Since the economy torpedoed in 2007, the U.S., along with much of the world, has been suffering under the worst recession since 1930’s. Unemployment is hovering around 10% and “real” unemployment exceeds 15%. The recovery has been limited and the future is uncertain.
While predicting the future is a risky endeavor (I typically fare better when I make predictions after the fact), following is a marginally informed guess on our economic future for the next few years.
Part 1. Things we should have learned in school but weren’t paying attention.
The 2008 stimulus package helped avert a new Great Depression. When, in 2007, the credit markets froze, business activity slowed to a crawl. Without capital to fund business cash flow, purchases of inventory and business investment; financial activity around the world started grinding to a halt, causing a cascade of lay-offs and bankruptcies, which in turn, led to less credit, more lay-offs, more bankruptcies, in an downward spiral that wouldn’t have stopped for a long time. We would likely have had 20% or 30% unemployment. In fact, the only thing stopping a complete economic collapse was the steady infusion of money from government to pay for safety net programs, health care, public workers, etc.
So, the government’s actions – such as flooding banks with cash, taking over GM, creating stimulus programs – while unpopular, kept things from getting much, much worse. And it’s clear that, if we want to return to full employment, further government stimulus will be necessary. While, reducing the deficit at this point in time would send the economy further down.
And, no, the government is NOT like a family sitting around the table at night balancing the budget. That’s a nice sound bite; maybe it’s a good vote getter; but it’s not true.
In the mid 1930’s, after President Roosevelt implemented stimulus programs, the economy started to grow again. However, just as now, deficit hawks urged government cutbacks and . . . the economy quickly went downhill.
We did emerge from the Depression finally when the government pulled out all the stops and embarked on the biggest stimulus program in our history. In the late 1930's, government stopped relying on the private sector to fix the economy and, instead, fully embraced . . . Socialism! Government hired millions of unemployed people and spent billions buying lots of new clothing, food, vehicles, ships, etc. We went hog-wild with the biggest deficit spending spree in history. Our current deficit is 60% of the gross domestic product; but in the 1940’s, it soared to 150% of our GDP! Even worse, our "robber" government increased taxes on the middle class and rich to unheard of levels. Marginal tax rates for the very wealthy soared over 90%.
And, of course, the pundits' dire predictions came true. The profligate spending of the 1940’s saddled the next generation and their children with crushing debt, from which they never recovered. Government domination of the economy and high taxes completely destroyed private initiative and wrecked the economy. By 1950, the country lay in utter ruin, people barely had clothes, lived in hovels and scoured the countryside for food. It was the end of the great American experiment.
Well, not exactly.
Not even remotely.
Government went on its spending spree, increased taxes on the wealthy and we went from 17% to 5% unemployed in twelve months! The Great Depression? Fixed, solved and banished for two entire generations. And after 1945, there was no collapse; in fact, the economy took flight for the longest period of continuous growth in our country’s history.
And the crushing deficit debt? It faded away under a rapidly expanding economy – an economy, by the way, where the highest tax rates remained above 90%.
That profligate stimulus spending was, of course, World War II. It appears that we can’t act in our own best economic interest unless it involves a really big war. It’s politically just fine to deficit spend and increase taxes on the wealthy if we’re fighting a war. But, otherwise, we can’t bring ourselves to do the things that would help us.
Oddly, an enormous, ongoing increase in stimulus funding could not only get the economy back on its feet; but could actually prepare us for a new round of growth and expansion. Deficit spending used to improve our transportation system, advance our educational programs, and wean us off oil, could create a higher functioning, more efficient economy – a good thing, by all accounts.
Still not convinced? Well, don’t tell China because that’s exactly what they are doing. When the world economy took a dive in 2007-2008, China took a hit too. But China learned from our experience in the Great Depression and embarked on an enormous, Keynesian, stimulus-spending program by building transportation, improving schools and migrating to alternative energy. Guess who is going to come out ahead in this debate?
Part 2. When the music’s over . . .
~ Jim Morrison
Unfortunately, we don’t seem to be heeding the lessons of the Great Depression and, instead, are going down a very different path. Here’s what’s coming up in the near future and the impact it will have on us:
First, stimulus funding is OVER. The old Congress had a difficult time passing bills. The next Congress will do even less. And incoming Congress members are clear that they will not support any new stimulus spending.
The 2008 stimulus funding, which kept local government and the economy alive, is winding down. State budgets are in sharp decline and Legislatures are cutting billions in spending. Some argue that’s a good thing; after all, what could be better than getting rid of bureaucrats? Bureaucrats do not make up the bulk of state and local government workers. These are mostly teachers, college employees, fireman, law enforcement, etc. So states will be eliminating lots of those jobs, which will affect classroom sizes, the number of police on the beat, etc. Cuts to Medicaid will affect hospitals, doctors, nursing homes and other medical providers.
