Sobering and realistic words from an incoming Administration… Now that it is official, the recession started in December of 2007, we have a year of pain under our tightening belt. Even though this passage of time alone is longer than the last two contractions of the American economy combined, 2009 promises to be a much more punishing year. If we actually push the official unemployment rate up to the expected 8%-9%, the government’s own “alterative measurement” (which looks at part-timers wanting to be full-timers and people who want jobs but have given up looking) threatens to be a staggering 15%-20% of jobless Americans, almost hitting Depression era highs.
With retail sales hitting 35-year lows, foreclosures reaching record highs and the number of people whose mortgages are higher than the value of their homes nearing 30%, the cycle feeds negativity on itself. People lay people off when they can’t sell what they make, those laid off people buy less and can’t pay their mortgages, more foreclosures create lower home values, and with each reduction, the society as a whole drops down a notch. It’s a spiral that must be broken.
Bernard Baumohl, chief global economist at the Economic Outlook Group, a research and forecasting firm quoted in the December 8 New York Times: “For the average American it’s going to be devastating for the next 6 to 12 months… I have not seen anything particularly hopeful right now, which tells me we have a ways to go.”
The solution? We can see it in the numbers and patterns in recent history itself. A laissez faire governmental attitude – let the chips fall where they may – sustained a decade-long recession in the 1990s in Japan, even as the rest of the world recovered from a downturn, Japan languished at the bottom until the government reversed itself. After the Crash of ’29, the Depression took the economic drive of World War II to end it in 1939, and the stock market did not resume its pre-Depression average value until 1954. This current market collapse actually started when, after bailing out insurance giant AIG and pushing Bear Stearns into JP Morgan Chase, the Department of the Treasury defied market expectations and let Lehman Bros. totally collapse on September 15. The markets have been pretty much all downhill from there.
We also know that giving money to anyone without lots of strings, limited supervision and less planning simply does not work either. Left unsupervised, big financial institutions have only used government money for their own selfish plans. I’ve called that phenomenon “Paulsonomics,” but the lessons are equally clear: you cannot support this economy from the top; unless your efforts have a direct and immediate impact on jobs and home values, you are simply robbing from the middle and lower classes to consolidate power and control in the mega-wealthy institutions that actually survive into the seemingly distant period of recovery. But the government still has to support the economy in the right use of its money.
A recent government study, reported by the Associated Press on December 8, also illustrates what happens when mortgage restructuring is minimal and not well-planned to fit the real world. The study looked only that those mortgages that were reworked before the big crash (those from the first half of 2008) where the benefits to homeowners were marginal at best. Even in those less dire circumstances, half of the homeowners are now in default again.
History and the need for prudent government suggests that somehow, the big three automakers need to be around for at least a while longer, sustaining necessary jobs in key parts of this nation. But they need to be controlled, management reconfigured and taxpayers rewarded in success. The message from both the President-elect and congress today was unambiguous: As it was in Washington, it’s now time for new leadership in Detroit.
Clearly the new Administration understands this truth – it has de-prioritized limiting deficits and accepted that battling this severe recession requires the counter-measures of a nation at war. The new government also has more time to consider the repair job, but that also means that implementing its solutions will not begin to make much of a difference until well into 2009. How many Americans will go under by then?
Healthcare is still on top of the priority list, since more unemployment necessarily means more without health insurance; this sector does promise new jobs and technology solutions for a recovery phase somewhere down the line. I’ve already discussed the infrastructure job challenge, and I cannot stress enough the role of training and education – currently two segments that are suffering greatly – any nation that expect to experience genuine prosperity again.
To those who think that a “bailout” only benefits rich corporations at the expense of the people, our government needs to make sure that does not happen again. But to those who think we should simply stop “bailing out,” history is littered with the bodies of that failed policy. The plan requires planning, oversight, realistic expectations and timelines and clear “strings” and limitations.
I’m Peter Dekom, and I approve this message.
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