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The Fire Next Time

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It’s been two years since the stock market fell off a cliff in a rapid and frightening descent, losing more than 52 percent in the five months starting October 2007. As of this writing, we are about halfway back up to the 2007 level and the news lately has been encouraging. No less a personage than Fed Chairman Ben Bernanke has declared that the “recession is very likely over at this point.”

There are certainly reasons for optimism. The stock market, a leading indicator, has been consistently bullish for months; new unemployment claims also appear to have peaked; industrial production and demand for freight transportation have finally started turning up; most impressively, perhaps, retail sales, excluding volatile sectors and autos (cash for clunkers), were up an impressive and higher than expected 1.1 percent in August.

Also of note, the vaunted TED spread, which only entered most of our vocabularies little more than a year ago, is at its lowest level in five years. The measure, which has fallen a whopping 450 basis points from its all-time-high a year ago, serves as an indicator of perceived credit risk in the economy.

But before we get too giddy with glee, there are more than enough data to give us pause. Perhaps most alarming, and all too evident in the consumer economy, is the rapid contraction of bank credit. The Daily Telegraph‘s Ambrose Evans-Pritchard reports the 14 percent annualized rate of contraction in the past three months has not been seen, ominously, since the Great Depression.

The reality of this problem is undeniable. Ask anyone who has tried to get a business loan and you’ll hear how many lenders passed on the application, and how less than the amount of funds requested, if anything, was approved. Ask anyone with credit card debt how he’s managing and you’ll hear — despite zero-level rates that banks themselves are charged — about rates that have risen to sometimes usurious levels when access to credit has not been cut off entirely.

While a rising chorus of pundits see a return to growth, and the majority of pessimists see spiraling inflation, the contraction of credit seems to portend a replay of deflation. If so, what tools are available to fight the problem this time? Where would we get the next few trillion?

Margaret Thatcher famously quipped: “The trouble with socialism is that you eventually run out of other people’s money.” Sooner or later, policymakers will need to search for solutions that shore up private initiative rather than bailing out failed institutions adept at gaming the system.

Hopefully, the economic cheerleaders are correct. No one, not even Nouriel Roubini, can (consistently) predict the future. But we can prepare for it.

Many of us are poorer today than two years ago, and many of us have been whiplashed in our business lives. We are all two years older. The question is: Are we any wiser?

Robert Tyndall

publisher emeritus

[email protected]