All Blog Posts from Econwatch

This post by Rachel Elson originally appeared on CBS' MoneyWatch.com.

---

In the hours leading up to the collapse of Lehman Brothers, JP Morgan Chase CEO Jamie Dimon warned his top executives to prepare for the worst. "There is no way that Washington is going to bail out an investment bank," he told his team. "Nor should they."

Andrew Ross Sorkin tells the story of the ensuing meltdown in his new book, "Too Big to Fail," going behind the scenes for a play-by-play account of the 2008 crisis on Wall Street.

Earlier this week, Sorkin stopped by the CBS MoneyWatch studios to discuss the meltdown with editor-at-large Jill Schlesinger.

They discussed the causes of the financial crisis, as well as the backstage drama, the big egos, and one unsung hero. Sorkin also calls out the two most important changes that he thinks could prevent a repeat of the meltdown.

You can watch Schlesinger's interview with Sorkin below, or read an excerpt of his book, at CBS MoneyWatch.

This article by Lewis Braham originally appeared on CBS' MoneyWatch.com.

---

While this month’s stock market action has been relatively benign, October is known to be a particularly spooky month for stocks (see: 1929 and 1987). Perhaps it’s the coming of fall, the days getting shorter, or the arrival of Halloween, but gloom and doom and ghoulish predictions for the future have often prevailed. With that in mind, we asked five money managers and financial gurus to share their worst-case scenarios for the market and the economy. From runaway inflation to sky-high deficits that force the government to slash Social Security and Medicare, we found five fears that keep the experts up at night.

Not to suggest that these spooky scenarios ought to make you hit the panic button. Just consider it a stress test for your portfolio: Are you diversified enough to provide protection if the market goes south, or are you betting the farm on a best-case scenario? Inflation is a recurring theme in our experts’ nightmares; you can hedge that risk by owning inflation-protected securities and boosting your exposure to international markets. That way, you should be able to get a decent night’s sleep no matter what happens.

1. Runaway Inflation

“I don’t think we’ll have a crash like the last one, but the risk that we will have a significant bear market is very real. There could be several catalysts. For one, European banks are undercapitalized and overleveraged — far more overleveraged than U.S. banks. So the likelihood of a major European bank failing in the next two to four years is significant. Also, the likelihood of the commercial real estate sector in the U.S. suffering a significant wave of foreclosures is high. A third risk is any sort of geopolitical shock, such as another terrorist attack or a small war starting in another country. The fourth — and arguably the biggest — potential catalyst is that our aggregated indebtedness as a nation has gotten totally out of hand. Rampant inflation is a serious risk if we keep spending $1 trillion to $2 trillion more than our tax revenues.”

Read full post…

This post by John Keefe originally appeared on CBS' MoneyWatch.com.

---

The Dow at 10,000. Does it mean anything? It may be just fodder for financial writers: a Google search that also specifies September 2009 returns five million results. But it could be that the Dow Jones Industrial Average at 10,000 coincides with some extreme in valuation, and is a "destination" for the market. Otherwise, it's just a number, like one of those small, frequent mile markers that tick by on the interstate.

Read full post…

This post by Nate Hardcastle originally appeared on CBS' MoneyWatch.com.

---

One thing seemed clear during the darkest days of the recession and bear market: The rules of investing had changed. Investors of all stripes, from big guns at giant financial institutions to the guy chatting you up at the cocktail party, were trying to figure out how to operate in the new paradigm. Pimco CEO Mohamed El-Erian dubbed it "the New Normal," and GMO money manager Jeremy Grantham, who'd warned us all that this was coming, looked forward from here and saw "seven lean years."

But is it really different this time? From a big-picture perspective, the stock market to this point actually has behaved pretty much as it usually does in recessions: falling in anticipation of the economic downturn and rebounding hard before the economy starts growing again, with cyclical sectors leading the way down and back up. "With the benefit of hindsight, the market really did perform as you might have expected," says Todd Salamone, senior vice president of research for Schaeffer's Investment Research in Chicago. "The game hasn't changed."

The investing climate is surely different than it was pre-crash. But the fact that the market mostly has followed the usual script through the recession suggests that long-term investors shouldn't throw the old wisdom out the window. To the contrary, their recent experiences should help them use that wisdom. "Today's investors now have a once-in-a-generation bear market and recession under their belts," says Jim Stack, market historian and editor of the InvesTech Market Analyst. "They can draw on what they’ve learned to make better decisions in the future."

Read full post…

This post by Kathy Kristof originally appeared on CBS' MoneyWatch.com.

Erik Weech learned about sneaky banking polices the hard way.

A few weeks ago, Bank of America hit the Chicago marketing man with a $35 overdraft fee when he had more than $130 in his account. The bank was apparently "holding" his money for charges that hadn't cleared - only they appear to have been holding three times more than he actually spent. Then, if that wasn't enough, they "reordered" his subsequent purchases in a way that tripled his overdraft charges. Within a couple days, he had racked up $140 in fees.

Authorization holds and transaction reordering are among the banking practices taking increasing heat recently from both consumers and lawmakers. Although nickel-and-dime fees are pervasive - just check your cable bill - the big financial institutions have become poster children for customer abuse. With direct access to your cash, they have developed a range of sneaky tricks that can quickly whittle down your account.


Use your credit card and you’re likely to find that they’ve hiked your interest rate, perhaps switching it from a fixed-rate to a variable. Don’t use your card and you could get hit with an inactivity fee. Fail to fix an overdraft promptly and you could get hit with a zero balance fee — in addition to overdraft charges. Flee the bank and they’re likely to slap you with an exit fee.

