Stop Calling This a Depression 24 comments
Dave Young
About this author:
-
Font Size:
-
Print
- TweetThis
Are we in a depression? No, and it is ludicrous to even make the comparison. We are not even officially in a recession yet, let alone a depression. The word depression is used perpetually in the media to describe our economy. These comparisons are irresponsible and only do more to unnecessarily destroy confidence, which is what makes the economy work.
- Unemployment was 25% during the depression, today it is about 6%.
- Our economic output (GDP) shrank by 25% during the depression, over the past year it grew at 3% .
- Consumer prices fell by 30% during the depression, today they are still rising.
- 40% of all mortgages were late by 1934; today only 4% are late.
- In the 1930s, more than 9,000 banks failed, in the past two years there have been about 30 failures.
Extraordinary Circumstances
Extraordinary circumstances are driving this bear market. One year ago, according to actual statistical measures, our economy was extremely strong and hitting on all cylinders. More than eighteen months ago, the presidential candidates began telling us how bad things were. At that time their mantra of economic weakness was completely untrue. Since political gain is much more important to most politicians than speaking the truth, they continued their drumbeat of doom.
They told us that we were in recession when we weren't. They told us unemployment was bad when it wasn't. They remind me of the annoying salesman whose strategy is to scare you to death in order to make the sale. Their goal is to convince us that in order to be saved (from whatever) we must elect them.
Plain and simple, our economy is based on confidence. When its participants are confident, they spend, they expand and they maximize growth. When they lose confidence and are scared they stop spending, stop borrowing, stop growing and effectively huddle in the corner. That lack of confidence causes the economy to slow or stop growing.
About six months into the campaign, the political scare tactics began to work. They were killing consumer confidence. One year ago in October the stock market started its descent and then six months later we began to see the first signs of economic weakness.
The Problem and Its Cause
At the epicenter of the current economic crisis is the subprime lending mess. Over the past few years banks began making loans to borrowers that normally wouldn't qualify for loans. Those loans were then repackaged in blocks by Wall Street and sold to banks to hold as investments. Banks are required to have capital reserves that equal about 10% of the amount that they make loans on. If their capital reserves fall below 10% then they either have to raise capital or liquidate holdings to bring their ratio back to 10%.
Initially, the subprime loans were assigned a value based on estimates of what the banks believed them to be worth. As our economy weakened and housing prices began to decline the actual value of these subprime loans was questioned. In an effort to strengthen their balance sheets many financial institutions tried to sell their subprime loan portfolios. Because so many were up for sale at the same time and no one knew for certain what they were worth, the value of portfolios of subprime loans began to plummet. Banks were stuck because they were being forced to sell these securities and since no one really knew what they were worth, they were assumed to be almost worthless. For example, when Merrill Lynch was forced into a merger it was assumed that their subprime debt was worth an absurd twenty-two cents on the dollar.
This evolved into a credit crunch. Because of the subprime debt on their balance sheets banks weren't sure if their capital ratios were in line or not. If those ratios aren't in line then legally they aren't allowed to lend. If they can't lend then consumers can't buy cars and houses, businesses can't borrow to buy inventory or meet payroll, and local governments can't borrow to cover short term needs. In essence, everything comes grinding to a halt. As a result of this credit crisis, the markets continued their sell off. By way of analogy, credit is to our economy what oil is to an automobile.
The essence of the federal bailout plan was that the government would buy the subprime mortgages from the financial institutions at a deep discount but for more than ridiculous fire sale prices. This in turn would alleviate the banks' short term capital needs. Because the government doesn't have the same accounting requirements as the banks, they could hold the subprime mortgages “long term” giving them time to determine what they are really worth and allow the depressed real estate market time to recover. In reality, it is highly probable that the bailout won't cost 700 billion and that the government may actually make money. (That would be a first.)
With all of the finger pointing who really is at fault in this mess? The Clinton administration started it by making a politically popular decision and mandating that consumers all be treated equally regardless of whether or not they actually qualified for their loan. Banks were pressured to make loans that they had historically avoided. Republicans attempted to rein in the liberal lending practices with regulations in 2005 but were stonewalled by Democrats.
Once the mandate occurred, then banks and mortgage brokers discovered that they could charge much higher fees if the quality of the loans were subprime. At this point they were incentivized to make the lower quality loans. Wall Street's role was to buy the loans from the banks, repackage them in blocks, and then resell them to other financial institutions. They were the delivery system. Because many of them held them on their books, the balance sheets of Bear Stearns, Fannie Mae and Freddie Mac, Lehman Brothers, AIG, Merrill Lynch and other major players were vaporized as the subprime mortgages became impossible to value.
The other guilty party was the consumer. Hundreds of thousands of loans were irresponsibly taken out by consumers that made purchases and then were unable to make their payments. Contrary to popular opinion there is plenty of blame to go around to all parties involved.
Where Do We Go From Here?
Based on market history we know that this bear market has hit the median numbers in terms of time and decline. The previous 34 bear markets have lasted a median of 363 days and declined 26.9%. Through September 30th, this current bear has gone on for 354 days and the S&P 500 has declined about 24%.
