With little fanfare and little exuberance during its reign, save its staunchest supporters who nevertheless dared not delve too deep into the less-than-stellar details, this period of economic growth still archaically called "prosperity" is about to end (between now and November.) There is no clear cut equation saying it will happen for certain (and hopefully I am wrong), but I'll play the contrarian here, because I do know, for one thing, that complacency (when many are in an optimistc lull) is a sure sign something is still amiss. But this here is just evidence to make a case for recession. For the sake of argument, I am using future sense (which assumes a recession will happen.) I believe we have hit a crucial inflection point in the summer months of July and August. The implications for this are many. Think this is just more alarmist banter? Some prominent voices seem to agree the boom will likely bust the economy (or already has.) Read on. Here now is an analysis of the so-called "Bush Boom", where I will also elaborate on some of the implications of its closure.
On the economic front, the most obvious facet of what is now turning into a sour recession (I surmise the worst since 1982), millions of homeowners are brinking on foreclosure. This is only the first step and it has already been tossed around discussions for months now. Foreclosure appears to be the "canary in the coal mine", giving prescience of things to come while being the defining image of this whole debacle.
August 21st, 2007. That is the day I began writing this. The reasons for leading up to this decision are not new, however. I wrote a few diaries this past spring on this matter, but that was before "everything changed" a few weeks ago so the old cliché has gone, as it just so happens, for a few weeks now. That "change" meaning the credit crunch, when Wall Street finally tumbled, when consumer confidence spiked before hitting a 12-month low, when the Federal Reserve (of all organizations and departments) finally came out saying it had reach its inflection point. Yes, the Fed no longer was as concerned about inflation as it was the economy itself as of August 17th. But either way, I feel I have not done enough to get my point across and to demonstrate my ability to accurately display my perceptions. As it is with each new writing, and I haven’t written in months due to a lack of internet access, I aim to improve. Ok, enough of that. Please read on!
Today is muggy, hazy, sizzling. But today seems more anxious than yesterday, as I’m driving along the Baltimore Beltway on a Tuesday afternoon. I hear the radio muffled by the air conditioner. The sky is clear, but the color of a pale yellow. Freight trains sit parked on overpasses, graffiti and rust all over. Admittedly, this anxiety is more something I sense than know for certain. But it races through my mind, as cars race past me on the other side of the median, where everyone is going. I don’t mean "where" with respect to driving, but in this environment, in a country where it is reeling from an already hectic decade. Three-quarters think the country is headed in the wrong direction. Many seem lost in 2007. The year opened up with some measured optimism, namely that a new Democratically controlled Congress would counter the Bush administration’s policies. But then came the announcement of the "surge" (or escalation) on January 10th. Then the Dems folded on Iraq. Then Alberto Gonzales (a case that still needs closure), Virginia Tech, warrantless wiretapping, toxic imports from China. Disaster after tragic disaster was August’s theme. It started with the Minnesota bridge collapse. The Utah mine cataclysm. Peru’s underreported earthquake. Iraq’s most deadly attack of the entire war (500 died.) Erin. Dean. Floods. All this is in my mind, as the cars are driving faster, more aggressively. And it soon seemed the living, those who survived or avoided fatal tragedy, would enter hell on Earth as housing markets crumble while violent crime rises nationwide. Baltimore, the city that was being circumvented by its self-named beltway, had reached 200 murders for 2007, well on pace for its worst murder bing in over a decade. This was not what the "land of the free" was all about. No one is free when they are in fear, harmed by violence, or weakened by poverty. And so it seemed that another page was being turned and another wave of problems was looming. What was it going to be? Will this be a year for textbooks? Oh yeah, no doubt about it. As if this wasn’t enough, questions loom about the future of an economy that gained little footing for the common American before threatening to damage this country’s economic DNA once more. Some have come to a radical conclusion that we need this downturn, that it will be better for us in the long run by "punishing" lenders. But they mitigate or completely ignore that a downturn is a.) painful to most Americans (particularly to the poor and marginalized) and b.) inevitable for whenever there is a period of growth that goes unchecked and deregulated. Simply suggesting that this will teach a lesson does not flow well, because such scenarios behoove reform, not simply letting the system glide like plankton in the current with little or no control. Complacency, as I will soon touch on, has also been a product of this boom-bust scenario.
