Prospects For 2009 Economic Analysis (30).
The year of 2009 looks like the worst since the Depression of 1930s. The following are the major events unfolded before the year began:
• The Bush Administration has finally acknowledged that the US has been in a recession for several months.
• The housing bubble caused by all those sub-prime financing has burst. Widespread mortgage defaults are occurring all over the US.
• The mortgage defaults bring the banks great losses resulting in a financial meltdown in October 2008.
• A credit freeze followed because the banks have no money to lend. This affected all businesses relying on credit for daily operations.
• The US government has passed a $700 billion rescue plan. The Federal Reserve has lowered interest rate to a record 0.25%. The Obama Administration has asked Congress for a stimulus plan of $800 billion more.
• The Big Three US automakers got the first dose of government bailout but their survival is still in doubt.
• A worldwide recession followed after the US financial meltdown.
• More than 2 million jobs have disappeared in the US since late 2008.
• Most stocks have fallen to record lows, especially financials.
What is in store for 2009? Things will get worse before they get better, hopefully soon. Everything hinges on the recovery of the banks, especially the stabilization of the mortgage market. The government has spent $350 billions to prop up the major banks in the US. The banks are still hemorrhaging and the credit market is still tight. The other half of the rescue money will be used very soon, about one-third for mortgage stabilization. Lets wait and see the results.
Have we reached the bottom in the financial crisis? Who knows? The magnitude of mortgage default is relatively easy to measure. The thing that remains a mystery is the magnitude of the mortgage-based securities that the retail banks have created. They have bundled their mortgage loans (good and bad together) and sold them to investment banks. This replenishes their cash so that the retail banks can lend again. This venture is based on the assumption that housing prices will continue to climb and few people will default. This assumption has been proven wrong, hence the meltdown.
Another mystery is that the investment banks in turn have bundled these mortgage-based securities and sold them to other financial companies or funds. Its just like selling mirror images of something real. The real thing here is only the house with a mortgage attached. You can imagine how the whole thing collapses when people start to default on their mortgages. At last, the financial creativity of the banks and all those involved, including the securities rating companies, are coming back to haunt them big time.
The terrible thing about a banking crisis is that it has widespread devastating effects on all industries and consumer spending. It generates tremendous gloom and doom about the economy, forcing consumers to cut spending and employers to reduce payroll. Therefore, besides economics, we are struggling with a crisis of confidence, which is also a major factor.
Do not fear. This is not the end of the world. When will things get better? The following are signs that can tell when we have reached a turning point:
• Stabilization and decline of the number of foreclosures.
• Pickup in house sales since mortgage rates are at its lowest with falling housing prices.
• The bond market where companies borrow to finance short-term operations. There are some signs of thawing now after the freeze.
• Retail sales and employment will decline further due to a time lag.
• The stock market will be the first sign of turning point since stock prices move several months ahead of major events.
Never underestimate the spirit and will power of a people facing a crisis. The beginning of a turning point occurs when people start to change. The US has been leaderless for the last eight years with special interest groups and lobbyists controlling the government. The new Obama Administration has embraced a new direction for renewal as shown by the following actions:
• Emphasize responsibility, accountability, and community service.
• Unity, non-partisanship, diplomacy, soft power (not war).
• Energy efficiency, conservation, sustainability, and renewable energy.
• Infrastructure repair and new technologies to create jobs.
• Reduce health care costs necessary for universal health coverage.
• Education and training, especially for the young generation.
For further information, please email to stockfessor@comcast.net
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