Happy Trailings to You

The National Association of Realtors announced that the U.S. sale of existing homes rose 7.2% in July, this despite the fact that CNN reported that 9% of residential mortgages were in some form of default. I’ve already blogged about the unemployment numbers being a tad optimistic (the “new” reduced 9.4% unemployment rate conveniently dropped off all those folks whose unemployment benefits ran out in July, all 400,000 of them). We are watching stories of “back-to-school” numbers underperforming (except for the now-ended “cash for clunkers” program, which sold a lot of Japanese cars, U.S. consumers are not spending), escalating defaults on commercial real estate, and even projections by the Federal Reserve that while the “contraction” necessary to define a recession may be coming to an end, unemployment and housing values will stay at or near the bottom for some time.

Clearly, Japan and the bastions of the European economy are projecting actual growth. It is true that Europe was spared the direct impact of the subprime meltdown (they got hit only to the extent their financial institutions bought subprime-backed derivatives), and their social safety nets put the brakes on unemployment. They also did not generate deficits on the order of magnitude that we did. China’s growth rate, with lots of governmental pushes, is at an astounding 7.9% already.

It’s true that our stock market trades on expectations, so it is a leading economic indicator… and it expects corporate growth, even though U.S. consumers aren’t spending and they account for 70% of the economic activity in the nation. It is equally true that housing starts, retail sales, sales of existing homes and employment are all trailing economic indicators – people hire and buy based on actual income/actual orders.

Conventional wisdom tells you that those numbers can be bad even for a few years after the a recession is declared over. That appears to be what the Federal government and Wall Street are counting on. The August 22^nd New York Times: “Though the Fed chairman repeated his warning that the economic recovery here was likely to be slow and arduous and that unemployment would remain high for another year, he went beyond the central bank’s most recent statement that economic activity was ‘leveling out.’ Speaking to central bankers and economists at the Fed’s annual retreat … in the Grand Tetons, Mr. Bernanke echoed the growing relief among European and Asian central bankers that their own economies had already started to rebound.

“Even as they indulged in a bit of self-congratulation over what had been achieved since the financial crisis of last year, these central bankers were beginning to focus quietly on another big task, how they will unwind the vast emergency measures they put in place to fight the crisis.”

There is a danger in following the European lead that we saw when Bush-era Treasury Secretary Henry Paulson, seemingly enamored of being surrounded by the financial big-wigs of the earth – himself among them – agree with European leaders to seek out the same kinds of solutions that Europe was exploring to solve the “global financial crisis.” It didn’t work out that way, but there is always a temptation to join the crowd and follow the path of least resistance – it what got us to over-borrow so much in the first place!

But American issues are uniquely American – our heavy reliance on home ownership as a bastion of our economy differs significantly from the patterns of other nations. Although some Americans may rail at what they see as “creeping socialism,” clearly, we do not have the same level of safety nets found in Europe and Japan. We are different. What’s more, our domestic corporations have yet to figure out how to “grow” beyond the cost-cutting they have engaged in for the past year; they now need consumers to spend to generate revenues. What happens to our stock market if Americans aren’t able to spend at the level needed to create “growth”? Can we rely on a recovering European and Asian market to replace those buyers? And what is happening to that essential element of any American recovery, reasonable access to credit for local small businesses and consumers?

Earlier this month, the FDIC seized Montgomery, Alabama-based Colonial Bank, a big lender in commercial real estate development with 346 branches in five states, the biggest bank failure so far this year, and the sixth-largest in U.S. history. On August 21^st, another large regional bank, Austin, Texas-based Guaranty Bank, with 162 branches in Texas and California, was taken over by the FDIC because of its failing investments in real estate lending and mortgage-backed securities, the second biggest failure of 2009 and the tenth-largest in America’s history. The writing is on the wall for dozens of large regional banks, and the Dept. of the Treasury is hardly affording these critical local banks the same “bailout” opportunities accorded to the largest 19 national banks. If local credit is essential to local business and regional consumers, this litany of regional bank failures does not augur well for our overall recovery, particularly at the grassroots level.

What really seems to be happening is that the economic power with the greatest degree of over-borrowing (both public and private) – the United States – is likely to be one of the last such nation to resurface from this economic meltdown. The “horribles” of trashed home values, impossible credit and dire unemployment/under-employment are likely to linger far beyond the trailing economic indicators of those other nations. In short, we need to be really careful in not playing “follow the leader” this time. Our problems are unique, and the damage to our economy has run deeper and wider than the damage that may have occurred in foreign lands. We get to be optimistic – last. Unless your work for Goldman Sachs, JP Morgan or CitiGroup; you can be happy right now… your government has successfully bailed you out!

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