We Are Not Ready For A Post Recession Evaluation

Recovery may be the word on many lips; but, not exclusively. A post recession evaluation may be premature. Indicators fail to show that we are not out of the woods. Rather they point to further continuation of what Alan Greenspan has called a financial crisis worse than any other, including the Great Depression. In spite of trillions pumped into the economy, bank lending continues a precipitous descent. Mass firings are on the menu again. Real estate prices continue their slide. No wonder, consumers are holding back on purchases. Looking forward we can ponder how to protect yourself if it happens again. What have we learnt so far from what we have experienced?

Prior to the Credit Crisis, consumer spending represented 72 percent of the economy. A consumer less recovery will not be sustainable. Reports have indicated that in the near future consumers may not resume their critical role. Consumers are credit poor with credit card and home equity loan debt continuing to drop. Consumers remain concerned about their job prospects and the plunging value of their homes, their largest source of investment. The weekly jobless claims rose again for the week ending February 20th. This is the highest level since November 2009. Meanwhile pension funds have had major losses, whether the fund is private or public.

New home sales dropped 11 percent in January 2010 to a new low in the third monthly decline in a row. The Obama administration has effectively nationalized the housing market and given what is being called a blank check to Freddie Mac and Fannie Mae to cover their growing losses until 2012. Despite the Government support to the housing market, the market is sinking. In the three years since the bursting of the housing bubble, and yet the number of mortgage defaults and foreclosures continues to increase. Analysts have estimated a shadow inventory of 1.7 million to 7 million homes in foreclosure that lenders have not put up for sale in market, perhaps fearing prices would plunge further.

The foreclosures pose a problem for at risk home owners, their communities, the housing market and the overall economy. Problems are not diminishing. The loan modification programs are not working. A negligible number are being modified and even those have not given borrowers a meaningful break so that despite this borrowers have defaulted thereafter. The re-default rate drops considerably where lenders have written off some of the debt, yet for the most part they’ve been either unwilling or unable to do so. President Obama launched another initiative to avert foreclosures, offering 1.5 billion USD from the 700-billion USD Troubled Asset Relief Program to housing finance agencies in California and four other states where home prices have dropped by at least 20 percent. The prognosis is not hopeful given what is needed.

Meanwhile Freddie Mac lost almost 26 billion USD in 2009., this is part of the almost 80 billion USD lost since the bubble burst. It has stated that a record 4 percent of its borrowers are at least three months behind on mortgage payments and are facing foreclosure. Freddie and Fannie have already used 111 billion USD, which is an amount expected to rise. Meanwhile, Freddie Mac said it will probably require more assistance which it might never repay. Fannie and Freddie have backed about 70 percent of loans last year. And, Freddie Mac has warned there remains uncertainty about whether or even when it emerges from government control.

At the same time, the latest report from First American CoreLogic revealed 11.3 million properties in negative equity. Adding those near this mar, k about one-third of all homes with a mortgage balance are underwater. Housing watchers have opined against this backdrop that there shall be no real recovery until job growth resumes.

Commercial mortgages are sounding another alarm bell, as the FDIC has revealed a substantial rise in the number of banks on the brink by the end of 2009. This represented a 27 percent rise from the preceding quarter. Analysts have announced a dangerous wall of junk debt exceeding 600 billion USD due to mature between 2001 and 2014 may increase the default risk. Little wonder that banks have posted their greatest decline in lending since 1942. In sum, we are not yet in a position to talk of a post recession period since we are clearly not out of the woods.

Ways to protect yourself if crisis returns

With hindsight, it seems the best protection would have been for consumers not to rely on home equity loans, credit card debt and housing speculation. A financial cushion and prudent money management would have avoided much of the fragility and anxiety of today. Reflecting worries about the global system, gold is becoming a safe haven and source of security in a world of financial insecurity. As noted by Peter Munk of Barrick Mining, the largest gold producer, people have lost optimism which is reflected in how they treat gold. Indeed. Mr. Munk could not see anything to break this pattern. Gold sales reflect a changing world according to Mr Munk, who thinks we live at the beginning of something new. It is thus not a question right now of: if it happens again; but, that it is not over yet and further there is no end in sight.

What have we learnt from the crisis?

Inadequate safeguards are unhelpful in preventing a crisis. Self regulation des not work where financial companies were concerned. The wrong incentives and mathematical models create a toxic picture. A bubble can intoxicate intelligent people into doing dumb things.

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