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4/08/08
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Friends and Colleagues:
This week Eugenio Aleman of Wells Fargo Economics shares with us his thoughts about the pending (?) recession, and about the propriety of the Fed’s actions in the Bear Stearns matter.
Can we finally get on with this recession already?
• March was the 3rd consecutive month in which the U.S. economy eliminated jobs rather than creating them.
• Of course, construction and manufacturing contributed the most to weakness in the labor market.
• The service sector, however, was also affected, which is one of the reasons why Mr. Aleman says we are very close to recessionary levels.
• In total, the U.S. economy eliminated 232,000 jobs during Q1 2008, which confirms the very delicate condition of the U.S. economy.
• According to Mr. Aleman, this opens the door for negative economic growth during Q1 and Q2 2008.
It sounds like the dreaded “R” train is coming….Is there any hope of avoiding it?
• Mr. Aleman says, “Yes”….If the U.S. economy posts slightly positive growth during Q1, we would probably avoid a “recession”, since technically a recession requires two consecutive quarters of negative economic growth.
• But would we really? He goes on to explain that this condition was not met during the 2001 “recession”.
• It is possible that the powers-that-be may decide to call this a “recession” even if we do not meet the technical definition.
Does the definition really matter to those of us in the working world? Would we feel any less pain if we skirt the “recession” label?
So Mr. Aleman, what do we have to look forward to?
• He projects that our weakening labor environment will add more pressure to the U.S. housing market.
• This time around, he contends that the problems faced by the market will not be limited to sub-prime mortgages but will also include the prime market.
• He believes that the fiscal package is going to have some effect during the 2nd half of the year; however, these effects may not be enough and may be diluted by a worsening economic environment.
In other words…it looks like more pain lies ahead of us…….
Looking back at the Bear Stearns matter…Did the Fed do the right thing?
First a quick primer on the workings of the Fed….
• The U.S. Federal Reserve is self-funded, which means it works as a private, quasi-governmental enterprise.
• They actually make lots of profits, and those profits are transferred to the U.S. government.
OK….but was it right for them bail out Bear with “quasi-public” funds?
• In the Bear Stearns case, the Federal Reserve decided to put measures forward to stem a potential collapse of the U.S. financial system.
• Yes, we can argue the “moral hazard” issue, but if Bear Stearns had failed, causing a run on the commercial and investment banking system, would anyone have really cared about moral hazard?
Yes, but….was it the right thing to do?
• Nobody really knows whether the Fed did the correct thing; however, the risk of not doing anything was extremely high and could have caused severe damage to the U.S. and world economies.
• Mr. Aleman contends that we empower our leaders to make tough decisions in tough conditions.
• He argues that our perpetually second-guessing their actions when there is no written “instruction manual” on the correct course of action is counter-productive.
Well there we have it…. A Recession is coming….but maybe it’s not. The Fed did the right thing in saving Bear Stearns….but maybe they didn’t.
The situation…like the economy….is as clear as mud. As our saga continues, we need to keep informed…..so stay tuned…..
THOUGHT FOR THE WEEK
Leadership….
In this election year we hear much about the leadership void in our society. But what exactly is leadership?
Leadership is defined as: “Going before; showing the way”.
Don’t we all do that at one time or another? Who among us never has the opportunity of going before, or showing the way?
We are all leaders…..and our actions serve as examples to those around us.
Do our actions show others the way by cutting corners…complaining…blaming others?
Or do we choose to lead down the path of integrity…fairness…kindness?
We are all leaders…..but where and how do we lead? In the week ahead, may each of us choose carefully how we will lead those around us.
Have a good week.
David Rosenthal, MAI
President & CEO
Curtis-Rosenthal, Inc.
drosenthal@curtisrosenthal.com
www.curtisrosenthal.com
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