“Consumers would be shocked at how many different tricks the regulators allow banks to use to take money out of their wallets,” said Ed Mierzwinski, consumer services projects director at the U.S. Public Interest Research Group in Washington. “As long as the banks disclose in the small print that they are going to rob you, it’s legal to rob you.”

Read full post…

This post by James Picerno originally appeared on CBS MoneyWatch.com.

In February, President Obama signed the massive $787 billion stimulus bill into law with the idea of jump-starting the economy with spending on everything from tax cuts to new highways to programs to increase energy efficiency. The size and specifics of the package-and even whether it was necessary at all-were hotly debated, and the resulting bill was supported by only three Republicans in the Senate. Seven months later, what can be said about whether the stimulus package has worked or not?


The answer is that at least some of the spending has goosed the economy. But it's a tricky business to assign credit-if a start-up hires six people, was it the entrepreneur's vision or the government grant that was responsible? And the jury's still out on all the stimulus money that hasn't even been spent yet.

In many ways, the Cash for Clunkers program, which offered rebates of up to $4,500 to consumers for upgrading to new, more fuel-efficient cars, exemplifies the debate over the effectiveness of stimulus spending. The program disbursed $2.9 billion in rebates, spurring the purchase of close to 700,000 new cars and giving a much-needed boost to the faltering auto industry. Critics accurately point out that many of those purchases would have been made anyway in the future, without taxpayer subsidies. But one of the primary goals of stimulus spending is to get people spending money now, while the economy is hurting, and Cash for Clunkers certainly did that. (See our earlier story, "Did Cash for Clunkers Really Work?")

Read full post…

This post by Richard Conniff originally appeared on CBS MoneyWatch.com.

There are plenty of good phrases to sum up the American consumer spirit of the past few decades — such as "Were you completely insane?" But what sticks in my mind is a bumper sticker I once saw displayed on a late-model Hummer hauling a trailer loaded with matching sparkle-painted $15,000 jet skis: "The one who dies with the most toys wins." I couldn't figure out why dying was key to the deal. But now I get it: There was no way that bozo could pay for so much crap in one lifetime — and his kids can't handle the bills either.

American consumers have awakened, bolt upright, with belated sticker shock ("I bought what!? I spent how much!?"), from a shopping spree that's arguably lasted since the early 1970s. That's when spending started to outpace economic growth, according to the federal Bureau of Economic Analysis. Credit cards proliferated. Easy credit based on rising real-estate and stock prices fed the delusion that we could go on consuming more than we produce forever. And it just got giddier after 1997, when consumer spending bubbled up from 67 percent to more than 70 percent of gross domestic product (versus 55 to 65 percent in more sober economies). "People are using their homes almost as a third income," an executive for a major lender told me in 2005, and she thought that was just fine.

Then real estate — and every other market — went bust and American household wealth dropped $14 trillion overnight. One year after the collapse of Lehman Bros., the investment bank that exemplified Wall Street's infatuation with borrowing, we're all learning to pay our accumulated bills with what we can earn from our first and second incomes, both of which seem likely to vanish at any moment. (Full disclosure: I'm a journalist and my wife is a real-estate agent. At least we didn't invest in buggy whips.) When consumer confidence came creeping back in August, the stock market fluttered upward. But the rebound took confidence only to midrecession levels. "Instead of being suicidal, it's just depressed," says Conference Board economist Ken Goldstein.

So the big question now is whether the American consumer, regarded as key to any recovery, is only temporarily missing in action. Or are we seeing a permanent shift in attitudes toward what we used to call "retail therapy"? Making it permanent could be a good thing for many badly strapped households — financially first of all, but also culturally, as people rediscover life beyond the shopping mall. But in an economy so dependent on consumer spending, that would be bad news for the recovery.

Read full post…

Here’s what some of the top economists and economics bloggers are saying about President Obama’s heath care reform speech delivered yesterday to the House and Senate:

Read full post…

This weekend, the President announced a handful of new initiatives designed to make it easier for American workers to save more for retirement. The initiatives supposedly make use of research from behavioral economics, the arm of the dismal science that incorporates the way people really act into the design of retirement plans. That’s has proven effective in the past..except this time the Administration loses its nerve.

Read full post…

By Cait Murphy of CBS MoneyWatch.com.

Over the past two years, the price you’ve paid for a gallon of gas has ranged from an average of $1.60 to $4.11. To use an economic term, that’s nuts. While the Arab oil embargo, the Iranian revolution, and the Gulf War, not surprisingly, provoked big price jumps at the pump, not one of those events caused a two-year round trip as dramatic as the one we’ve just seen. And the geopolitical drama that caused the most recent spike, sending the price of a barrel of crude up to $145 on July 4, 2008? Well, there wasn’t one. So why did gas prices leap 100 percent in 12 months only to plummet to $30 on December 23, and then more than double, to a recent peak of almost $75 on August 21? And how much will it cost you to fill up your tank in the coming years?


Crude Oil Prices 2000-Present

What’s Driving Prices

There are four major factors that determine oil prices — supply, consumption, financial markets, and government policies. What has happened is that what have historically been the fundamental factors in pricing the barrel — supply and consumption — are no longer in the driver’s seat. So this year, for example, there has been abundant supply and slowing demand, but prices have doubled. Economics 101 says that shouldn’t happen. But it has.

Read full post…