Unfortunately, even though many of our “bottom watch” indicators have triggered, we don't know for certain if we are at the bottom or not. What we do know is that previous bear markets have often reversed when the news has been the most dire. We also know that some of the sharpest declines have been followed by the strongest rebounds. Historically it has been a huge mistake to sell during the depths of a bear market
Disclosure statement: Paragon Wealth Management is a provider of managed portfolios for individuals and institutions. Although the information included in this article has been obtained from sources Paragon believes to be reliable, we do not guarantee its accuracy. All opinions and estimates included in this article constitute the judgment as of the dates indicated and are subject to change without notice. This article is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security.
Related Articles
|
-
The Seeking Alpha 100
See allThe top 100 stock
market authors
selected for publication
Seeking Alpha 100 » -
Fastest Climbers
Authors with the largestSee all
increase in followers
in the last 7 days
Fastest Climbers » -
Top Commenters
Top commenters,See all
as ranked by their peers
Top Commenters » -
Top Instabloggers
The 100 most activeSee all
Instabloggers.
Top Instabloggers » -
Top StockTalkers
TopSee all
StockTalkers.
Top StockTalkers »
This article has 24 comments:
Do you guys believe your own Bravo Sierra?
I've been running across more and more people that can't find work that are no longer on the unemployment reports because their benefits have expired and there is no benefit to them to go back to the unemployment board.
Also a good many, probably millions of people who have worked as temp workers on a 1099 basis are not included on the unemployment reports and we can't find work either, my self included.
My personal suspicision is that unemployment is very close to 15 to 20 percent and I would like to find a media organization that would help me to run an accurate poll by getting the need for this poll in front of all of the people, not just some.
Virgil
www.KeepAmericaAtWork....
seekingalpha.com/artic...
lots mo stuff inna pipeline man...
Were you also advising the rest of the cheerleaders that the "fundamentals of the economy are strong?"
I am so glad that I ignored drivel such as this and charted my own financial course. Dave Young, how much money have you lost so far for yourself and your clients?
You mention the government forcing lenders to loan money to people who couldn't really afford to buy homes, yet you provide no statistical evidence to back this up.
The particular act you refer to was called the "Community Reinvestment Act." And the truth is, only 17% of lenders fell under its obligations. Also of note, is the fact that of the top 25 lenders, only one fell under it. Obviously, this act could hardly be the culprit you would like to make it out to be.
You also mention that the other guilty party was the "consumer," who took out "irresponsible" loans.
Excuse me, but if I go to a lender and ask for a loan, and then get the money, you can bet that I qualified for that loan, or, nobody bothered checking my application.
Wait a minute. Since when don't lenders check applications? Aren't they responsible for them? Well, starting a few years ago, some mortgages were wrapped up as "investment securities" and passed up the food chain to someone else, each party along the way taking their "commission" and then passing it on. So essentially, nobody really cared about the loan being good or not, because there was lots of money to be made.
In order to make as many loans as possible, the lenders offered homes with incentives like "no money down," and sometimes even with non-recourse loans, which meant that the borrower wouldn't have anyone coming after them if for some reason they couldn't make the payments. Add to that the fact that there was high demand all over the world for these mortgage backed securities because US mortgages were perceived as being safe, thanks in large part to Moody's and other rating agencies giving them bogus AAA ratings.
So money was literally being thrown at anyone walking through the lender's front door. (One of the ex loan officers from WAMU recently reported in the news of intense pressure by upper management to "close more loans," during this period.)
When the upward trend of housing prices collapsed as all upward trends eventually do, housing values fell. Coupled with that, were increases in loan rates when variable mortgages spiked upward. Expected monthly payments then rose. The economy also soured. So today we have a 6% default rate and rising, although 94% of homeowners are still making payments. Nevertheless, some people cannot afford to make payments, while others are walking away who could pay, but their houses have dropped in value under what they owe on the loan. Anyone who thinks that people are going to continue making payments under these circumstances is naive to say the least. Why would these people be expected to act any differently than the unscrupulous lenders?
Fair is fair, and singling out Democrats and consumers, heavily biases your argument, and presents an unrealistic view of the real picture.
I don't think the word has been often used to describe the state of the economy today, but rather: 1) where the economy might be heading; 2) how bad certain statistics are relative to the Depression; and 3) how far the market has fallen recently in comparison to 1929. Hence, this article attacks a strawman.
Of course. We haven't gotten that far yet. Give it some time.
shadowstats.com shows
1) unemployment as calculated pre-Clinton at 15%
2) GDP growth at -3%
3) CPI as calculated in 1990 at 13%
Nope, not quite a depression ... yet.
www.shadowstats.com/al...
With Ron Paul as President, things would have been fine. But what does Obama understand about economics? And I have read at another site that WWII ended the Great Depression and NO ONE disagreed!
Plus, all this talk about Obama being the Messiah (blasphemy) and our intervention in the Middle East seem chillingly like what is described in Revelation.
If I had to bet ...
