Gary
I heard on Radio National this morning that the state of Michigan has lost 400,000 jobs, with another 50,000 expected. The problem is Detroit, and the faltering US auto industry. Michigan is a rustbelt, with high unemployment and big housing foreclosures. Those jobs are gone and they are not coming back.

These are not the signs of a healthy economy.

Nan,
South Carolina (unemployment) and Nevada (housing foreclosures) are also in bad way. So it is no wonder that American voters want change ---as the Bush administration's stewardship of the American economy has not been good. Even retail sales are stalling in the US.

So we can expect the Federal Reserve to cut interest rates again, as an insurance against what they are calling an economic downturn, but which means recession. The fear in Australia is not just inflation----it is that the credit crunch will trigger a recession in the US that could drag down other economies.

Gary,
this article in Salon is good--it's about Mitt Romney addressing the auto crisis in Michigan. He's telling Motor City that he is going to rebuild the industry by taking government regulation and burdens off the back of the auto industry. He reckons he will get the old jobs back with some good old fashioned free enterprise and free trade.

Though General Motors is getting crushed by labour costs---the health benefits it pays its workers---the Republicans are not in favour of a national health care. They--the GOP--- still think that government is not the solution to the problem; government is the problem, and that good policy is to curb the size and influence of the federal establishment.

The Republican party is enamored of free markets, limited government, low taxes and a strong defense.---Reagan conservatism.

Nan,
It's more than the car industry that is causing grief.

There is an article in the Financial Times by Wolfgang Münchau entitled This is not merely a subprime crisis where it is argued that:

The German experience has taught us that persistent problems in financial transmission channels cause long economic downturns. Today, the really important question is not whether the US can avoid a sharp downturn. It probably cannot. Far more important is the question of how long such a downturn or recession will last. An optimistic scenario would be a short and shallow downturn. A second-best scenario would be for a sharp, but still short, recession.A truly awful scenario would be a long recession.

He links this to the credit default swaps---relatively modern financial instruments that allow bondholders to insure against default.

Economically, credit default swaps are insurance. But legally, they are not, which is why this market is largely unregulated.Technically, they are swaps: two parties swap payments streams – one pays a regular premium for protection, the other pays up in case of default. At a time of low insolvency rates, many investors used to consider the selling of protection as a fairly risk-free way of generating a steady stream of income. But as insolvency rates go up, so will be the payment obligations under the CDS contracts. If insolvencies reach a certain level, one would expect some protection sellers to default on their obligations.

The defaults are happening. The CDS market is huge--about $45,000bn, which is more than three times the annual gross domestic product of the US. He adds:

If protection sellers were to default en masse, so too could some protection buyers who erroneously assume that they are protected. Given that the CDS market is largely unregulated there is no guarantee of sufficient liquidity behind each contract.It is not difficult at all to see how the CDS market has the potential to cause serious financial contagion. The subprime crisis came fairly close to destabilising the global financial system. A CDS crisis, under a pessimistic scenario, could produce a global financial meltdown.

He adds that this is a contingent scenario based on an event – a nasty and long recession.