With a surprisingly large number of analysts shifting dramatically from "it’s all clear skies on the ‘soft landing’ front" as early as just before July 26th-ish when the "credit crunch" was catapulted into headlines to "yeah, I agree with Bob that we’re sinking into recession" (the quotes are my personal paraphrases for this revelation), I would be quite surprised if we made it out of this debacle without at least some cuts and bruises (that is, many job cuts from this point forward.) Knowing how cloud nine many economists feel about their respective field (again, with so many of them believing that recessions are a thing of the past), this was especially surprising. And when Larry Kudlow* capitulates, albeit subtly, that the Federal Reserve needs to cut interest rates, you know something is up. Angelo Mozilo, CEO of Countrywide Financial (the number one mortgage company in America) now fears this crisis will turn into recession. Some say Mozilo is in no position to make forecasts since he is the CEO of a mortgage lender, not an economist. Maybe so, but then again, economists haven’t done so hot on forecasts either, having missed the recent recessions of 1990 and 2001 (neither of the two were minor ones either, contrary to common perception.) Still more have proposed this utopian idea of a endless "prosperity", a theory that is not new but has been consistently incorrect time and time again (I recommend Wealth and Democracy by Kevin Phillips for details.) Now I’m not knocking economists for doing what they do as they have been pivotal in calculating some important information and shaping policy (for better or worse), though I do think some scorn should be delegated to the sheer complacency they emit so often until it is too late. But it's not just a rising number of CEOs and economists raising red flags. Former Treasury Secretary Larry Summers reported a couple days ago on the prospect of a housing led recession.
Unlike in 1990 and 2001, when the economy in both cases was only "rumored" to be in recession while actually in the midst of one, largely a product of complacent views on ecnonomic growth, there are far more widespread anxieties out there in 2007 giving fair warning. It is almost like living in a reverie of all things impossible. Three analysts appeared on the Kudlow show on Aug. 22nd. All three believed the chances of recession were pretty solid. Two different men said 40% and 50%. The other, Joe Pinto, said the odds were between 80% and 90%. This is odd in that that particular show hosts some of most tenacious advocates of "free market capitalism", with overbearing optimism being one attribute. The show is an avatar for the whole "Goldilocks", go-go globalization, cut taxes, deregulate, Reagan this, and Reagan that love affair. Months ago, I could not imagine even this much chatter.
But transcending the rhetoric, here is one thing to consider. No housing downturn as serious as one like this has ended on a good note in the United States. To put this ever so bluntly, it’ll be a miracle if this crisis doesn’t crater the economy for at least a few months (and that’s just talking about the lowest points.) So unless 2007 bucks history’s trends, the jury is still out on this one. However, history is still the best forecast. It is the bridge between past and future, which is why it serves as a reliable reference. Nevertheless, individuals such as Treasury Secretary Henry Paulson have measured their comments to such a point that they are clinging to the idea of this housing downturn as a "correction" that is stabilizing. In actuality, the "stabilization" argument should have died in 2006 when home sales began to tumble and foreclosures began their ascent (home prices also peaked.) That is not stabilization, that is a reversal.
"It’s just a correction"
I am hearing this quite often, and not just about the stock market, but about housing as a whole. This choice of language is a nice diversion from calling it what it really is—a crisis. Housing sales are certain to fall even further than they already have and remain in the cellar until 2009. Credit standards have tightened ever more. We know about subprime; now a second phase is in its incipience, that of which involving "jumbo" loans (home loans over $417,000.) So much for the "buyer’s market", for now at least. Frankly, what I see are the early phases of a bear market for stocks and, what it means for most Americans, a deepening housing recession. Housing starts are at a 10-year low and new home sales are now lower than they were before the boom. Home prices have dropped for a 12th straight month while housing inventories are at their highest levels since 1990. In fact, home prices in the 2nd Quarter of 2007 (April through June) fell at their fastest rate of all-time (3.2%). This is pretty provocative, since housing prices are so often associated with people's faith in the economy and consumer spending. Assuming home sales do continue to decline (and there is no indication that this will end anytime soon) this will galvanize further price drops and throw the country into a real danger zone.
