What is Going On With Our Economy

Are we in a recession? Is this another depression? Those were the questions I heard last night from a couple friends.

After the tumble the stock market took yesterday it almost feels like. I avoided looking at my portfolio last night because I knew it would be depressing. The Sun Sentinel headline this morning was "riding out the financial storm" as a comparison to another hurricane hitting the US. (Poor taste in my opinion when you turn to page 3 and see the real devastation in Galveston.)

Is our country failing financially? Are we in dire straights? I do not believe things are bad, but they are not great either. For example:

• Inflation is not as bad as other countries - we complain about 5% when other major countries struggle to keep it under 10%.
• Unemployment might be up to 6% but this is not the great depression where up to a third of the workforce was unemployed.
• People are not loosing their savings from bank failures - bank accounts, brokerage accounts, mutual funds are protected and laws are in place to safe guard them. (Granted the value of the securities has gone down but all is not lost.)
• Gross National Product (GNP) is down but still positive.

So what is next? What are we going to do (or should be doing)?

• I think the Fed will be forced to lower interest rates again in order to stimulate the economy. We can take a little inflation in order to keep the economy moving forward (growing). Some banks will need capital to stay liquid.
• The SEC should examine the acquisitions of financial firms closely to make sure that firms are not covering their tracks for fraudulent deals they made. (I am not accusing anyone or know anything but it is suspicious for failing firms to be bought for a premium.)
• I do not like regulation, but new financial instruments need to be examined and fully explained. With mortgage derivatives, the risk holder has been clouded and we are now seeing who is holding the bag. Government in general should not interfere with free markets, but they need to insure that rules, instruments, and risks are clearly defined for everyone so that it is a level playing field.
• As individuals we need to be cautious about taking on new debt, paying down what debt we do have (especially if you credit card debt), and looking at investment opportunities (Buffet, Forbes, Trump, and others start buying at the bottom of the market downswings).

Several friends work in industries effected by this turbulent markets in areas such as banking, investment management (including myself), and real estate. I have seen (and felt in my wallet) to other major corrections in the stock market (1987 and 2001). America and the markets will be fine but it will be bumpy ride in the meantime.