That is exactly why I am now, more than ever, and inflationist. We've had deflation; now we're going to have INflation. Perhaps the most epic inflationary run in history, in response to the cracking of the biggest credit bubble in history. The fact is that, to a Keynesian, if you're trying to inflate and can't, it's only because you're not trying hard enough. And so they will try harder. I think they know we've been deflating now for years, with defacto rising unemployment and shrinking GDP.
Get ready for some REAL, currency-collapsing, balls-to-the-walls, in-your-face inflation.
Back then, the USA was the world's biggest oil exporter and debt levels were a fraction of what they are now. And a third of all Americans lived on small family farms and grew most or all of what they ate.
It appears that the structural composition of society today holds much higher risk for serious problems. We have both an economy and a society that runs on oil, yet we produce less than 1/4 of the oil we use.
Looks like the first clouds of a perfect storm coming our way.
I agree completely. Eventually inflation will return with a vengance. You can't flood the world with more paper money and not expect inflation to return.
I just hope I can earn enough profits trading paper gold to buy a bunch more physical gold before the wheels come off in a big way.
Looks like something is nibbling at the low gold prices today. Up around $40/oz so far.
there's just one Party
and it ain't no fun.
So I went to the polls
and voted for none!
But don't be appalled;
I wrote in Ron Paul.
When banks made hefty profits, no problem. But 2009, banks will have to curtail lending by -4% inflation x 12, or -48% of capital.
Its the same old story that destroyed comercial banking, and favoured investment banking, withou this ludicrous rule.
Small business lives on short-term loans. But nobody's lending. Now THAT was a key factor in the 30's. It was a worse risk at that time because farmers had their homes tied up with the business, but we've "covered" that by having two bubbles burst simultaneously. And the unwind is 100X as large, and consumers have stopped spending as well, and let's not forget the auto industry nor the $596 Trillion in derivatives that might have 5-10% bad money in it.
Too early to call, but it looks bad.
don't even begin to go there.
i pay my friggin bills and keep my friggin promises - the kind that I've made that I dam well intend to keep.
now i'm forced to help pay for this collection of losers without any indication that any of them will be punished for any of their broken promises/defaults. even worse, they're getting sympathy from the bleeding friggin hearts in the media and liberal "fix the world's problems think-tanks/media".
Un-beleeevable.
At each layer of this process, people were trusted to 'do the right thing', both legally, and with their integrity. Apparently when nobody's watching, those things don't matter.
the premise of your piece, is simply that without confidence, the system collapses, so stop calling it a depression, and we'll all get confident again, and things will be OK. nice.
Semantically you may be correct in the technical aspects of a defined recession/depression, etc., but words-shmords, you're completely overlooking the real issue underneath the problem. We're in the throes of a cultural depression/recession beyond belief. who the hell should I trust now?
My neighbor?, who says 'my house isn't worth the payment, so f---it? or my banker?, who gave my savings to that idiot, knowing full well that they probably wouldn't get it back?, or my mortgage broker?, who used obfuscation to hide his crap amongst the goodies, or my republican congress?, who could have overruled the "fix freddie/fannie" 'no' vote if they had really wanted to, or the democrats who wanted to give everyone a house?
Give me a break. Based on this complete Cultural Failure, the current financial failure is child's play, and we've only seen the beginning of a "f--it, i'm gonna get mine" cycle that will only grow as the new administration keeps its un-affordable promises to make everyone comfortable and happy.
good luck, and get out of cash. "we're friggin doomed"
have a nice day,
--ikk
yes, the media frenzy to create doom/gloom is working, and is only as effective as we let it become. If we invest more faith in the rest of us honest bill-paying folk, and that better side of america, we'll come through this mess intact, maybe stronger. (til then, "we're friggin dooomed :^)
thanks for the article.
--ikk
We have unacceptable un-employment & under-employment.
We have declining housing prices.
We have declining commodity prices.
We have declining tax receipts.
We have declining wages & standard of living.
We have downswigs in stock & financial institutions.
We have negative rates of growth in GDP.
We have debt contraction and deleveraging.
We have high total debt, (financial, house-hold, federal, local, state, international, & unfunded, etc.)
Productivity is in a 56 year downtrend.
In 2006, Japan's productivity rate was nearly twice that of the USA, new EU members were 3 times better, and China's 7 times higher.
We don't have savings, we have dis-savings (house-hold -1.3% in 2007)
Home equity is lowest in 62 years.
America has 281 lawyers for every 100,000 people, compared to Britain with 94, 33 in France and a mere 7 in Japan.
2006/7 recorded its lowest rate of labor productivity growth in more than a decade, with growth in output per hour worked falling significantly behind the European Union, Japan, China and India.
The trade deficit in 2007 was 816 billion.
On a GDP basis the U.S. manufacturing base declined from 30.4% of GDP in 1953 (when we had a trade surplus) to 11.7% in 2006 - a 61% drop.
The bottom is falling out.
So we are just perhaps at the beginning of a longer slide like back in '29......heck, the market had several rallies in that 20-32 time period.....in fact, I think the great depresison was technically something like two longer recessions...not exactly one long session.
Still....the sum total of pain was there. Perhaps we are just beginning the process. (let's hope not)
that list is 'depressing' ...
-ikk