Many so-called financial “experts” are comparing
our present financial conditions to the Great Depression. And why shouldn’t
they? With recent headlines like No
Signs of Recovery in Jobs Report, Weak Retail and Price Data Dim Hopes of Quick Recovery, and
countless others hourly bombarding the American people, it’s hard to keep any
perspective beyond that of the media’s doom and gloom. One of the first things
I learned in my Journalism 101 class many years ago is simply this: Bad news
sells, and good news is no news at all. But I think if we could all take
a deep breath or two and compare reality to truth, we might gain a little perspective on things.
One of the things I learned in my
Freshman Econ class those same long years ago is that an economic depression is
simply any economic downturn where real Gross Domestic Product (GDP)
declines by more than 10 percent. Applying this method, then the Great
Depression of the 1930s can be easily be seen as two separate events: an
incredibly severe depression lasting from August 1929 to March 1933 where real
GDP declined by almost 33 percent, a period of recovery, then another less
severe depression of 1937-38 where real GDP declined by 18.2 percent. The U.S. hasn’t had anything even close to a depression since the post-WWII period. The worst recession in the last 60 years was from November 1973 to March 1975, where real GDP fell by 4.9 percent.
In fact, since 1970 the GDP has
only fallen more than one percent once, and that was in 1982 when it fell 1.9
percent. According to the U.S. Department of Commerce, the GDP decreased by
only 0.5 percent in the third quarter of 2008 – one-half of one percent. While
the decrease in the fourth quarter of 2008 was significantly higher – 5.6
percent – the newspapers had a field day with headlines screaming, “U.S. GDP
Shows Biggest Drop in 27 Years,” planting even more seeds of fear and doubt. As
the media portray this decline as a harbinger of impending doom, I think it is
only fair to remind everyone, as stated in the above paragraph, the GDP
plummeted in the early 1930s by almost 33 percent.
In the four years from 1929
through 1933, about 10,000 out of the 25,000 banks in the United States
disappeared (source: Business and Media Institute). Take. A. Breath. It’s not
even close to anything like that today. Currently our nation supports
approximately 8,400 banking institutions. The recently updated Federal Deposit
Insurance Corporation (FDIC) Failed Bank
List shows a total of 75 bank closings between October 13, 2000 and April 10, 2009. But please keep in mind there was no FDIC during the Great Depression, so there were no federally insured deposits, which resulted in the chaotic and panic-driven run on the banks as depositors rushed to get their money out before the banks folded. Today,
however, the FDIC guarantee is up to $250,000 per account. That means there
will be no run on the banks as there was during the Great Depression.
The media have been relentless in their
focus on home foreclosures. Mortgage foreclosure rates have risen. But the
truth of this economic matter is that the buying frenzy between 2000 and 2005
caused home prices to more than double. But you don’t need me to remind you
that incomes surely didn’t parallel this trend. At the same time, financial
institutions made money more accessible to buyers by easing mortgage
qualification regulations. And the simple truth is that careless lending
practices can be blamed for many of the foreclosures we are seeing today. The
mortgage foreclosure rate during the Great Depression was approximately 50
percent. In August of 2008, the national foreclosure rate was 4.4 percent. It
may be a little higher now, but it’s not even close to what it was in the 1930s. The
truth is that the U.S. has been long overdue for a major adjustment
from the unsound lending practices of the last few decades. For example,
illegal aliens and others who had no way to pay back their loans were receiving
subprime home loans with government guarantees. That’s beyond bad business – it’s
wrong… but when has ethics ever gotten in the way of business in America?
In fact, hang with me as we look a
little closer at this development, because this is really the heart of the
matter. A wide array of evidence has long pointed toward minorities accounting
for a disproportionate number of the defaulted subprime mortgage losses that
set off the economic crash. This would hardly be surprising since the
government pushed hard to increase lending to minorities of marginal creditworthiness
in the name of increasing minority homeownership. President Clinton, who said
that he wanted his legacy to be that everyone in America would be able to afford a home,
teamed up with leftist groups like BHO’s partners-in-crime at ACORN to push for
more lending to minorities. According to the Federal Home Mortgage
Disclosure Act database, minorities
got half the subprime cash (for home purchases and refinancings) handed out in
the boom years of 2004-2007.
