The investment sector of our economy, which relies heavily on debt, is in financial trouble. This week brought about the bankruptcy of one of America's oldest and largest investment firms, Lehman Brothers, and the collapse of insurance giant AIG, which suddenly found itself without legs because it was heavily invested in mortgage giants Freddie Mac and Fannie Mae. When Fannie and Freddie collapsed last week, their stock became essentially worthless and AIG lost a substantial portion of its cash reserves. The Federal Reserve will now secure half the value of AIG, worth roughly $85 billion.
This article from the NYT Freakonomics blog, which clearly explains the Fannie/Freddie collapse, the bankruptcy of Lehman Bros., and the bailout of AIG, is an absolute must read if you want to understand what happened this week.
John McCain has taken a lot of heat for saying that the fundamentals of our economy remain strong. He was also pilloried for stating several months ago that he was "always for less regulation" , although the rest of his quote (conveniently omitted by Democrats) states that "there is a need for government oversight".
But is McCain right? Read this Yahoo! News story and marvel at this:
New York's investment community was experiencing "a rather difficult crisis of confidence," but one where people haven't given up hope that opportunities to make money are still out there, somewhere.
Then consider the fact that foreign governments and investment firms are jumping at the chance to invest in struggling American financial institutions. Despite the great debts that sunk those firms, there is still a considerable amount of real property wealth in this country, as well as positive future valuations for productivity and economic growth, the factors that keep the stock markets in positive territory. Inflation is still low; unemployment has risen slightly but is only 60% of what it is in "progressive" European socialist states like France and Germany; consumer prices have risen this year, but not out of proportion to rising fuel costs; there has yet to be a single quarter of negative economic growth, so we are still no where near a recession. American investors seem to have confidence that the massive, unpredicented government intervention this week will actually bring about economic stability -- the Dow swung wildly (down over 800 points at one point) but ended the week down only 34 points.
As I see things, we took it on the chin this past week, but those blows involved finally coming to grips with some extremely dangerous lending and debt policies that allowed financial firms to grow far beyond their ability to responsibly manage their debts and assets. "Too big to fail" really just means "too big," period. In order to maintain stability, the Federal Reserve (which is simply the financial arm of our federal government) ended up involved at an unprecedented level in the operation of our financial markets. If you are a strict believer in laissez-faire economics and regret the abandonment of the gold standard 35 years ago, then undoubtedly you are very upset right now. I am not an expert in these things, but the positive reaction of the stock market seems to indicate to me that we will weather these crises intact, though perhaps a bit humbled.
In California, Gov. Schwarnenegger vowed to veto the state budget, stating that it was overstuffed with deficit spending and accounting tricks. The state's Democratic leadership capituated, and yesterday signed a budget compromise.
Did you know that we formally handed over security of Iraq's Anbar Province to Iraqi forces three weeks ago? This is a huge milestone, and I imagine if a Democrat was in the White House it would have been celebrated with front page headlines from major newspapers and endless "special reports" on network news broadcasts. General Petraeus has also publicly speculated that American troops could pull out of Bagdhad by next summer. This has got to be bad news for Democrats, who wanted to be able to take credit by themselves for the eventual troop draw-downs in Iraq.
A few weeks ago, Forbes Magazine ranked Hollywood's most overpaid actors and actresses, based on the amount of money they make for the studio versus how much they are paid. Actress Nicole Kidman tops the current list, earning only $1 in box office receipts for every dollar she was paid.
A group of conservative Evangelical pastors has declared that clergy have a constitutional right to endorse political candidates from their pulpits, and is openly defying the IRS. This is interesting, since liberal churches have been involved in social and political action for decades, and rarely draw the ire of the tax man. Specifically, Democrats have made black churches into one of their most effective political grandstands.
On the other side of the world, the Large Hadron Colider at CERN in Switzerland has successfully completed its first tests. Fortunately for us, the elementary particle interactions that occurred in the machine's artificially-created environment (which simulates conditions in the universe just fractions of a second after the "Big Bang") did not create an earth-swallowing a black hole, as some theorists had feared.
Meanwhile, back in the States, Bell Laboratories officially announced that it would be pulling the plug on its fundamental physics research department -- a department that produced scores of invaluable patents and developed such crucial techonolgies as the negative feedback amplifier, information theory, sonar, radar, the transistor, and the laser. In the process, Bell Laboratories scientists took home six Nobel prizes.