EconomicCrisis.US

The principal problem with the current economic crisis is that the authorities are trying to solve the debt crisis by adding more debt — which is akin to trying to cure a viral infection by injecting more viruses. In case some have forgotten, the United States is undergoing a serious credit crisis, that is, a debt crisis.

All sectors of the American economy are suffering from a chronic addiction to credit, which manifests itself as the disease of excess debt. Household, business, and public debt have reached all-time highs. Consequently, it would not seem logical for the federal government to fight the debt crisis by adding trillions of dollars to the national debt and by lowering interest rates to promote even more credit.
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An international financial advisory group said Tuesday that accounting rules were not the cause of the recent credit crisis.

The Financial Crisis Advisory Group also voiced concern about recent regulatory pressure that led to the easing of guidelines about how banks value risky assets that were at the center of the crisis.

In a report released Tuesday, the group said “accounting standards were not a root cause of the financial crisis,” but did acknowledge that the weakness in the application of rules reduced credibility in financial reporting.

At the heart of the debate over accounting standards is a rule determining how banks can value assets such as mortgage-backed securities. In a split vote in early April, the U.S. Financial Accounting Standards Board approved a change to the rule, allowing financial firms to value assets at what they would go for in an “orderly” sale, as opposed to a forced or distressed sale.
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The Obama administration marked with little fanfare a major milestone in its bank rescue effort — its decision on Tuesday to let 10 big banks repay federal aid that had sustained them through the worst of the crisis — as policy makers and industry executives focused on the challenges still before them.

“This is not a sign that our troubles are over,” President Obama said. “Far from it.”

While the announcement had been expected for weeks, the official word put the administration’s imprimatur on a corps of big banks considered healthy enough to extricate themselves from Washington’s grip.
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The stock market has rallied off the lows of early March in part because of improved economic expectations. This is certainly valid in that the risks of a further severe downturn from the credit crisis have eased. The prospects for an improvement in economic conditions are less certain.

First Quarter GDP

The decline in first quarter real GDP at a 6.1% annual rate was viewed as less worrisome than the 6.3% rate of decline in the fourth quarter. This is valid.

The decline in first quarter GDP was exacerbated by a huge drop in inventories. This reflected a sharp decline in industrial production and is thus a valid measure of lower economic activity. The decline in inventories does mean, however, that any pickup in demand will now result in the need for more stable production.
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