Are We Following Greece Over the Edge?

Even the mythical Greek gods would have trouble helping Athens.  As of this writing, Greece is on the verge of defaulting on their loans and causing untold damage to European and American banks, not to mention challenges to the EU currency.  Greece enjoyed years of unrestrained spending and cheap lending, which together with lax financial regulations and statistical fudging have made it the economic basket case of Europe.  Their debt rating has dropped to its lowest possible level.  Ireland, Portugal, Spain, and possibly Italy have similar issues and could be right behind the Greeks.  Prime Minister Papandreou is caught between the debt issues and strikes by a Greek populace that doesn’t
want to give up what it feels that it is entitled to.

Is the U.S. likely to go over the same cliff?  Most of the experts say no.  Their reasoning varies from the factual to the just plain silly.  It’s true that the U.S. is a much more diverse economy that controls the currency still widely viewed as the world’s reserve currency.  As lacking as U.S. financial regulations have been and as badly as cronyism rears its head in U.S. government entities, Greece is much worse.   Plus, Greece has defaulted on numerous occasions over its longer history, while the U.S. has not.

That said, there are some similarities between the issues facing Greece and those of the U.S.:

1)   Some experts point out that the GDP of Greece has been falling while that of the U.S. has been going up.  While that is technically true, I would argue that U.S. GDP has been rising only because the U.S. government has been artificially sustaining the economy by spending money that it does not have.   The U.S. cannot continue to spend like this forever.

2) Others point out that the debts of Greece (relative to its GDP) are much higher than in the U.S. However, if we include the future entitlement obligations of the U.S. (namely, MediCare and Social Security), which takes our debt level to somewhere between $50 trillion and $200 trillion, that argument becomes much harder to make.

The U.S. simply has no way to pay its debt.  While a default isn’t out of the question, the bureaucrats will first try inflating our way out of the mess and implement some combination of tax increases and service cuts.

Of course, all of the government shenanigans have a dramatic effect on real estate.  Unemployment is still high and the median household income has been dropping.  People who have no jobs or jobs with low pay cannot buy property.

I see this whole scenario playing out in one of two ways in the U.S.  The first is that the financial system gets truly reformed, the government stops shoveling money that it doesn’t have into poorly thought-out programs, and the politicians get serious about addressing the country’s debt.  This would mean a lot of short-term pain and civil unrest, but longer term sustainability.

In real estate, banks would become more strict about who they lend to, down payments on houses would go to at least 10%, and a more transparent system would appear.  Owner financing, where a mortgage note (a.k.a. real estate note) is created, would become more prevalent and fill in the cracks where banks can’t lend.  The secondary market for mortgage notes, with a willing note holder and a mortgage note buyer, would get together in a true financial transaction to sell the real estate note.

The second way that the economic scenario plays out is that the government does more of the same, with minimal financial reform, the creation of more silly programs, and the politicians assuring us that everything will be just fine.  This extends out the problem to a future date, at which time all heck breaks loose.

The optimistic part of me hopes for the first scenario.  However, my brain and my heart tell me that the second is much more likely.

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