Thursday, December 22, 2011
Thursday, November 3, 2011
Tuesday, August 9, 2011
Thoughts on U.S. Debt and Current Market Conditions
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Thursday, July 14, 2011
Tuesday, June 14, 2011
The History That is Yet to be Written
Thoughts on the Great Recession
It was in the decades after the end of the Great Depression that modern economic theory was developed. In the Depression’s aftermath, historians and economists studied the causes and effects as well as debated what went right and wrong with government policies. It is now generally accepted what some of the key mistakes of policy makers were. These mistakes included the initial absence of government stimulus spending, no social safety net, no support to stop the financial system from collapsing and a rise in nationalist protectionist policies that restricted global trade.
In what I believe to be our generation’s version of the Great Depression, The Great Recession, most of the mistakes of the Great Depression were not repeated. There was support for the collapsing financial system in the form of the Troubled Asset Relief Program (TARP). Most of this so called “bail out money” has since been repaid to the government. The social safety nets were already in place around the developed world and were in fact enhanced through temporary measures to help support the hardest hit citizens. Governments around the developed world implemented stimulus spending programs to partially offset the large drop in private sector spending. World leaders were able to successfully defend against calls from their democratically elected legislatures for trade barriers to be put up to protect domestic producers. Global free trade prevailed.
The total effect of implementing policies based on the lessons learned from studying the Depression is that our generation may have to only experience a Great Recession rather than a replay of the catastrophic 1930s. However, all is not perfect. I believe some serious mistakes were made and are still being made. These mistakes are, I believe, partly responsible for a substantially sub-par recovery and human misery that is higher than it needs to be at this time.
This recession of 2008/2009 has led to a very damaging bout of class warfare, made worse by the fact that the peak of the financial crisis took place at the moment the United States was conducting a ground breaking Presidential election. The electorate was terrified at what was unfolding before their eyes at incredible speed. The victors were the ones that were best able to harness fear and anxiety. Divisions emerged between the “corporate elites” the “banker fat cats” and the common working class families. The blame game started. Governments, armed with new mandates from their people, set about on new rounds of regulation and punitive taxation schemes meant to target and punish the financial services industry in particular. Now, “what’s so wrong with that?” you might ask.
The genesis of the financial crisis was a collapse in the bubble of real estate prices in the US. Many of the middle class that was now looking for someone to blame and something to be done, had willingly leveraged themselves into highly risky real estate deals. It was common place for families to do high ratio equity loans on their residence, to leverage themselves into a second property for the purpose of flipping it at a quick and handsome profit. Now they preferred to believe that the only reason they did it was because a banker tricked them or made them do it!
As of today, June 2011, we find ourselves in exactly the opposite predicament when it comes to the housing market in the US. Keep in mind that a family home has been the most important asset on a family’s balance sheet since the Second World War for most middle class families. As a result, the wealth destruction that is represented by the decline in residential real estate is massive. This effects people’s sense of well being and their willingness to spend money. Price stability in the housing market may be a necessary condition for a sustained healthy recovery in the economy.
Normally when the price of something drops far enough, it will reach a point where buyers come back in and start buying again. This increase in buyer interest stops the price from falling and then if demand picks up the price starts going back up again. This has not been happening in the US housing market yet. Even though housing is more affordable today than it has been in a very long time, people cannot simply go write a cheque and buy a house. They have to borrow the money to buy that house and despite interest rates being at historic low levels, buyers are having a hard time getting the money lent to them. Why? Because financial intermediaries have been singled out as the cause of the trouble in the first place and now face much tighter regulations, higher capital requirements, and higher taxation. This makes them less willing and able to lend to some of the same people they lent to before. And without these potential buyers, there is not enough support for housing prices.
The measures directed towards the financial sector were needed 10 years ago when the right thing to do was to slow down the hot real estate market. They are exactly the wrong measures for a real estate market that is on its knees. Soon policy makers will start realizing that, as distasteful as it seems, they need to stop playing the blame game and help banks get back to the business of lending again.....even to the marginal borrower at the right price!
Other factors holding us back right now include too much regulation and not enough tax incentives directed to the corporate sectors. Businesses create most of the jobs in capitalist societies, not governments. Business prefers a stable legislative and regulatory horizon to plan for it’s future. Once businesses can see what the future framework looks like they can implement their plans, in the pursuit of profits, and are likely to start hiring people back to work.
It is clear the global economy is struggling to build momentum. Policy makers should take credit for the things they did right, which did avoid a real calamity. However, it’s time to ask the question “what are we doing wrong right now?”. Historians and economists will give us the post-mortem 10 to 20 years later. I believe they will identify the promotion of class divisions for the purpose of political gain as a key hindrance to a robust recovery.
