Wednesday, January 23, 2008

Bad Economy - Who's to Blame?

Almost everyone knows the U. S. economy is in bad shape and a lot of people here and abroad are feeling the pain. The evidence is seemingly everywhere.

Real estate markets are chaotic with substantially falling prices and for the most part supply far exceeding demand. Mortgage investors have lost billions of dollars in recent months. Capital spending is slowing down. Many of our largest companies are reporting greatly reduced earnings or sizable losses, especially in the financial sector, like Citigroup and Merrill Lynch, due in large part to too many customers having debt they can't satisfactorily service, a big rise in mortgage foreclosures, and having to make substantial write-downs to the value of their loan and investment assets. All of this is leading to tens of thousands of layoffs and an increase in the national unemployment rate, which averaged 4.6% for all of 2007, but rose to 5.0% last December, and most likely will rise further in the months ahead.

Personal and business bankruptcies are on the rise. Making individual investors more nervous, the stock prices of the majority of our largest and most popular companies are down between 17% and 25% since early October 2007, when the Dow-Jones Industrial Average reached its all-time high. Not surprisingly, consumer confidence, a key to our economy's performance, is very shaky, and recession fears are mounting. To deal with these serious factors, President Bush and the Congress is beginning to urgently look at a sizable economic stimulus package to put more money in the hands of tax payers, and the Federal Reserve (the Fed) just cut the much watched benchmark federal funds rate by an unusually large 3/4% from 4 1/4% to 3 3/4% to ease borrowing costs and provide some badly needed confidence in the financial markets.

So who or what is to blame for the economy's current bad shape? Many scholarly articles and no doubt also several books will be written about this, but one can place legitimate blame on a number of groups of people and organizations. First, one can blame lending and regulatory institutions who encouraged lax credit standards, overly aggressive marketing of loan products, and inadequate disclosure and advice to unwary borrowers. One can also blame their senior management and boards for imprudent policies and poor oversight. Second, one can blame individual borrowers for excessive spending, taking on too much imprudent debt, and generally poor household financial management. Third, one can also place some blame on the Administration and the Congress for not seeing this coming and taking remedial action much earlier. There are many others as well one can point to, such as accounting firms, investment bankers, rating agencies, and real estate appraisers.

It also comes down to excessive consumer materialism and lender greed, with poor judgment all the way around. It will take a long challenging time for a full recovery. Hopefully many good lessons have been learned by all involved.


JimT said...

The economy should have been allowed to experience a less-mild recession after the dot-com boom, but instead interest rates were cut and tax laws were changed which just moved the speculative mania from stocks to real estate. The real estate boom is what has kept the economy rolling for the past several years, not only in job creation but in consumer spending as well (people using their houses as ATM machines).

The US savings rate is at an all time low, while consumer and goverment debt continues to rise. Lower interest rates discourages saving, and encourages borrowing...not to mention aiding in the collapse of the dollar. This scenerio can only last for so long, and as housing prices continue to fall this situation will only get worse. The over $1 trillion in adjustable mortgage resets over the next few years is going to cause millions of home "owners" serious pain, hurting the economy even further.

I don't believe there is much the Fed/Congress can do to prevent a serious recession. All the recent talk about economic stimulus is politically motivated. Incurring debt carries a cost and has to eventually be repaid. The banks have not yet fully disclosed all of their exposure to bad debt, so the financial industry still has serious trouble in the months ahead.

I hope I'm just an economic skeptic, but sadly I do believe we are in for some more tough times ahead. I think historically that the worse a recession is, the better the recovery...hopefully that will be the case here.

Thomas said...

At an even more basic level, how much can be blamed on parents not teaching their children fiscal responsibility? It would seem that they would be the first place that children could learn about how to properly handle their money.