Another major concern that has recently sprouted is that loans are poised to reset this autumn and launch mortgage payments, which could drop home sales at a precipitous rate. So, it seems clear to me that this is not at all a "correction", as it has now descended to lower levels of the staircase than before. When millions of people might lose their homes, this can’t be glossed over as a "correction." When the foreclosure rate is nearly double what it was a year ago and the vacancy rate on new homes is at an all-time high, this isn’t a correction. When we are now seeing American workers being laid off en masse, this isn’t a correction. It’s a crisis; it’s the poison that will bring a bad recession.
To be sure, 2/3 of Americans believe we’ll be in a recession or we’re already in one, according to a recent NBC-Wall Street Journal Poll. Still, too many analysts are in so much complacency it’s unconscionable. By contrast, only 11% of investors in a Gallup Poll believe this to be the case. See the difference between wealth lines and perception? When I hear analysts like Stephen Moore crying out about the losses of hedge funds and the big losers being the financials, I wonder if it intersects their minds that millions are on the brink of foreclosure. Consider that there were 180,000 foreclosures in July alone. That’s 6,000 a day. These people are the central victims, not the very lenders who initiated this whole thing. Foreclosure will reciprocate other bad vibes. When a person loses their home, their faith in the economy should sour as well, so they become less inclined to re-enter the market or consume. From a more logical standpoint, not having a home would make impossible the purchase of furniture and gadgets to be of a higher priority. The complacency that enshrouded homebuyers during the boom, believing home prices would rise for a long time, has now been shattered as well.
"The American economy is the envy of the world"
On the political front, this is a strong indictment of deregulation and basically clinches, assuming economies can be used as the number one proxy for how Americans perceive the direction of a country, that Bush is a lame duck president, and indeed a tragic failure. This crisis reeks of the savings and loan crisis of the late 1980s/early 1990s as the result of Reagan’s deregulation frenzy for S&L’s, only the 2007 fiasco is perhaps even more bleak knowing that the nucleus of this particular ordeal concerns the most valuable asset to the average person (their home.) Paraphrasing Edward Chancellor, who published a superb editorial in the Washington Post on August 19th, when real estate markets boom, their busts are longer and much, much deeper. As a corollary, when credit experiences heavy growth, especially under the heavy speculation of the 2000s housing boom, their crunches elicit massive shockwaves. Chancellor also mentioned that the run up of debt over these past several years does not bode well either and may finally clobber the world’s largest economy. Excess is catching up to us.
Much of this, it is often argued, will be secluded to financials and not the greater economy. As you can imagine, I disagree. Comparing the direct impact of a housing slump ultimately tracing to Main Street to a currency collapse secluded to Wall Street simply will not jive. It is not that those other issues are not important, but I would charge that losing value on a home (or losing a home altogether) is reflected multiple times more negatively. Housing is still the largest asset for any family. It is the embodiment of the American Dream, so the story goes.
It’s even more comforting knowing that, thanks to an economy that is a function of greed and fear more than logic or ethics, much of what has been mistaken for a "boom" rested on high-risks (the greed variable.) Those high-risks are manifested in the CDOs (collateralized debt obligations), where lenders though it a genius of an idea (and in fairness, it was clever albeit unethical) to take the high-risk interest only loans they delivered to low-income families and cloak the loans that were re-sold elsewhere in this financial labyrinth with high credit ratings or whatever they pleased, so as to extrapolate the dimensions of the mortgage loan itself. When Jane gets a home loan, it is more than simply going to her bank and filing an application for the loan and that would be the end of it. That was what it was all about, right? The mortgage? Whatever could yield the highest profits, I suppose. So, real estate was played like a game of Jenga. The pieces were all locked into each other, almost interdependent of one another. Of course, this analogy is a bit lacking in that it asserts that the pieces are essentially of equal value. In reality, the problem starts at the beginning with the homeowner who couldn’t make it. But the point is that if one significant move is made, the whole tower collapses. Trillions of dollars worldwide have already been lost after this sharp reversal. The Baltimore and Washington regions have recently determined the housing recession was taking away millions of dollars in revenue, as this sector is key to regional governments (indeed nationwide) particularly in Washington where construction is so heavily relied upon. When all is said and done, these same corporations will do as they can to slash cuts and salvage their money, and so the employees are the first ones to go. And this brings me to another section.
