Thursday, September 25, 2008

Bailout or Not, It's Gonna Be A Blue Christmas

An ashen faced George Bush warned the nation last night that if his so called economic bail out plan is not passed the nation is facing a painful recession. The words "painful recession" may the euphemism of the decade if not the century. In a copyrighted story on Reuters, former GE President Jack Welch observed, "I now believe we are in for one hell of a deep downturn." Welch told the World Business Forum in New York on Wednesday that the first quarter of 2009 will likely be "brutal."

Many thoughtful commentators are now comparing the events of the past few days to those of October, 1929 which kicked off the Great Depression. These same commentators see the so-called "Bush Bailout" not as a cure for the problem but rather as a parachute to ease the shock of the virtually inevitable crash of the American economy.

There is plenty of blame to go around. The mortgage industry bears its share for making obscene profits on nearly worthless paper. The housing industry bears its share for continuing to build homes that everyone realized weren't likely to be sold at anywhere near their asking price or even their projected cost. Government bears huge responsibility for social experimentation in the mortgage industry which forced lenders to write mortgages to people who simply could not and never would be able to afford the homes they bought and for an overall monetary policy that artificially inflated everything in the financial sector. And most of all, the American people bear responsibility for a multi decade credit and spending binge that has transferred nearly all of the nation's hard assets to foreign investors in return for cheap consumer goods and ever more expensive energy. Separately or combined, it was and is an unsustainable economic model.

If last week was a 1929 style crash, and I believe it was, then it will take about ninety days for the effects to be felt. Credit will tighten and as it does the marginal households who have been living on credit will begin defaulting on everything from credit card payments to car payments to mortgages to utility bills. That in turn will deny income to wiser citizens who had been living within their means but have little if any cushion for an emergency of this type. As credit dries up, businesses will slow down or fail altogether, layoffs will begin and, unthinkable as it is, the whole great machine we call the American economy will grind to a halt just as it did in the grim early months of 1930.

But, there are great differences between the America of 1930 and the America of 2008. 1930 America was still based upon a primarily rural, agricultural economy. While there was great suffering by many, many families could still grow their own food, butcher their own meat and maintain a sustenance level existence. There was enough, for lack of a better term, structure to maintain a semblance of normality and governance. Modern Americans lack both the skills and the moral fiber of our Dust Bowl ancestors and our society lacks the local, small scale structure to take care of its own. I shudder to think about the social chaos that could result from a 1930's style Depression given our modern, hedonistic, consumption obsessed population. Perhaps the closest historical comparison would be the Weimar Republic and we all know how well that ended.

Over the years, I have advised a lot of people in personal financial crises. Given the recent changes to bankruptcy law and the virtual inability to charge off most credit card debt, I usually tell the ones who come to me early that they have from sixty to ninety days to get their houses in order, preserve a few hard assets if they are lucky and make plans to feed, clothe and house their families through a long hard spell. Given what I am hearing and reading about the economy this week, that might be good advice for a lot of us today. In short, don't buy that big screen for Christmas just yet, you may need the money for the light bill.


Blogger Blogmaster said...

May I differ from my learned fellow travelers prognostications?
The economy will keep on keeping on...the rich people and people with retirement vested with the stock market may suffer but most of us in the great unwashed will still be chugging along clinging to our guns and religion, working to earn, shopping to eat, and getting in a little fishing.

12:47 PM  
Blogger Bill Kumpe said...

I disagree. The rich have the means to protect some income and assets. A financial reversal for them means that they will not be able to get a new Lexus this year and may be forced to sell their second home in Aspen or the Hamptons. But, for the average American a financial reversal of this magnitude may mean that they lose jobs, homes and other hard assets like retirement funds. If this financial crisis follows the pattern it has to date and the U.S. keeps on with its foreign borrowing and printing of money to pays its mushrooming debts, your monthly retirement check might buy you a loaf of bread and your whole 401k might take care of your expenses for a few weeks or months at best. I reiterate, the closest economic models we have for what is very likely to happen are the American Great Depression and the Wiemar Republic.

12:57 PM  

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