My local newspaper today stated that the stock market had its worst quarter “since the financial crisis ended.” This begs the question of who in their right mind actually thinks that the financial crisis has ENDED. The U.S. government has debts that are worse than ever and will probably never be paid off, a huge number of banks are still a mess and hold billions of dollars in shadow real estate inventory, several European governments and big banks are arguably in worse shape than the U.S., and vast numbers of households are in debt up their eyeballs and have next to nothing saved.
Of course, I understand that the writer was referring to the times of the Lehman Brothers collapse and when so many of the “experts” agreed that the U.S. financial system would melt down if the government didn’t inject hundreds of billions of dollars into the system. I would argue that, while the short-term outlook for the economy and financial system is marginally better now, the long-term forecast has worsened considerably.
I submit to you, the reader, a few thoughts on how we will know that the financial crisis has really ended. Just don’t look for these solutions to happen in the next few years.
1. The government is solvent and able to meet its long-term obligations. Recent activities such as TARP, Cash for Clunkers, foreign wars, and the Fed’s quantitative easing programs have run up huge tabs for the U.S. taxpayer. Future entitlement obligations such as Medicare and Social Security are even bigger, with tens of trillions needing to be paid out as the baby boomers retire. To date, politicians and bureaucrats have been unable (perhaps unwilling) to truly solve the U.S. financial problems.
2. Banks will once again be stable institutions and largely insulated from the greed of Wall Street. Megabanks like Bank of America and JP Morgan Chase will be cut down to size so that no single bank or small group of banks can imperil the financial system.
Last week, Moody’s downgraded the debt ratings of three large banks – Bank of America, Citigroup, and Wells Fargo. Several analysts and even Representative Barney Frank stated that this is a new political reality where no banks are too big to fail. In my opinion, this is bunk. As Fortune suggested, the banks are bigger and more interconnected than ever before, making any potential failure even bigger than the Lehman Brothers collapse in fall 2008. Bank of America’s $2.5 trillion in assets are about equivalent to 18% of the U.S. GDP, and their assets are ten times what those of Citigroup were twenty years ago when it was the largest bank. Wouldn’t it be wonderful if banks emulated the transparency of the promissory note buying market, where parties are responsible for their own actions and finances, and can’t just hoist the risk on to someone else?
3. Households will, on average, be net savers and not dependent on government handouts, as half of them are today. To reach that goal, consumers need to not only be more financially astute but also have jobs to provide income and pay their bills. I would argue that while the government needs to considerably tighten regulations on the financial system, they need to back off on many other laws such as Obama’s healthcare reform actions. Private enterprise is infinitely more efficient and effective compared with government, which produces little and tends to focus mostly on creating large bureaucracies.
The three topics listed above wouldn’t solve all of the country’s ills but would provide one heck of a good start. Consumer confidence would go up, unemployment would go down, the stock market would be more stable and actually reflect the true value of the companies, and the U.S. could regain its throne as the world’s economic powerhouse. Right now, the country’s economy is headed toward a major implosion, and no real leaders have emerged who could right this ship.
REAL ESTATE NEWS FROM THE PAST WEEK
* New home sales are down nearly 80% from their peak in July 2005 (9/27/11 Wall St. Journal)
* Only Detroit and Washington D.C. registered year-over-year price gains among the 20-city Case Shiller Home Price Index (9/28/11 WSJ)
* The number of mortgage lenders declined for the fourth year in a row to 7923, compared to 8886 in 2006 (9/23/11 Housing Wire). Could this help owner financing and those wanting to create a promissory note?