Consider the much lauded jobs market. As to how those numbers are derived is not the question posed (birth-death models, including part-time jobs, etc.) The question I am raising, however, is how any reasonable person can suggest such a strong economy to exist? Objectively speaking, there seriously isn’t all that much to jump up and down about. I’ve said this for years, even using the ankle-deep figures often taken for face value, this economy is l-o-u-s-y. Evidently, using their numbers (i.e. government), we find that the economy was in a jobless recovery until February 2005! This means that, in the aftermath of the 2001 recession, it took the job market an excess of three years to finally reach even a net gain. 2005! And here now is perhaps the most incredible part, which is that private sector jobs minus the health/education sector (which is a given growth machine under any economy, recession or not) were in a jobless recovery until mid-2006, almost half way through Bush’s second term. This means that total job growth was in the positives for only two years—2005 and 2006—and three if we make it out of 2007 without losing more jobs than were gained. One senses how weak the stilts are holding up the Bush administration’s credentials on the economy. Being "fair", since Bush claimed he "inherited" a recession in 2001 (and said it so many times it must be true!), from December 2001 to July 2007 (the most up-to-date period of this "prosperity"), the economy churned about 7 million jobs, which sounds great until it is just as easily discovered that this equates to a vapid 105,000 jobs a month (the worst "prosperity" since the Great Depression.) Bush’s performence in the early 2000s debacle was at best passive. Did I mention that the poverty rate also rose sharply? No? Well, I did now.
Pundits have casually described job growth as "strong" over the years, despite it trending well below average. Well into 2007, it has been maintained that "the job markets are strong." In actuality, job growth has trended downward over recent months. And while it’s still positive, job growth is poised for a negative outcome sometime between August and November, I believe. I’m using the 1990-1991 recession for comparison, since it was most recent real estate related recession to hit the U.S. This graph tells us there is not much time to go. You say, "but job growth does not appear to be declining as sharply now as it was a couple decades ago." Good point, but job growth has much weaker this decade to begin with (noticing 2005 and 2006 compared with 1988 and 1989), so the percentage drop is similar. Average job gorwth declined 44% from March 1989 to July 1990. From March 2006 to July 2007, that figure is 34%. By any measure, both figures are sharp. Another 10% drop seems more than likely at this point over the next couple of months. Also note that there is little evidence deceleration in this downward trend taking place. That is, job growth has been dropping consistently for some time. The months of June and July actually show an acceleration.
August should be less than august
Evidence seems to suggest August will be a very downbeat month. Roughly 20,000 mass layoffs in the mortgage industry have already been announced (as of Aug 23) in just a matter of days. Everyday, it seems there is another announced layoff and another bankruptcy. That is what a young recession looks like, I would presume. The companies at the heart of the matter start failing and closing, soon infecting other regions of the economy. Manufacturing and construction will be down again (much sharper than in earlier months this year now that the economy seems to be deteriorating considerably.) Losses in manufacturing will be through attrition, as they have been since 2001. According to one analysis, construction alone may lose up to 1 million jobs when all is said and done. Retail has been very sour over recent months. This boils down to a very sobering jobs report for August, probably leading to a net gain of 20,000 or less with government and health services doing the heavy lifting.
Financials looking bad for August:
6,000 jobs cut from American Home Mortgage
6,000 from First Magnus
1,900 from Capital One
1,600 from Accredited
1,200 from Lehman Bros.
