As the great ballplayer Satchel Paige once said, “Don’t look back. Something may be gaining on you.”
In light of the topsy-turvy gut-wrenching year that was 2009, this is sage advice.
Most of us are thrilled to rip 2009 from our calendars. Given the trials and tribulations of the past year, finding our way to the new decad can’t come fast enough.
Before lurching forward, we ought to take a brief moment to look back. As author and historian David C. McCullough has observed, “History is a guide to navigation in perilous times.”
The past year has seen tectonic shifts in our perception of wealth. Seemingly overnight as the real estate bubble collapsed, personal prosperity for millions of American evaporated.
In the blink of an eye, $11 trillion in value was drained from the economy. Banks were shaken to their core, joblessness hit heights not seen in a generation, and businesses were shuttered from Main Street to the mall.
As the mythical mogul Gordon Gecko famously intoned, “Greed is good.” But greed can also make us blind, stupid and vulnerable.
It Had to End
Everyone knew we were trading on the borrowed time. Nearly two years before the bust, former Fed Chair Alan Greenspan cautioned that the red-hot housing market was becoming a little too exuberant for its own good.
“Without calling the overall national issue a bubble, it's pretty clear that it's an unsustainable underlying pattern,” Mr. Greenspan told the Economic Club of New York in May 2005. Stopping short of pronouncing a bubble, Greenspan warned of excessive “froth” in the real estate market.
Nobody was listening. All were too busy getting “rich.”
For the last seven years, the American prosperity was fueled by easy credit. To achieve this affluence, we utilized home equity loans; cash- out refinancing, credit card debt, and auto loans to live above our means.
Household debt reached $13.8 trillion in 2007, with $10.5 trillion of that held in mortgage debt.
Historical charts show that consumer debt started to spike shortly after 9/11. With the President urging Americans to spend and Greenspan lowering interest rates to 1 percent consumer debt accelerated. Post 9/11, it was as if the acquisition of debt was equated with patriotism.
Now economists are talking about the “New Normal.”
Today, it takes two incomes to provide what one income provided 30 years ago, a middle-class house in a safe neighborhood with a decent public school. It’s no wonder that among the world’s developed countries, the U.S. has the lowest savings rate.
We have outsourced our savings to the emerging economies, along with our manufacturing jobs. The Chinese are saving the money we’ve paid them for flat screen TVs. The OPEC countries are saving the money we’ve paid them for oil. In the end, we’ve left little for ourselves.
Contrary to the prognostications of doom on the horizon, 2010 holds untold promise.
While unemployment will likely to continue to climb well in to the New Year, it appears that the end is in sight. Although we may rail about the unprecedented debt shouldered by taxpayers to fund the recovery, there is little debate that governmental intervention is starting to shorten the unemployment line.
The Lending Bugaboo
Stocks have risen a whopping 60 percent since their remarkable lows in March. Historically, unlike employment, the stock market has always been a leading indicator of economic recovery.
As the appetite for risk returns, so, too, should investment in the “real economy.” Despite historically low interest rates, persuading banks to part with “our” money will remain a challenge.
No amount of government cajoling or coercion will force lenders to loosen their grip on credit unless/until their portfolios stabilize. This will only happen when the banks feel certain that real estate prices finally have found the bottom. With hundreds of thousands of mortgages still at risk, it may be 2012 before credit markets for everyday Americans genuinely start to thaw.
Consequently, capital efficiency will be the order of the day. The future scarcity of available capital and credit will compel us to live within our means.
Historically, we Americans are at our best when our backs are to the wall. The notion that we may one day become a second-rate economy or soon be eclipsed by China scares the hell out of most us.
Fear always has been the great American motivator.
It pushed us to intervene when we thought our financial system was about to implode. Going forward, if history is our guide, fear will bring out our best measure of creativity. Historically, it has always been this way
The pain of the past two years may linger. But from my vantage point, the best days of the American economy are still ahead of us.
Here’s to a prosperous New Year.
John Cohn is a senior partner in the Globe West Financial Group based in West Los Angeles. He may be contacted at www.globewestfinancial.com
