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Bubbles, Unemployment and Other Economic Problems

Lori: Under Obama the America’s Trouble Asset Relief Program (TARP) will end up costing tax payers less than 1% of GDP. In the past the average cost to resolve such a crisis was around 13% of GDP.   Great news right?!

Andrea: Well banks have found other ways to reestablish their financial health; for instance with interest rates so low it is easier for them to borrow from the Feds and invest that money in US bonds. The US bonds pay considerably better interest rates and earn a substantial profit without having to engage in public lending, an activity that can entail some risks for them.

Lori: Nevertheless banks have returned money they owe the government. This action has demonstrated their good will.

Andrea: By returning the money they owe quickly, banks free themselves of government supervision. Now bank executives can once again earn huge bonuses every year, bonuses that sometimes are worth millions of dollars.  Also banks have benefited from the Feds low interest rates in other ways, for instance; a large number of the savings deposits that banks now hold, were earned without having to offer high rates to their clients in order to attract them. Savers have nowhere to go but to banks in order to park their money without risk.

Lori: I tell you what worries me the most about the economy is the unemployment situation 10+% is too high and with such numbers it is doubtful the economy will recover soon.

Andrea: With the banks reluctance to give loans, even to small businesses, and with so many unemployed workers, the economy will not likely recover for a long time. In deed, Joseph Stiglitz a Nobel Peace Prize winner economist said recently that he and other economist believe the financial system today is even more frail than before the crisis. Stiglitz believes that another crisis is probably around the corner and that it would be a good idea to reform the global financial system to avoid more financial disasters.

Lori: I read Stiglitz's article too.  He believes we need a global response to the problems we are facing. He also advises there should be a new reserve only coin to be backed up by some of the countries with stronger economies in the world.

Andrea: On top of all the problems we have, the Stock Market, according to The Economist, is about “50% overvalued on the best long-term measure” and although the market rebound was needed in order to stabilize the economy last year, it appears now excessive growth is creating dangerous bubbles. On the other hand the Feds can not respond by raising interest rates to break the bubbles that could crush economic growth.

As The Economist indicated; the problem is not just that valuations look high by historic standards, but it is also that the current combination of high asset prices, low interest rates and massive fiscal deficits is unsustainable.

Published Jan 27 2010, 06:25 PM by cartoon
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