Tuesday, January 22, 2008

Bad Economic News

Picture from the Hong Kong Standard.

International financial markets have a head-cold, caused by the flu in the American housing markets. In short, looks like the beginning of a recession to me:

A sell-off in global stock markets on a day when Wall Street was taking a respite, celebrating Martin Luther King Jr. Day, sent a chill through investors anticipating that Tuesday may bring a chaotic start to trading when U.S. markets reopen.

In a grim portent, futures on the Dow Jones industrial average were off by as much as 500 points. The Dow has fallen by more than 2,000 points, or about 14 percent, from its peak reached in October.

"We could have a messy opening," said Chicago economist Carl Tannenbaum, who said the wave of overseas pessimism seen Monday is hard to explain. "Much of the blame was placed on recession fears, but those fears have been expressed many times in recent weeks."

There was no particular trigger to Monday's huge sell-off, he said. But other analysts said the biggest factor is a new wave of pessimism about the global banking sector.

While others were eager to blame a $145 billion tax-stimulus plan offered by President Bush late last week, Tannenbaum said, "It's easy to take a negative view of the proposal, but many people have been positive about it."

The downbeat mood began in Asia and spread to Europe, leaving no major market unscathed.

In many cases, the sell-offs were stunning. Britain's benchmark FTSE-100 slumped 5.5 percent; France's CAC-40 index tumbled 6.8 percent; and Germany's blue-chip DAX 30 plunged 7.2 percent.

In Asia, India's benchmark stock index tumbled 7.4 percent, while Hong Kong's blue-chip Hang Seng index plummeted 5.5 percent, its biggest percentage drop since the Sept. 11, 2001, terror attacks.

"It's another horrible day," said Francis Lun, a general manager at Fulbright Securities in Hong Kong. "Today it's because of disappointment that the U.S. stimulus package is too little, too late, and investors feel it won't help the economy recover."

Note the double-speak in that quote. Is it Bush's wrongheaded stimulus proposal or is it not? Lowering the taxes on the wealthy will not work, because the less wealthy don't have money to buy anything and thus the wealthy won't invest the extra money in new firms, say, and the wealthy consume a smaller fraction of the extra income they would gain than the less wealthy would.

This is just my opinion, but I think we should increase public spending by fixing the decaying infrastructure all over the country and by rebuilding New Orleans. We could fund it the same way the Iraq war has been funded...