CNBC Depression
There is no doubt that the bursting of the housing bubble has caused a ripple effect that's exposed serious weaknesses in the global financial system. The consequences of an unregulated and widely misunderstood credit default swap market, predominantly used to insure mortgage backed securities, has placed undeniable stress on the system. It's not hard to figure out that when there's a run on an insurer (i.e. Credit Default Swap issuer), just like when there is a run on a bank, that insurer or bank, given allowable leverage ratios, is not going to have the capital to meet its obligations. And, since the use of these complex instruments exploded over the past decade or so, it's understandable how the entire system has been impacted.
What is less understandable, though, is how the financial media, led by CNBC, has portrayed the situation. Just like they help markets to overshoot on the way up, they cause them to overshoot on the way down. A very bad situation has been exacerbated by hyperbolic reporting, analysis, and commentary. When markets go bad, it is normally the resulting crisis in confidence, more so than the actual problem, that causes the most damage. That certainly appears to be the case this time. One can reasonably argue that the issues, serious as they are, could have been mitigated by a few actions—government stimulus, an elimination of mark-to-market accounting, and conscientious media coverage. So far, we've only gotten about .5 out of three. The media has gotten so reckless that the Fox Business Network has sued the government to force it to reveal the names of financial institutions who have drawn down money from the Fed's Discount Window. How irresponsible can they be? Banks that are using the Window for very legitimate purposes would potentially be overrun with panicked depositors/investors if their names were released. Is that really in the public interest? Wouldn't it be more prudent to reveal the details later, after the crisis has subsided? Clearly, not for Fox Business. They're more interested in sensationalism and its positive influence on ratings.
How many times have we heard the CNBC talking heads and their guests cavalierly throw around the "D" word? Are we really on that path? Might they not provide a bit more historical context?
Perhaps a reality check is in order. The prior quarter's GDP was down one half of one percent. During the Depression, there were initial quarterly drops in GNP of near 10%. In fact, Real GNP dropped 30% between 1929 and 1933. It dropped 42% in Nominal terms. Unemployment is currently 6.5%. Remember when full employment was considered to be 6% (now it's generally thought to be 4%)? Unemployment peaked at 25% in 1933. Today, it was announced that Real Income increased 0.3% in the prior month. That's right, incomes are still going up. By 1933, there was a 21% drop in wages.
Don't get me wrong, things are definitely bad. But, please don't be fooled by the so-called experts on CNBC and Fox Business. We are currently off course, but the thesis for global growth has not changed. China and India still have hundreds upon hundreds of millions of people to move into the middle class. Their GDP's are but a fraction of what they can and will be. Brazil and Russia continue to have enormous potential, as does Eastern Europe and much of Latin America. The more quickly confidence can be restored, the more rapidly we'll get back on the path to prosperity. The fundamental financial plumbing problems have largely been fixed or are in the process of being fixed. So, right now, it's really almost all about confidence.
The media does have a responsibility to educate, to warn, to be a watch dog, but it has to do so in a responsible and ethical fashion. Admittedly, it can be a very fine line. Mistakes will be made. The media's performance during this period of turmoil , though,can be characterized by a lot more than simple mistakes. They've compromised their standards and integrity in a brazen attempt, I believe, to advance their own interests.
As the saying goes: "A recession is when your neighbor loses his job; a depression is when you lose your job." To the financial media, their job is the global economy. Guess that's why they often view the world with Depression-colored glasses.
What is less understandable, though, is how the financial media, led by CNBC, has portrayed the situation. Just like they help markets to overshoot on the way up, they cause them to overshoot on the way down. A very bad situation has been exacerbated by hyperbolic reporting, analysis, and commentary. When markets go bad, it is normally the resulting crisis in confidence, more so than the actual problem, that causes the most damage. That certainly appears to be the case this time. One can reasonably argue that the issues, serious as they are, could have been mitigated by a few actions—government stimulus, an elimination of mark-to-market accounting, and conscientious media coverage. So far, we've only gotten about .5 out of three. The media has gotten so reckless that the Fox Business Network has sued the government to force it to reveal the names of financial institutions who have drawn down money from the Fed's Discount Window. How irresponsible can they be? Banks that are using the Window for very legitimate purposes would potentially be overrun with panicked depositors/investors if their names were released. Is that really in the public interest? Wouldn't it be more prudent to reveal the details later, after the crisis has subsided? Clearly, not for Fox Business. They're more interested in sensationalism and its positive influence on ratings.
How many times have we heard the CNBC talking heads and their guests cavalierly throw around the "D" word? Are we really on that path? Might they not provide a bit more historical context?
Perhaps a reality check is in order. The prior quarter's GDP was down one half of one percent. During the Depression, there were initial quarterly drops in GNP of near 10%. In fact, Real GNP dropped 30% between 1929 and 1933. It dropped 42% in Nominal terms. Unemployment is currently 6.5%. Remember when full employment was considered to be 6% (now it's generally thought to be 4%)? Unemployment peaked at 25% in 1933. Today, it was announced that Real Income increased 0.3% in the prior month. That's right, incomes are still going up. By 1933, there was a 21% drop in wages.
Don't get me wrong, things are definitely bad. But, please don't be fooled by the so-called experts on CNBC and Fox Business. We are currently off course, but the thesis for global growth has not changed. China and India still have hundreds upon hundreds of millions of people to move into the middle class. Their GDP's are but a fraction of what they can and will be. Brazil and Russia continue to have enormous potential, as does Eastern Europe and much of Latin America. The more quickly confidence can be restored, the more rapidly we'll get back on the path to prosperity. The fundamental financial plumbing problems have largely been fixed or are in the process of being fixed. So, right now, it's really almost all about confidence.
The media does have a responsibility to educate, to warn, to be a watch dog, but it has to do so in a responsible and ethical fashion. Admittedly, it can be a very fine line. Mistakes will be made. The media's performance during this period of turmoil , though,can be characterized by a lot more than simple mistakes. They've compromised their standards and integrity in a brazen attempt, I believe, to advance their own interests.
As the saying goes: "A recession is when your neighbor loses his job; a depression is when you lose your job." To the financial media, their job is the global economy. Guess that's why they often view the world with Depression-colored glasses.
Best one yet!!! The OFHEO HPI measures the entire nation where Case Schiller index only reviews housing price declines in the top 10 to 20 cities. Guess which index provides a better picture of gloom? You guessed it CS.My point is that it is the only measure of HPI that the media reports. More doom and gloom. The past few months the 5.5% mortgage securities were trading at par. That means the rate to the consumer would be 6%. No reason why mortgage activity is not more robust except for one reason.....the media!! Keep hitting them hard....
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