State of the Economy – February 2009Posted: February 28, 2009
I have written quarterly articles about what I hear and see around me. The last two months have been a self fulfilling spiral of pessimism and Warren Buffet was right in saying it will get worse… unless we can break the self feeding spiral.
Large corporations have frozen their budgets for the first half of the year and the ripple effects are being seen everywhere. If the stimulus money doesn’t start to bite and artificially boost demand, budgets will be cut during the second half as well. Consumers are holding of on purchases just in case it will get worse. The good thing is that consumer dept is actually degreasing lessening the risk of an added credit card crisis. The degrees in consumer dept is also a sign that when we surface we will be better for it. Major items are not moving because banks are not lending. Banks are not lending, because they will need the liquid reserves to stay alive as the economy continues to slow down and they continue to make huge losses on toxic assets.
Pumping money into banks will not solve the underlying issues…. they will not lend out a cent more. The economy will continue spiraling and the bailouts will only cover losses banks are making keeping them artificially afloat. Buying the toxic assets will help to stabilize the free fall of the banks making them profitable again opening up the banks to new risk taking… lending. In addition to buying the toxic assets the Fed should pump money into Fannie and Freddie (with unprecedented oversight the whole lending value chain) and allow banks to start brokering mortgages and loans again with a service margins… at a lower risk profile than in the past. Yes, Fannie and Freddie should expand to car and colleague loans as well. Fannie and Freddie should be nationalized credit wholesalers for consumers. Why isn’t anyone talking about the role of Fannie and Freddie in the stimulus program???
Consumers will not start to buy until they see their major assets stabilize… housing values. Housing values will not stabilize until mortgage lending is restarted and demand is created (enabled). After all 15 million new households are going to be created in 2009 and they got to live some where. When consumers start buying, then corporations will start to scale up again.
At the risk of over simplifying…. this isn’t rocket science.
I think that the current administration should continue on the path of transparency and create a commission to prosecute all parties that benefitted from the last five years leading to the crisis with full knowledge of what they were doing and where their actions were leading to. S&P saw what was happening (House Oversight Documents). The bankers who were lending with insane risk ratings knew well enough where their short sighted greed was creating an immense bubble. A bit of e-discovery into private email accounts of top 1000 bank executives would be fun reading for the Senate Finance and Financial Institutions Commission. Many articles lay blame on consumers who bought houses they could not afford. Well true and believe me they are paying the price, but the bankers are not. It takes two to tango after all.
I believe that by applying the stimulus where it matters, infrastructure and research that will artificially create demand for goods and generate jobs leaving the nation better equipped to compete in a post recession global economy, we will not continue to spiral as Mr. Buffet predicts. By laying off tens of thousands of workers corporations are lean and mean again. The unfortunate outcome of this however is an inflated structural unemployment that will last for a long time. The administration’s educational programs should focus on addressing this issue in addition to focusing on the next generations.