The "D" word

Americans woke up this morning to banner headlines about yesterday's bold interventions by the Federal Reserve to "stem a crisis that is engulfing the financial system and threatening a deep recession," according to the Wall Street Journal. "Many bankers are steeling themselves for the global financial crisis to both last last longer and grow deeper."

In recent days, the dollar has hit record lows, oil and gold have hit record highs and the third largest investment bank, Bear Stearns, imploded (sold off to JP Morgan at $2 a share just two days after its stock was trading at $57 a share.)

With Southern California home prices down 19% from a year ago, the real economy is slumping. But what is now crashing is the "casino economy" of hedge funds, which have made leveraged bets on everything from sub-prime mortgages to currency exchange rates. The increasingly exotic financial instruments deployed by the wunderkinds of international finance are untested by crisis -- until now.

Because no one regulates (and few understand)the trillion dollar "derivative" market, we are literally in uncharted territory. The closest historical comparison is the run-up to the Great Depression, when stocks were bought on margin with the expectation that an ever-rising market would bring unlimited leveraged profits. It all worked splendidly until the market turned down -- and then leverage began working in reverse, bankrupting millions of investors and smashing faith in banks and markets.

A decade and a half of international misery and global war produced a new financial system based on the United States dollar. That system lasted more than half a century -- but now appears in danger of collapse. The Dow dropping below 9,000 before President Bush leaves office is no longer an implausible prospect.

Here in Ventura, far from the frenzy of international monetary trade, we go about business as we did last week. But housing production has virtually halted, our budget projections are falling at least $2 million short for this fiscal year and next year is looking more and more grim. We are shut out of the bond market, even as the Federal Reserve slashes interest rates, because Wall Street has put even municipal credit on the endangered list.

It is important not to panic. We all remember Franklin Roosevelt's calming words, "We have nothing to fear but fear itself." But until Washington comes to terms with the depth of the crisis (borrowing money to send out checks to taxpayers only deepens our debtor problems), we are increasingly on our own to try to cope with not only the headlines -- but the real world impacts on supplying the vital services that Ventura residents depend on.