Are Positive Economic Signs Helping Ordinary Americans?

While some people point to Wells Fargo's surprisingly healthy first quarter last week (Noriel Roubini said in Time magazine last month that Wells Fargo was one of the weaker banks; what happened?) as proof the recession has bottomed out, unemployment is still 8.5 percent and likely rising. A chipper AP story reports that the first week of April had the lowest amount of new jobless claims in months. One good week in the middle of 40 may not be a great indicator, and its impact on the unemployed remains to be seen. This New York Times piece speculates that the strong Dow could be covering up significant problems in the overall economy.

This blog has quoted economist and frequent Commonwealth Club speaker Robert Reich on numerous occasions, but he, along with Paul Krugman, have consistently spoken with clarity and caution regarding the state of the economy. In a Salon article Monday, Reich again tempered the media's newfound bullishness and believes the economic perkiness is due to the massive cash infusion issued by the Treasury.

But we're not at the beginning of the end. I'm not even sure we're at the end of the beginning. All of these pieces of upbeat news are connected by one fact: the flood of money the Fed has been releasing into the economy. Of course mortgage rates are declining, mortgage originations are surging, and people and companies are borrowing more. So much money is sloshing around the economy that its price is bound to drop. And cheap money is bound to induce some borrowing. The real question is whether this means an economic turnaround. The answer is it doesn't.

The inclusion of the theory that the recent bump in the Dow is due to the printing of new money was non-existent in most news coverage. Instead, the message in nearly every major story last week, save for a very cautiously optimistic article in the Boston Globe Friday, is that the financial sector is doing well and could indirectly help the pocketbooks of struggling Americans. It's true that short- and long-term interest rates are unbelievably low, but will it translate into more construction of homes? The inventory of already built new homes is high, and recently foreclosed homes are even higher. This could be where Wells Fargo's announced $190 billion in new loan applications are emanating. Once the glut of inventory begins to deplete in relation to low interest rates, where will this segment of the economy look like?

The attitude of much of Wall Street is to keep things positive; to keep the wheels of finance rolling. But it's likely that more than a half million additional workers will get a pink slip this month. Add to this the previous 5 million, and you have quite a segment of the population scrimping and saving and not purchasing goods and services. Until Americans see their own personal economies picking up, the overall mental health of the economy will not be viewed as looking as rosy as recent news reports might be leading people to believe.

--Steven Tavares

Administration: Nationalization of Banks is not Happening

The Citibank web site has its famous marketing slogan atop its home page, "Citi never sleeps." The motto means customer's can do their banking anytime, but with nationalization of banks becoming more likely by the day, it could be an admission of many sleepless night to come.

The past week has seen more than a whisper campaign from some Democrats and few leading economists that the short-term remedy for the banking system is nationalization. Sen. Chris Dodd has said it may "unavoidable", which is nearly equivalent to saying, "Folks, get ready. It's happening." It's no wonder the stock market is beginning to reflect concern about what a collapse of Citibank, Bank of America or Wells Fargo could mean to the economy, and the Obama administration may be slowly setting the stage for nationalization. For the time being, though, President Obama and Fed Chairman Ben Bernanke say nationalization is not on the radar. Bernanke's comments stoked Wall Street, and that may have been his intent, while Treasury Secretary Timothy Geithner told Jim Lehrer, “I think that’s the wrong strategy for the country and I don’t think it’s the necessary strategy.”

The Washington Post reported that the Obama administration tweaked the terms of government assistance by demanding common stock in lieu of cash. "The change paves a road toward nationalization for the most troubled large banks," according to the Post. A piece on Bloomberg.com goes further in calling nationalization inevitable.

Nationalizing the nation's top banks has its critics, of course. With taxpayers already shouldering a large burden of risk that is likely to increase in the future, backing the financial sector may be too much. Some economists even believe another stimulus bill of nearly the same sticker price will be needed within two years. 

James S. Turley, Chairman and CEO of Ernst & Young told The Commonwealth Club of California earlier this month that state ownership is a bad idea over the long haul:

The thing I hope doesn't happen is government officials get too comfortable with state ownership in the various industries they are investing in. And I hope they don't see this as the long-term solution.... Let me be clear, I think it was important that the government stepped in during these unprecedented times, but it is not a good idea and no thinks that governments over the long-term allocated capital as efficiently or effectively as free markets.

On the other hand, many commentators say that taxpayers saw little in return in the form of consumer lending after the initial $350 billion bailout money passed late last year, and news reports of lavish executive spending and multi-million dollar bonuses left a lingering distrust toward the banks.

How poor is the health of the nation's biggest financial institutions? The grand sage of the credit mess, New York University Professor Nouriel Roubini laid it out in this week's issue of Time, saying Citibank is "on the way to ICU," Bank of America should "prepare the transfusion" and surprisingly, Wells Fargo needs a "Defibrillator. Stat!"

Just 16 months ago, Bank of America and Citigroup were quarterly flipping top positions for the title of world's largest bank. Today, they may be on the verge of being owned by the biggest economy in the world.