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04/09/2009
Not Quite as Dark
By
David B. Kantor
It is now generally agreed that we are in the worst bear market/economic crisis since at least the 1930s. The big problem is that it’s, well, a big problem. Our problems far exceed the 1990s-era Japanese economic crisis, triggered by a collapse in real estate prices and widespread bank failures (sound familiar?). While the Japanese solution was not terribly effective, and while we may learn from their example, it’s not clear that our solutions will be any easier or any quicker, as our economic problems seem more profound.
The government is trying hard to fix the banking system. Without a working banking system, we have no credit and without credit, we have no economy. Fixing it will not be easy, and it will not be cheap. Beyond the banks, we have a number of other serious problems: residential and commercial real estate, credit card defaults, and the federal budget deficit, just for starters. Any one of these “secondary” problems is potentially as serious as the savings and loan “crisis” of the early 1990s…at the time, viewed as the worst financial crisis in decades.
Let’s not fool ourselves. There can be no certainty that anything the government is doing will “work”, if by work, one means restoring the economy to its previous health. At best, the unprecedented measures now being undertaken may prevent the banking system and economy from collapsing. The people in the administration are smart, hard working and trying to impose what they believe to be the right policies. That does not mean they will always do the right thing; since no one really knows what the “right thing” is, that should not come as a surprise. It is distasteful, even maddening, to contemplate rewards to the undeserving at taxpayer expense. However, the alternative…punishing every corporate executive and every borrower and every lender that exhibited poor judgment …means that the virtuous among us wrap themselves in self-congratulation while the economy goes down the drain. Cutting off your nose to spite your face, my mother used to call it.
Even if and when the banking sector gets back to business, the economic landscape of America will change in a profound way. For too long, America’s economy has been fueled by a manic buying orgy fueled by borrowings against home equity and credit cards. Those days are over. The new American economy will be more sober, more restrained and more sustainable. What this means for long-term profitability of banking and industry is hopefully encouraging.
No matter how the current crisis is resolved, there will be a great deal of uncertainty about the investment and economic outlook. There will be days of euphoria, (March 23rd) when the stock market cheered the new Geithner “toxic asset” plan. There will be days of despair, as when the government sacked the CEO of General Motors (March 30th).
March, 2009, with the best monthly stock market increase, 7.7% since 2002, gives some indication of a brighter day ahead. The nation is now into its 17th recessionary month, a long time. We are convinced better days lie ahead for both the economy and the stock market.
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