Economic Woes?

Apparently, this will be another sideways day on wall street. Yesterday the market paused on its wayward trip to the gutter. If we keep purchasing stock on the way down, I have been told that is a method of “dollar loss averaging”, with the purpose of spreading the pain out over months and months and providing our stock brokers with much needed revenue..

Thinking of the economy reminds me that it is four years since the last presidential campaign. That’s difficult to believe; seems like it was just yesterday that the Hon. Senator Kerry was stumping his position that it “was the worst economy since the great depression”. I wasn’t around for that depression, so I don’t know. However, I do remember my parents telling me a few stories, such as the one about people walking along the rails in winter, picking up pieces of coal discarded from the trains. This was apparently used to heat homes and for cooking. Sounded plausible to me! When I was a kid growing up in Chicago in the 1950s, we had a coal stove and oven in the kitchen. An explosion in that stove blew the round inserts off of the stove top and into the ceiling. This was attributed to a blasting cap or caps left in the coal. That event stimulated the family’s quest for a more modern fuel. We switched to kerosene and natural gas. The advantage was less ash, but it was still necessary to carry a large can of fuel oil up three flights of stairs twice each day.

But I digress. So the present economy is much worse than it was four years ago. I guess the big question is, how bad will it get? The second questions is “How long will it last?” Well, this is not the first or even the second recession I have experienced. I once experienced very high prime rates that resulted in the interest rate on my second mortgage reaching something like 21%! That was like purchasing a house on a credit card. Ouch! We have a way to go before we get to that point.

I remember watching President Jimmy Carter, sitting in front of a fire place dressed in a neat sweater, telling us all how we were going to have to pay the price for our past sins, or something like that. Well, I don’t know about “we” but I do know I paid a price. Recently, while watching former President Carter on a TV interview, I concluded that he has made out pretty well. Somehow the politicians always seem to make out very well, unless they get caught with their hand in the proverbial cookie jar.

As to how difficult it will be for the rest of us, using history as a guide, it will be unpleasant or worse. We are not yet at the particular day of reckoning for this fiasco (which in Wall Street parlance is the “market bottom”). I expect we’ll be getting close when the mantra “How could this happen?” becomes a din!

As the economy winds down, sales tax revenues will drop. This will impact communities large and small. Of course, our political and civic leaders have spent every last dime and so they are no more prepared for this than the rest of us, who also assumed that the good times would roll on, forever. Apparently we believed that recessions never happen, housing values always go up, inflation is always moderate, energy will forever be cheap, etc., etc., etc. Unfortunately for us, history and reality do not support that rosy lensed view.

Statistics quoted in the media imply that millions of my fellow citizens have spent the past 10 years using their home as an ATM machine so they can support their lifestyle. Feeling strapped by the current housing implosion, they are now turning toward robbing their 401Ks. Of course, home owners and apartment dwellers alike have maxed out their credit cards. My personal solution has been to upgrade my shredder to a near industrial model to keep up with the credit card offers I receive daily. I assume I am average in this.

Waiting for the unraveling and the inevitable bottom is boring, with an edge. It’s like watching the movie Jaws for the 100th time. I hear the music, I know the shark is in the water and I know somebody is going to die. Eventually after the carnage is over, the shark will be slaughtered and the water will again turn blue.

I view our economy to be similar and when the clouds part, the cycle of excess will begin anew.

Until we get to that point, home-livers who are faced with upside down mortgages will be bailing. This will put pressure on many banks and credit unions who provided the mortgages and now are stuck with foreclosures. The Federal Deposit Insurance Corp. announced on August 26 that its list of "problem" banks, or those at risk of failure had grown from 90 three months ago to 117 as of June 30.

I expect the home-livers to bail out for the same reason they jumped into the housing market. Greed! The thought that one could have a house for little or no cost which would turn into a cash machine, was more than many could resist. That same philosophy will get them out of the housing market. Why own something that requires maintenance and cash injections? Having a house was simply an expedient, an opportunistic moment! So how bad it gets for the rest of us, will I think, be determined by how many bail. If everyone who “purchased” a home since 2005 decides to jump ship, leaving the rest of us to clean up the mess, it could get nasty, indeed!

My personal opinion is that it will take a few years for this particular “game” to go around the entire board and return to “home”. So those who are looking forward to quick resolution will be disappointed.