This past week was pretty bad for Wall Street. The stock market dropped around 7%. Analysts believe that investors are losing hope of our economy making a comeback within the next year or two (my favorite source of such analysis is Bloomberg radio). The soaring price of gold indicates that a lot of people with money are thinking “great depression 2”.
I don’t have any cheerful thoughts to offer in response to that. Unfortunately, the American economy doesn’t seem to have an “engine of growth” ready to go right now, set to pull all the other sectors out of the ditch. (Wall Street has obviously lost confidence in the Obama Administration’s ability to do that, despite the financial stimulus package.) Over the past 10 years or so we had the real estate sector, personal consumption and the internet/technology fad to keep things bubbling. In the long run, America still has some cards to play: it still has the best education infrastructure and a strong tradition of creativity and innovation. We can still sell those strengths to the world — once the world is ready to buy again. Remember, this economic crisis is world-wide. For now, the fizz is gone, the economic champagne has gone flat.
All I can contribute right now is a semi-witty acronym meant to summarize how we got here (some might say it’s “quasi-witty” or “pseudo-witty”, or not witty at all!). That acronym is FWREC: Finance, World-wide, Real estate, Energy, and Consumer demand. Economic analysis is a dime a dozen these days, so I’ll just give a quick synopsis of our current “FWREC’d” situation.
F – Finance: Our generally unregulated financial system came up innovations like mortgages without income checks, down payments, and for the first two years, without principal and full interest payments. And credit cards were given away like candy. And then there are the secularized investment instruments that spread such mortgage and credit card debt over thousands of investors according to complex rules; these are now known as “toxic assets”. And mix in all those default swap agreements from the insurance companies. It all seemed so safe, so solid, so interconnected. Unfortunately, no one could see that all taken together as one, this was a house of cards ready to collapse once the right gust of wind came along. And come along it did.
W – World-wide: America and the world are now extremely tied-in and co-dependent. In many ways that’s good. But when America, the biggest source of global economic demand and the biggest receiver of global investment, goes down, the whole thing goes down. Again, the system had a tipping point that hardly anyone foresaw. Until the “black swan” landed.
R – Real estate: Real estate brings out the best and worst in people. Families that own their own homes tend to take more pride in the neighborhood and contribute more to civic life. HOWEVER, real estate also brings out a lot of greed and short-sightedness, both on the local and national level. Our political system assumes that real estate is an unlimited good, and encourages it (via tax deductions and money supply expansion and lending incentives to banks) beyond the point of economic rationality, both on the part of homeowners and mortgage lenders. And now the chickens have come home to roost — the dark side of real estate has reared its ugly head; i.e. foreclosures, bank failures, toxic assets, and rapidly declining consumer consumption. Unemployment is boosted because workers in declining cities like Detroit can’t sell their homes and move elsewhere in search of jobs. Furthermore, the hunger for large real estate plots in the exurbs has locked us into development sprawl and the high energy demand that comes with it — the next FWREC factor.
E – Energy: Oil prices are pretty low, at the moment. However, this recession began over a year ago, when oil prices were at record levels due to supplies leveling off while demand increased in the developing world (China, India, Brazil, etc.). That no doubt helped to drag our economy down. Experts say that as soon as the world economy starts picking up, oil prices will skyrocket once again, slowing or possibly stalling a fledgling recovery. Life and business in today’s USA was designed around cheap oil; due to suburbanization and development sprawl, you need a car (and preferably an SUV) to get to most offices, homes and shopping places. It will take many years to redesign the USA landscape in favor of denser urbanized settings, where mass transit (or cycling or even walking) can be used to accomplish the basics. For the next decade, we’re trapped in a high energy consumption mode that will sap a lot of strength from our economy.
C – Consumer demand: With all the easy money and chimeral real estate wealth (everyone assumed that real estate prices would continue to rise come what may), families assumed that there was no need to save money, and no problem with taking out more debt to spend on the finer things of life (vacations, SUV’s, entertainment systems, home improvements, etc.). Hyper consumption was caused by finance (easy loans), the world (below-cost consumer goods from Asia), energy (oil was relatively cheap until two years ago) and real estate (no need to put aside for a rainy day if your home value rises significantly each year); and each of those institutions in turn grew because of that consumption. It was an upward spiral based on good impressions; but it was not backed up by real economic productivity.
And so the party is now over, and we all face a lot of uncertainty. I’m still employed at present but will have my salary cut via furloughs. As to my hopes to retire comfortably in 10 years, that too is up in the air, given that the current value of my retirement funds have been cut in half. I’m not sure what I will do if it all gets worse. All I can do right now is to curse the FWREC that our economy has become. But as to blaming any one person or institution, e.g. George Bush or the Federal Reserve or the big banks or the CRA — no, it was collective stupidity. Let’s hope that some collective wisdom seeps in because of all this.
PS, here’s a good article from The Atlantic on what the long-term effects of the FWREC will be.
Jim,
Yes, I agree with you that this will be the “great depression 2”–definitely.
