If you keep doing what you have always done, you will keep getting what you’ve always gotten…
And yet, it seems like as we try to tackle this recession, we are largely using the same tools that were only fairly successful in the 1900s (yep, some of these tactics were used to “fix” the great depression). Our country, infrastructure and economic system are radically different than they were just 20 years ago, so it seems as if we are fixing a system with outdated tools. While using leeches has come back into vogue, most of us wouldn’t use 100 year old medical tools to cure a modern disease, and our economic doctors should be doing this either.
This isn’t a political blog, so we won’t go too far down this path, but it seems to me that a good portion of our administration, and specifically some of the financial regulators and policy makers just doesn’t get it. I am not joking when I say that we are still using metrics that were designed when the fastest you could get information person-to-person was via telegraph. Or, to put it another way, the heads of our financial system: Bernanke, Bair, Congress, others are looking into their bag of tricks and are quickly realizing that they’ve run out of options; stimulus programs, tax cuts and government spending are, after all, effective in some economic climates. Unfortunately, none of these programs make sense for an economy that has somewhere between 10%-20% unemployment. Our current leadership reminds me of the band playing on the deck of the Titanic.
Am I saying that we are heading for complete economic collapse and that our time as a superpower is fading into the past? Of course not. That scenario isn’t close to playing itself out yet. We are home to some of the brightest, most forward thinking, creative people on the planet…. and we tend to attract those very same types of people from countries across the globe. One big problem that I do see is what I like to call “the Greece Complex”. Our nation has become “used to” certain things and we will need to let go of a few of them in order to survive. To fix our current mess, we will need to sacrifice and our leaders are afraid to tell us this. Instead they tell us that things will be fine, “keep spending”, but never dealing with the real issues………..because that would be unpopular. They are regulating, legislating, and leading according to polls, focus groups, and rumor. For example, in our recently passed FinReg bill, derivatives were not dealt with. ??? This was one of the biggest problems and causes of the mess that we are in, and it wasn’t even addressed!
Okay, enough “opinion” – here’s what you need to know. Things are not good in our economy, especially in any metric related to housing. Rates are at a historic low, and I mean just rock bottom. The best numbers that we see are that refinance volumes are through the roof, which is a pretty obvious reaction to the market. This helps a few people reduce their monthly expenses, but doesn’t really stimulate anything new. New/Existing home purchases are at 10+ year lows, and when you consider that our population is much larger now, those numbers show a much bigger gap.
Here’s some more good news: some markets are improving. Businesses are beginning to show interest in expanding. They are accomplishing this expansion first and foremost, by making more effective use of their current staff. Over time, the job losses will taper off, and we will begin to see a true “bottom” in several important metrics, like employment rates and business spending.
OK, some not so good news? Housing is going to be way behind the curve in regards to recovery. The American public as a whole has shown remarkably low demand for new Mortgages (preferring to Rent vs. Buy), even with house prices way down and rates at, like I said, all-time lows.
Stocks, always known to be a volatile investment, have lost their gains from the last 10 days. Bonds have been more favored and, as a result, rates are still trending down. At this point, you should read “lower rates” as “more refinance activity”; we used to have a strong correlation between lower rates and new home purchases, but that link has been broken for about a year now. Especially as the market begins to price in a “bond bubble”, we could easily see interest rates stall out and not drift lower. This is because investors are becoming concerned about the value of those bonds, their ratings (as Moody’s, Fitch, and others have suggested that downgrades could be coming), and their relative risk.
So, I’m not trying to be negative, just realistic. As I have said many times, accepting reality means that you have a good foundation for success in the future.
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Geoff Boyd – PrimeLending – Clackamas, OR