Mar 17, 2008 10:14 pm US/Eastern
The Financial Meltdown
WASHINGTON (CBS4.com) ―
By now, you have read about the collapse of Bear Stearns. The banking giant went from turning billions of dollars of profit, to literally running out of available capital. The fall of Bear Stearns was just the latest in a series of questionable moves by banks facing the prospect of mortgage defaults and an ever decreasing amount of available money, that could trigger one of the worst financial crisis' to hit the United States since the Great Depression of the 1930's.
The bailout of Bear Stearns was carried out at the request of the Federal Reserve and the Treasury Department. Bear Stearns managed to survive for 85 years, surviving the Depression and a dozen recessions only to meet its end in the rapidly unfolding credit crisis now crippling the American economy.
The collapse of Bear Stearns left many on Wall Street asking who's next to fall? Analysts expect US banks to report some $50 billion in additional losses in the first half of this year, in addition to the $100 billion-plus in writedowns announced so far, as key markets such as leveraged loans, home equity and real estate continued to deteriorate, according to the Financial Times of London.
Complicating the matter further for Federal officials is the declining value of the U.S. dollar when compared to other currencies. The collapse of the dollar is linked to the cutting of interest rates and a fear from global markets of the current economic downturn in the U.S. As the Fed lowers the interest rate it charges to loan directly to banks, the dollar becomes less and less valuable.
Since many commodities like gold are traded in dollars, as the dollar collapses, the price of gold skyrockets. Gold is not used to backup the United States dollar. Instead, the dollar is based on the full faith and credit of the United States. In 2004, it was estimated that if gold were again required to back the circulating U.S. currency (approximately $733,179,953,704), gold would need to price at $2800 per ounce, or more than double what it is worth now.
Another blow to managing the U.S. economy is the price of oil. Like gold, oil is measured in U.S. dollars. Since the dollar is collapsing in value, the price of oil is skyrocketing to a new record every day. Many investors are looking to buy into commodities like oil instead of directly investing in stocks. That further drives up the price of oil and as the price of oil continues to shatter records, gas prices follow the same trend.
Gas prices are averaging almost $3.30 across the country, with some areas like Miami Beach seeing $4.00 a gallon prices. The prices will most likely continue to rise as refineries shift to making a summer formula of gas. Many analysts predict the average price of a gallon of gas could reach $4.00 across the country by late-May.
For his part, President Bush made statements meant to increase the confidence in the economy saying, "Our financial institutions are strong. One thing is certain, we're in challenging times...But another thing is for certain, we have taken strong and decisive action."
So could another run on banks, similar to the ones preceding the Great Depression, be coming? On the positive side, the FDIC insures our money in banks. Anticipating a collapse in the banking industry, the FDIC recently brought back dozens of people who have experience with managing a banking crisis. Since 1934 and the founding of the FDIC, no customer has lost a single cent of insured funds due to a bank failure.
Critics question how cutting interest rates for big businesses and not for the average taxpayer will tickle down to the rest of us. In addition, they say the rising cost of food, fuel, and housing costs are cutting a critical flow of money into the economy from those who might typically spend more disposable income on goods.
But is the economy in a recession? A recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales, according to the National Bureau of Economic Research. Therefore, by definition, the U.S. is not currently in a recession. Still, many analysts believe the country is embroiled in the most serious recession in decades.
But the president of the National Bureau of Economic Research says the recession is already upon the country. "The economy is now in a recession," he said. "It will last longer and be deeper than the last two recessions, which lasted only 8 months from peak to trough. It could well be longer and deeper than the recession in the early 1980s that lasted 16 months," according to the Boston Globe.
What does this mean to you?
Most analysts say that if you're invested in the stock market or in other markets, the best idea is to just ride the economic slowdown out. Still, with many people looking at steep losses in their wallet, analysts fear a massive downturn in profits could trigger a major run by consumers to recoup as much capital as possible to help ride out the topsy-turvy market.
(© 2008 CBS Broadcasting Inc. All Rights Reserved. This material may not be published, broadcast, rewritten, or redistributed. The Associated Press contributed to this report.)
