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September 16, 2008

Economic Crisis - McCain says everything is Great & Reviewing my Predictions

By Steven Leser

The financial industry cannot police itself, and yet McCain, Bush, and the rest of the Republican Party continue to operate as if it can.


I’ve been writing about the coming economic crisis for the last 8 months and what I have expected has finally started to materialize. I have never been so unhappy to see my predictions come true. I hope my readers don’t mind me taking them back through some of the things I wrote previously before coming up to date.

Some of my previous articles on the economy can be seen at these links:





One of the concepts to which I would like to reacquaint readers is that I look at five key components to determine how bad any negative economic cycle will be. Those five key components are:

1. Consumer savings and spending/ability to spend
2. Corporate income, health and spending/ability to spend
3. Government financial health and ability to spend
4. The lending and banking system and its ability to extend credit
5. Inflation & scarcity of resources

As I have written several times before, for the first time in American history, all five of these components are in a horrible condition. Please note the inflationary component of our current crisis. The stagflation of the late 1970s was the only other time when the US has experienced an economic downturn accompanied by rising inflation. That makes the problems exponentially worse and harder to solve.  My predictions for what was to come were as follows:

I see a Dow in the 7000-9000 range, the S&P 500 struggling to stay over the 1000 mark and a NASDAQ in the 1400-1600 range. I see unemployment and inflation both between fifteen to twenty five percent. I see many consumers defaulting on their credit cards and the major crisis in the banking and lending industry will be compounded by hordes of consumers defaulting on their credit cards. As a result of these credit card defaults, more banks will fail and major banking insurers will fail as a result as well as investment funds and securities that are based on credit card debt. I believe there will be consumer and corporate bankruptcies on a massive scale

When I made these predictions, the DOW was at 12825. The DOW is now nearing 10917 so it is halfway to my expected range of 7000-9000. Inflation was at around 3.94% (it is now 5.64%) and the unemployment rate was 4.9% (it is now 6.1%). There are no major or minor efforts underway to deal with any of these issues. In fact, the Federal Reserve is about to make another major mistake and lower interest rates again which for inflation is like throwing gasoline on a bonfire. I stand by my prediction of 15% or more in both of these measurements as the five components act in concert to drag the economy down into the abyss.

Getting back to the five components:

1. Consumer savings and spending/ability to spend
2. Corporate income, health and spending/ability to spend
3. Government financial health and ability to spend
4. The lending and banking system and its ability to extend credit
5. Inflation & scarcity of resources

The great depression was cured by government spending. That is not possible today. The government is running at an annual deficit of nearly $500 Billion dollars already. In addition, because of the fact that this crisis has an inflationary component, any money thrown at the situation is going to cause additional inflation and make the problems worse. Consumers are hurting, businesses are laying people off, and the banking industry is on life support.

One of the most surprising things in all of this is that John McCain started off yesterday parroting the Bush administration that everything is great and the financial system is sound. I’m wondering which of his ten (or is it twelve?) houses he was in when he said that? Talk about someone who is out of touch with what is happening to the typical American worker and American family. I wonder if McCain’s houses are on this planet or if he lives in another galaxy. At the beginning of the great depression, Henry Ford said something similar. He later realized that the depression was something serious but do we want to elect someone who so clearly doesn’t get it?

We can easily see that the fundamentals of this economy are not strong and that if something isn’t done soon, the economy will collapse completely. Maybe McCain really believes what his chief economic advisor said that the recession is a mental one and that America is a country of whiners. Speaking of Phil Gramm, McCain’s chief economic advisor, Phil Gramm is the main architect of a lot of the banking deregulation that caused the current crisis when he was the head of the Senate Banking Committee from 1995-2000.  This is the guy McCain has chosen to advise him on economic matters.

There is something that could be done to step in and mitigate the crisis. It will not seem like mitigation when it is done, but we are in a situation that takes two steps back before we can take four steps forward. When I wrote previously about what needs to be done to start fixing the economy, I wrote the following:

When you do that research, you immediately come upon one Paul Volcker. Volcker was chairman of the Federal Reserve from 1979 to 1987. Volcker correctly deduced in 1979 that the remedy was to limit the growth of the money supply and allow interest rates to rise. This solution, which is the only one that will work in a serious stagflation situation, will result in several years of massive unemployment and even deeper negative GDP growth. It takes money out of people's hands causing both of the things that you need to happen to effect recovery. It causes the supply of goods to rise because people don't have the money to buy them and as a result start to conserve resources, and the reduction in money supply bolsters the value of the nation's currency. These twin powerful effects drive prices down and create the conditions where recovery can happen, but as I said above, it takes several years for this to work. When they read this, I am sure many people will think of the saying "The cure is worse than the disease" and it almost is. It is also the only thing that will work and the sooner it is applied the shorter the duration of the stagflation.

The current crisis is absolutely the result of Republican policies of the last 40 years which have been universally anti-regulation on the banking and financial industry (and anti-regulation of probably every other industry as well).  Every 9 years, we see why the banking and financial industry needs regulation. We had the Savings and Loan and Junk Bond Crises of 1986-1991 brought about by Brokered Deposits and risky loan practices. We had the tech bubble that burst in 2001 and now in 2008 we have the sub-prime mortgage disaster.

All of these issues could have been avoided and each threw the entire economy into crisis. This is not an industry that can police itself, and yet McCain, Bush, and the rest of the Republican Party continue to operate as if it can. The economy lost between $500 and 700 Billion dollars yesterday. When I say the economy, I mean everyone who has a 401K, everyone who has stocks, bonds, etc. Everything about the economy has gotten worse under 8 years of a Republican President and six years of a Republican congress of which John McCain was a prominent part. Its time for a change and Barack Obama is that change.

Submitters Website: http://www.ibtimes.com/blog/steven-leser_103/bio/

Submitters Bio:

A political blogger for the International Business Times, Steve Leser is a hot national political pundit. He has appeared on MSNBC's Coundown with Keith Olbermann, Comedy Central's Daily Show with Jon Stewart and Russia Today's (RT) Crosstalk with Peter Lavelle. But, Leser is most known for his work as commentator and the progressive counterpoint on the very conservative FOX News cable network. Steve Leser has been frequently featured on Your World with Neil Cavuto, Bulls & Bears, and Cashing In against such FOX notables as Neil Cavuto and Stuart Varney. Leser gave the stirring live commentary on FOX as news broke of the resignation of Sarah Palin as Governor of Alaska. Steve Leser is in demand in New York as keynote speaker for his authority on the power and machinations of Republican think tanks, the economy, health care reform and various other political topics. Leser is also a political organizer and has held positions within the Democratic Party including District Chair and Public Relations Chair within county organizations.