Economy sinks as we save bankers

By Bill Fleckenstein

I hear a lot of chatter about the next problem in the financial food chain, as it were. Yet I am much more concerned about jobs and the economy (as well as a future funding crisis I'll explain below) than I am about this phase of the financial crisis.

I could be wrong, of course, but I think we're probably in about the eighth inning of the crisis in financials. The government is not going to let any major financial entity (or almost any large entity) go bust at this juncture -- which means no one will lose access to green paper. Thus, while folks are worried about financial institutions, their real concern ought to be the economy.

For several years now, as regular readers know, I have discussed my view regarding how weak the economic environment would be in my "next time down" scenario -- when real estate, stocks and the economy all feed on each other to the downside. I first proposed the idea before I saw the ultimate insanity that was our real-estate and credit bubble.

To review the point that I made in Chapter 7 of my book "Greenspan's Bubbles" and in many columns: In the past expansion, economic growth was almost entirely about real estate. Gross-domestic-product growth, excluding mortgage-equity extraction, was almost nonexistent. In addition, when you consider that 30% to 40% of all jobs were real-estate-oriented, it's clear how hollow the economy is liable to be going forward.

Considering the capital destruction and the credit contraction now under way, I have a hard time seeing where the new jobs will come from to handle all the layoffs that are going to take place. Given that lots of marginal businesses have survived on consumers' wild spending, many of them will not make it as folks retrench aggressively. That's on top of all the carnage in anything related to real estate or finance.

Building a highway to job creation

Parenthetically, I hope that as the government goes about spreading taxpayer money everywhere, it does something intelligent, such as spending money to rebuild our infrastructure (roads, bridges, ports, etc.) or undertaking the task of stimulating alternative energy resources while building plenty of nuclear power plants, so we can create jobs and eliminate our dependence on foreign energy sources like the OPEC nations.

• Talk back: Who should be blamed, who should be punished in credit crisis?

I'm sure there will be other ideas about how best to help create jobs, but one "solution" that's no solution at all is trying to put a floor under home prices. The problem is, home prices in America are still too high, relative to average income, and the average income is going down. So, trying to "stabilize" home prices is (a) impossible and (b) a complete waste of money.

Dollars to doughnuts, we'll borrow in euros

The third crisis that I see coming, which is theoretical but I suspect cannot be avoided: At some point, the U.S. will not be allowed to finance all of its debts in dollars. We have proposed better than $1 trillion worth of bailouts, and there will be more money thrown at the economy, I'm sure. I cannot see why foreigners would fund a couple of trillion dollars in spending in our currency, given our recent behavior.

Thus, somewhere down the road, we might have to borrow in foreign currencies, which would cause an additional set of problems. Hopefully, we'd be far enough along in the first two crises that this wouldn't be a catastrophe.

• Video: Is there a bottom in sight?

To return to baseball metaphors: As I said earlier, I believe the credit crisis is probably in the eighth inning. The economic crisis is still taking batting practice. As far as the funding crisis goes, I don't think folks even realize that game is on the schedule. That's my view of where we are and a bit of a road map as to where we could be headed.

Obviously, there are many things that I can't know, and there will certainly be more surprises from the dark matter of the world's financial institutions. Any market rally we see is almost certain to be transitory. And while it may be tradable (depending on the setup and the skills of individuals), it will not be something you can buy and forget about.

Last note: For those who wish to watch, I'll be on Fox Business News' election night coverage.