Can It Get Any Worse?

So who's benefiting most from these latest rate cuts, if consumers aren't in any position to be borrowing now? Banks?
People say it takes six months for the rate cut to percolate through the economy. But that's not true if you're a leveraged trader like Goldman Sachs or Merrill Lynch. Banks profit from the rate cut immediately, because they have large trading desks in fixed-income instruments, which are worth more when the Fed cuts rates. That's where the pressure [to cut rates] is coming from. Decades ago there used to never be this kind of pressure on the Fed funds rate, but in 2007 the financial sector accounted for nearly 40 percent of corporate profits in this country. So they represent a very large interest group. Highly leveraged financial-services firms live and die by the rates. It makes their books look better.

What advice do you have for consumers?
Plan to survive the recession. Ratchet back spending. Your job is at risk. Unemployment is going to go up. Wages will be flat. Start saving.

When do you think the economy will improve?
If we start facing facts—either because we choose to or because we have no choice—I think it will be a two- or a two-and-a-half-year cycle. It's just underway now.

So it's much worse than our politicians are indicating now?
Oh, yeah. In December consumer spending was up, and everyone yelled in glee, but there was a noticeable tick up in credit-card debt. The glee was idiotic. People were going into credit-card debt for Christmas spending, and now Wal-Mart is saying customers are using credit cards for grocery shopping. And, as I said, they're apparently selling off their 401(k)s.

Are there any hopeful signs that the economy might recover before 2010?
We just need to ride this out. It will take longer the more we try to act like everything is fine. It's easy to say, now. Bear Stearns is out of the way and so everything looks fine. But it's not.

© 2008