Originally Posted October 9, 2008
As I watched the debate Tuesday night, I listened as both candidates threw the blame for our current economic crisis on our mortgage debacle. The bubble of housing prices through the US has created negative equity, high foreclosures, which in turn are causing bank failures, etc… We’ve all heard it on the news for the past month, but I began wondering how much of this is really due to the housing? And actually, what has housing done for the US in the past 5 years.
A quick recap of the US economy over the past 4 years: (very quick indeed). In June 2007, the credit crisis began to become a reality. Since this time, the S&P 500 is off by more than 50%. We all know what has happened in the last two weeks, so I won’t rehash the current status.
I want to go back though to the years leading up to the credit crisis. You will recall that in June 2006, pundits started asking if we were in a recession. The answer was always no. However, if you look at the fundamentals of the US economy, there was reason for concern. Specifically, corporate spending was down, government spending (other than the war in Iraq) was down. Unemployment numbers were flat. The Fed had raised their target rate from 1% to 5% on fears of inflation. Gas was at $2.87 a gal (DOE numbers) and would hit $3.00 just two months later. But consumers were spending enough to keep the GDP growing.
I attended a conference in 2004 in which the speaker, a well respected national economist, said that every attendee should go home and refinance and take all the equity out of their home, adn keep doing it as often as the bank will allow. The idea was that no one was charging for re-fi’s, and that money had been cheap. Equity in our homes was the greatest method of increasing wealth ever seen. You could buy with no money down, and then in two months, take some cash out. And as Americans, many did… in droves… (By the way, this was not a get rich quick conference, this was a symposium for MBAs from all over the East Coast addressing “the new economy”.)
Fast forward to 2006 and we find that while nothing in the economy was really going right, the GDP continued to grow, albeit slowly… And what was the number one reason? Consumer spending. While corporate American cut off the spigot, and the Govt did too, Joe Six Pack kept spending like crazy. He bought cars financed through his house, he bought furniture, and the biggest TVs anyone had ever seen. Despite the lack of fundamentals in our economy, the consumer kept us going.
The only thing that allowed the consumer to keep spending was that their net worth was rising at rates never seen in the country. People felt rich. And that led to more spending. Conspicuous Consumption at its finest. God Bless the American savings rate.
We as consumers kept this economy going, and we have our mortgages to thank.
So this raises my question for the day. If we had not had the slack mortgage lending practices, and had we not promoted home ownership to the level that we did, when would this recession have started? 2004? Perhaps before?
The consumers won’t be spending money for the foreseeable future. It will now turn to the Govt to pump out the dollars (and the debt)… and pray we can pull it all together.