Tuesday, September 16, 2008

The Writing On the Wall

Today's post is somewhat in response to Natasha's post. To be clear, I was not angry at her post; this is definitely not a rant at her. I just wanted to share some thoughts I've had in the past year or more about the economy.

First, based on almost any economic measure, 2006 was a better year economically than 1996. Lower unemployment, larger growth in the economy, and so forth. Yet, in 1996, the media described that year as "one of the best in decades" or "a sign that a new day is dawning in America." In 2006 they began talking about "economic downturn" or "signs of a recession." In 1996, Bill Clinton needed to get reelected. In 2006, the press was ready to start sewing the seeds that helped usher in another Clinton, or at least another Democrat.

Because so much was said about a downturn, people started buying less. A slowdown did follow, but the economy was still growing (not contracting, which is what defines a recession). Fuel prices continued to rise, and a bio fuel craze followed, throwing inflation into the mix not seen since the early 80's or even the late 70's. The consumer price index (CPI) did not reflect this true inflation, though, because it does not factor in the price of gasoline among the goods measured. Still, with the negative talk on the economy and the inflation making things cost more, the slowdown continued.

With slowdown, fewer people were buying new homes, so the housing market started to crumble. Builders had overbuilt dramatically. In 2004, though, Fannie Mae had made a big push to make loans more available, which spurred those builders to feel confident they could sell more homes. The congressmen in charge of oversight of Fannie Mae and the banking regulations turned a blind eye while loans went out that should not have. Bonuses were paid to Fannie Mae employees for production - production of loans which was either poorly generated, or actually not generated at all. Many congressmen still talk about the need to make homes more available and affordable. Well, now there are plenty to choose from...

Now, here we sit, complaining about the dire straits we're in. I've been bothered by the talk of the "writing on the wall" of a recession, which simply had no basis for many months. So the question will forever remain in my mind: was the media predicting a recession that truly was imminent, or were they creating the recession by scaring people about the economy so badly that the house of cards fell?

I know one thing: the American people will survive. People might lose jobs, stocks may plummet, and homes will get foreclosed on. Still, we will all persevere. I hope we will finally start learning from our mistakes again. I know it sounds terrible, harsh, cruel and mean, but I really wish we would let the people who have these horrible failures actually fail, so next time they can remember and avoid the pitfall. Bailing out should be for sinking boats, not corporations, banking institutions, or even social programs that are underfunded.

-- Robert

P.S.: I didn't even get into the bad wrap that adjustable rate mortgages got in all these problems. I wrote a post about that here and here, though. They can actually be a good instrument, if used properly to gain more equity. The people complaining about them either didn't understand that or made no effort to do what they needed to make proper use of the lower interest rate period.

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