Nine Reasons This Recession Is Welcome 18 comments
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Recessions are lousy - as Americans have learned about 10 times over the last 50 years. But they’re also necessary. Prosperity tends to produce a lot of economic sediment, like unneeded purchases and excessive debt, that coagulates like gunk in a pipe. A good recession flushes it out. It also washes away things we need, like jobs and businesses. But on the whole, the “troughs” in the business cycle - recessions - help refresh the economy and keep it healthy.
There will be plenty of pain in 2009, as employers cut more jobs, the unemployment rate rises toward 8 percent or higher, and shellshocked consumers curtail spending even more. But beneath the dismal headlines will be some hopeful trends. Here are some of them:
More saving. If you haven’t heard by now, the savings rate in America is alarmingly low - barely above zero. That forces the nation as a whole to borrow from other countries - like China, where the savings rate is close to 50 percent - to finance everything from the government debt that will fund the Obama stimulus package to mortgages that help young couples buy their first home. Profligate spending also leaves many consumers with little cushion for rough times. Like now.
For once, anxious Americans appear to be putting more of their paycheck in the bank. The savings rate has inched up recently, no doubt because Americans are worried about their jobs and incomes. That’s bad news for the economy today, since more consumption would boost retailers and other companies. But overspending is no way to crawl back to prosperity. Saving is. It means lower household debt and more money available for smart investments that will return way more benefits down the road than a new couch. If we can keep socking away a few bucks, that is.
[See 5 risky assumptions for 2009.]
Smarter spending. Most middle-class Americans could find ways to cut their spending by 10 percent without downgrading their lifestyles all that much. That kind of cutback would be a disaster for stores, but it ultimately benefits consumers because frugal spending forces retailers to offer the best possible products and add as much value as possible. Banks are helping – in a perverse way. With tougher lending standards for car and home loans, and lower limits on credit cards, consumers have to be more careful about how they spend their money. They should be.
[See how the smart money turned dumb in 2008.]
Great buying opportunities. Nearly everything is cheaper than it was a year or two ago – electronics, gasoline, cars, homes, and especially stocks. That’s no excuse for impulse shopping. But it’s a great chance to buy things you might need eventually, like a new computer server for your business, or a minivan for your family. Talk about “deflation” might leave the impression that we can now take low prices for granted. Don’t count on it. Once the economy and the housing market bottom out, spending will pick up, driving prices back up. And a flood of new money from the Federal Reserve, meant to ease credit today, could kick off an inflationary period in the future, with little warning. That could make 2009 a golden year for bargain shopping, especially for things you’ll keep for awhile.
Better lending. A couple years ago, you may have wondered how your neighbor could afford that Lexus or luxury vacation to Europe. Now you know: Banks lent to practically anybody when offering mortgages and home-equity loans, assuming real estate values would skyrocket forever, effectively creating money. Of course, it didn’t go on forever. Bad lending underwrote the housing bust, which now threatens the entire economy. There won’t be another reckless lending orgy for a decade or two, and until then, we’ll have to buy what we can afford. It’ll be a good lesson to re-learn.
[See why you and I deserve a personal bailout.]
Less swagger. Even though it was an era of excess, there were still plenty of Americans who spent cautiously and stayed within their limits. They might have felt foolish while those around them showed off their new kitchens and gargantuan SUVs. But the frugal are finishing first. They’re the ones able to get loans these days, to take advantage of low rates on mortgages and financing deals on cars. And they’re less likely to boast about it - relief for everybody else.
Tougher consumers. Let’s face it, we’ve had it easy over the last decade. Individuals may suffer from unfortunate circumstances or bad decisions, but as a whole, America’s consumer class hasn’t really known privation or sacrifice in a long time. Sorry if it sounds like a lecture from your father, but hard times still generate ingenuity and fresh ways to solve problems. Overcoming adversity is an American strength. It wouldn’t hurt to rediscover that.
[See the 10 worst assumptions of 2008.]
Easier traffic. Just as air travel was becoming about as miserable as it could get, travelers began to cut back, leaving smaller crowds at airports and a few more empty seats on planes. Americans are driving less, too, easing congestion. Fewer driver miles are also helping drive gas prices down to levels of four years ago - a rare bright spot for consumers.
