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The New York Times reports that President Bush -- whose visit to Jerusalem this week is likely to roil the energy markets -- is considering what to do about the U.S. economy. Although the cheerleader in him says "the markets are strong and solid", the tax cutter in him sees an opportunity to cut taxes as a way to face "economic challenges" due to rising oil prices, the home mortgage crisis and a weakening job market.
Bush certainly listed some of the right problems. Oil prices have quadrupled from $24 a barrel to $95.60 since he took office. Two million people are expected to lose their homes due to foreclosure by the end of 2008. And the unemployment rate rose to 5%. He just happened to exclude other problems from his list -- like a dollar that's down 60%, $9 trillion in government borrowing, and hundreds of billions in Federal budget deficits -- because they make it harder for him to argue for tax cuts.
These are all problems as are rising food prices and health care costs. But I think the problem that most concerns the typical citizen is the high price of oil. 149,000 people responded to a poll of most worrisome consumer trends and high oil prices got 55% of the votes -- second most important with 23% was the subprime crisis. I was surprised by how much people are worried about oil prices but if you have to make a choice between driving to work or heating your home, high oil prices could be a big worry.
I don't think we'll know officially whether we're in a recession until later this year, but if Washington wants to address what ails consumers -- who should be motivated to vote -- then it should just let the recession happen without intervening. Why?
- Free markets. Unless the financial system is on the verge of collapse, recessions are a normal part of capitalist economies. They help clean up bad deals and restore supply and demand to a level where growth can resume. If we're facing the worst catastrophe since the Great Depression then the government should do something. Otherwise let the free markets clean up the mess they made.
- Recession will lower energy demand and cause oil prices to drop. I'm never sure what makes oil prices go up or down and there's some anecdotal evidence that is has to do with hedge funds and other institutional investors. But it looks to me like oil prices are backing off of $100 as evidence of a recession mounts. The logic is that if there's a recession, demand for oil will drop and so will prices. This would help alleviate the worries of the 55% of consumers who responded to the poll.
- Available options will make underlying problems worse. Bush will push for more tax cuts which will certainly weaken the dollar further, increase the deficit, and further enrich the wealthiest who least need a government bailout. Giving people government money or offering tax rebates will also increase the deficit and put further pressure on inflation. Forcing mortgage backed securities investors to bail out subprime borrowers also strikes me as a non-starter.
Perhaps the White House wants to feel as though it still matters. And I have no doubt that some sort of proposal is forthcoming. But the best thing to do about the coming recession might be nothing at all -- if the market works, oil and housing prices will drop on their own. If people who took on mortgages they couldn't afford end up renting within their means instead of owning above them, they'll be better off.
Peter Cohan is president of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter.
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Reader Comments (Page 1 of 1)
1-08-2008 @ 1:54PM
John said...
Oil prices are determined by reactions to information in the free market about risks, supply, and demand. Some might think it good to have a recession to reduce oil prices, but not me. That's lunacy.
People have been making irrational decisions about the size of their homes, the distance of their commutes, and the gas mileage of their vehicles. The benefit of high oil prices is that nonsense will have to stop. 55% are worried because they irrationally elected to believe in a never-never land where energy is cheap and abundant.
If the free market should start reducing energy prices, the administration should immediately raise energy taxes to keep the costs of energy at a level where consumers get real about their choices. Will they? No, they're living in never-never land, too.
The rational decisions high energy prices are and will will force will dovetail nicely with looming system changes that will be required to mitigate CO2 emissions from fossil fuels in the near future.
1-09-2008 @ 4:16PM
DD said...
No Offense to all the EXPERTS, but do you want a government who doesnt have to pay its bills, like all of its citizens do? Do you want a government who spends Trillions of borrowed money on wars that weren't even properly declared, while cutting taxes to get re-elected? Perhaps just a trifle bit of short sighted irresponsible thinking? Why does it seem against all common sense to think that printing up money to pay for wars is ok, while America runs up the largest debt ever incurred by any nation, ever in the history of man? I don't know about you, but I dont like having to pay 35% of my salary to an incompetent government who hasnt paid off any of its own bills, leaving the largest debt ever for the next presidents.
1-08-2008 @ 5:30PM
Jim McKusky said...
