The current economic crisis is one that has an unfortunate, effectual permanence to it. If we are successful at designing and implementing the structures that work to mitigate these asset bubbles and busts in the future, we will have sealed our own fate… and we must. Our policy makers are flailing around grasping at a thousand ineffectual straws, sealing the promise of an even longer and more painful period than could have been. The rule of law and letting bad businesses fail, is now nothing more than a historical novelty.
We are in the midst of a fundamental downward shift in our standard of living to a very uncomfortable equilibrium. Excess credit availability, stoked by the fires of Federal Reserve policies and governments heavy hand in private markets, have fueled trillions of dollars of phantom wealth that are now in the process of being removed from the system. In our efforts to cushion the blow and in hopes of spending our way out of the problem, we are growing spending, debt and the size and scope of government far beyond our now completely disconnected, constitutional bounds.
Our desperate grasp at maintaining our standard of living, has caused us to give up our founding principles of free market capitalism, individual liberty and limited government. Yet, when it is all said and done, all we will have accomplished is the loss of these ideals because the unfortunate fact is that we are in for an extended period of readjustment that I believe will last as long as 10-15 years.
It goes without saying that there has been a downward revision in the wealth and balance sheets of the American people since 2006…
Housing devaluation = $6+ trillion
Equity markets devaluation = $6.9+ Trillion
Unemployed 15 Weeks and over an increase = 3.3 million
Public Debt = $11.5 Trillion or 60% of GDP by 2010
And we are still attempting to pump trillions of dollars of air into the balloon to keep it from hitting the ground. I have been repeatedly asked, “Where did all of this money go?” In simple terms, down the drain by route of a completely irresponsible administration and Congress keeping failed companies in business; banks, insurance companies, foreign banks and investors and now automotive manufacturers and suppliers … all up in a puff of smoke. So our solution becomes what has now become De rigueur; borrow more money and print more money.
Let’s suppose for a moment that housing prices stabilize in the next six months. Then what?
Willingness and Ability
To find the bottom of the housing market requires buyers who are both willing and able to buy the inventory. The willingness factor will not be an issue. In fact, the reduced prices that exist today, are already stimulating interest from buyers. If willingness were the lone factor, we would be feeling the bottom now.
The stark reality from an ability perspective is that borrowers received loans in the past, that shouldn’t have, in every credit class. That group of borrowers is out as lenders will no longer make loans to that population. There is a large segment of sub-prime group of borrowers moving forward, but they are only going to be handled by the tax payer owned and only sub-prime lender left, FHA. Popular low payment products such as Adjustable Rate Mortgages (ARMs) have now been regulated out of those advantages, wiping out another segment.
Lending will not return to pre-crisis levels, even if unemployment and the economy “normalize”. If we want to avoid this same situation in the future, banks will have to reserve for losses and own the credit risk, effectively and permanently cutting off the previous level of credit.
More borrowers are becoming less qualified by the day as jobs losses continue, real estate equity declines persist and an increased tax burden for each family foisted by this “stimulus” begins to draw on the consumer’s net cash flow. Commercial, credit card and auto loan portfolios are all in the same cycle, as tapped out consumers borrow the last of their lines to sustain living standards and credit histories and scores are destroyed for a segment of the population.
Interest rates can’t stay low forever; we are going broke trying to keep them that way. Interest rates will have to increase and we will have rampant inflation, more than likely both. Energy prices have nowhere to go but up, and since we dropped below $4 a gallon for a gallon of gas, in the space of a mere few days, the pain was wiped from Americans ever short memories thus wiping out policy pressure like rain off the windshield. This energy tax will be with us again soon and we will all be braying that this was obvious and wondering why we haven’t done something in the last 10 years to gain energy independence.
In the period from 1990-2000, mortgage volume averaged 11.64% of GDP. From 2001-2006, the end of the mortgage boom, it averaged 25.10% of GDP. Knock that 13.46% of GDP and we knock off a very real $2 trillion per year in spending moving forward. Since the public debt is going to go as high as 62% as a percent of GDP from around 38% in the very near term, it is not difficult to see how long term and difficult the climb back to our standard of living will be for ordinary, taxpaying Americans.
All of this portends that the mortgage and housing market, minus continued and unsustainable stimulus, will be reduced to the qualified borrowers in existing homes moving up, buying second homes or refinancing existing mortgages. To that you can add the new first time home buyer population rolling in, but it doesn’t make a dent in stabilizing housing values.
Raise historically low and massively subsidized interest rates by a mere .5% and watch these currently qualified borrowers hunker down to the comfort of their existing mortgages, while at the same time more and more borrowers become “unqualified” as higher interest rates increase monthly payments they must qualify for.
The conclusion of my thoughts is that the U.S. citizen loses at every turn. Average wealth and assets values are being hammered, access to credit will continue to be denied and a mountain of debt will have to be paid back from the hard work of the current and future generations. We’re in for a permanent adjustment to our standard of living and to think any of these trillions of straws we’re grasping at will help is totally unrealistic. We’re trying to borrow our way back into prosperity and if there is anything the current crisis should make people realize, it’s that it may look like it’s working for a little while, but it’s a bit like borrowing on your credit card to make your mortgage payment; soon the credit line is maxed out, you can’t get more credit because you don’t qualify due to your level of increased indebtedness, your income hasn’t increased and next month’s mortgage payment is coming with the predictability of time.
Before you listen to the snake oil sales folks on TV whose livings depend on selling you the great “come-back” dream and an administration that plays with taxpayer hard earned money like its monopoly money, think carefully. Stay as liquid as possible. If you have assets that have values that are declining, you should consider selling them and preserving your cash and reentering when the actual reality meets the dream for over a year. Don’t buy the desperation of their dream, preserve yours. In short… plan accordingly.