U.S. Economy Teetering on Double-Dip

by John M. Curtis
(310) 204-8700

Copyright October 5, 2011
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           Wall Street’s unrelenting sell off continued, dropping the Dow Jones Industrials, Nasdaq and S&P 500 into bear territory, prompting Federal Reserve Board Chairman Ben S. Bernanke to take urgent actions.  While the Fed’s hands are tied to some extent because of the already historic low interest rates, the next round of Treasury buy-backs known as QE3 gets closer.  Bernanke and Treasury Secretary Timothy Geithner haven’t gone back to the drawing board to figure out what must be done to pull the U.S. economy out of its nosedive.  Calling the economy “close to faltering,” Bernanke sent stocks skidding still worried about how a Greek default would affect the Eurozone—those 17 sovereign nations functioning on the euro.  If Greece goes down, there’s a growing possibility that the common currency may not survive, causing currency devaluations across the continent.

            Turning around the U.S. economy is no easy matter.  Much reform is needed especially in unregulated hedge and private equity funds that game the markets by short selling.  Unless the Fed and Treasury can figure out how to control short selling, markets will move sideways, robbing long-term investors and paralyzing publicly traded corporations from hiring new employees.  When the stock market crashes, most companies belt-tighten with respect to new hiring.  President Barack Obama, faced with a dicey reelection bid in an ugly economy, must call an economic summit to get a handle on current obstacles to U.S. growth.  Whatever happens in Europe, the U.S. must press ahead with its own reforms to improve the domestic economy.  If short selling by currently unregulated hedge and private equity funds can be controlled, the stock market faces endless sell-offs.

            Unable to grow the stock market, companies aren’t likely to expand hiring in the near future.  Without jobs growth, Bernanke knows it’s a matter a time before the economy double-dips.  Billionaire investors like Warren Buffet and George Soros already believe the U.S. has fallen back into recession.  Expanding the jobs market requires specific changes in how Wall Street operates, specifically regulating hedge and private equity funds.  Shifting treasury yields from short to long-term rates in a process called “twisting” won’t fix a broken system, rewarding unregulated funds for short selling.  Spending more cash to repurchase treasuries also won’t stop hedge and private equity funds from driving markets lower by short selling.  Fed Governor Sarah Raskin told the Maryland State Bar Assn. that more must done to slow down the growing avalanche of real estate foreclosures.

            Bernanke warned lawmakers that dramatic spending cuts—the one’s currently on the table with a special blue ribbon commission on Capitol Hill—would harm short and long-term economic growth.  Slashing spending could throw millions of federal, state and local government workers into employment.  More unemployment is the fasted way to a double-dip recession.  “The question of what can be done is continuing.  There are discussions to try and look very seriously at foreclosure reduction techniques,” said Raskin, pointing to specific things to help the housing market.  Growing the housing market, either through promoting refinancing or home purchases, represents a necessary first step in halting foreclosure and stimulating the economy.  When the housing bubble burst and the derivatives market collapsed in 2008, consumers lost the cash needed to stimulate the economy and fuel economic growth.

             Fixing today’s economy must look at more than restrictions on foreclosure.  Fed and Treasury officials must go back to the drawing board with Fannie Mae and Freddie Mac to go back to reasonable qualifications for lending standards.  Today’s overreaction from the housing bubble made it virtually impossible for anyone with good credit to qualify for a loan.  Working on a more reasonable set of lending standard would go a long way in improving the housing market.  Markets boomed when average citizens had access to real estate mortgages.  If the Fed and Treasury can work quickly to relax overly strict lending standards, there’d be hope for the consumer economy.  Without cash from mortgages in peoples’ pockets, it’s going to be difficult giving consumers enough cash for consumer spending.  Increasing consumer spending through employment or mortgage financing helps the economy.

            Obama must step up to the plate and show some leadership when it comes to the economy.  Waiting for things to turn around on its own is both unrealistic and dangerous.  Getting cash into the hands of consumers should be the president’s top priority.  Keeping the stock market growing requires urgent regulation of hedge and private equity funds.  No group of investors should capitalize on a bear market by short selling U.S. equities.  Fed and Treasury officials must look for ways to employ U.S. workers and get cash into the pockets of homeowners.  Obama and the Congress must look for ways to induce U.S. and foreign companies to assemble and manufacture in the States.  While there’s no easy solution to the economy, there are fixes.  More manufacturing domestically, relaxing lending standards for qualified borrowers and regulating hedge and private equity funds would be a good start.

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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