In response to John's post, "Some might think it good to have a recession to reduce oil prices, but not me. That's lunacy." Nowhere in the article did Peter mention it would be good to have a recession. He simply stated that no intervention should take place by the government if there is a recession, and I agree with him. Additionally, in regards to the comment, "If the free market should start reducing energy prices, the administration should immediately raise energy taxes to keep the costs of energy at a level where consumers get real about their choices." That is the most ridiculous thing I have ever heard. Why should the government benefit from reduced energy prices? Let the American people keep there money instead. I agree that most SUV driving Americans are worried because they bought a vehicle with poor mpg and have long commute times and they are heating larger homes that they possibly can't afford. However, those are choices they made. If they lose their home as a result, then they lose their home. If they have to sell their SUV, then they have to sell their SUV. That's life. Hey, I have an interest only loan right now. I will need to refinance to a 30 yr fixed eventually. But I have good credit, and I make good money.
1-08-2008 @ 6:52PM
Jim said...
I think if a recession occurs the stock market would drop considerably making it a good time to invest.
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1-09-2008 @ 9:57PM
Gale Whitaker said...
The reason oil is increasing in price is that the world is running out of easy to get light sweet crude. Its called "Peak Oil" (read J. H. Kunstler's "The Long Emergency"). Peak oil is going to cause the biggest disaster the world has ever experienced. I'm sure you won't believe what I say but it is childish to believe that there is an unlimited supply of cheap oil just waiting to be pumped out of the ground.
1-14-2008 @ 4:04AM
cheryl cotterill said...
Impeachment is the only hope the US Economy has of saving itself. If impeachment does not occur, legitimacy will not return, and the economy will not recover--for a long time.
1-14-2008 @ 4:01PM
JaneScriv said...
About oil - short-term, hedge funds and speculators can influence prices on a daily basis. Mid-term, supply and demand, all the way from getting the oil out of the ground, shipping it to refineries, refinery capacity, and ground transport, guide the trend and can produce sharp short-term price changes. Long-term - peak oil will drive prices upwards. It's not that the world is running out of oil. It's just running out of easy to obtain oil, and producers are having to put a lot of new money into new techniques and equipment to obtain the harder to reach supplies. And as the price of oil rises, other energy sources of all kinds become economically viable, which will have a dampening effect on radical rises in oil prices. Ultimately - and I hope it won't take longer than 5 - 10 years, I hope that oil will only be used for the technologies that can't run on anything else, and all other energy needs be handled by other energy sources. Qatar has enormous reserves of natural gas, and it is plentiful elsewhere. Technology and delivery methods need to catch up. There is a lot yet that consumers can do to reduce their energy needs. I am amazed that the absurd SUV fad has lasted as long as it has, and my feeling is that if you feel you can afford an SUV, you better be prepared to pay for the gas without complaining. Nothing I've said above has been any great secret for several years now. Anyone could have seen this coming. And the government doesn't need to do a thing about it besides encourage development of fuel efficient cars and other equipment, and development of alternative fuel sources. That, by the way, is already creating new industries, new jobs, and a new source of profits for investors.
As far as the mortgage crisis goes, there I disagree with Mr. Cohan. When I was younger, all you could get was a 30 year fixed rate loan, and believe me, you had to provide documentation of your ability to pay. This resulted in a very low rate of default - but also put home-ownership out of reach of a large number of people. I hadn't really been paying attention much to new ways of lending until recently, but I could hardly believe my eyes when I read that lenders were making substantial loans on the basis of 'stated income.' Virtually an invitation for people to cheat - or at least overestimate their ability to pay. Just absurd. But - in the majority of cases - and I believe it is the large majority, the new easier terms for getting mortgage loans allowed people to own their own homes who would never have been able to before, and they are keeping up on their payments. Socially, locally, politically, economically, it is in the interests of everyone in the country that people be able to own their own homes. It creates stable neighborhoods, with involved citizens. Over time, it provides a source of equity for the owners. In this particular area, I feel the government should work with lenders to ensure that as many homeowners as possibly be able to keep their homes by restructing their mortgages. But the real ability to pay has to be ascertained by solid documentation and evidence. Abuse of equity, and excess use of credit cards - well, that's another matter and that is where people need to face the consequences of their purchasing behavior.