The U.S. stock markets were closed Monday in observation of Martin Luther King Jr. Day but that didn’t stop the Dow Jones industrial average futures from dropping 436 points or 3.6%, following the lead of foreign markets. Japan’s Nikkei 225, Hong Kong’s Hang Seng, London’s FTSE-100, German’s DAX 30 and France’s CAC040 all dropped considerably on Monday and Tuesday.
So what happened – what spooked the world markets?
One thing that happened is the Conference Board leading index decreased by 0.2 percent in December. This is the third month in a row this indicator has decreased, and it has been down four of the past six months. Of the 10 components in this index, six were negative for the month of December 2007 — not a real good sign.
The FOMC, under the direction of Chairman Ben Bernanke, has already taken adequate measures to date based on market conditions, but the foreign sell off caused an emergency video meeting Monday night and on Tuesday morning the FOMC announced a decrease in the federal funds rate 75 basis points to 3-1/2 percent and a decrease in the discount rate 75 basis point to 4.0 percent and left he door open for further cuts following their scheduled meeting for next week.
President Bush has announced his plans for a stimulus plan to jump-start the economy, but it shouldn’t surprise anyone that Bush’s new stimulus proposal will have little impact on the people in this country that need it most, the poor and the middle class.
Where the Democrats want a plan that provides additional spending for food stamps, extended unemployment and infrastructure projects, Bush has different priorities stated in his weekly radio address: "This growth package must be built on broad-based tax relief that will directly affect economic growth — not the kind of spending projects that would have little immediate impact on our economy".
The January 18, 2007 Press Briefing by Treasury Secretary Henry Paulson and Chairman of the Council of Economic Advisors, Ed Lazear provide us with few details on the plan.
The total package will probably be between $140 to $150 billion, with the biggest portion, perhaps $100 billion benefiting individuals and perhaps $50 billion for business investment incentives.
Secretary Paulson when asked whether or not Social Security recipients might get a one time payment responded:
…"The Christmas season has come and gone. We’re not trying to decorate a Christmas tree here."
He further stated the proposed stimulus plan:
"is focused on broad-based tax relief for those who are paying taxes, and that was the principle he [President Bush] laid out. This is something that has worked well before, has worked in 2001, worked in 2003 — get to consumers, put money in the hands of people, letting them spend it rather than the government spend it."
The problem with the Economic Growth and Tax Relief Reconciliation Act of 2001 [June 7, 2001] and The Jobs and Growth Tax Relief Reconciliation Act of 2003 [May 28, 2003] is the outcome.
As Chairman Lazear indicates in the press briefing
"There are two major parts of the economy that we have to deal with: the consumption side, and the investment side. Consumption is important, of course, because it is the major component of GDP; it’s 70 percent of GDP. But in addition to that, investment is extremely important not only because it’s a significant part of GDP, but also because investment is the way that we create demand for labor. And demand for labor means more jobs and more wages, and that’s the reason that we have to focus on that side as well."
Over the past seven years the stimulus plans put in place by this administration have added a grand total of 6,011,000 jobs to the economy. That’s 6.0 million in seven years, or little more than 71,000 jobs per month to an economy that needs twice that many jobs added just to keep pace with population growth. Source: Bureau of Labor Statistics
The subprime mortgage crisis is the force pulling the economy down and with 1.7 million subprime mortgages scheduled to reset in 2008 and 2009, the maximum $150 billion dollar stimulus plan proposed by the White House may do little to curb recession fears.
What we may be looking at is another "growth" package from 1600 Pennsylvania Ave that grows little more than grass on the White House lawn and may be the very reason why world markets are ringing alarm bells.