Cling-Ons Attack America!

Watching grass grow has a faster timeline that watching the economy improve. There are those who tell us that The Great Depression has a bigger lesson for Wall Street traders than seems to have been learned so far. They are profound neo-negativists who believe that the 50% rally in the post-crash market during The Great Depression followed by an even steeper 85% drop in share values is exactly the pattern that will apply here. Pointing out that the current market reflects the economies of cost-cutting and layoffs but shows no revenue growth to sustain the Dow and that the commercial real estate debacle has yet to roll through the banking world, these nay-sayers have a big substantial following in the investing world. I hope they are profoundly wrong.

But we have the Pollyanna-ish statistics of both business and government telling us that we are at the beginning of the bottom, that except for a “few aftershocks” of slightly higher unemployment and some continuing losses in residential real estate, the economy has stopped contracting. Still, the government lets banks carry toxic underperforming, under-collateralized or non-performing mortgage derivatives sit on the balance sheets of these institutions (the heart and soul of their ability to borrow money from the Federal Reserve) as if they were solid and real. We get statements like the reduction in the unemployment rate to 9.4% without emphasizing that 400,000 Americans are no longer counted in that statistic, because they have run out of unemployment benefits. We’re masters of illusion!

With the exception of the “cash for clunkers” program – basically a federal give-away – retail sales continue to show that Americans aren’t spending; we’ve become a nation of terrified cling-ons. The August 14^th NY Times: “Halfway through the back-to-school shopping season, retail professionals are predicting the worst performance for stores in more than a decade, yet another sign that consumers are clinging to every dollar…

“Stock analysts at Citigroup are predicting a decline in back-to-school sales for the first time since they began tracking the figures in 1995. They estimate August and September sales at stores open for at least a year — known as same-store sales — will fall 3 to 4 percent, compared with an increase of nearly 1 percent in the same period last year.

“The National Retail Federation, an industry group, expects the average family with school-age children to spend nearly 8 percent less this year than last. And ShopperTrak, a research company, predicted customer traffic would be down 10 percent from a year ago.”

It is estimated that 22% of American homes are worth less than the mortgages on the property with projections that this number will rise to 30%. The government also doesn’t seem to have addressed the issue of massive commercial real estate failures – evidenced by a 585% increase in foreclosures in this sector over the same period last year. On Friday the 13^th, the sixth largest bank collapse in U.S. history, Colonial Bank (Montgomery, Alabama), was taken over by the FDIC. The main reason, one that trembles all across the smaller regional banking community? The failure of its commercial real estate portfolio. Yet our government “clings” to slower declines in negative numbers and a rising stock market to tell us that the recession is just about over, but they carefully admonish that high unemployment and soft real estate values are our future for the foreseeable future.

What does the government really have to do? Well clearly, their attempts to stem the tide of residential mortgage foreclosures are a complete bust. July saw a 7% increase in foreclosures over June. Bottom line: the government needs to deal with the underlying fear that has eroded consumer confidence. Enough “stimulus subsidies” for those big boys; if I read one more story about Wall Street bonuses…

At a sub-zip code level, the Feds need to mandate an automatic mortgage reduction for any who apply as to residential mortgages that are in sub-zip codes with average mortgages that are underwater, and allow the same to occur when homeowners in other areas can prove the they are underwater. We can cap that at 10% of the value of the mortgage, the government can cover the difference vis-à-vis the banks, and we need to cap mortgage rates at the new Freddie and Sallie rates. The banks’ get better balance sheets; homeowners get more spendable cash and less fear. Given the massive stimulus package, think of how different it would have been if all that money had instead simply been given to homeowners to reduce or eliminate their mortgages! It would never have happened (I’m picturing screaming renters), but we probably would be well out of this financial meltdown by now.

The second giant step the government needs to take is to force lending liquidity into small businesses that provide the bulks of the jobs in this country. Small business loans need to be provided through a simpler and expedited process, backed by the government, and funded immediately. Selling inventory at less than cost to generate operating capital (where loans are unavailable) puts companies out of business and kills jobs. Tuition subsidies are needed to train or retrain the American workforce to earn its way out of its uncompetitive malaise.

At the most simplistic level, government has spent way too much time and money on the big boys to “lead us out of the recession.” They’ve only led themselves out of the recession, leaving the suffering to the average American… and we’ve become a nation of cling-ons.

I’m Peter Dekom, and I approve this message.