Don't Panic: Recession, Maybe, But Not Total Collapse

If you listen the mass media hysteria, you'd think the world were on the brink of total collapse. You'd think that we're about ready to sprint right past recession to depression. Certainly the global markets are jittery, as is the stock market, and even the Federal Reserve Bank. Any time the Fed cuts .75 points from a key rate, people sit up and take notice.

But, lest you panic completely, Tyler Cowen at Marginal Revolution shares the following:

Even Citigroup Inc., by far the hardest hit of the big U.S. banks by subprime-related problems, earned $3.62 billion last year. That was with a $9.83 billion fourth-quarter net loss and more than $22 billion in writedowns and additions to loan-loss reserves.

For JPMorgan Chase & Co., the third-biggest U.S. bank, the focus was on the 34 percent drop in fourth-quarter profits from a year earlier. Its full-year $15.4 billion profit, a record, was largely ignored. ...

Economist Robert E. Litan, a senior fellow at the Brookings Institution who has done numerous studies of the U.S. financial system, said the banks are in far better shape than the dire assessments suggest.

''Strip out the losses and Citi could make close to $10 billion a quarter,'' Litan said. Noting how quickly the bank has been able ... to replace the capital depleted by losses, he added, ''Why would anybody buy stock if they thought Citi was going down the tubes?''

So, don't panic. It looks like the banks, at least, are still solvent and doing ok. Sure, they're taking a beating in the sub-prime mortgage market, but it seems that 2008 will likely lead to a correction in that area, leaving a much healthier economy (we hope). The big thing, I think, to watch is inflation, as driven by energy costs. This situation really highlights the importance of finding alternative energy sources, whether that be nuclear power generation, ethanol based on better renewables like prairie (switch) grass, and so on.

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