I find myself somewhat taken aback at the fact that all the stock indicators have recently taken another seriously serious nosedive. But I wonder if it is that “they” have “lost confidence in the Obama Administration.” Rather, I think we are seeing the inevitable result of the serious “mis-administration” of the banks for the last how many years. I heard an economist (sorry I don’t have the citation to give you as I was listening as I was doing household chores) yesterday say that the banks are in such a bad state that no one knows–and worse no one can find out–which banks are in any kind of decent shape and which banks may tank at any moment.
A few years ago I remember reading that unspecified banks (and suppposedly some of the biggest) were in terrible shape and could go under at any moment, but it was impossible to find out which these were. (Turns out Lehman Bros. was one of them, I presume.) I remember inquiring for myself at the time because I was thinking, “I’ll find out how my own bank(s) is/are doing and maybe change my accounts around. Impossible to find out even then.
So it would seem that the banking situation, the real estate situation (for two) were built on sand. About 10 years ago I had a house up for sale. I raised the price a bit, thinking that any sensible/reasonable buyer would surely give me a lower bid on it; I surely would never think of giving the asking price for any piece of real estate. Instead to my total and complete astonishment, within a day or two of its being on the market I received two offers for it–both higher than the price I was asking for it! At the time I simply could not believe the situation. I found out after selling the property to the higher bidder that that person turned around and sold the very same property for an even more exorbitant (to my way of thinking) price.
I do think that people who think that the recent serious downturn of the stock markets has anything to do with Obama’s Administration are foolish–he’s been in office barely over a month. Nobody can really do much of anything in a month–and Obama has done much more than anyone else would have done. (Picture GWB in the place of Obama.) Obama has not even given the State of the Union address yet. I believe it’s coming up this week.
I do think the entire country is in for a long struggle to get out of the depression we are in. I also think that the only true hope for really getting out of the situation is a complete and total change in the lifestyle of Americans, which in the end may not prove to be a bad thing.
Yesterday I heard Zsa Zsa Gabor’s husband complaining that they lost all their money in the Madoff ponzi scheme–$10 million. A huge amount of money. Sad, true. Yet, I found myself unable to feel too very sorry for him as they actually still had a mansion filled with the work of artists and various obviously expensive ornamentation–some of it gold or what looked like gold. And it appears that some of the people scammed by Madoff lost millions–of the billions they are worth. I have to say that I feel for them, but I just can’t reach them.
However, I can feel for–and reach–people like you who see your chance for retirement sink gravely. Or people like my sister who has lost about half of the savings she was counting on in her own retirement.
It may be that Americans will have to learn to distinguish between wants and needs. And here I can speak of myself: I (and I am one of those definitely on the lower end of the economy) have found that I have a serious fault–any book I may even think I might like I simply must buy, if for no other reason than the fact that I would like to read it or I might read it some time in the future. Well, even I have changed my habits. Now I find myself thinking: Is this a book I really NEED to read; that is, will it educate me, add to my growth as a person, or even be an entert
Comment by MCS — February 22, 2009 @ 2:47 pm
Jim,
Yes, I agree with you that this will be the “great depression 2”–definitely.
I find myself somewhat taken aback at the fact that all the stock indicators have recently taken another seriously serious nosedive. But I wonder if it is that “they” have “lost confidence in the Obama Administration.” Rather, I think we are seeing the inevitable result of the serious “mis-administration” of the banks for the last how many years. I heard an economist (sorry I don’t have the citation to give you as I was listening as I was doing household chores) yesterday say that the banks are in such a bad state that no one knows–and worse no one can find out–which banks are in any kind of decent shape and which banks may tank at any moment.
A few years ago I remember reading that unspecified banks (and suppposedly some of the biggest) were in terrible shape and could go under at any moment, but it was impossible to find out which these were. (Turns out Lehman Bros. was one of them, I presume.) I remember inquiring for myself at the time because I was thinking, “I’ll find out how my own bank(s) is/are doing and maybe change my accounts around. Impossible to find out even then.
So it would seem that the banking situation, the real estate situation (for two) were built on sand. About 10 years ago I had a house up for sale. I raised the price a bit, thinking that any sensible/reasonable buyer would surely give me a lower bid on it; I surely would never think of giving the asking price for any piece of real estate. Instead to my total and complete astonishment, within a day or two of its being on the market I received two offers for it–both higher than the price I was asking for it! At the time I simply could not believe the situation. I found out after selling the property to the higher bidder that that person turned around and sold the very same property for an even more exorbitant (to my way of thinking) price.
I do think that people who think that the recent serious downturn of the stock markets has anything to do with Obama’s Administration are foolish–he’s been in office barely over a month. Nobody can really do much of anything in a month–and Obama has done much more than anyone else would have done. (Picture GWB in the place of Obama.) Obama has not even given the State of the Union address yet. I believe it’s coming up this week.
I do think the entire country is in for a long struggle to get out of the depression we are in. I also think that the only true hope for really getting out of the situation is a complete and total change in the lifestyle of Americans, which in the end may not prove to be a bad thing.