Sick of all those road construction projects that are going on right now? Well, not to worry, as federal stimulus funds dry up, we can say goodbye to those as well. And while we’re at it, say goodbye to all those jobs that kept the construction industry on life support after the housing market collapsed.
Well, maybe we can live without a few teachers or construction workers. But keep in mind, those newly unemployed people will stop spending as much money at the local Safeway and other stores. As their numbers climb, business activity will decline. If the cuts are severe, it could throttle the weak recovery.
Contrary to what the pundits say, we do not live in a “we’re all on our own, pull yourselves up by your bootstraps” world. We are profoundly and intimately connected to and interconnected with each other. When many of us suffer, we all suffer. When most of us thrive, we all thrive. This is not socialism; this is our reality. And nothing demonstrates this interconnectedness more than the housing market.
Part 3. And I’ll huff and I’ll puff and I’ll blow your house down.
~ B.B. Wolf
It was the popping of the housing bubble in 2007 that led to the great financial collapse. After being driven sky high by Wall Street’s funny money derivatives, the whole edifice collapsed in 2007 and millions lost their homes, millions more lost decades of savings and, of course, the world economy nearly collapsed.
Well, at least that part is behind us, right?
Right?
Well, not exactly. In fact, not at all.
You see, there is a cloud on the horizon. It’s not exactly a secret; in fact, you can find mention of it inside the WSJ and NY Times.
Remember all of those toxic, subprime loans? These were the loans given to borrowers who would never be able to pay them off. These bad loans have mostly worked their way through the financial system. People lost their homes, a lucky few were able to refinance, and most of these loans have been accounted for.
Unfortunately, the innovators on Wall Street didn’t stop with subprime loans. In the mid-2000’s, they started promoting “Alt-A” and “Option ARM” loans. These loans often had “teaser” rates. Borrowers would pay low amounts – for example, interest payments only – for the first few years of their mortgage. After 3-5 years, they would start paying interest and principle and their payments would increase . . . a lot. Say, 30%, 50% or more. Lenders assured borrowers that perhaps they would earn more income in a few years; or perhaps they could refinance in a few years.
A good plan, except that incomes have not gone up and you can’t refinance your home if you owe more than your house is worth. And that’s what is happening now in a big way. In fact, there is over $1 trillion in such loans that are coming due in 2011 and 2012. As these loans “recast”, a few million people will be unable to pay their mortgages and many will foreclose. More foreclosures means more banks need to sell more homes, and the glut of housing should drive overall housing prices down. This will create a downward spiral where more and more people will find themselves “under water” – owing more on their houses than they are worth. And, once again, as people lose their homes and their accumulated wealth, the effects will percolate through the economy dragging it down further.
This is an awful scenario, but there’s more to come.
It was not enough for Wall Street to sink the housing market and torpedo the economy; there was still more mischief to be done. After making enormous profits on home mortgage loans and derivatives, they moved on to the commercial real estate market, introducing similar “innovations” there. As a result, there is about $1 Trillion in commercial real estate loans that are at risk of defaulting in 2013 and 2014.
So, we appear to have a triple whammy:
- The one thing to revive the economy would be stimulus funding; but this appears unlikely to happen. The existing stimulus funds are winding down. As they peter out, state and local governments will make dramatic cuts to education, health and construction programs, further depressing the economy.
- More toxic mortgage loans are about to come due, which will increase foreclosures, drive down home prices and roil the credit markets and economy.
- Commercial real estate loans will go through similar turbulence in 2013 and 2014. This will further disrupt the financial markets and lending will diminish, subjecting the credit markets to a slow freeze.
It’s a sorry picture – one that implies long-term unemployment for millions, job insecurity for many, and considerable (and unnecessary) suffering.
However, it won’t be bad news for everyone. Over the last 40 years, the very wealthy have gotten . . . well . . . very, very wealthy. More wealth is concentrated in fewer people’s hands than ever before. And those few people sitting on enormous amounts of cash will be able to clean up.
As housing prices plummet, you’d think that ordinary people would be able to buy those homes at really low prices. However, this would not be the case. Because, at the same time, the instability in the financial markets will make lenders scared or unable to lend. The only people able to take full advantage of rock bottom prices will be those sitting on mounds of cash. As they sweep up cheap homes and commercial real estate, two things will happen: 1) a growing percentage of Americans will become renters and 2) the accumulated wealth of much of the middle class will have been captured by the wealthiest sliver of society.
In other words, the rich will get richer.
