Economy Du Jour: November 2, 2009

A major stock market index took a big hit last week with Friday's drop of 250 points. Things are looking at little better this morning if futures are the right indication. After significant drops in stock prices, it's typical for people to "buy on the dips." Stock market volatility may provide profits and joy on Wall Street, but Main Street's economic health requires a different outlook. Unemployment figures are close to ten percent after the Obama economic team speculated it would not exceed 8.5 percent with the stimulus plan in place. With regard to unemployment, the Obama administration announced yesterday that its economic program had "created or saved" 640,000 jobs. Critics have called this figure a "hat trick" and question how "created or saved" can be measured when overall unemployment has increased.

The Federal banking system is still operating on a policy of "quantitative easing." If that term seems unfamiliar, don't worry. The practical meaning of "quantitative easing" is loose monetary policy, low interest rates, a dollar that doesn't buy as much or pay as much in wages, and a manna-from-heaven cascade of low-interest dollars into the economy through large financial firms. Still don't get it? Good-that's why it's called "quantitative easing." You're not supposed to get it. If you got it, you might get angry, lose confidence in the economy and stop spending. On the plus side, the loose monetary policy is designed to make American products cheaper so that we can export more and get Americans working again. The good news is that U.S. exports have improved; the bad news is that corporations are producing more without hiring unemployed workers back.

The infusion of money into large financial institutions is another way of getting pass-through money from these giant banks to companies which need loans. Unfortunately, this noble purpose does not help small business owners who are often still unable to get loans from retail banks which need to hold onto available cash to meet new government requirements. The cash infusion to banks (think bailout) doesn't always work. Bank corporation CIT Group filed bankruptcy today and a $2.3 billion dollar taxpayer bailout just went up in smoke. Bankruptcy wipes out the corporation's debt to the taxpayers.

Controversy is brewing too on financial giant Goldman Sachs interest in purchasing Fanny Mae tax credits. Taxpayer bailout moneys paid out to the once private mortgage giant amount to $45.6 billion. Goldman Sachs is one of the giant successful financial firms which has already paid back the taxpayer bailout moneys. It is one of the nation's strongest financial firms and has been an early and strong supporter of the Obama administration. Incumbent New Jersey Governor John Corzine, for whom the president has made three campaign visits, was a successful former Goldman-Sachs executive. The perception is widely held that Goldman-Sachs was given preferential treatment during the early phase of the financial crisis while other investment firms like Lehman Bros. were allowed to collapse.

The perceived favoritism received by Goldman-Sachs may be working against its purchase of tax credits from Fanny Mae, once a private institution but now owned and controlled by the federal government. Fanny Mae doesn't need tax credits because it continues to sustain major losses. Goldman-Sachs would benefit from buying Fanny Mae's tax credits because the credits can extend forward for a decade and Goldman anticipates its past highly successful performance patterns. While selling the tax credits would strengthen the position of U.S. taxpayers supporting Fanny Mae, the Treasury department may block the purchase because of perceived public perceptions of favorable Goldman-Sachs treatment. A blunt reading: The Obama administration receives huge financial support from Goldman-Sachs; in return, Goldman gets to buy federal tax credits to avoid taxes on future earnings.

Although Ford CEO Allan Mullally cautions against excessive optimism, there is good news for Ford. Analysts had estimated a loss for the 3^rd quarter and the Ford auto company surprised the Street with a nearly 1 billion dollar profit for the period. Not all the news is good for Ford as UAW workers have rejected contract changes which would have aided the car company.