The sunny optimism about the European financial situation has all but disappeared. For many months, various European bureaucrats and central bankers had climbed the podium to tell their trusting citizens that everything was okay and that the situation was under control by the “experts.” Of course, the opposite was true. Manufacturing output in even Germany and France is down, and it seems clear that the Eurozone recession will be long and deep. Greece is on the verge of default as it plays a game of chicken with Germany, and several of the other PIIGS (Portugal, Italy, Ireland, Greece, and Spain) are not far behind.
The debate is raging in Europe about whether to continue austerity programs or shift to a pro-growth mode. The general public and the politicians clearly prefer the latter, with the plan being to fix the deficits in the future. Similar discussions are taking place in the U.S. I would contend that a refusal to solve the debt problem now is a refusal to solve it at all. Does anyone really think that future politicians will be more focused on solving the country’s problems than furthering their own re-election chances? No way, as politicians (at least most of them) are made from the same mold, and few are interested in truly solving longer term financial crises.
USA Today recently noted that the real federal deficit last year was $5 trillion rather than the official $1.3 trillion. Companies and state and local governments are required by federal law and the private boards that set accounting rules to include retirement benefits in their financial statements. Congress exempts itself from including that cost. If the Feds were required to use standard accounting principles plus balance the budget last year without reducing expenses, the typical American household would have paid almost all of its income in taxes.
The headlines over the next year or two will tell us that the European recession is adversely affecting U.S. exports (meaning lost jobs) and causing losses at our banks and U.S. Treasury, who were foolish enough to loan them dollars. We’ll hear more about shenanigans at Wall Street banks causing additional taxpayer losses, since it is clear that the Dodd-Frank rules to force adult supervision of the banks have been stripped of any teeth. Poor fiscal management, especially of overly generous pension plans, will force more U.S. cities into bankruptcy. The city of Vallejo, California was the largest to file bankruptcy, back in 2008. The Washington Post states that, in California, municipalities like Stockton, Mammoth Lakes, and Montebello are exploring bankruptcy protection and projects that at least 100 municipalities will have to seriously explore it by the end of 2012.
If I had a dollar for every headline that I’ve read saying that the real estate crisis is over, I’d be lounging on the beach on a tropical island instead of writing this blog. Real estate prices are following more of an “L” than a “U” or “V” curve. They may be near-bottom in most cities but there is nothing to trigger an upswing. Too many families are dealing with unemployment or underemployment. Since one in three mortgages is underwater, a lot of families cannot move up to bigger houses because they are trapped in their current ones. With the robo-signing scandal over, expect banks to continue ramping up foreclosure activity. The Fed will likely roll out another quantitative easing program to boost GDP and the stock market, though the positive effects will be even more short-term than the previous two.
Admittedly, things look rather gloomy for our economy right now. A more educated public could force the politicians to do the right thing if we could in parallel strip the lobbying money out of the system. It is that money going to politicians and their affiliate groups that has caused so much of our current situation. A true crisis point will be needed to force the issue and get us started on a REAL road to recovery. Entrepreneurism and the American spirit can eventually bring back the nation to its former level of prominence, but we must first recognize the true issues and have qualified, independent, non-government individuals and groups find ways to solve them.