Nature Rules Even The Economy

The Storm Is Back

You may have noticed that we are out of the eye of the storm.

As I mentioned in my last post on the economy (Rules of Nature), the current process of economic unwinding is going to be long and painful, and we are still in the early stages of the process.

The headline issues of the last few weeks – the “stimulus”, the “nationalization of the banks”, and Obama’s “housing plan” – do little to change this reality.

Primary Driver = The Housing Market

The primary driver of our current economic situation remains the housing market. I will not bore you too much data about  where we are, but this article indicative: Housing Prices in 20 U.S. Cities Fall a Record 18.5%.

Unfortunately, these declines are only the beginning.

We must remember that the record mortgage issuance of 2005-06 continued through 2007 and that this was at the end of a massive levering-process at the household level that had been going on for decades. In other words, there is a massive wave of people with underwater mortgages who will continue to default and be foreclosed upon unless something is done to facilitate rational pre-foreclosure restructurings.

Unfortunately, it appears this is not going to happen.

Change Is Not Coming

The primary reasons why proper reform is not happening are: 1) most people don’t understand how important this issue is, 2) most people who do understand the economics let half-baked moral arguments about “bailing out” homeowners get in the way while at the same time talking out of the other side of their mouth about how we need to keep the Banks and GM out of bankruptcy, and 3) when we finally do get a proposal that makes enough people happy to satisfy the lobbyists, it is watered down and ineffectual.

As a result, I am fairly certain that housing prices will continue their steep decline, that this decline will continue to spread to commercial real estate, that the balance sheets banks and other financial institutions (including the Fed) will be even more severely strained, that consumer spending will continue to fall, that consumer defaults will rise, that corporate bankruptcies will spike, and that these results will spur second-and-third order effects around the globe.

Call it a depression or a recession or whatever you want, but it is almost inevitable at this point. But this is nothing new. The writing has been on the wall about this for nearly two years.

Ineffectual Responses Don’t Help

There are so many bad ideas coming out of Washington right now, I am reluctant to even begin dissecting them in specific terms, but the TALF is a good example of governmental attempts to control nature and the markets.

The now $1T package is discussed in this article:
U.S. Tries a Trillion-Dollar Key for Locked Lending

That the credit system needs thawing is obvious, but providing below-market loans, funded by taxpayers, to encourage under-water risk takers to bet the bank in order to get these markets going to me is beyond the pale. And more than that, it just won’t work. It is too small and too late.

Real Hope

All of that being said: I remain optimistic about innovation and the long-term success of the American Economy.

There is a lot of exciting stuff going on in the world of social-networking, medical technology, biotechnology, clean tech and digital media. These and other areas will continue to drive the engine of innovation in this country and subsequently the world.

I am grateful to go to school with entrepreneurs who are taking the plunge to do something creative in spite of the dark reality in which we find ourselves.

But that is unsurprising.

A half-melted, rain-soaked, bloody-mouthed American Dream is still the best promise and hope that the world has ever seen. And years from now, that dream will continue to be worth fighting for.

In the meantime, keep your umbrella handy and be patient. This one will be around for awhile.

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