A Lost Decade?

That’s what they called the 1990s in Japan, as one stimulus after another failed to reignite that economy after its late 80s real estate bubble burst, sinking Japan into a long, deep recession. So in these horrific days, what do you call an “optimist”? One who thinks that what Congress has passed to date is the only stimulus injection we need to right this economic ship – even if it takes a few years to “take.” A realist, after we have sunk $700 billion under TARP and $787 billion from ARARA? Someone who thinks there will be another trillion dollars needed to bring back our financial and real estate sectors. A pessimist? Hey! Enough already!

The Federal Reserve revised its 2009 numbers recently, knowing that $787 billion more would be injected into the economy, suggesting that the current direct unemployment rate of 7.6% would climb to 8.8% (I actually think that’s “optimistic” – but there’s always 2010) and that our overall economy would contract by 1.3% this year. If you haven’t noticed recently, except for mostly lower-end foreclosure sales, real estate isn’t selling, there are almost no business loans and our main banks are still a mess.

This is a long term mess that requires a long term solution, a reality that has not escaped our President’s notice. In his Denver speech on February 17^th, as he was about to sign the American Recovery and Reinvestment Act into law, he stated: "We will need to do everything in the short term to get our economy moving again, while at the same time recognizing that we have inherited a trillion-dollar deficit, and we need to begin restoring fiscal discipline and taming our exploding deficits over the long term.. None of this will be easy."

The really expensive part of the fix is clearly the repair of the almost mortally wounded financial sector, the prodigal son who just happens to be the life blood of the entire economy. From the February 22^nd L.A. Times: “‘The upfront costs are going to continue to rise,’ said Adam Posen, deputy director of the Peterson Institute for International Economics, who predicted at least $1 trillion more will be needed. ‘They're going to have to buy a bunch of bad assets from the banks in one form or another, and they're probably going to have to put more capital into the banks.’”

We have different ways of saying the same thing – nationalization, creating a “bad bank,” having the government provide the loan money that they want to see back in the credit market, insuring against loss, helping lenders with mortgage adjustments – it all comes down to the government providing survival cash to unfreeze the credit markets. So far, they haven’t remotely come close to the tipping point.

In the end, this all will end. We will be “Americans” again… new folks living in many of the old houses, a different array of job choices and probably a more conservative, less debt-driven lifestyle… but we will be back. Think of this as a war, one where we have to throw all of our resources to fight a powerful enemy, but a war we know we can win. We also know that we probably will hit some real bottom (maybe with some bad employment numbers continuing for a bit beyond – employment is a trailing economic indicator) within the next 12 months. What we don’t know is how fast or when we will rise from that bottom, but we need to let our government be the stimulator it appears it really must be.

I’m Peter Dekom, and my wrists are still intact!