U.S. Treasury Secretary Henry Paulson says the era of "raw capitalism" is over. He is mistaken.
Google Inc. CEO Eric Schmidt also claims the latest financial debacle on Wall Street "is in New York, not here. It's business as usual at Google." He is equally mistaken.
Capitalism is not a government-driven process. It is a system that has taken hundreds of years to evolve and, like a hurricane, it is directed and moved by the forces that shape it and not by the whims of mere mortals.
Economists believe the financial problems Paulson and other government officials are trying to resolve will deepen the U.S. economic recession, constrain government spending, lower corporate earnings, jack up taxes for everyone, raise lending costs for consumers and corporations and take many more years to clean up.
"For the here and now, look for steeper losses to be reported, look for equity to become highly dilutive," said David Rosenberg, an economist with Merrill Lynch & Co. Inc.
That's the message the equity market forcefully passed on to Paulson on Monday (Sept. 22) when the Dow Jones Industrial Average resumed it's free fall witha 373-point decline, down more than 3 percent, despite a massive government bailout plan that should have been perceived as a positive.
The Dow's fall, and the even more severe 4.2 percent drop in the Nasdaq Composite Index, occurred on the same day that the price of a barrel of crude oil rose a record $25 to an intra-day high of $130, and the U.S. dollar weakened sharply against a other currencies.
All this happened even as Paulson and officials at the Federal Reserve Bank and regulators from the U.S. Securities and Exchange Commission were implementing or considering various actions that they assumed would help calm frayed investor nerves.
To stem the drift, the Bush administration wants Congress to approve the purchase of $700 billion or more in distressed real estate over the next two years.
Investors across the globe studied the plan and sneezed hard. Equity markets plunged, the dollar weakened even further and crude oil prices swung wildly, dipping first below $100 per barrel and then racing back above $130. By Tuesday crude oil prices were sharply lower again.
Here's why the market is unnerved and why you also should be concerned, whether as an individual or as a business manager.
By assuming effective control of Fannie Mae and Freddie Mac, the U.S. government has already dramatically increased its public debt obligations by as much as $5 trillion (yes, trillion) since the two institutions together account for more than half of total U.S. mortgages.
This doesn't necessarily mean the U.S. government now owes $5 trillion in addition to the already huge $9 trillion or so in public debt. Rather, the implication is that the government is now on the hook for any defaults arising from the mortgages held by Fannie Mae and Freddie Mac.
(However, mortgage interest rates have dropped since the U.S. takeover of Fannie Mae and Freddie Mac.)
In order for Congress to approve the Bush administration's bailout plan, it also would have to increase the U.S. government's borrowing limit to more than $11 trillion.