Recovery is Not

There is a prevailing attitude in the press that we are in economic recovery, but I would be hesitant to trust that. Off the top of my head I can see a couple of reasons we seem to be in recovery, but they are not fundamentally sound.

One is that government bailout money and incentives have temporarily supported the housing, auto, and stock markets as well as the banking sector. Much of the banking system is in a “zombie” state, meaning it would be bankrupt, dead and gone if the government wasn’t supporting it with tax dollars. All this bailout money went to the banks so they could continue operating and lending, but they have hoarded the money instead of lending and made a lot of investments for themselves in the stock market. In this way the stock market has been artificially supported and is riding much higher than fundamentals would have it. The housing market has been supported in too many ways to count. The government has been the sole investor in mortgage backed securities since the crisis hit full force in 2007. They’ve been buying a bunch of junk assets way over market price (or WE have, actually, as tax payers). They’ve been subsidizing home buying with tax credits and wasting a whole bunch of money on foreclosure prevention that is totally failing and in my opinion unethical to start with.

But the time has come where the money well is running dry. The mortgage buying scheme has ended. The tax credit has ended. Unemployment insurance extensions are ending. The efforts to stop foreclosures have all failed and been a complete waste. Citizens are growing angry. They no longer want to support all this nonsense. Renters and responsible homeowners are tired of paying for other people’s financial folly. The middle class grows poorer and the poor grow desperate. The powers that be are going to find themselves having a harder time getting support for this sort of aid to the irresponsible. Traditional economists say we need more bailout money, that we learned from The Great Depression we need to keep spending. Perhaps this would have been a viable plan if we’d invested those tax dollars more wisely. In any case, I doubt it will continue because people are becoming distressed about it.

Everyone’s excited that we’re in a recovery and consumer sentiment is up. Spending has increased. Well, I hate to be the bearer of bad news (no, actually I love it- the truth sets you free!), but there is no fundamental support for this sentiment. Unemployment continues, property prices are still moving downward, the stock market is creeping down as well and most importantly there has been absolutely no increase in household income. So where is the money coming from to support this spending? For one thing, people have stopped saving again (after a brief move out of negative territory in the wake of the crisis of 2007). For another, they have stopped paying their mortgages en mass. They are living in their houses but not paying mortgages, insurance, or rent. That’s a pool of money that adds up quickly, and as fast as it does people are spending it. Banks are so overwhelmed with the backlog of distressed property on their hands they are taking up to two years or longer to process foreclosures and evict the squatters. That’s a lot of spare cash redirected into the marketplace. But of course it won’t last forever.

Don’t believe the hype. Be prepared for a second leg down. Banks are beginning to miss thier TARP payments and many are at risk of failure. The FDIC is in the red. California is definitely not out of the woods. The situation here is extreme. There will be more cuts in the public sector. There will be a second wave of foreclosures in the mid to upper tier housing markets. There is even a possibility that Los Angeles may be forced to file for bankruptcy. That said, I leave you with words of wisdom from my old fictional film friends and spiritual advisers, Bill and Ted,

“Be excellent to each other.”