We Are Not Ready For A Post Recession Evaluation
People are talking recovery; but, others are saying a real recovery is not on the horizon. Are we out of the woods as conditions deteriorate? The present time does not appear to be an opportune moment for post recession evaluation. None other than Alan Greenspan has come out and said it is the worst financial crisis than even the Great Depression. Little wonder, despite the bailout of trillions bank lending continues to fall at an epic pace. Mass firings have resumed after a respite. Falling real estate prices continue amid rising foreclosures, lost jobs and underwater mortgage holders. Not surprisingly, consumers are cutting back on consumer purchases as only a precious few like Wall Street financiers seems to be enjoying a bonus season. Looking forward, we have some signs of how to protect yourself if it happens again. What can we say we have learned about our own folly?
Preceding the onset of the crisis, consumer spending constituted 72 percent of the economy. Reports have stated that consumers can not be relied on to resume their role. Consumers are credit poor as they remain concerned about job prospects, declining home values.
New home sales have seen a record 11 percent fall in January 2010. Even though the Administration has essentially nationalized the housing market by guaranteeing Freddie Mac and Fannie Mae, the market is falling like a pricked balloon. Mortgage defaults and foreclosures are on the rise.
The foreclosures pose a problem for at risk home owners, their communities, the housing market and the overall economy. Problems are not diminishing. The loan modification programs are not working. A negligible number are being modified and even those have not given borrowers a meaningful break so that despite this borrowers have defaulted thereafter. The re-default rate drops considerably where lenders have written off some of the debt, yet for the most part they’ve been either unwilling or unable to do so. President Obama launched another initiative to avert foreclosures, offering 1.5 billion USD from the 700-billion USD Troubled Asset Relief Program to housing finance agencies in California and four other states where home prices have dropped by at least 20 percent. The prognosis is not hopeful given what is needed.
Freddie Mac was 26 billion USD poorer in 2009. Yet, Freddie announced more to come with a record 4 percent of borrowers behind on payments. Freddie and Fannie have already benefited from 111 USD support from the Government and are holding back the slowly falling market from a sharp fall with the vast majority of new loans they have supported in 2009. Freddie Mac announced recently that it might never repay what it owes.
At the same time, the latest report from First American CoreLogic revealed 11.3 million properties in negative equity. Adding those near this mar, k about one-third of all homes with a mortgage balance are underwater. Housing watchers have opined against this backdrop that there shall be no real recovery until job growth resumes.
In addition to the housing problems, commercial mortgages are being called the next shoe to drop. FDIC has revealed the number of troubled banks has risen in the fourth quarter of 2009 to 702. This is an increase of 27 percent from the third quarter of 2009. Junk debt of more than 600 billion USD due to mature between 2001 and 2014 increases the risk of corporate defaults, according to Bank of America Merrill Lynch analysts. Perhaps awaiting that, banks have posted their sharpest lending decline since 1942 in the year 2009. In short, we cannot yet be talking of a post recession period, as we are clearly not out of the woods
Looking forward, how to protect yourself if happens again.
The best protection not misuse of home equity loans, credit cards and housing investments. With a financial cushion, prudent money management would have led to more stability under current stress conditions. Gold is becoming a safe haven and source of security reflecting worries about the global economy. Peter Munk of Barrick Mining has been quoted for pronouncing that people have lost their optimism and he could not see anything on the horizon to alter the situation. Mr. Munk has noted that gold sales reflect a changing world and we stand on the threshold of something new. These are some of the reason why it is not a question of whether it happens again. Instead the reality is that it has not passed.
The lessons to be drawn from the crisis
We learned adequate safeguards were missing. Self regulation is ineffective. The wrong incentives and mathematical models failed the system in stunning fashion. A bubble makes people irrational.
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