For the better part of the past week, American's are hearing the economy is in a free-fall and the government is tossing tons of cash at the crisis which might not end anytime soon.
But what does that mean ... what does it really mean?
Joseph Stiglitz, 2001 Nobel Prize winner in Economics and Columbia University professor, explained the current situation rather simply in a commentary posted on cnn.com.
"President Bush famously said, a little while ago, that the problem is simple: Too many houses were built. Yes, but the answer is too simplistic: Why did that happen?
"One can say the Fed failed twice, both as a regulator and in the conduct of monetary policy. Its flood of liquidity (money made available to borrow at low interest rates) and lax regulations led to a housing bubble. When the bubble broke, the excessively leveraged loans made on the basis of overvalued assets went sour.
"For all the new-fangled financial instruments, this was just another one of those financial crises based on excess leverage, or borrowing, and a pyramid scheme.
"The new 'innovations' simply hid the extent of systemic leverage and made the risks less transparent; it is these innovations that have made this collapse so much more dramatic than earlier financial crises.
Stiglitz believes there are other key factors to the present crisis, including the lack of proper regulations, a tax-cut in 2001 which did not stimulate the economy, the Iraq war which contributed to soaring oil prices, the drop in household savings in which Americans began living on borrowed time and money, as well as financial institutions which mismanaged risk by misallocating capital.
Thus the implosion of Lehman Brothers, Fannie Mae, Freddie Mac, and AIG (American International Group). Now it is the American people -- through the federal government -- who are footing the bill for these setbacks ... to the tune of $816-billion to bolster the present financial situation. Unfortunately, the blood-letting may not be over. There are said to be rough roads ahead for Washington Mutual and Wacovia.
The Federal Reserve is actively working to infuse foreign money into the American financial system. One infusion of cash may come from China which is being encouraged to work with Morgan Stanley. Morgan Stanley is one of only two remaining independent investment banks in the United States.
"Fear is driving this market, not facts, not the fundamentals of so many great American companies," declared Jim Cramer of CNBC. "At times like this, when you're overwhelmed with panic, it helps to know the history," he added.
"What did it feel like today (Wednesday, 9/17/08) ... it felt like 1987 .. it felt like 1990, when the fear was palpable and the market was getting crushed .. pulverized," he stressed. However, this is not a precursor to a recession or a depression, at least not according to Cramer. He points out that this is not consumers who are withdrawing money from both commercial banks or savings and loans. Rather, he explains, this is a case of a run on investment banks by hedge funds.
All of this has become one of the major points of contention in the 2008 presidential campaign. Both Republican candidate Senator John McCain and Democratic candidate Senator Barack Obama quickly produced new television commercials, looking directly into the camera to address the American voters.
"End the 'anything goes' culture on Wall Street with real regulation that protects your investments and pensions. Fast track a plan for energy ‘made-in-America’ that will free us from our dependence on mid-east oil in 10 years and put millions of Americans to work. Crack down on lobbyists – once and for all -- so their back-room deal-making no longer drowns out the voices of the middle class and undermines our common interests as Americans," said Obama.
"We need strong and effective regulation, a return to job-creating growth and a restoration of ethics and the social contract between businesses and America. Important questions remain to be answered by Wall Street. Did executives mislead investors and regulators about the severity of the problem? We must investigate whether or not there was misrepresentation on part of the company executives. If there was, there must be penalties," said McCain.
As if Americans needed one more example of an economy in trouble, the auto industry may be getting ready to ask for $25-billion in government-backed loans. This measure is now being discussed with the U.S. House of Representatives, according to Majority Leader Steny Hoyer, (D-MD).
Thanks to the 2007 Federal Energy Legislation, auto makers may tap $25-billion in low-interest loans to retool and modernize their manufacturing facilities. However, with the American auto industry at its lowest point in 30-years, General Motors, Ford, and Chrysler are seeking to double that dollar figure to $50-billion.
Whether the current financial crisis has been brought about the George W. Bush administration, Wall Street, or consumers, the only certainties in this calamity are that 1) both presidential candidates will push the blame on others, 2) both presidential candidates claim to have the plan for recovery, and 3) Americans are trying to keep their jobs, their homes, and their cool.
" ... or so this news junkie thinks!"
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