More innovation. Booming layoffs are a nationwide bummer, but some of the suddenly unemployed will go into business for themselves, and form startups that will grow into thriving companies someday. With big employers outsourcing as much as they can and cutting expenses everywhere, there’s also more room for entrepreneurs to be the ones to come up with creative new ways to fill niches and reach customers. Sure, with money scarce and start-up loans hard to get, it might seem like a dreadful time to start a business. At least that’s what your potential competitors think.
The nearing end. Not the end of the world – the end of the recession. We’re in the middle of it now, and the economy will get worse before it gets better. But in a downturn the economy starts to improve, little by little, before a lot of people realize it. The unemployment rate, for instance, usually doesn’t start to improve until the economy is already growing again. So new opportunities will start to materialize while the official news is still bad. Those who give up and simply wait for something better to come along could end up waiting a long time. But those determined to make their life better will get their chance. We still do that in America.
Disclosure: no positions.
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If only the government would stay out of the affairs of business. But that's a dream that we'll never realize in this age!
Unfortunately, this is not always the case though. If the government picks up the slack in deficit spending in replacement for consumer debt not only do we not solve the overspending issue but get much less than what the consumer would have gotten for the same amount of money.
Smarter lending should be the outcome but little does anyone know CDS contracts are still being written and rolled over to this day. And bad low interest loans are still being written. And the same ones selling them are selling them with new identities. So far I have not seen any one firm new rule to stop the aggregious vargarities that happened not 10 or 5 years ago but 1 or 2 years ago. Is Congress and the regulators asleep? I'm surprised disgust of this fact isn't more prevalent.
Likewise, there is no fundamental financial reforms.
It is good we, the public are tightening our belts and being more fiscally prudent. But do we, the taxpayer have to shoulder everything? Can't we ask for reforms that will make our economy stronger or more immune to scandalously bad behaviors by banks and other financial institutions? Or ask that loan agents at least require a decent down payment and/or proof that they make more than their monthly rent? So far there is no rule barring this still? Just rules of thumbs. We all know where that leads.
You say, who in their right mind would do something like that. You can wonder all you want. The fact is that was someone doing it and for all we know there is people still doing that. After all, it's even more enticing to do it today since they know 100% now that they can get the government to suck up the losses as some sort of "financial calamity".
The government is treating this as if recklessness and theivery are some kind of cyclical blight or seasonal rain. So I am not happy for the recession and am not convinced we are getting the benifits we should from making do with less.
Per a number of comments, I too have some issues with how our political representatives have handled some of the issues - both sides (repub and dem) contributed to our bailout economy.
Personally, I have each of my Senators and my House representatives (Federal & State) contact info close at hand. Their web sites are bookmarked in my favorites (for a quick email) and their contact numbers are readily accessible. Most people don't call or write (a snail mail letter is even more powerful). If you do contact them, you begin to separate yourself from the pack of people that like to complain, but don't do anything.
For example, the CDS issue needs to be taken care of - we can't have opacity and convolution. The bank (among others) bonuses need to be reined in given that taxpayers are subsidizing their incompetence. We need to watch the FHA loans - ensure there is a strong track record of payments in terms of the borrower.
Overall, we should not incentivize failure and poor decision making and expect good things to grow. If we are truly investing in X (e.g., banks, auto companies, homeowners, etc.), we should be able to state a clear path to getting some return (on our investment) - including the timing, magnitude, and risk of the cash flows. This triad is the basis of capital budgeting decisions - whether it's a household, a business, or a government. The basic fundamentals don't change. Crash diets don't work.
Let me point out an issue I had with several economist on your savings discussion. In some circles people consider the reduction of credit card debt as savings. I would be careful with this concept since many credit card companies are reducing limits and some our actually canceling your credit card. This amount should be removed from the calculation and not be considered returnable within the cash balance - therefore this is not savings.
Another possible mispreception is the reduction of consumer debt - its not as rosy as it seems - they arent all paying it off - most of this reduction is shifting the balance to banks per consumers foreclosing. Someone still needs to pay - this is the essence of my article - we can shift the money around but at some point someone needs to pay.
