• This is a rush transcript from "The Journal Editorial Report," July 19, 2008.

    PAUL GIGOT, HOST: On the "Journal Editorial Report," customers panic as a big California bank goes under. With more failures likely, how safe is your money?

    Rising inflation, $4 gasoline, a plunging dollar, we'll look at what Washington should being doing to clean up this mess.

    Plus, Barack Obama is packing his bags for Iraq and sticking to his timetable for a troop withdrawal. But does the public agree?

    We find out, after these headlines.


    GIGOT: Welcome to the "Journal Editorial Report." I'm Paul gigot.

    More bad news on the economy this week as wholesale inflation hit a 27-year high and the U.S. dollar plunged to a historic low. And his twice yearly report to congress, Federal Reserve Chairman Ben Bernanke outlined a host of problems facing the U.S.


    BEN BERNANKE, CHAIRMAN, FEDERAL RESERVE: The economy continues to face numerous difficulties, including on-going strains on financial markets, declining house prices, a softening labor market and rising prices of oil, food and some other commodities.


    GIGOT: Here to make sense of it all is Liz Ann Sonders, the senior vice president and chief investment strategist for Charles Schwab.

    Liz Ann, good to have you back on the show.


    GIGOT: The economy, a lot of bad news again, but despite it all it seems like we so far have avoided a recession. Is it possible that we could avoid one this year?

    SONDERS: I suppose it is possible though I think the chances we are in one is relatively high. Remember the bureau that dates recessions does not typically date it until well after the fact. In fact, the last time two recessions, they dated them, not only after they had begun, but after they were already concluded.

    I also think some of it's an issue of semantics. There's no question the economy is very slow and that has a lot implications, the label of recession notwithstanding.

    GIGOT: On the housing front, that seems to be the core problem with prices falling and foreclosures still moving to the system. Do you see a bottom at all?

    SONDERS: Unfortunately, I don't think we are not in a position to declare a bottom or at least one in our sites. It is hard to judge either in time terms or in percentage-drop terms how much further we have to go. If you go back to some normal historical relationship between the median incomes and median home prices, it suggests another 10 percent or 15 percent drop. It doesn't mean that we have to get there, nor does it mean we will overshoot that. The speed with which that can happen is the tricky part. As odd as it seems, it may be the silver lining to an ugly economic environment. And the same could be said with energy. It may be triggers the correction, the last leg of the correction to happen more quickly, which ultimately would be good.

    GIGOT: If you have a 10 percent to 50 percent greater decline in home prices, that's going to flow right through the financial system to the financial institution and that means a lot more bank failures.