National – Lead, follow or get out of the way: In 1932, at the depths of the Great Depression, Franklin Roosevelt declared, "the only thing we have to fear is fear itself." Economists tell us that the psychological effects of fear on the economy can never be underestimated. When the real-estate bubble burst in the middle of a presidential election its effects were exacerbated by the pronouncements of aspiring politicians as well as the media. Nothing sells (fill in your media of choice) like a disaster. Fear and fear alone drove the public to withhold spending even while personal incomes rose. Fear and fear alone drove people out of the stock market. Of course the consequences of fear were the very things people feared most, rising unemployment and declining sales etc. Besides the momentary freezing of the banking system there were little signs of an impending recession. Inventories of everything except new and existing homes for sale were steady as was employment data. Auto sales were weak but only for American flagged manufacturers. In a more regulatory era "default credit swaps" and "mortgage backed securities" would not have been allowed and AIG, which triggered the calamity, would not have failed and taken the banking system with it. Make no mistake about it, AIG, Citybank, Bank of America as well as GM and Chrysler, all the brand name stock brokerage houses and many, many others failed. Without the intervention they would all be in federal bankruptcy court right now.
The source of the rise in bogus securities can be tied directly to our balance of trade deficit with the rest of the world, especially China. We sent so much money overseas we became a debtor nation while much of that money returned to U.S. financial institutions and was made available for loans. When financial institutions have too much money they begin to make dumb investments and there are no limits to the creativity of crooks willing to take advantage of dumb bankers. Fortunately the right lessons were learned from the mishandling of the Great Depression and the Federal Reserve Bank and the Treasury Department appear to have stepped in and solved the bank liquidity problem just in time. The first sign of success was the announcement in early March that Merck was going to buy Schering-Plough for $41 billion. Merck didn’t write a check for that amount, it was arranged by an investment bank someplace in the world with access to that kind of money. In November this transaction could not have taken place.
The tragedy of the Great Depression was that the crash of 1929 was not addressed until the election of F.D.R. in 1932 and an "economic stimulus" large enough to jolt the U.S. out of the depression wasn’t applied until the massive expenditures of WWII. By 1932 the recession had become endemic. People had three years to tighten their belts, loose their jobs and close down both banks and businesses. By 1932 demand for all things reached a low point. How people spend their money is largely a result of their psychological status. In certain times we may be willing to go out on a financial limb knowing there will be a paycheck tomorrow. In uncertain times we will be more cautious, spend less and save for a rainy day which could be tomorrow. By 1932 there had been enough rainy days to systemically reduce demand and anyone who still had money kept it in their proverbial mattress not in a bank.
Fortunately, our current crisis has not festered long enough to reduce underlying demand for goods and services. We may have 8, 9, 10% unemployment but that still means that over 90% of us are still taking home a paycheck and largely unaffected by the shenanigans of AIG executives or Bernie Madoff. Economic statistics showed that we paused briefly but that we are bouncing back, perhaps it’s just the Great American habit of shopping for bargains. For example:
- The Commerce Department said durable goods orders rose 3.4 percent to $165.6 billion in February, the biggest increase since December 2007. January orders fell a revised 7.3 percent. The Commerce Department had previously reported a 4.5 percent decline.
- Non-defense capital goods orders excluding aircraft, a closely watched proxy for business spending, expanded 6.6 percent in February. January orders fell an adjusted 11.3 percent.
- Inventories of manufactured durable goods fell for a second consecutive month in February, easing 0.9 percent to $336.8 billion, after dropping 1.1 percent in January. Falling inventories means that industry will be re-hiring workers to start up the assembly lines soon.
- The Commerce Department also said that sales of sales of newly built homes in the U.S. rose 4.7 percent to a 337,000 annual pace, the fastest increase since April last year, from 322,000 in January. The inventory of homes available for sale in February was the smallest since June 2002.
- The Mortgage Bankers Association (MBA)'s index of mortgage applications, which includes both purchase and refinance loans, increased 32.2 percent to 1,159.4 for the week ended March 20. Refinancing accounted for 78.5 percent of all applications.
- Borrowing costs on 30-year fixed-rate mortgages, excluding fees fell to an average 4.63 percent, the lowest since MBA began its weekly survey in 1990.
- The Stock Market rebounds – Ever since the Treasury Department announced a way to remove "legacy loans" from banker’s books it’s become apparent that the sluice gates are opening and the smart money is getting out of "safe" investments and back into the stock market.
It’s hard to say if we’ve dodged the bullet but the data looks good and Americans are spending again.
Personal Income Rise Lifts Consumer Spending
Merck to buy Schering-Plough for $41 billion
Durable goods orders rebound in February
U.S. home sales climb at fastest pace in 10 months
Obama Rally Reaches 22% in Recovery From Bear Market