Tuesday, September 16, 2008

Wesbury: Gales of Punitive Destruction

Brian Wesbury does a great job of explaining the difference between the "financial" sector meltdown and the rest of the economy. For those of you who are freaked out by the recent craziness in the market, I urge you to read this one page commentary. Excerpts below:

"The economy is not taking down investment banks; lousy lending standards and the excessive use of leverage are taking down investment banks. And just like the problems of the 1980s and 1990s, the roots of the problem reach back to a period of absurdly low interest rates. When the Fed cut interest rates to 1% in 2003, balance sheet math involving leverage-based strategies turned so lucrative that many financial market players could not help themselves. Wall Street based its business model on leveraging up the most leveraged asset on Main Street – housing."

"The good news is that this financial earthquake is unlikely to turn into an economic earthquake. The bad loans made earlier this decade did not create a widespread economic boom; and the realization of how bad some of these loans are will not create an economic bust. The nonhousing economy, which is roughly 95% of total US economic activity, has been remarkably stable. In the three years ending March 2005, non-housing real GDP grew at a 2.7% annualized rate. In the three years since then, nonhousing real GDP has grown at a 3.2% average annual rate."

Scott Dauenhauer, CFP, MSFP, AIF