- The Washington Times - Monday, October 27, 2008



The bad news is that the economy probably contracted in the third quarter and will likely shrink further in the fourth, plunging the country into a sharp recession.

The good news is that the government has put in place all the tools necessary to get the economy growing again, pulling it out of a recession sometime early next year.

Economic analyst David Malpass forecasts that the third quarter’s gross domestic product (GDP) - the measure of all the goods and services we produce - will come in at a minus 0.2 percent. He predicts fourth-quarter GDP will be minus 3.6 percent. Others predict worse for both quarters.

The sharp downturn in the stock markets in the wake of the subprime mortgage and credit debacle, falling home values, higher unemployment, declining corporate earnings and a pullback in consumer spending has sent the economy into a nose dive.

But Mr. Malpass, among other economists, thinks Washington has “put in place very effective tools by Oct. 14 to stop the financial crisis. We expect aggressive use of the Treasury facility, the Fed’s new powers, the FDIC, and Fannie Mae and Freddie Mac. “If the financial crisis stabilizes, the permanent damage may not be so severe as to force a recession much into 2009,” he said in his latest memo to clients.

“Looking forward, we expect a recovery early in 2009, with positive GDP each quarter,” he said.

Indeed, despite the understandable gloominess over the economy, there are a number of hopeful developments that will help gets us through this down period. Among them:

— The dollar has rebounded, boosting global confidence in the U.S. economy’s future.

— The sharp drop in oil prices, edging well below $70 a barrel last week, and driving gas prices down at the pump in many regions of the country will give consumers and businesses some needed relief from punishing energy costs.

— Another improvement is the gradual opening of clogged credit lines, as lending activity between banks is being restored both here and abroad. Lending interest rates have begun coming down at a time when troubled businesses need credit to get them through this downturn.

— That bodes well for real-estate financing, too, as buyers have been coming back into the housing market to scoop up bargain-priced homes. We may well see a continued uptick in pending home sales that we saw in August.

The big variable in this is some semblance of economic stability in the financial markets and restoration of consumer confidence.

Treasury Secretary Henry Paulson continues to pump liquidity into the financial system, getting credit arteries flowing again. But the stock markets, driven by fear and insecurity, remained mostly bearish last week, rising or falling on random pieces of economic data.

Warren Buffet bullishly stepped into the breach last week like a latter-day J.P. Morgan, exuding confidence about the stock market’s future and America’s inexhaustible resilience - declaring there is no better time to buy a piece of corporate America at fire-sale prices.

Using his own personal finances, which he had locked away in Treasury bonds, the billionaire from Omaha, Neb., declared in a New York Times op-ed column that he intended to sink 100 percent of his net worth in U.S. equities to demonstrate his confidence in the U.S. economy.

“A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful,” Mr. Buffet wrote.

Yes, investors were right to be wary of highly leveraged firms or businesses thrown into “weak competitive positions,” he said. “But fears regarding the long-term prosperity of the nation’s many sound companies make no sense.”

Sure, American corporations will have “earnings hiccups” in this recessionary period, just as they have in past economic downturns. “But most major companies will be setting new profit records five, 10 and 20 years from now,” Mr. Buffett said.

During the depths of the Great Depression, the Dow Jones Industrial Average sank to a low of 41 on July 8, 1932. By the time Franklin Roosevelt took office in March 1933, the stock market had risen by 30 percent.

But the short-term reality of the economic mess is that we are in for a bumpy ride: The economy is contracting, business earnings are declining, and job losses will accelerate.

The question this poses for voters right now: What is the best policy for an economy that will be in recession in January 2009 when a new president is sworn into office? Barack Obama’s prescription is to raise taxes on businesses, higher-income earners, investors and retirees and mandate that struggling small businesses pay their workers a much higher minimum wage, tied to inflation, encouraging payroll cutbacks.

When John F. Kennedy ran for president in 1960 decrying a lackluster economy, he proposed to cut income-tax rates on the top earners, saying, “A rising tide lifts all boats.”

Mr. Obama’s “share the wealth” income-redistribution plan proposes just the opposite: Raise taxes in a recession - guaranteeing that our weakened economy remains at low tide.

Donald Lambro, chief political correspondent of The Washington Times, is a nationally syndicated columnist.



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