600 from HSBC
One other point to note is that the credit crunch is nascent, as it emerged around July 26th ("Easy Money, Lifeblood of Economy, Is Drying Up", Washington Post 7/26). So, this suggests that whatever July data was released this month (employment numbers, housing, retail) may come crashing down hard in August. That the situation has "calmed" recently seems more tied to emotion than any tangible, dramatic changes that go beyond hackneyed symbolism. It is largely tied to the speculation that the Federal Reserve will cut interest rates in September. But suppose it doesn’t? Then I would suppose the stock market would go haywire and have some roaring selloffs worse than what was seen in late July and mid-August. Even though the engines that are driving this housing recession are humming (layoffs emerging, foreclosures are up), Wall Street is putting its chips into this idea that Bernanke will come to the rescue. Either way, there is no guarantee a cut in interest rates would buoy the economy, as was seen in 2001. And still, it isn’t much surprise to me that people are again becoming complacent, because they look to the stock market and think, "Oh, it’s not as bad as it was." Note, the stock market is not exactly the best indicator of economic health. It is driven by speculation, corporate earnings, vacations (supposedly a trip to the Hamptoms entails a slow market day), then there is greed, fear, rumor, gossip, and off-the-mark predictions. The results of these factors are anyone’s guess: way up, way down, sideways, a little up, a little down. The emotions sort of compound each other. Fear and greed are especially contagious. If this is the best reflection of the economy, I am just baffled. Then again, nearly 2/3 of stocks are owned by the wealthiest 5%, so that should say something. Now of course the normally stock market trends upwards over the long term, but I maintain that it is a proxy for corporate earnings, not an objective insight into the health of an economy. This is especially the case given that corporations now make most of their profits overseas, not in the United States. So did anyone else pick up on both GM and Ford possibly moving their headquarters from Detroit to Latin America or Asia? "What’s good for GM is good for America," right?
Again, with feeling
Throughout this unmistakeable fiasco, Bush has played a very unpresidential role, strutting about exclaiming the strength of the economy. He asserted that we would "yield a soft landing." Excuse this brief ad hominem, but does he even know what one is? No, those are just the prepared notes I’m hearing. As usual, before deteriorating to his desperate assertions, he threw in a truism: "the American economy is the envy of the world." Well George, that makes one person who thinks so. Then there was "the entrepreneurial spirit is key to U.S. economic growth." Onward to the "desperate assertions", where Bush missed the boat, completely missed yet another opportunity to rally Americans behind him. Attempting to look clever instead of rational or tempered, and through the remainder of his tenure I do not expect that to ever happen, he declared that, perhaps, Americans just didn’t understand what loans they were getting into. Well gooooolly! So much for the "ownership society", then. There goes my hero, trying to make a quip about a serious issue and doing nothing about it (and when I mean nothing, I mean that he has not expessed even a splinter of concern.) As for consumer spending, 3/4 of the GDP, this is now turning upside down, unless you are wealthy enough to buy one of those Mercedes deals for "true love" or Saks Fifth Ave. Need I say more? Laissez-faire, deregulated capitalism is a surefire ticket to recession sparked by excess and asymmetical economic growth, from the Depression of the 1870s, to the Great Depression, to Savings and Loans, to the Dot Com bust, to the Morgage Bust. Passing off the notion that recessions will never happen again has undoubtedly widen the room for dangerous complacency. The Great Depression accelerated under Hoover until Roosevelt, as Hoover clung desperately to his "trickle down" theory. Indeed, the GDP "trickled down" (or rained down.) In modern day lexicon, this would equate to deregulation and cloaking it as benign, sensible economic policy. Ok, let’s also not have rules or laws elsewhere and we’ll let the populace decide what they want to do. As nice as that sounds, to truly be free and prosperous, some guidelines need to be applied. We need standards and we need oversight. Government intervention is a perfectly healthy way to approach any situation and, despite what the straw man says, it does not ruin the economy and it doesn’t ruin the precious corporations. It ensures that employees work in a secure, healthy environment. It ensures that businesses and citizens alike receive fire and police protection. It ensures that consumers are not misled. It ensures the food we eat, the toys children play with, and the cars we drive are not going to harm us. It’s about accountability, something this world needs very seriously and something that privatization alone cannot provide. History is always there to test the rhetoric. It is no aberration that the states with the highest foreclosure rates didn’t have anti-predatory lending laws in place.
In 2007, I am hearing that, "because the markets brought us into this mess, they should also take us out of it." Herbert Hoover, anyone? No, I’m not calling another depression (though this too could happen under the most chilling circumstances), but I am saying that letting the markets bring us out of this hole without any government intervention or reform is pretty naive. Recessions only punish the proxies of ideas in greed (specific mortgage lenders!), they do not punish the ideas of greed themselves. Seriously, give it a little while and the same people (or their progeny) will come back trying to salvage every penny that hits the ground. It doesn’t work. I'll admit, I don't know all the implications of a homebuyer "bailout", but I don't think keeping the status quo is the solution. In the meantime, the poor will get poorer, and the rich will get richer.
