The talk of the town, every village and the entire country is about recession and it is obvious that everyone fears it as a bad thing. The speaker of the House of Representatives, Nancy Peolosi, wouldn't even utter the word, let alone the presence or absence of it: “I don't like to use the word …” But a recession is an economic phenomenon-not a Frankenstein or a Martian that will physically obliterate us if we say the magic word-just hard times for the wallet and hard times at work.
Curse me: I, for one, believe a severe recession is a good thing and entirely timely.
Societies' addiction to free money and complacency is worse and difficult to cure than an individual's addiction to psychotropic substances. The fact that lowered interest rates sparked a lending binge to credit unworthy customers who staged themselves in a house simply to speculate, is in itself an unwanted activity requiring correction. Economists call it “mean reversion,” a fancy term for getting back to normal levels. Sure, house values go up and go down but historically houses were meant as places to live and raise a family and not for the purpose of speculating. If only those people who were really interested in living for a longer term bought houses in the past years, would house prices have sky rocketed-50% increases in some cities in the past five years. Is the influx of speculators alone the cause of the bubble? Mostly, but we all were speculating one way or another. Full-blown speculators are not the only ones causing the problem: it includes those that took a loan on the house assuming its inflated value to sustain into eternity.
It is even those of us that upped the standard of our individual lives deluded by the good times of those who themselves were in a delusion. Banks that lent-and those that continued to keep these loans on their own books-fattened their profits with fees, higher returns and were banking on resetting rates that ticked like a time bomb. Banks are suffering their own comeuppance. The economic downtrend cannot be blamed singularly on sub prime borrowers, though they played a major causal and precipitating role. If your bearings were straight and your spending was within limits, this recession will pass by you with envy.
The Consumer Sentiment survey from the University of Michigan reported sentiment levels at 70.8, compared to historic highs of 112 at the peak of dot-com bubble. We are now back at the 1993 levels when Bill Clinton was running against George Bush Sr. largely around the “It's the economy stupid” platform. The era of historically low interest rates beginning in 2002 combined with an extended period of low inflation and overall unemployment rates at 4% have lulled our economic senses into a deep coma making us into consumptive maniacs. Consumption itself may not be bad-till we reach the dire straits predicted by Thomas Malthus-but addictive consumption aided by an as-yet unknown future income (debt) has a questionable certainty. To put this debt in perspective here are a few numbers: Americans owe a trillion dollars in debt to credit card companies. Even if all 320 million resident Americans had a credit card-which is impossible considering those under 18, illegal residents, convicted and serving criminals, and a swathe of credit unworthy cannot get a credit card- the credit card debt per individual calculates to about $3,000. The real figure is probably in the vicinity of $10,000 per individual considering that many of us have more than one credit card. Some of it may be easy money borrowed at lower interest rates and some of it may be driven by necessary spend. Considering the earned median income is at $35,000, a third of an average Joe's annual income is supplemented simply as I.O.U.s or will pay tomorrow.
For banks, the end of the free money era will give birth to more scrutiny era, which is a good thing: why should we, small time depositors, pay the price of a run on the bank because it did not scrutinize borrowers thoroughly? Banks' profits will keep in line with general economic growth trends, shorn of a wistful era of high yields. Lenders from credit card companies to those that finance private equity buyouts will be thoughtful and cautious as they mow the borrower's capacity with a fine toothcomb. The mystic art of leveraging-speculating with borrowed money-will be less employed.
A recession allied by loss of jobs will test not only the sustainability of our earned income but equally compel each one of us to question the rationale of presently splurging the unknown future income. Thus an intense dose of an economic purge by way of a recession will likely render the same benefits of a digestive purge after a binge of beer and pizza served via plastics-on a plastic plate and paid through your plastic credit card. And probably individuals, banks and companies will start the next cycle more thoughtfully and experientially wise.