No axe to grind -- hopefully we would have fewer immigrants in the coming years. Decades and decades of excessive immigration would need to take a much needed, if belated, ebb.
Smarter lending should be the outcome but little does anyone know CDS contracts are still being written and rolled over to this day. And bad low interest loans are still being written. And the same ones selling them are selling them with new identities. So far I have not seen any one firm new rule to stop the aggregious vargarities that happened not 10 or 5 years ago but 1 or 2 years ago. Is Congress and the regulators asleep? I'm surprised disgust of this fact isn't more prevalent.
Likewise, there is no fundamental financial reforms.
I feel that this article was ripped out of the pages of Newsweek or Time, homogenized to placate the masses.
A "good recession" can cure a lot of ills, if it is at least allowed to follow its natural course. But the difference between this and other recessions is the overly obvious meddling of the government in its recovery--the examples of which have been cited numerous times by SA in the last months.
There are many posters on SA who are cheering for this recession to develop into a depression or at least a deep, long lasting recession, and they may yet prove to be correct. However they should keep in mind that deep recessions have usually resulted in steep recoveries, and as the author has pointed out we are a full year into the decline. Also, financial markets do not require economic recovery to advance strongly. They are usually advancing long before economic recovery is generally acknowledged.
Too many writers are still Pollyannas, saying in their own ways that the pot of gold can still be seen at the end of the rainbow. When these Pollyannas finally are beaten down in this mess like the rest of us and then write about it, maybe then an overall improvement will start to show itself. By then, all the money that's going to be made by the market controllers who caused this to happen in the first place will have been made and the only money left to make will be in the upside. Only then will it start to turn.
Does anyone actually believe that $100+ oil had nothing to do with the severity of the current recession? Out of control oil prices and, more importantly, our economy's dependence on oil turned what would have been a bank correction on the scale of the 1980's S&L scandal into a potential depression. The same oil-induced economic devastation occurred in the early 70's and early 80's, causing double-digit unemployment, bankruptcies, and poverty.
How many times must we suffer the consequences of oil dependency before we figure out just how expensive oil really is? We go through this destructive OPEC-controlled boom-bust cycle over and over again without ever learning our lesson. Don't even get me started on the cost of the last 20 years of oil wars.
Huh, wrong. Having saved 50% of my salary for years, I fit in the "frugal profile".
There's only so many places to put saved money, and if one saves his money away one realizes he is only running in place if that money isn't invested.
Those who didn't save are way ahead. The majority of those who did save over the last decade have at some point put much of their savings in stocks.
Those who haven't saved know full well it if far better to lose 100% of somebody else's money than to lose 40% of your own.... As a "frugal" person I certainly do not feel I have the upper hand at this point.
www.youtube.com/watch?.... copy and paste to your web browser , or click on my website
The statistics have been compiled based on information provided by 12,000 corporate executives throughout the world. A system of rating the banking systems of individual countries was conducted by participants answering a number of questions and rating the banks on a scale of one to seven, one being in need of government support seven being entirely healthy.
Canada’s baking system, lead by Royal bank, CIBC, Scotiabank, TD Bank, Bank of Montreal and National Bank, received the highest rank in the world, scoring 6.8 on the rating scale.
The top 10 safest countries for banking are currently as follows:
Canada (6.8)
Sweden (6.7)
Luxembourg (6.7)
Australia (6.7)
Denmark (6.7)
Netherlands (6.7)
Belgium (6.6)
New Zealand (6.6)
Ireland (6.6)
Malta (6.6)
A previous poster said that lack of energy independence is a negative. I would respond that the technological prowess of the US (still the most technically advanced nation in the world) will provide a platform for achieving great strides toward energy independence, thereby improving efficiency in the US manufacturing base (still a major employer, albeit smaller than a generation ago), and foster a new round of innovation that seems virtually impossible now.
There's reason for hope, not only because of the new administration, but because of the resiliency of the American people. Responding to crisis is something Americans do well. In this period, look for innovation and entrepreneurship to lead us back to a level economic platform.
With the lessons of excess learned, the country, and its people, will emerge stronger, more flexible, and better prepared for the future, than we've seen in many years.
Thank you for the positive outlook. Too often we miss seeing the rainbows for the rain.