Impressions

Recession of 2008

Yes, there will be a recession or, at best, old fashion stagflation; that fact seems to be indisputable at this point and the only question now is how long will the downturn last and how deep will it get? The other interesting information now being analyzed is the manner in which the housing boom of the last six years proved to be the stimulus of the entire economy and that the tax cuts that received credit for the stimulus seem to have had very little to do with it.

When one looks back over the credit policies of the financial community during the past ten years, it is easy to see where everything went wrong. Hindsight not only has the benefit of having a 20-20 view of the past but also is instructive, something from which we can learn lessons to make us smarter going forward. Unfortunately, using history wisely has not been mankind’s strong point.

Certainly (now it all looks so evident), over the past 20 years we have become more and more of a consumer driven economy. The days of the United States being the manufacturer to the world have been gone for a long time and they are not coming back any time soon. I would not shut the door on the possibility of our manufacturing might improving, especially with the dollar continuing to weaken; it’s just that many of the manufacturing entities will be owned by global corporations based in Europe and Asia. Even Mexico is reported to be investing billions in United States manufacturing in Texas and California.

What the governing bodies of the Fed and the various economic forecasting bodies of government should be experiencing is a “DUH” moment when they look at the income and spending trends of the past decade. Real income adjusted for inflation has been flat or declining for people with incomes in the 20 to 30% tax brackets (which is where the great majority of incomes are) yet their spending has been expanding geometrically. How did they do it? Many economists have argued that the tax reduction benefits of a few years ago never fully materialized for this class of people, who happen to be the ones that were driving the economy.

Enter your friendly banker supported by local and national government.

In their effort to do good, elected officials have prodded financial institutions to provide affordable financing for the general populace to own their own homes and to have access to the credit necessary to care for and improve them. Well, they have been successful. The problem with so many congressional incentive programs is in their implementation.

One side of the aisle wants the government to step aside and let the industry involved set up its own rules and permit the “free” market to manage them. The other side wants to control the process either directly or by a new governmental agency. What is driving the recession of 2008 is the worst of both worlds.

Ever since the mid 1970’s, the banking industry has been pushing the envelope of security that was placed around them after the financial meltdown of the 1920’s and 30’s. The idea was that banks should be banks, remember them – companies that took your deposits for safekeeping and then loaned the funds in the community, as a way of creating local growth and jobs. Admittedly, that is a simplistic view as there have always been banks that financed international trade, financed corporations and businesses and that provided correspondent services to other banks. However, as a rule, one bank didn’t try to do it all as is the case now.

At every turn over the past 25 years the regulators and government have just continually caved in, bit by bit (the camel’s nose in the tent syndrome) to the banker’s pressure. The argument has been a continual variation on the same theme: if you take the restrictions off we assure you that the United States will continue to be the seat of global finance well into the next generation. To a large degree, it seems to be the way most of the business world has come to believe in that bigger is better; that economies of scale will solve everything; to compete we must be big. The problem is that when you take two mid-size companies that are performing poorly and merge them you get a large company that is performing poorly. It doesn’t matter if the companies are banks or airlines, things look good for a year or two and then they are back to being in trouble again.

The recession we are looking in the face is the direct result of the basic financial services industry business model being broken but the concepts are still being taught; there seems to be too little “back to the drawing board” analysis going on in board rooms or universities. Too many relationships both in business, education and government have become incestuous, which encourages the status quo. It’s Bank of America buying Countywide Mortgage because it seems to be a bargain (its not going to come back), and Chase buying Bear Stearns at bargain basement prices (it’s not going to come back), GM continuing to push Hummers and super SUV’s (their not going to come back).

These are examples of a lack of innovation, something that was America’s hallmark. These are examples of always wanting the sure thing but being unwilling to develop it yourself: let someone else do the development work, prove it’s a success and then we’ll take it over, cut the expenses with operational efficiency and less expensive parts and components and show dramatic profits for three to five years, bleed it dry and sell it off for something else when its market starts to shrink. This is, unfortunately, believed to be good, sound business practice.

The Recession of 2008 will have deep pockets and shallow pockets. It’s time to turn the Queen Mary and it’s not going to happen quickly, which might give us the opportunity to determine what course we, as a nation, want to follow.

Note:

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