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Mira Farka, assistant professor of economics, CSUF  

Click Here for a Bio of Mira Farka


Wednesday, August 06, 2008
Red Capitalism?
Atlas shrugged
A half a century later and the title of Ayn Rand’s masterpiece has never rung so true. Atlas, the Greek god who was described in mythology as holding the celestial globe on his shoulders, has literally dropped the ball. The world is on edge, and things are likely to get a lot worse before they get better.

Although governments around the world have taken unprecedented steps to shore up capital markets, there has been very little bang for the buck on that front. Congress approved (after much controversy) the $700 billion bailout package by the end of September, yet financial shares seesawed at a dizzying pace throughout October. As the economists at the Treasury and the Fed are finding on a daily basis, the price tag may be “a few dollars short and a few days late.” There are roughly $11.25 trillion mortgages outstanding. At the same time, the total number of homes in foreclosure is currently at 2.85 percent, and 6.41 percent of all home mortgages are one or more payments overdue. The estimated losses from the foreclosed and at-risk homes are between $1.3 and $1.7 trillion, roughly double the amount of what the Treasury proposes to purchase. The situation may get worse if housing prices continue to decline and there is no indication that a reversal is likely to occur anytime soon.

The most terrifying companion to the current financial crisis is the slump in consumption spending. Consumer expenditure makes up 71 percent of GDP growth. If consumers scale back, U.S. growth will freefall. Consumer spending declined by 3.1 percent in the third quarter of this year – the largest quarterly decline since the recession of the early ’80s. This does not come as a surprise: there is little respite for U.S. consumers these days – massive job losses, negative wealth effect from home and equity price declines, low income growth, large debt service payments, and the list goes on. Even those who are employed and have the money to afford products are holding back, afraid to spend because things may get a lot worse. As credit markets continue to remain problematic, even those few who are willing to purchase goods have found it increasingly difficult to get a loan to finance spending, no matter how good their credit rating is or how solvent their personal accounts are. The end result is a complete erosion of consumer confidence, which will continue to translate in much lower consumer spending and lower GDP growth.

Eventually this crisis will blow over as all others – much worse than the current one – have. In the meantime, let’s hope that Atlas swings the globe back on his shoulders firmly and quickly.