IR, just remember, you asked:
I love irony: We are currently in a recession. Everybody knows it. Yet
the official proclaimer, the National Bureau of Economic Research has
yet to call it. I find it ironic the Calculated Risk blog been calling
recession since last December and most people on the street can provide
anecdotal evidence of recession yet the official government agency has
apparently not made up its mind about the matter.
So we go about our daily lives suspecting times are not as good but not really thinking about it… or acting on it.
Many here witnessed the run up in home prices during the bubble,
knew it to be unsustainable, and realized prices had no choice but to
come back down to earth. Many have also agreed prices will over-correct
running lower than fundamentals for a brief period due to buyer
psychology (fear of being a knife-catcher).
I find it ironic, then, to hear (at least in the recent past) that
while we are in a recession, and there is a chance of severe recession,
it will not be a depression.
Psychologically, we simply do not want to consider such ideas. We
cling to the idea that the government will do its thing, and then the
economy will do its thing.
The media has widely reported over the last few years the economy
has been driven by the American consumer. How many times have you
discovered it was cheaper to buy two of the same item than one? How
many “value-paks” have you purchased. Our economy has traditionally
built upon expansion, but for the last 5-7 years our economy has
actually been depending on it.
The American consumer was able to meet this demand and fuel the
economy for the last few years using Mortgage Equity Withdrawal, Heloc
Abuse, credit cards, and savings depletion, but just as houses can’t
increase in value just because prices go up, our economy can’t continue
to expand on borrowed money. Those days are over.
You might say, sure things are bad for real estate and for Wall Street, but my company is doing business just as it always has.
Now remember, all of those housing bulls kept saying “can’t happen
here” and “all real estate is local” and “there’s no such thing as a
national housing bubble” yet here we are.
If we’re willing to open our eyes and look around: lowest personal
savings rate since the great depression; biggest decline in home prices
since the great depression; highest number of foreclosures since the
great depression; T-bills yielding zero has not occurred since the
great depression; non-banks borrowing from the Fed for the first time
since the great depression;
The currently proposed bailout will be the largest economic intervention by the government since the great depression.
The depression is not coming. Like it or not, it’s here. To coin an
ancient ad for Palmolive dish soap, we’re “actually soaking in it”.
Of course your company’s sector (unless the financial sector) is
probably unaffected by all the commotion, your company probably seems
sound, your job probably seems secure. But wasn’t there that group that
recently got laid off?
Likewise, if you own a house you are probably not bothered by the
equity-destroying comps of your neighbors, that is, until those comps
completely wipe out your equity. Even then, it’s a paper loss unless…
for some reason… you need to move.
The economic dominoes are falling. If we have learned anything in the last year, it’s that nothing is contained.
As you might guess, I’m an occasional reader of this blog and also
CR (and that Nouriel Roubini guy). I don’t mean to be un-American or
panic anybody by calling this a depression. If my claims above are not
true, please correct me.
It’s fair to say we’ll know the housing market is getting better
once the number of foreclosures subsides and starts to diminish.
Likewise, we’ll know the current economic crisis is getting better once
government bailouts start diminishing in size, but if you look at the
numbers you can see we are currently heading in the wrong direction.
I would like nothing better than for all markets to regain
confidence and work through this crisis, but again there is no
foundation for this to happen. By it’s very nature a bailout should not
inspire confidence, it should indicate system failure.
Just as the housing market can not bottom until prices reach
fundamentals, our economy can not heal until its fundamentals are
tested and found to be sound.
