Capital Markets

U.S. Sees Long Recovery; Investors See Red

Bush, Paulson, and Bernanke sound same theme of extended challenges, but Wall Street is also hit by weak consumer spending numbers — knocking the D...
Roy HarrisOctober 15, 2008

Henry Paulson wants your input about the government’s insurance program for troubled assets, and its role in restoring “liquidity and stability to the financial system.” But as the Treasury secretary advised corporate and other taxpayers how to respond, investors were sending word that there’s no stability yet.

The Dow Jones Industrial Average — after Tuesday’s close at 9310.99 — once again swung below 9000, dropping as much as 572 points. That plunge gave up more than half the 936-point advance from Monday, as fears of a deep, long recession were stirred by the government’s September retail sales reports showing sales off 1.2 percent, nearly twice the 0.7-percent drop that had been expected.

Corporate earnings reports colored trading as well, with banking powerhouses JPMorgan Chase and Wells Fargo reporting third-quarter profit plunges — 84 percent for JPMorgan and 23 percent for Wells — although chip-maker Intel Corp. beat analysts’ estimates with a profit increase of 12 percent, according to the AP.

Last week’s stock market trading reduced shareholder wealth by about $2.5 trillion, and took the Dow back to its lowest level since April 2003. After some recovery early in the week, investors are particularly sensitive to prospects for daily triple-digit losses returning.

“Even though the banking sector may be returning to normal, the economy still isn’t,” Doug Robert, chief investment strategist at ChannelCapitalResearch.com, told the Associated Press. “We’re in for a tough ride.” As the wire service noted, consumer spending accounts for more than two-thirds of economic activity in the U.S. And, of course, the critical year-end consumer buying cycle is approaching rapidly.

President Bush, Federal Reserve Board Chairman Ben Bernanke, and Paulson all harped on the same theme, cautioning that a rebound will take time. The president told a meeting of his Cabinet that “in the long run, that this economy will come back.” The Fed chairman, warning in prepared remarks for the Economic Club of New York, said: “Stabilization of the financial markets is a critical first step, but even if they stabilize as we hope they will, broader economic recovery will not happen right away,” according to the AP.

And at the same time, Paulson was telling ABC’s “Good Morning America”: “This will take time. There will be challenges.”

In the administration’s release of the government’s September Monthly Treasury Statement of Receipts and Outlays, Paulson and Jim Nussle, director of the Office of Management and Budget, outlined a swelling of the actual deficit to $455 billion as of Sept. 30, or 3.2 percent of Gross Domestic Product. Total September monthly receipts were $2.52 trillion and total outlays of $2.98 trillion, creating a $162 billion monthly deficit, and estimates for the 2009 fiscal-year showed a deficit of $410 billion. The Treasury noted that the results “reflect the ongoing housing correction, and the manifestations of that in strained capital markets and slower growth.” The two added, “While it will take time to work through this period, we will overcome the current challenges facing our nation.

Added Paulson, “The budget results reinforce the need to not only address short term challenges, but pursue policies that promote economic growth and fiscal responsibility, and address entitlement reform.”

In its plea for feedback on the troubled-assets buyback plan, Treasury is asking for taxpayer comments by Friday, Oct. 29. They are to be submitted at the website www.regulations.gov. Comments are invited “on how the program should be structured to minimize adverse selection, including how premiums should be calculated, what events should trigger insurance payout, what form that payout should take, and which institutions and assets should be eligible,” the department said. It also seeks comment on “what legal, accounting, or regulatory issues would arise and what administrative challenges the program will create.”