Bottom? What bottom?

Across Manhattan there are many observers — including Bear Stearns senior officers who are in dire straits from borrowing money on the shares they never sold and face financial ruin.

Their most telling gripe: If the Fed had opened the discount window to the investment banks on Thursday, March 13, instead of Monday, March 17, might Bear have been able to get the transfusion it need to keep its doors open? We'll never know for certain.

Despite all the Fed actions to stabilize the markets, Bernanke laid out all the negatives, one by one. We believe it was as clear an exposition as possible and far more useful than getting the scenario bit by bit, which is hard to digest clearly.

Financial market conditions

• Lenders are reluctant to provide credit, which has forced investors to liquidate holdings and reduce their leverage. Ultimately, reducing leverage, which must be on the minds of the Fed officials supervising major investment banks like Lehman Brothers, Morgan Stanley and Goldman Sachs, makes the financial system safer.

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  Credit availability is restricted by limited capacity and the unwillingness of some large institutions to extend new credit. Witness the number of leveraged buyouts that are cratering or being canceled — a virtual plague. Global debt underwriting volumes dropped over $2 trillion since July 2007, which is an enormous loss of liquidity to the financial system, says Meredith Whitney, an Oppenheimer & Co. bank analyst.
• Strains are evident in numerous markets, commercial paper, municipal bonds, student loans and mortgage-backed bonds from government agencies.

The economic ramifications

• The cumulative decline in single-family home-building starts since early 2006 has been more than 60 percent. Just recently, New York real estate brokers have contacted us about the way prices on apartments are softening fast, helped along by the layoffs on Wall Street.
• Unemployment will be moving higher. The 5.1 percent it hit last Friday in the latest figures underscores the recession we are now in. The pullback in hiring will cause a reduction in capital-spending plans.
• Disposable income is rising at a rate of only 1 percent — down from 3 percent — and obviously will cause consumer spending to decelerate. Bernanke believes the tax rebates and fiscal stimulus will reverse this trend in the second half of 2008.

• Inflation meant the price index for personal consumption expenditures rose 3.4 percent over the past 12 months, up from a more manageable 2.3 percent. Bernanke is optimistic inflation will moderate as futures markets are forecasting that oil and other commodities are softening.

We agree with Bernanke's summing up last week before Congress: "In light of the recent turbulence in financial markets, the uncertainty attending this forecast is quite high, and the risks remain to the downside."

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