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Dean Anil Puri, CSUF Mihaylo College of Bus/Econ

Click Here for Dean Anil Puri's Bio
The Tsunami on Wall Street: West Coast to be hit
While the federal Band-Aid is being applied to Wall Street’s financial mess, it will take a lot more structural surgery, regulatory medicine and healing time before it can begin to support normal growth of the economy. The credit boom of the last decade and a half supported not only the real estate boom but also the generous expansion of state and local economies. On the West Coast, and California, Nevada and Arizona in particular, it led to remarkable expansion in home ownership. While the average home ownership rate in the three states increased by 4.6 percent from 1986 to 1996, it rose by 10.6 percent in the next decade, 1996 to 2006. A large portion of this was fueled by easy credit.
 
But that is not the whole story. Plentiful liquidity also facilitated business growth financed by venture capital, private equity and hedge funds. Many of these funds made their money on Wall Street, and funded new and small businesses. Given the generally greater tolerance for risk, the growth in general business expansion made rapid strides. But the bust on Wall Street will put the brakes on such rampant expansion and certainly demand a more careful analysis of the expected performance on such businesses. Many of these businesses have already cut back or gone under (for an example, see the Financial Times story at ft.com/cms/s/0/095142b8-8c30-11dd-8a4c-0000779fd18c.html).
 
The private sector was not the only beneficiary of easy money. State and local governments also benefited.  Higher tax revenue and liberal use of the bond market allowed expansion of government programs, from infrastructure to education to benefits for the disadvantaged. The aftermath of the financial crisis will make it much more difficult to undertake these tasks.
 
It is hard to tell at this time in what ways the current financial wreckage will change the shape of credit intermediation in the U.S. economy. It will certainly not eliminate risk inherent to business and financial operations. But it is most likely to lead to greater regulation and accountability.
 

October Redux?
The 1929 stock market crash occurred in October. A 23-percent drop in the Dow Index took place on the last day of October in 1984. The stock market also fell by 10 percent on the last day of September in 2001, signaling the beginning of the dotcom bust. Without being superstitious, is there something in the yearly cycle of time that coincides with the economic rhythm of the country?

There is, of course, well-recognized seasonality in the trends of many economic variables, but there is little evidence of a macro-level conglomeration of the woes of the economy that should periodically manifest itself in a sharp jolt to the system at this time of the year. Explanations are offered usually in terms of year-end window dressing by firms, but these do not fully explain the phenomenon.

Yet, forces seem to be lining up for just such a possibility. The housing market shows no let up in its steady downward trend with increasing inventory of unsold homes and declining prices. Credit markets continue to be in a funk. Uncertainty about the fate of Freddie Mac and Fannie Mae is endangering further disruption of the mortgage and related markets. Commercial and investment banks are writing off unprecedented amounts off of their balance sheets and some are in dire straits in raising additional needed capital. Rumors of a major bank failure in the U.S. refuse to go away.

The “real” economy has finally entered the recessionary phase as indicated by the latest employment statistics and the implied downfall in output. The recent fiscal stimulus has dissipated and there is little on the horizon to give households any confidence in maintaining their high spending levels. The latest sales data attest to that.

This slowdown does not need an October to show its colors. We have been in it since mid-2007. Given the current situation it will take a few more quarters before the economy turns around. A great deal will depend on not only our domestic policies, but also on the global economic situation.


A new beginning
At this time of economic turmoil and political uncertainty, it may appear that there is nothing but greater pain and wrenching adjustment ahead of us. But there are positive things happening in the world.

For us, at the Mihaylo College of Business and Economics at Cal State Fullerton, moving into our new home this week is the beginning of a new chapter.  After being spread across the campus for decades, the largest nationally accredited business school in the state of California now has for its center, Steven G. Mihaylo Hall, an $88 million, 200,000-square-foot complex of three buildings.

With over 30 classrooms and computer laboratories incorporating the most advanced instructional technology available today, it provides an extraordinary learning environment for our 8,500 students, 300 faculty and staff members, and 13 Centers of Excellence.

New classroom desks being delivered and installed
 
The Mihaylo College (yes, our college got a new name earlier this year, thanks to our generous alumnus Steven G. Mihaylo) is committed to developing the region’s next generation of leaders – young men and women who have the knowledge, confidence, and foresight to connect Orange County to the world and make our region globally synonymous with growth and innovation. 



Here is a glimpse of our new facility. More pictures of our new home may be seen at business.fullerton.edu/move.  

The Big Question: Stumble or Fall?
The inexorable torrent recently of bad news has the stock markets reeling, with the Dow-Jones index almost in the bear territory. Housing market blues show no sign of going away in the short run. And, the consumer sentiment is quickly descending from mere nervousness to downright pessimism.

There are also concerns about the longer run U.S. economic dominance that we have enjoyed at least since World War II. These arise as much from our overextended military operations, continued weakness of the dollar, high energy prices and the steady rise in commodity prices as from the rise of China, India, and other powers.
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If the over-indulgence of our financial sector led to the current turmoil in the credit markets, it is the auto industry that now has become the poster child of failed strategic vision in a world of high energy prices. In fact, the U.S. economy’s overall growth is significantly more dependent on cheap energy compared to those of other countries. As a result, we are likely to be hit much worse compared to the rest of the world if high oil prices persist in the long run.

There is little doubt that we have a prolonged spell of weakness ahead of us and it will take substantial effort to reverse the current trends. But there are reasons for optimism as well. The U.S. has repeatedly faced difficult odds only to recover stronger because of its innovative spirit, flexible markets, deep financial base, and prudent economic policies. Therefore, whether the economy will merely stumble or fall this time depends on these same factors.

Bad news comes in 3s...
They say bad news comes in threes. As I see things, we had that happen over the last few days.

The Fullerton Titans lost to Stanford Cardinals in the Super Regional baseball tournament. Big Brown failed to capture the coveted Triple Crown when it not only lost at Belmont but came in last. And, finally, the stock market took a tumble on Friday with the Dow-Jones index dropping almost 400 points.

While the sports results were but once-a-year events, will the stock market repeat its disappointing performance in the near term? After reaching a Bear Stearns low of 11,740 on March 10th, it rose 11.3% to 13,058 by May 2nd. But the latest economic news is giving it indigestion.

The stranglehold of high oil prices seems as tight if not worse than the continuing fall in housing prices. The loss of jobs last month and rising inflation have people talking about the dreaded phenomenon of stagflation, a la nineteen-seventies. The Fed appears to be changing its tune and appears not to favor further loosening of the monetary strings. In fact, it may be getting ready to sweep up the liquidity it so recently created.

So is there any ray of hope in this June gloom? Or, are we headed for a real down-and-dirty recession? (Contrary to the pre-mature claims of some, the official data do not indicate that we are in a recession at this time). Productivity growth has, surprisingly, held up so far mitigating the fear of stagflation. The banking sector in the U.S. appears to be more than half way towards cleaning up its balance sheet. And there is still a possibility of further fiscal action to ameliorate the mortgage woes.

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