Those were GWB years, but pay that
no mind. There are many who suspect he was only looking to convert said
minorities into loyal Republican voters. And of course some critics blame
President Bush simply because he supported broadening homeownership. But
President Bush’s goal was for people to own homes they could afford, not ones made accessible by reckless lenders who
off-loaded their risk to Fannie and Freddie. The housing meltdown is largely a
story of greed and irresponsibility made possible by government, i.e.
congressional, privilege. The reality is if Democrats had granted the Bush
administration the regulatory powers it sought, the housing crisis wouldn’t be
nearly as severe and the economy as a whole would be better off.
For a little more perspective on
things, consider this: It took Fannie and Freddie over three decades to acquire
$2 trillion in mortgages and mortgage-backed securities. Together, they held
$2.1 trillion in 2000. By 2005, the two government-sponsored enterprises (GSEs)
held $4 trillion, up a spectacular 92 percent in just five years. By 2008, they’d
grown another 24 percent, to nearly $5 trillion – and between them they held
almost half of all American mortgages.
The more President Bush pushed for
reform, the more paper Fannie and Freddie bought. Peter Wallison of the
American Enterprise Institute and Charles Calomiris of the Columbia Business School suggest $1
trillion of this debt was subprime and “liar loans,” almost all purchased
between 2005 and 2007. This build-up in funny money made it possible for banks
to lend recklessly on a substantial scale.
But I digress. From 1999 to 2006, mortgage
dollars (prime and subprime) for home purchases loaned to Hispanics went up a
whopping 691 percent and 397 percent for blacks (but only 218 percent for
Asians and about 100 percent for whites). As fate would have it, a sizable
majority of defaulted dollars lost are in just four heavily Hispanic states: California, Arizona, Nevada, and Florida. But I guess that’s a subject for
another day.
As much fun as all this stuff is
to write about, what we really need to consider is, What has all this led to?
Let’s start by considering this:
The 1981-82 recession last lasted 16 months and was followed by an explosive
recovery thanks
largely to the Reagan tax cuts (even though they were slowly
implemented). The current downturn, according to the National Bureau of
Economic Research, started in December 2007. Is the current recession
ending? I don’t know. Haven’t got a clue. But now that we no longer have GWB to
kick around, let’s take a quick look at where BHO is on things.
It will be his decision to
forego deep and permanent new tax cuts, his decision to not extend the
Bush tax cuts, his decision on how to spend the remaining $350 billion in TARP
money, his decision to quasi-nationalize healthcare, his decision to push
a cap-and-trade carbon emission program, and his decision to spend hundreds of
billions on a “green” industrial policy. From all appearances, it even looks to
be his decision to reunionize the American labor force, since he’s pretty much
in the unions’ collective back pocket now.
If the White House was under the
impression that what the capital markets need to recover was a full-out public
relations exercise from Obama, Bernanke and Summers, as witnessed the other day,
said White House was sadly mistaken. Case in point: After these leaders addressed
the nation, the U.S.< equity market dropped over -1 percent. On a day that started badly, and then got worse, not even extensive pro-BHO TV coverage of the A-Team was able to turn things around.
Here’s the problem: The public is
clamoring for an end to TARP and the bailout mania. That’s a key message coming
from this week’s tea parties that have cropped up spontaneously around the
country. This is evolving into a real grassroots uprising against rising taxes,
TARP, and all the federal bailouts—and the trillions of dollars of deficits and
debt being used for financing.
If BHO and his merry band of
cohorts ignore this unrest, it will be a guaranteed one-term administration,
which means it will do as much damage as it can in the next 31/2
years. So the
net widens. While commercial banks of all sizes are increasingly profitable and
are willing and able to pay
back their TARP money, the Treasury Department is now proposing to extend TARP
funds to life-insurance companies, most of which are in absolutely no danger of
failing. No one has proven that life-insurance companies constitute true
systemic risk to the financial system. This is nothing but a financial mugging
“bailout” and I use the term with a certain amount of creative license since
none of these insurers has failed. And for those several that are in danger, I
wonder if a simple bankruptcy proceeding might be more appropriate than additional
taxpayer money.
It comes down to this: We are
already on the hook for the banks, GM and Chrysler, and don’t forget we’re getting
hosed for guaranteed government-backed GM warranties. And the banks themselves seem
to be preparing to go to war against an administration that wants
to maintain control over the big-bank sector to prevent the banks from
paying off TARP. It’s as if BHO and Friends are saying, “Screw the taxpayers. We’re
Democrats. This is about government control.”
Coming up next: What does all this mean for the faith-based nonprofit sector?
Cartoon by Steve Kelley, New Orleans Times-Picayune.
Used with permission.
Thanks, Steve!
