I've become a fan of Joseph Nocera's business column in the Saturday edition of the New York Times for the same reason I like public radio's Marketplace business program: both make the affairs of business and the economy comprehensible to someone like me, who is unused to thinking about such things. Today's Nocera column was pretty sobering. He writes about the likelihood that we are at the end of an extraordinary economic era -- from 1982, when the stagnant, inflationary economy that overcame the economy in 1969 was finally broken -- and that the immediate economic future looks grim. Excerpt:
Similarly, our home offered us the ability to buy things we wanted — vacations, for instance, or second homes — because we learned that we could borrow against the equity. The rise in the value of that asset made the prospect of repayment relatively painless. It also allowed us to avoid facing the fact that our incomes weren’t keeping pace with our desires.But the crazy run-up in home prices since the new century began was unsustainable, and the trillions borrowed against home equity that has since vanished has now become the great overhang in our economy. Consumer spending will slow because people need to pay off that debt instead of taking another vacation. It will also slow because it scares people to know that their chief assets are no longer doing what they are “supposed” to be doing. “Their strategy of borrowing against their homes has left them vulnerable,” said Jacob S. Hacker, the author of “The Great Risk Shift.”
As for the stock market, it really can’t handle much more bad news. Yet Charles R. Morris, a writer steeped in the details of the derivatives and credit default swaps that have caused so much trouble, believes that there are plenty more write-downs yet to come — and that the era that began in August 1982, when the bull market began in earnest, is winding down. “I view this as an end to a 25-year cycle,” he told me. He’s titled his new book “The Trillion-Dollar Meltdown.”
I don’t claim to know where the stock market is going in the near term. Nobody with a brain can claim to know that. What I do know is that the events of this week — and the past few months — have served as a painful reminder of how dependent we have become on a rising stock market and an ever-appreciating home. If we ever get back to an era like the one that took place from 1969 to 1982, it’s not going to be fun. It’s not just that we were younger back then. America was a different place, and Americans didn’t need the stock market, or home appreciation, to live the way they wanted.
Now we do. Let’s see what happens on Monday.
Living beyond our means. Assuming we could defy gravity forever. Well, we can't, and, it seems, we haven't. What a fall we're in for. The Great Re-Learning begins.
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As someone who hopes to buy land in the next year, I can only say, it's about time. Constantly-climbing real estate prices might be great for homeowners, but not so much for new home buyers or prospective small farmers.
I've been waiting for the chickens to come home to roost ever since the early Nineties, when Bush and then Clinton raised taxes, personal bankruptcies shot up, and Clinton moved more of the nation's debt into short-term vehicles instead of long-term because the better interest rate made the deficit look better temporarily. Low interest rates and cheap foreign goods have extended the consumption party, but they can't forever.
Isn't it funny how now we talk about this 25-year period of economic prosperity, despite the fact that, during the 1992 election, Democrats and the press claimed Bush took us into a huge recession. "Worst economy in 50 years," wasn't it? Oops, guess not.
I think one of the things that changed in the 80s and that has helped to fuel economic growth is the expansion of credit. It used to be more difficult to borrow money. The banks didn't used to hand out credit card applications to people who didn't have a real job (like college students). There was a time when a "gold" card actually had some genuine cachet. These days it seems everybody has a "Diamond Elite Platinum" card.
I think it's fair to say that the people that run banks are pretty good at making profits. They don't win all the time but in the long run they're going to be very profitable as a sector. So what I'm getting at is that the banks aren't going to stop loaning money to less than stellar credit risks as long as there is money to be made doing that. By basing their corporations in states like Delaware and South Dakota they can charge high enough interest rates (30%+) to offset default risk and still come out way ahead. And as long as the banks are willing to lend, people are going to take it and spend above their means even if it means paying 25% interest for that new television or Nintendo.
So I really don't see America coming back down to pre 80s levels of financial sobriety. Sure, some of the froth will come off as banks tighten credit a little. The worst of the worst credit risks may get shut out for a while. They'll have to use pawn shops and the paycheck cashers. But I think it would take something on the order of a depression to shock us back to our senses financially as a people.
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Yes, Rod, time to tighten the belt. Americans will need to learn to do without those expensive frills and luxuries, like organic food.
Posted by: R Duquette | January 26, 2008 11:27 PM
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Or learn to grow their own organic food...
John E: Or learn to grow their own organic food...
That's even less cost-effective than buying it, especially when you figure in the cost of water (and living without a grey-water system.)
Ralph F: So I really don't see America coming back down to pre 80s levels of financial sobriety.
I don't, either. For one thing, if many people are to work in certain sectors, they are almost forced into moving to either coast (with their phenomenally high costs of living.) For another, some areas are still showing rising housing costs; they haven't caught up with the "bubble-pop" yet. Finally, borrowing is THE pathway to the "American way of life." Kids start by borrowing money for college; about the stupidest thing you can do. They continue with that pattern their whole lives.
The problem with strictly blaming the whole economy on the people who bought on money they didn't have is.. that's what created the so-called 'boom' in the first place. If everyone DID gain that financial sobriety, that would mean that they wouldn't be buying all that plastic crap from China in the stores. All those 'profits' from sales of products that help fuel the market? Gone. And we'd have to look at something more real.
What people can truly afford to buy. You know, buy with the money they MAKE, from the jobs that they have, and the work that they do.
And that's when they realize, for the first time, how crappy their actual PAYCHECKS are. Without the addition of equity, or their credit line, or anything else they would use that they have to pay back, with interest.
You know, the money most of us have to live on. Not dividends, not profits from stock trades. The money we get from working. And wages have been flat for.. well, a long time as CEOs are more concerned with the perception of profits to make their own stocks do better in the market than the long term health of their company, the people who work for them, or even the product or service they provide.
That's something. When is the last time you heard any financial news talking head talk about anything other than the stock market? When did the 'economy' and the stock market become synonymous? And what has THAT done to the way employers run their businesses, hire, fire, and treat their workers? How has the way people decide on what to.. can't use the word invest..
After all, who invests anymore? To invest means.. you research the company. And I mean more than the most current quarterly reports and latest news that might IMMEDIATELY, and temporarily impact their stock prices, if its an upward or downward trend and for how long. I mean, what's their longterm potential. To be in it for the long haul. To read the reports, to, if possible, attend the meetings, to vote your shares, and to rely not on the profits of buying low and, hopefully, selling high, but of dividends.
People don't invest, they speculate. Which is just another way to say gamble.
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