Yesterday I heard Zsa Zsa Gabor’s husband complaining that they lost all their money in the Madoff ponzi scheme–$10 million. A huge amount of money. Sad, true. Yet, I found myself unable to feel too very sorry for him as they actually still had a mansion filled with the work of artists and various obviously expensive ornamentation–some of it gold or what looked like gold. And it appears that some of the people scammed by Madoff lost millions–of the billions they are worth. I have to say that I feel for them, but I just can’t reach them.
However, I can feel for–and reach–people like you who see your chance for retirement sink gravely. Or people like my sister who has lost about half of the savings she was counting on in her own retirement.
It may be that Americans will have to learn to distinguish between wants and needs. And here I can speak of myself: I (and I am one of those definitely on the lower end of the economy) have found that I have a serious fault–any book I may even think I might like I simply must buy, if for no other reason than the fact that I would like to read it or I might read it some time in the future. Well, even I have changed my habits. Now I find myself thinking: Is this a book I really NEED to read; that is, will it educate me, add to my growth as a person, or even be an entertainment that I will truly enjoy? Or is it a book I just WANT to have because I’d LIKE to read it. Amazing how I’ve found my book bill has gone down.
People will simply have to cut back on their lifestyles, CHANGE their lifestyles.
But I also think that people who are in serious need of food and shelter should be given a break–not to maintain a lifestyle that is unrealistic–but a reasonable lifestyle.
And yes, it will take years for the world to get out of the situation in which it finds itself.
But I must say that what worries me is that in “the great depression 1” it was WWII that brought the U.S. out of its economic slump. Let’s hope that this time Obama will lead the country in another way–out of the depression but not with a war.
And I say we have voted Obama into office because we wanted his option for “change.” Let’s give him some YEARS to achieve that change and not expect miracles in a month or two.
MCS
Comment by MCS — February 22, 2009 @ 2:47 pm
Jim,
Yes, I agree with you that this will be the “great depression 2”–definitely.
I find myself somewhat taken aback at the fact that all the stock indicators have recently taken another seriously serious nosedive. But I wonder if it is that “they” have “lost confidence in the Obama Administration.” Rather, I think we are seeing the inevitable result of the serious “mis-administration” of the banks for the last how many years. I heard an economist (sorry I don’t have the citation to give you as I was listening as I was doing household chores) yesterday say that the banks are in such a bad state that no one knows–and worse no one can find out–which banks are in any kind of decent shape and which banks may tank at any moment.
A few years ago I remember reading that unspecified banks (and suppposedly some of the biggest) were in terrible shape and could go under at any moment, but it was impossible to find out which these were. (Turns out Lehman Bros. was one of them, I presume.) I remember inquiring for myself at the time because I was thinking, “I’ll find out how my own bank(s) is/are doing and maybe change my accounts around. Impossible to find out even then.
So it would seem that the banking situation, the real estate situation (for two) were built on sand. About 10 years ago I had a house up for sale. I raised the price a bit, thinking that any sensible/reasonable buyer would surely give me a lower bid on it; I surely would never think of giving the asking price for any piece of real estate. Instead to my total and complete astonishment, within a day or two of its being on the market I received two offers for it–both higher than the price I was asking for it! At the time I simply could not believe the situation. I found out after selling the property to the higher bidder that that person turned around and sold the very same property for an even more exorbitant (to my way of thinking) price.
I do think that people who think that the recent serious downturn of the stock markets has anything to do with Obama’s Administration are foolish–he’s been in office barely over a month. Nobody can really do much of anything in a month–and Obama has done much more than anyone else would have done. (Picture GWB in the place of Obama.) Obama has not even given the State of the Union address yet. I believe it’s coming up this week.
I do think the entire country is in for a long struggle to get out of the depression we are in. I also think that the only true hope for really getting out of the situation is a complete and total change in the lifestyle of Americans, which in the end may not prove to be a bad thing.
Yesterday I heard Zsa Zsa Gabor’s husband complaining that they lost all their money in the Madoff ponzi scheme–$10 million. A huge amount of money. Sad, true. Yet, I found myself unable to feel too very sorry for him as they actually still had a mansion filled with the work of artists and various obviously expensive ornamentation–some of it gold or what looked like gold. And it appears that some of the people scammed by Madoff lost millions–of the billions they are worth. I have to say that I feel for them, but I just can’t reach them.
However, I can feel for–and reach–people like you who see your chance for retirement sink gravely. Or people like my sister who has lost about half of the savings she was counting on in her own retirement.
It may be that Americans will have to learn to distinguish between wants and needs. And here I can speak of myself: I (and I am one of those definitely on the lower end of the economy) have found that I have a serious fault–any book I may even think I might like I simply must buy, if for no other reason than the fact that I would like to read it or I might read it some time in the future. Well, even I have changed my habits. Now I find myself thinking: Is this a book I really NEED to read; that is, will it educate me, add to my growth as a person, or even be an entert
Comment by MCS — February 22, 2009 @ 2:47 pm