Tuesday, September 30, 2008

Economic Recessions

My advisers told me that if the congress fails to implement an economic recovery plan that they thought the stock market could fall by as much as 1/3 or more of its current value. That means the Dow could fall to somewhere in the 7,000's. They thought other areas of the economy would be dramatically affected as uncertainty and lack of credit spread. They thought it would last maybe 5 years or so and all this would happen very quickly.

I was interested in how many recessions we've had in the United States and how long they lasted. I found a list at good old Wikipedia.

I count 17 entries including panics, recessions, and depressions. I'm going to rewrite the list from Wiki and note that the article states that those times before 1900 are estimates:

  1. 1797 - 3 years - Panic
  2. 1807 - 7 years - Depression
  3. 1819 - 5 years - Panic
  4. 1837 - 6 years - Panic
  5. 1857 - 3 years - Panic
  6. 1873 - 6 years - Panic
  7. 1873 - 23 years <<+++++ Long Depression (yikes!)
  8. 1893 - 3 years - Panic
  9. 1907 - 1 year - Panic
  10. 1918 - 3 years - Recession
  11. 1929 - 10 years <<+++++ Great Depression
  12. 1953 - 1 year - Recession
  13. 1957 - 1 year - Recession
  14. 1973 - 2 years - Oil Crisis
  15. 1980 - 2 years - Recession
  16. 1990 - 1 year - Recession
  17. 2001 - 2 years - Recession
So of these 17 I have lived through 6. I feel like I know a lot about the Great Depression because it was so central to my parents' lives and I heard them talk so much about it. I always hoped I would never see anything as severe as the Great Depression.

Here in Oklahoma in the 1980's we experienced a much more severe crisis than the rest of the country when Penn Square Bank failed and then the oil boom burst followed by our own real estate bubble exploding. It was a very hard time here. But my dad said it was nothing like the Great Depression.

During all these downturns I was in business myself or my father was in business or we both were in business together. It really hurts when you have to cut expenses and lay off people who have become your friends because you simply have no work for them to do. I did that myself many times and it was so hard on me. I felt responsible for their families nearly as much or more as my own. Often we would cut our own pay to try to keep from laying off people. After my last time I told myself that I just never wanted to again shoulder that responsibility.

Dad many times told me about the Great Depression days when he went to work for a local company as a posting machine clerk. Something that affected him greatly was seeing every morning more than 100 men gather at the gate and the foreman would choose 4 or 5 for that day and all those others would be turned away. Dad himself worked 3 or 4 jobs every day just to survive. He typed menus and washed dishes and whatever else he could find. He didn't find it particularly unusual because everyone else was doing the same thing. He recalled in vivid detail the soup kitchens of that time.

The unemployment rate during the Great Depression nationally was nearly 25% but my dad said it was really higher than that. The highest unemployment I've seen in my life so far was just under 10% in the 1980's according to official records. But I think it was really higher.

I think we have an opportunity to lessen the impact of this downturn. I so hope our leaders rise to the occasion. If they do it means going against popular opinion. For a good many it probably means jeopardizing political careers and ambitions.

Leadership is sadly lacking.

One of the Presidential candidates tried to lead and the other did absolutely nothing. I admit I was shocked by Mr. Obama's cavalier attitude and lack of appreciation of the seriousness of this crisis. Worse is what it portends for future crises as he appears to be the most likely choice for President.

Mr. McCain at least tried. It is reported he was able to sway some Republicans but the Democrats were unyielding. That in itself bodes badly for any kind of reach-across-the-aisle bipartisanship occurring in the next administration. At this point it does seem likely that Democrats will be in control of the Whitehouse and the Congress. That almost certainly means there will be a further retraction in the free economy and an expansion of the government.

The congressional leaders were nearly all abysmal failures as leaders. The Democrats were unable to pass the measure on their own but showed no ability at all to attract Republicans to the cause. Speaker Pelosi seemed to go out of her way to alienate and divide. The Republican leaders could not deliver their own members.

The Bush administration in my view probably performed the best of any of these groups. In particular I thought Henry Paulson reacted quickly and decisively with a plan that I think would have worked pretty well and with a minimum exposure to risk for the people's resources. And it nearly was passed. But nearly doesn't count much.

It was sad that the effort was defeated for many reasons. One certainly was the startling failure of leadership during a significant crisis. Even worse was the loss of millions of dollars in the stock market that ultimately will not be regained. For very young people it matters not as much because they have more time for recovery. But for many of us it means a great deal because we are at an age that simply does not allow time for recovery. That's especially true if the recovery takes a while and that seems very likely at this point.

It really does not surprise me that so many ordinary people are against the plan that was proposed. There is abysmal, widespread ignorance about our system.

Credit was important in the Great Depression days. But now it is even more so. Hardly anyone buys a car or a house or a building or college education or appliances or much of anything else for cash. If credit is not available so many things just become reduced or eliminated. Credit will become harder and harder to secure if something remains undone.

One of the problems is that assets like homes and buildings have a market value that is not necessarily the same as their cost or even their replacement. We are all accustomed to market prices going up and our homes and buildings being worth more than what we paid. But those things can go the other way, too. And that's what has happened now.

Partly at least this is exacerbated now because of the Sarbanes-Oxley legislation that was passed in 2002 largely in response to the Enron and other corporate failures. It required that companies value assets at market. Unexpected consequences.

Some mortgages, admittedly very few, will not be repaid according to the terms agreed. But knowing which ones is very difficult for various reasons. One is that they've been packaged into securities. So the market for them has just dried up. But not because they have no value but because the value is hard to determine.

That does not mean they are worthless but only that they cannot be immediately sold. And if you are a bank or any other company for that matter then you have to report these mortgages at market value and that generally means you have less worth than before. And that means you can lend less money than before.

If you are a bank or other lender then you still need to lend because that's your business. But you can raise the criteria used to select those to whom money will be lent. That weeds out people who are exactly the ones who need credit the most. It is likely that even credit card limits will be reduced.

Maybe the company down the street can't get a loan to build a new building. Or they can't hire more employees and buy more equipment. Or someone can't go to college now or someone else can't buy a car and then lose a badly needed job. Or a new sewer plant has to be postponed by a city because bonds can't be sold. And on and on. All that ripples right on through the economy. Add a little panic and you have a full fledged crisis.

Here in Oklahoma we went through some of this in the 1980's. Suddenly homes and buildings lost 1/3 or more of their value. It happened to me in fact in the late 1980's. There were some people who bought some of those inexpensive properties and waited patiently. The same thing happened in the Great Depression. Those folks eventually made a lot of money.

Yesterday millions of people were really hurt. I am so amazed at the cavalier attitude that people seem to have about this. I've heard some people say it will all come back. Maybe but it will take a while. And there were people yesterday that will not see anything return.

It will be very interesting to see what happens over the next few days.


Lori1955 said...

I think what scares most people about the bail out is that we have already lost so much and now will undoubtly be asked to give more in order to fund this. But unless someone has a better idea, these politicians are going to have to vote this through.

The way things are looking as far as the elections go, the next administration scares the heck out of me. All I can think of is May God have mercy on America.

~Betsy said...

It's a matter of going back to basics. Young folks don't think we have anything to worry about, yet those of us who have been around a little while remember the energy crisis in the 70's and the long gas lines.

I vividly remember my parents struggling desperately to pay their bills when I was growing up. In fact, I remember a car my dad had that he was paying 19.8% interest on the loan! It was the only loan he could get and he needed a car.

But hey - "they'll call me when they need me".