The Recession May Be Over, But The Depression Is Not

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?

Preceding the onset of the crisis, consumer spending constituted 72 percent of the economy. Reports have stated that consumers can not be relied on to resume their role. Consumers are credit poor as they remain concerned about job prospects, declining home values.

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 problems associated with foreclosure remain. Loan modification programs do not seem to have had a major beneficial affect. Few have been modified and borrowers have defaulted again despite the modification. It has been noticed that the re-default rate falls substantively where lenders partially write off the debt, yet most do not do it.

Freddie Mac was 26 billion USD poorer in 2009. Yet, Freddie announced more to come with a record 4 percent of borrowers behind on payments. Freddie and Fannie have already benefited from 111 USD support from the Government and are holding back the slowly falling market from a sharp fall with the vast majority of new loans they have supported in 2009. Freddie Mac announced recently that it might never repay what it owes.

A recent report from First American CoreLogic revealed 11.3 million properties with mortgages are in negative equity. If those close to this level are considered, one-third of all homes with a mortgage are underwater. Real recovery seems distant.

In addition to the housing problems, commercial mortgages are being called the next shoe to drop. FDIC has revealed the number of troubled banks has risen in the fourth quarter of 2009 to 702. This is an increase of 27 percent from the third quarter of 2009. Junk debt of more than 600 billion USD due to mature between 2001 and 2014 increases the risk of corporate defaults, according to Bank of America Merrill Lynch analysts. Perhaps awaiting that, banks have posted their sharpest lending decline since 1942 in the year 2009. In short, we cannot yet be talking of a post recession period, as we are clearly not out of the woods

Protection from being victimized by a repeat

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?

Institutionally we have learned that adequate safeguards were not in place. Self regulation for financial companies amounted to nothing. The system had the wrong incentives and mathematical models failed spectacularly. We also learned that a bubble intoxicates and makes otherwise intelligent people do stupid things.

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