The Recession May Be Over, But The Depression Is Not
Written by Gordon FJ Cook   
Monday, 15 March 2010 07:33
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?
by GordonFJCook


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.

There was another decline in new home sales for the month of January in 2010. The Government has backstopped Freddie Mac and Fannie Mae. Yet, the housing market continues its slide downhill. Mortgage defaults and foreclosures have climbed since the housing bubble burst three years ago. How time has flown. A shadow inventory hunts the market.

At risk home owners, their communities and the economy are hostage to the foreclosures. Loan modifications seem ineffective and prone to re-defaults. Modification where some portion of the debt is written off reduces the re-default rate considerably. But, banks are seldom going in the direction of loan write offs.

The housing market giant, Freddie Mac has lost about 26 billion USD in the year 2009. In sum, it has lost almost 80 billion USD since the bursting of the housing bubble. Yet, more of its borrowers are on the brink of foreclosure. Freddie and Fannie have used up 111 billion USD of taxpayer largesse; while Freddie Mac has already warned it might never pay back what it has received. How much the market is suffering is indicated by the fact that Fannie and Freddie have backed the vast majority of the loans made in 2009.

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.

Besides housing, commercial mortgages are on the brink of a default wave. Troubled banks have risen alarmingly in number. Meanwhile, 600 billion USD in corporate junk debt coming due threatens solvency of corporations. Perhaps this is why banks declined their lending sharply comparable to 1942 levels.

Protection from being victimized by a repeat

The best protection not misuse of home equity loans, credit cards and housing investments. With a financial cushion, prudent money management would have led to more stability under current stress conditions. Gold is becoming a safe haven and source of security reflecting worries about the global economy. Peter Munk of Barrick Mining has been quoted for pronouncing that people have lost their optimism and he could not see anything on the horizon to alter the situation. Mr. Munk has noted that gold sales reflect a changing world and we stand on the threshold of something new. These are some of the reason why it is not a question of whether it happens again. Instead the reality is that it has not passed.

The lessons to be drawn 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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