I have a hunch the change in the American landscape will not be the one envisioned by many people. I personally did not live through either The Great Depression or World War II, but if you’re reading this then you are living through The Great Recession. Joblessness, foreclosures and tight money were evident during The Great Depression while shortages characterized the period during World War Two. In each case, the American psyche was altered, as it will be again once the current crisis finds its way into the history books.
About 70 percent of the American economy depends on consumer spending. The last two decades have seen government sponsoring reckless credit and wealth built, not from the creation of goods and services, but from high-risk paper instruments. The party is over and I believe the American consumer will display more practical spending habits and begin to handle their financial affairs more prudently. If Congress and the Obama administration follow that lead, eventually we will have a sound economy.
Unfortunately, many of the same people in Congress that got us in to this mess have now become our investment advisors.
There are many damaged segments in our economy but two are of specific concern. First, the major money center banks have intentionally or ignorantly understated their actual liabilities. They have gone back to the trough, and they’ll likely go back again. In addition to their declared American toxic assets, all of these banks have offshore facilities that were established to skirt American tax laws or keep assets, now liabilities, off their balance sheets. These must be fully disclosed to the American public before we put our collective fingers in the dikes of these faltering institutions with our tax dollars.
The second area that worries me is the car-manufacturing sector. Including the foreign car assembly plants, we have the domestic capacity to produce nearly 20 million automobiles per year. Cars are being built to last longer and the stigma of having a two- or three-year-old vehicle will disappear along with countless dealerships. Credit will continue to elude less deserving buyers and yearly production of 12 million new cars may be sufficient to saturate the market. I question the logic of subsidizing an industry with a foreseen overcapacity. I also wonder about the volume of yearly sales the newly subsidized car companies have forecast to return themselves to financial stability.
Not to harp on the car companies, but watching General Motors borrow money at 8 percent then subsequently offer zero percent financing is not a brilliant business model.
If the stimulus plan is to succeed, it must address some core problems. It must provide help to those who need it. It must provide tax certainty for businesses and individuals that want to enact long-term plans. It must stabilize financial markets with capital, insist on real transparency and put competent people in charge of overseeing regulations already in place. It must bring spending under control. It must deal with government’s unfunded liabilities, mostly entitlement programs, on schedule to increase by nearly $3 trillion every year. It must address government’s ability to create jobs without pushing the private sector out of the game.
We are on the precipice of the most brilliant scheme to ignite our economy or the greatest financial debacle ever experienced in the modern world.
Tags: Stimulus and pork
January 30, 2009 at 6:37 pm |
Lou,
Well said.
Thank you for sharing your thoughts, always a great read.
Best Regards,
Michael Wardian
February 6, 2009 at 5:51 pm |
I am afraid that I do not see our current economic situation as a change agent similar to The Great Depression/WWII. For one thing, those previous events were interconnected and our alternatives were survival as a nation or destruction. Our industrial and entrepreneurial skills were just waiting for a challenge and WWII gave it to us. Today we have a society that suffers from a severe case of affluence and down through history no society has survived affluence. In the last couple of months I have spent time in Colorado Springs and Santa Barbara. When I go out to the store or restaurant the atmosphere of good times is just as strong as ever. The young people I see show no signs of want or uncertainty. Not only have they never experienced bad times, they simply will not tolerate them. Certainly some of this is that the communities I know are not based in manufacturing so it may take some time for the bad times to arrive. Nonetheless, I still think that we are living in a dream. We expected a “change” from the new President and we got more of the same old hacks who expect us to pay their income taxes for them. Leona Hemsley was right. Taxes are for the little people–that’s you and me. We now have a President with class and flair, but he and the rest of Washington are insulated from the “bad economic events” happening in the country. They talk the talk, but they better start acting like they understand what the country needs–uplifting rhetoric and decisive action. We do not need to be told how bad things are by people who have never missed a meal and cheat on their taxes. At this rate The Great Recession will go into the history books along with the American Era.
February 11, 2009 at 8:30 pm |
Hope and Change?
I have no hope and I’m still looking for the change. Like you, I’m concerned about addressing the “core problems.” But, most Americans don’t know about the core problems. Scant attention has been paid to how America and the world got into this fix in the first place. A simple analysis of cause and effect will get us there. The effect is easy because we are living with it every day. Loss of work, loss of savings, low market value of our homes, high energy costs and no discretionary money are things from which Americans can’t hide. But, how did we go from 3 ½% unemployment to 7 ½% unemployment in less that a year? How did 51consecutive months of GDP growth turn into unemployment lines?
First the big question, why are 7+% of Americans looking for jobs? Some will say that economies were cyclical. It goes up and then corrects itself and goes down. The stage was set in the late 70s with the misguided goals off the well intentioned Community Revitalization Act and having Freddie Mac and Fannie May guarantee the mortgages of Americans who put nothing down on their homes and couldn’t really afford the monthly payments. Easy credit and undisciplined spending are also part of the problem. The peaking of energy prices last summer, specifically gasoline, triggered the collapse. None of these things would have mattered if residential housing continued to appreciate at 10 to 15% per year. But, once those who couldn’t afford the housing that they lived in stopped making their mortgage payments, the trouble really started. The consequence of mounting personal debt, many started to default on mortgage payments and the housing market came under the strain of excess inventory. Many of these unqualified home owners, the recipient of sub-prime loans, now had to face balloon mortgage rates that many didn’t understand when they closed. Now the laws of supply and demand took over.
America might still have weathered this except that years of the congress coercing banks to accept these now unsecured, but still “guaranteed” loans. Banks knowing the liability of what we now call “toxic assets,” bundled them and sold them to other banks world wide. Yes, they no doubt lied about the quality of these loans, but after all they were “guaranteed” by the full faith and credit of the US government, via Freddie and Fannie. As defaults increased and foreclosures mounted, fueled by the realization by many that their homes had a market value lower than what they owed on the mortgage…they just walked away. This caused an accelerated drop in home values, more foreclosures and more banks in trouble.
We all know about the cascading effect this has on jobs, credit, banks ability to lend and the economy in general. One of the big causalities was the auto manufacturers. For years they offered “zero interest” loans. They already weren’t making any money on compact and medium sized cars. Now, with no buyers, they were in real trouble. GM for example, owes $60 billion, $20 billion of that unsecured debt. Fifteen hundred dollars of every vehicle that rolled off the assembly line went to pay for retirees benefits. Detroit while not dead was dying fast. One economist that testified before the Senate said that it would take between $100 and $140 billion to save the big three. With fewer customers, all understand the nature of the crisis.
The congress wants to bail out the big three so that they can force them to build “green” vehicles. Make no mistake about it; manufacturing the Chevy Volt will be the price that Detroit will pay for getting our tax dollars. Have you visited the Volt website? You should. This is a battery powered car capable of 40 miles between charges. It will take 6 ½ hours to charge it from your home. They will cost about $40,000 each, but the website says that few will buy one. They will likely be leased. The batteries will last about five years and will cost $8000 to replace them. Did I mention that the congress plans to demand the electric companies produce less electricity?
Here is the bad news. No one will buy these cars. The really bad news is that if GM, Chrysler and Ford (?) is forced by the congress to build them, the result will be massive layoffs, enormous unemployment benefits paid, a revival of welfare and a downward spiral of what was once the most powerful economy the world has ever seen. Oh, they will also go out of business leaving the American taxpayer holding the bag.
So, like you Lou, having “Hope” is becoming more and more difficult to sustain.