Thursday, October 16, 2008

Predictions


ap file photo, stolen from Huckleberries online

"We have nothing to fear, except fear itself." Spoken by President Franklin D. Roosevelt, about the great depression.

I've talked about my take on the economy. There is more to come. Many were cheered when the market jumped back up two days ago. That was bargain hunters buying back in at lower prices. Yesterday, as predicted, we went into free fall again on Wall Street. I believe it will get a whole lot worse before it gets better. There are simply too many things broke for a simple fix.

To study history, one must go back to 1929 to picture where we might go next. The "Great Depression," started in 1929 but didn't reach bottom until 1932. These collapses do not happen over night, with one mighty drop. It is incremental, but inevitable. Our national debt is primarily held by Japan and Great Britain, along with China. If these countries cut us loose, it would be disastrous.

Lets just review a few problems that we are facing. Individually, most are solvable in the long term. collectively, the put us into a great hole, without a ladder. Oil prices led the parade, as Gasoline topped $4.00 and diesel was even higher. Farmers operating large equipment were suddenly paying more than their crops were worth to plant, fertilize and harvest. Truckers and railroads paid more to haul them to market. Suddenly, a country where most of us had disposable income, was no more. Boat & RV manufacturers are shutting down. Hotels and motels without travelers are suffering. Without spelling this out, I think most of you can figure out the rest. It's like lining up dominoes then pushing one over. The rest will follow.

The banking debacle, for me, is the hardest to figure out. I was in that industry for 30 years. In that time, (I retired in 1997) lending standards were, of a necessity strict. If you had bad credit, you would have to rehabilitate yourself for at least three years, and longer if a bankruptcy was in your past. How the industry could justify, especially after 1980-83, the reckless abandonment of sound lending practices, is beyond me.

I haven't been able to confirm when, where and who, but as I understand it, many liberal senators and representatives insisted, a few years ago that everyone should have the opportunity to own their own home. They passed legislation to that effect and the gates were open. You see, there is no way to make more homes available without lowering lending standards. The term now used, is sub-prime, which is a misnomer with spin. The actual name should be substandard. The increase in demand created an overheated market where demand outran the supply. That caused prices on land and homes to soar, even when mills were shutting down due to low lumber prices.

Interest rates were held too low, too long. That created another reaction, that being a wide open boom market. When demand was used up, due both to most people already having bought, and prices skyrocketing out of reach, it was all over. Builders were, as they did in 1980, still subdividing, still slapping spec homes up in cookie cutter tracts resembling California in the past, full speed ahead. "Happy days are here to stay." They weren't and didn't. If Paul Volker were fed chairman again, he would have long ago raised interest rates as he did back in late 1979.

Next I will speculate on what may happen in the near term and compare it to what happened in 1929 and examine the differences between then and now.

5 comments:

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Anonymous said...

Herb,

Maybe the next president should make you the secretary of finance. You also could serve on the housing reform board and possibly be the next CEO of fannie and freddie. You have been predicting the end of the financial system for 2 years now. Last Friday most economist felt like we found the bottom of the market. They also predict the market will again retest this bottom which will happen over the next couple weeks. After the retest and the presidential election consumer confidence will rise and some people actually feel we will be out of this thing in late 2009 early 2010.
So until then you can sit in your trailer and type on your computer and proclaim to all who will listen that you forwarned everyone about the end of the world.

Bay Views said...

Did I forget to mention that the sky is falling?

Actually, I'm not predicting the end of the world that the anonymous commenter suggested, but it certainly is the end of an era. The old Chinese proverb,"May you live in interesting times" may apply here. Oh, and I'm not ashamed to live in a trailer, as the above person noted, which really isn't in context, but was an obvious put down. I went out of business in the 1987 crunch and was too old to recover financially, but at least I put my money up and took my chances.

Anonymous said...

The trailer comment was not meant to be a putdown. You always comment on your home but I apologize if you took it that way. I also commend you on taking your chances sooner or later we all do in some form or another.

I'm just tired of doom and gloom when the fact of the matter is the gov't is trying these days, in the stock market for every seller there is a buyer and housing prices nationally has found the bottom. The Libor index tells us that credit is beginning to flow all the while you and other news media are trying to spook everybody, what gives?

Anonymous said...

Shame on you Anonymous for an intended put down that you now claim was not meant to be a putdown. With your inability to stand behind your mistake with an apology but instead putting blame on Herb for taking it the wrong way gives a clear indication of your integrity. It was in the manner you delivered the message that makes this an insult, not the fact that Herb lives in a trailer. The type of home a person lives in is not a reflection of a person's integrity, but their words are.