Can our economy get worse? 11/23/2008 3:57 PM By GREG ROBERTS Columnist
With the Dow Jones Industrial Average closing at less than 8,000 for the first time since 2003, financial pundits are asking the question: "Can things get any worse?" The answer, sadly, is yes.
Last week in a conference call, noted economist Nigel Gault stated that regardless of whatever stimulus packages are applied to the economy, it will be impossible to avert a recession. He went on to say, "...We think it will be the worst since World War II."
With housing starts at their lowest level since the '50s, it seems to me that one of the cornerstones to economic recovery is to stimulate the housing market.
In that regard, I believe that Secretary of the Treasury Henry Paulson did the right thing last week when he announced a new direction for the bailout of troubled banks and other savings institutions.
Essentially what Paulson did by his announcement was to signal a shift in the direction of the bailout. Instead of simply purchasing underperforming assets from banks, holding them until the assets recovered their value and then reselling them, hopefully, at a profit for us taxpayers, the Feds will invest directly into banks, thereby obtaining ownership interests in exchange for cash investments by the Feds.
This approach has been used effectively in the United Kingdom, and it is designed to stimulate more loans by banks as a result of the capital influx.
Another encouraging sign of the times are the recent activities of Fannie and Freddie, now under government control, as well as that of Citibank, now owned in part by the Feds.
These institutions have launched programs to renegotiate terms for more than 800,000 mortgages to home-owners who would otherwise face foreclosure.
Additionally, the head of the FDIC rolled out an incentive plan for lenders covered by the FDIC to place a cap on monthly mortgage payments of 31 percent of per-tax monthly income with rates as low as 3 percent for the first five years.
Another principle of economic recovery is a stable employment picture, and at least one economist has predicted that the unemployment rate will rise to more than 9 percent by the end of 2009.
To plug the hole, Congress is now considering a $300 billion program to rebuild aging roads, bridges and water systems, to name just a few.
Programs such as these will provide employment opportunities for thousands of workers across the nations. But this is simply a short-term answer to a long-term issue.
That issue is erosion in one of the cornerstones of our country's economic success in the last 35 years. That downturn has taken place in our manufacturing base.
From our founding up until the early '70s, America was the manufacturing hub of the world, but U.S. manufacturing companies made the easy rather than the difficult decision by outsourcing product manufacturing to other countries, primarily, China.
The excuse given to us citizens that was our workers' wages were simply too high, and, to compete in the world economy, these companies needed to reduce costs by outsourcing.
Actually, what our manufacturers failed to tell us was that we could compete by investing in our own manufacturing infrastructure.
Question: Where are the highest quality goods in the world now manufactured? Not China, Korea or Mexico. Not in any South American or Asian country, either. The answer is Germany and Italy, and to a degree, France.
These countries invested in manufacturing technologies that have enabled them to compete and win business from more labor-intensive manufacturing countries.
All this means that our recovery will take longer. I look for lean times until, at best, the beginning of 2011. I hope I am wrong.
Got a financial planning question for Greg? You may e-mail him at Greg29803@gmail.com.
Greg Roberts is a certified financial planner with 35 years of financial and estate planning experience.
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