The panic, first evidenced last August in wild stock price swings and concerns about liquidity, was still in evidence in mid-winter when concerns about Bear Stearns surfaced. It obviously was still in evidence this summer with new concerns about the housing market, defaults, and the subsequent damage not only to these two giant mortgage backers but the banking system as a whole.
How bad is it? Bank stock prices were down about 45 percent in July, compared with about 25 percent in June. Stock prices in general were down but not even close to these levels. And the underlying economy is weak but not declining, and certainly not falling at anything like the pace of bank stock price plunges. Cassandra warnings about dire circumstances ahead abound. Are they warranted?
Another week and another set of figures reflecting a weak, potentially even weakening, economic environment. One problem not going away is the decline in profits now closing on its first anniversary. And profit declines are likely to continue because the economy is likely to remain weak in the second half of 2008.
It's about pricing. Costs are rising faster than the price of goods and services produced. A look at the "core" PPI and CPI shows this. Core prices (which exclude food and energy) have been rising more slowly than prices of core materials. This is because the global economy helps determine the price of commodities while the domestic economy is slow enough to limit retail inflation.
The global economy is slowing a little and that trend could continue through the second half of the year. Will it slow enough to slow the rise in commodity prices? The answer will determine whether a weak domestic economy can return to health in the first half of 2009.