As Steven Pearlstein of the Washington Post basically said, this is like a doctor telling a patient they have a lump on their chest, but they shouldn’t resolve it until it turns into a malignant tumor that induces cancer. This is pretty astute, actually. It is one thing to have some tempered optimism (as well as a little pessimsim for purposes of questioning the status quo), it is totally different to ignore or downplay the concrete issues that are there and expect a nice outcome. I am certain Bush will sit on his hands throughout this debacle as he has so far. I am convinced he will allow the economy to fold and, while doing so, will act as though there is no crisis. Or once it does, he will spin this crisis into a tax issue, such that "if Democrats don’t pass a tax cut, we will be in a recession", when in fact we will already have been in one! He already claimed a couple weeks ago the $1.4 trillion tax cut in 2001 prevented a recession (it didn’t by a long shot and one could make the argument that it worsened joblessness in his first term.) I understand the argument that Bush is out to salvage whatever is left of his mauled reputation, thus requiring him to actually "care" about what happens. Well, I don’t really think Bush’s modus operandi for salvaging his reputation is the same as a rational president. He is bent on having things his way, no matter the outcome. "The ends justify the means" statement also applies. Seriously, this is the same man who projects his problems on other people, whether that be in his own Cabinet, in Congress, or the American people themselves. Even a fool could make the case for Bush’s flagrant denial and stubborness. But Republicans cannot win in 2008 with this sort of rationale, considering that (first of all) saying that the failure to pass a tax cut would induce a recession is a big-time non sequitur. And to be sure, many are indeed recommending that we simply let it go, letting markets "sort it out", because it just sounds so Reaganesque, so clever, and so bold. But the results of this are exactly why we have rules to play by from grade school to the real world, to set as standards for business conduct, for oversight and, yes, for stability, too. Recessions are a symptom that requires us to improve, they are not mandates for continuing with the status quo. Recessions matter, and they matter a whole lot, and it is even more painful when its chief causes can be traced to greed run amok. We need someone to rescue this country, and capitalism for that matter.
So, where is this recession?
Some have asked "I’ve been hearing about this for a while and there hasn’t been one yet." Again, I would argue this year is a different ball game (and in a real way.) It is less about if, and more about when. The general causes have been the same and probably could have been seen for some time (downturns follow excess, so the pattern has suggested over the decades.) Recent weeks demonstrate how much subprime mortgages have weaved through the financial system. How much? From here, to Europe, to Australia, and now to China (Asia), it seems everyone tried to make a buck in recent years on lousy home mortgages at the expense of poor people. We are finally seeing jobless claims tick up, too. We are now seeing growing weakness in consumer spending. Foreclosures continue to rise on a year over year basis (from 83% in May to 93% in July.) I suppose it is worthy of noting that the asymmetrical spending and income growth along class lines are finally catching up to reality. We should have known this wouldn't go on forever.
My bottom line: Look out below. This one will begin sometime between now (August) and November 2007 and continue until autumn 2008 with extended job losses into 2009. It’s going to be one hell of a mess come Inauguration Day 2009. Whoever wins in 2008 will have a full plate of Iraq and the backside of the recession hurricane to deal with. If that person is good at multitasking and can raise the country to greater heights from these issues, they will have a roaring re-election victory in 2012. Of course, this is based on the idea that the course of things will not change too much (i.e. Bush demanding that troops stay in Iraq and Dems slink... again...) With much luck, the aftermath of an early 2008 Iraq withdrawal would leave only an economy to fix-up (this is going to have to happen whether or not the economy tanks thanks to the widened wealth gap and poverty rates) and a much needed renewed attention given to Afghanistan. Health care and global warming, too. Either way, the next president will need to be very sharp, very open (can’t be a divider pretending they’re a "uniter"), and very concerned/proactive. It sounds cliche, but it hasn’t come to pass in a long time. No, I’m not an economist, nor a financial advisor. But I do like crunching some numbers and making observations. Take it as you will.
*Kudlow was a former Reagan aide and hosts the news show "Kudlow & Company on CNBC." He is a fervent supply-sider and, up until recently, was strongly in defense of "Goldilocks."