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Farrell: Ben Vs GE

GE Capital had a meeting yesterday to go over in some depth their book of business. They feel they will earn $5 billion this year if, and this is a big if, unemployment peaks at 8.5% and averages 7.7% for the year. Their estimate for GDP is for a decline of 1.8% for 2009. But if unemployment were to average 8.4% and not 7.7% then earnings for GE Credit would be halved. Carole Berger of Soleil/Luna Analytics feels this is a very aggressive projection on GE'S part as it would require the economy to bottom soon and begin a fairly healthy upturn.

You have to figure that Ben Bernanke would also disagree with GE's economic outlook. Or why would he have unleashed the Fed's balance sheet as he did in yesterday's surprise move? If the economy were poised for a rebound the massive expenditures on the Fed's part would not be necessary. He hasn't said, nor should he, but he must feel that the economic response so far to all his initiatives is lacking. The Fed must have marked down its economic forecasts due to the collapse in the stock market and the extent of the recessionary forces outside the United States.

The Obama administration is also way too hopeful on the economy. The President's budget estimates that GDP will be off a relatively modest 1.4% this year and grow 4% a year thereafter. No way can that happen. There are a goodly number of economists that are at a negative 2.5% GDP for 2009 or thereabouts. That makes a lot more sense to me.

First quarter GDP, however, might be a bit better than I had been fearing. There are some who expect a negative 7 or even 8% annual rate of decline. But with the Cost of Living Adjustments (COLA's) for government recipients disbursed recently and with a lot of early tax return filings providing some temporary juice to retail sales, there is a chance that Q1 GDP will be a touch better than the fourth quarter's miserable -6% plus.

The new wild card in the equation is the hostility now being overtly acted upon by Congress on the financial community. While the rage engendered by AIG's bonus pool is understandable, the Congressional reaction is not. TARP recipients will get out as fast as they can if this proposed tax becomes law thus wounding the whole idea of rebuilding the banking system. While it is encouraging to see a couple of TALF programs get bids the response is far less than was hoped for. I would guess there will be serious reservations about doing business with a government that believes in retroactive and punitively populist legislation.

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