Taking Stock Of Our Economic Woes

We're taking stock of our country's economic woes this morning. Everyone knows we've been through some tough times of late. But does anyone really know how to turn things around? Our cover story is reported by Rita Braver:

A run on a California bank … while the nation's two federally chartered mortgage giants turned up in need of a government rescue plan, a plan Treasury Secretary Henry Paulson described as being aimed at "supporting the stability of financial markets."

Stocks rallied, but only after weeks of losses. There was a new round of layoffs by General Motors. And even though oil prices fell a little, there was confirmation that inflation is on the rise. Consumer prices were up 1.1 % in June, while wages fell 2.4 percent over the past year.

Art Cashin, director of floor operations for UBS Financial Services, says it's been one of the most unstable periods he has seen in 45 years on the New York Stock Exchange.

"We're in what is called bear market territory," Cashin said. "We're down over 20 percent since October. We have very volatile moves where the stocks looked like they were going into absolute free fall. There were heart stopping moments here."

A new CBS News/New York Times poll finds that 80% of Americans believe the condition of the economy is bad.

The fallout continues. That once-booming housing market that we've all seen go bust …

Says Mark Weisbrot, co-director of the non-partisan Center for Economic and Policy Research, "That's the overwhelming cause of this recession. And that's because we built up an enormous bubble in home prices from 1996 to 2006. It was over eight trillion dollars of bubble wealth."

Weisbrot says that only about 40% of that bubble has deflated so far.

"So you're going to have a lot more foreclosures, a lot more writedowns in banks, possible bankruptcies."

By some estimates, banks may need to write off up to one trillion dollars in bad loans. One scary example: this past week's run on IndyMac, the California bank that went bust due to too many bad mortgage loans.

(CBS)

And she is angry: "At the Fed, at the greedy lenders, at the lying borrowers."

She says that she's had to cut hours for the employees of her small company that makes down and feather products. And because her name is on his account, her son Anthony, a Marine who has served in Iraq, can't withdraw the $6,000 he's been saving for a motorcycle.

"I can't get the money out, I can't touch it, and now my dreams are falling apart," he said.

Anthony and his mother still hope to get all their funds back. And no one is predicting the kind of bank failure fever that swept the country in the Great Depression.

But the turmoil of the week had President Bush trying to reassure Americans that the country is on solid economic ground.

"We can have confidence in the long term foundation of our economy, and I believe we will come through the challenge stronger than ever before," he said.

Not everyone was buying it.

In fact, the economy is still showing small signs of growth. But Matt Weisbrott says that with inflation up and wages down, that's little comfort:

"It's kind of like the guy who jumps out the window of a 60-story building, and he passes the 30th floor and he says, 'Everything's okay, so far.'"

Things are definitely not okay in places like Ravenna, Ohio, with businesses closing and workers laid off.

Dave Vaughan of the nonprofit Neighborhood Development Services says, "Home ownership counselors and our foreclosure specialists go through, day in and day out, hearing just terrible stories of people losing their houses, their dreams shattered."

Vaughan says that it's not just foreclosures.

"Most of the manufacturing jobs are simply disappearing," he said. "And the replacement jobs that are coming into play are much lower wage than they had been previous. As one of my colleagues said, the people who built the F-150 are now building Big Macs."

Last month, 37-year old Marianne Page, a single mother of two, lost her job as a production scheduler for a manufacturing company due to downsizing.

"It was hard, it was hard," she said. "The kids didn't really understand. Maybe a little bit, but they're young."

Now she scrimps on gas and groceries, and still can't find work.

"It just seems like everybody's swarming for the same jobs," she said. "It's just like one job and 100 people going for the same thing. It's just not a good thing."

And for many Americans the worst may be still to come.

Peter Schiff, president of Euro Pacific Capital which specializes in foreign investment, said, "We are going to have a lot more inflation. Unemployment is going to keep getting worse. Interest rates are going to go a lot higher. That is gong to make things worse. We are going to see a lot more bankruptcies, a lot more foreclosures, a lot of the big retailers cutting back and going out of business."

When Schiff first started predicting the bursting U.S. mortgage bubble, failure of financial firms and a steep rise in oil prices, he became known as "Dr. Doom."

"And people just dismissed, they almost laughed it off like it couldn't happen," he said.

He says that Washington and Wall Street have gotten it wrong for years:

"Our economy has been built on consumer credit, on borrowing and spending money," Schiff said. "The real foundation of an economy needs to be on savings, on under-consumption, and on production. We've got it backwards."

Now he forecasts that there will be a slowdown in consumption because, given the current economy, more of us are now unable to pay our credit card bills.

"And then it's going to be very difficult for Americans to get credit cards," he said. "Americans are going to see their limits dramatically reduced on the cards that they have, and so their ability to consume is going to be limited to the money in their checking account.

Though Schiff says lower consumption, whether it's of expensive homes or fancy consumer goods (especially on credit) would be good for the country, the view from Wall Street is different:

"What kind of impact does that have when consumers stop spending money?" Braver asked.

"That is the daily worry down here," Cashin said. "The American consumer is 70 percent of this economy, and if the consumer hits a brick wall and stops, then the economy all across the nation will be in serious trouble."

And almost everyone has a different view of how to get things back on track.

Some are calling for tighter regulations on financial institutions. Others say there are too many rules already.

Some economists and politicians want to let the market right itself. Others are calling for a government spending program to stimulate the economy

(CBS)

"It is probably much more the latter," Cashin said. "I'm afraid that it's Thanksgiving. They are all in the kitchen and there are no measuring cups. It's a little bit of this and little bit of that, so without the measuring cups, we're making it up as we go along."