New signs of trouble in the economy

March 20, 2008 7:29:39 PM PDT
There are new signs of trouble in the economy.

The index of leading economic indicators slipped in February, marking five straight months of decline.

Foreclosure signs surfaced a year ago, jobs have been drying up for months.

California last month led the nation in unemployment claims. And now, the index of leading economic indicators dropped three-tenths of a percent last month.

Jobless claims, building permits, delivery times, consumer expectations and stock prices are dragging the economy down.

So why didn't the Federal Reserve act sooner?

We posed that question to Tom Campbell, Dean of the Haas School of Business at Cal.

Campbell says in hindsight, the Fed probably did the right thing.

"Had it dropped the discount rate to below three percent last summer, we would have had at the same time the run-up of petroleum prices, higher cost of food and you might have re-ignited inflation," said U.C. Berkeley Haas School of Business Dean Tom Campbell, Ph.D.

There is plenty of finger-pointing now that it appears lenders loosened credit standards and borrowers fudged on their applications to get mortgages.

However, Campbell disagrees financial institutions created a fragile house of cards.

"A house of cards I'm not completely sure. It's not that speculators were the cause of this. I think it was more a sense that housing prices had shown a trend going up reason to believe it would continue. Well, now we know it didn't," said Campbell.

What about Bear Stearns? Should the government be bailing out a private investment bank?

Campbell acknowledges it could be an unwise decision to use taxpayer's money.

"There is just a little bit of a risk that the next time this happens, a financial institution will make the long bet, will make the high risk bet because the worse that can happen is the government will help us out as opposed to going bankrupt," said Campbell.

Massachusetts Congressman Barney Frank heads the House Financial Services Committee. He called today for tighter regulations for non-bank lenders.

Campbell says he agrees more oversight is needed. Economic contraction, he says, is psychological, and it's just a matter of restoring confidence.

The Federal Reserve traditionally has seen its role as an inflation fighter. Given its actions in the past week, Dr. Campbell and others say its focus now is on keeping the economy from becoming stagnant.