average climbed back 147 points from its 504-point plunge Sept. 15.  Lehman Bros.’ bankruptcy sent the market into a long-awaited correction, shaving off 4.4% or $700 billion in overall value.  Adding $70 billion to banking reserves, Federal Reserve Board Chairma Ben S. Bernanke sought to reassure troubled financial markets that the Fed wouldn’t stand idly by while the nation’s leading institutions tightened the money supply.  When economic upheaval hits Wall Street, financial institutions jack-up rates to cover risks.  Adding banking reserves helps offset the tendency of financial institutions to hike interest rates.  Nothing hurts the business cycle more than inflated interest rates.  Recently bailing out Fannie Mae and Freddie Mac, the Fed couldn’t rescue cash-strapped Lehman Bros.

            Wild swings in the stock market signal defensiveness on the part of fund-traders, whose portfolios go through extreme gyrations.  For months, Wall Street has traded in a narrow range, moving sideways making little upward progress.  Watching American Insurance Group teeter on bankruptcy also didn’t reassure markets, whose defensive positions have helped drop share prices with the year from $70 to its Sept. 16 close of $3.75.  Shareholders at Lehman Bros. have already been wiped out, with AIG following close behind.  Venerable investment house Merrill Lynch has all but gone under, agreeing to a hostile takeover by Bank of America.  B-of-A, who took over defunked Countrywide Jan. 11, is having second-thoughts about the $29 a share offer, now worth around $15 after Monday’s meltdown.  If B-of-A. withdraws its offer, Merrill Lynch would go belly up.

            Former Fed Chairman Alan Greenspan, blamed by some for the current financial mess, called today’s misery “a once in a half-century or century event,” admitting it was the worst of his career.  Greenspan’s critics blame him for deregulating financial markets, artificially driving down interest rates and arbitrarily bailing out his personal friends.  Today’s mess continues the same kind of irresponsible corporate behavior once seen in the 2001-02 dot.com bubble, erasing $7 trillion of wealth in U.S. stock markets.  Corporate CEOs continued to hide liabilities and plunder company resources, leading to the kind of insolvency witnessed by Bear Stearns, Lehman Bros., AIG and WaMu.  White House Treasury Secretary Hank Paulson, former CEO of Goldman Sachs, stressed the importance of overhauling Wall Street’s antiquated regulatory system, leaving too much room for abuse.

             Despite Wall Street’s volatility, oil prices continued its plunge to $92, from its July 27 peak of $147, injecting some disguised optimism into today’s gloom. High oil and gas prices helped—together with the exorbitant price of the Iraq War—to tank the economy.  No industry other than big oil has profited over the last two years at the expense of the economy.  Big oil got more than it bargained for, driving the country into recession, causing lower demand for petroleum products.  Oil traders have been shorting the market, driving prices back to reality.  Unless there’s something done with the margin requirements, speculators could once again drive prices back to unrealistic levels.  Most energy producers, like Saudi Arabia, Iran, Iraq, Kuwait, Venezuela and Russia admitted that supply-and-demand had nothing to do with relentless price increases that eventually broke the economy.

            There’s plenty of blame to go around contributing to nation’s current economic mess.  Pointing fingers at Wall Street or the financial sector doesn’t address runaway government spending, especially to subsidize wars in Afghanistan and Iraq.  Spending $12-16 billion a month has depleted the U.S. treasury, robbing the country of necessary infrastructure projects to stimulate the economy.  Too much out-sourcing has neutralized the stimulus effect from war-spending.  Today’s war economy puts U.S. tax dollars into defense corporations, which, in turn, out-source manufacturing overseas.  Defense spending, including corporate welfare to the nation’s largest contractors, isn’t considered socialism.  Yet any non-defense spending directed toward infrastructure, education or social engineering is considered out-of-control “liberal” spending by those advocating perpetual warfare.

            Today’s economic meltdown has more to do with runaway defense spending, especially on Iraq.  While there’s a need for more oversight and regulation, there’s a bigger need to rein-in runaway defense spending.  No economy—including the mighty U.S.—can afford to rebuild foreign economies.  Asking Iraq to pay for its own security would go a long way in containing the ongoing hemorrhage to the U.S. treasury.  No one has all the answers but Big Oil should not be allowed to fleece business and consumers at the expense of the overall economy.  When the economy recovers, Congress must fix Wall Street’s wild speculation that has driven oil prices to record levels.  More regulation should help rein-in corporate greed that has given Big Oil a license to tank the economy.  Before the cycle repeats itself, the White House must do its part to contain Big Oil before it’s too late. 

About the Author

John M. Curtis writes politically neutral commentary analyzing spin in national and global news. He's editor of OnlineColumnist.com and author of Dodging The Bullet and Operation Charisma.

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