Has the economy / market hit bottom?

by Millionaire Mommy Next Door on March 23, 2009

in Economy

I think it depends on what you believe got us into this economic crisis:

A)  If you believe the crisis was caused by government incompetence, then all you need to do is move out of the country to find relief.  (Oh yeah… but this is a global recession…)

B)  If you believe it was the banks that got us into this mess and that fixing the credit crunch is going to fix the problem, then we should expect a full economic recovery in a few short weeks. Why? Because the government is throwing a ton of money at banks to loosen the flow of credit.

C) If you believe that consumer debt caused this problem, then we will have to wait for the housing and stock market bubbles to fully deflate, for our economy to reset to an affordable level, and for consumers to free themselves from their smothering burden of debt.  Once these things play out, THEN consumers can AFFORD to spend again; THEN businesses can profit; THEN more jobs can be offered.

Personally, in the long run, I believe it’s mostly scenario C.

What about you — what do you think?

{ 33 comments… read them below or add one }

Colin March 23, 2009 at 10:51 pm

D) All of the above.

Government encouraged bad loans by the banks to consumers who’ve made bad choices. None of the three are innocent.

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Millionaire Mommy Next Door March 23, 2009 at 10:57 pm

Colin, I agree with you — none are innocent; it’s been a messy combination. So what do you think it’s gonna take to get out of this mess? Any thoughts?

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Stephanie O March 23, 2009 at 11:21 pm

I agree that lots of factors caused the mess, but I think you’re right that we’re not coming out of it until consumers have cleaned up their debts and can afford to spend. I look at it like we spent the last 5-10 years “pre-consuming” lots of stuff that we could only afford with debt. This was made possible in large part by the housing bubble (mortgage equity withdrawl) and easy credit. The effect was the bubble in the stock market as the economy grew based on the “pre-consumption.”

So now the economy has to contract while it all gets paid for, and there won’t be growth until the debt is cleaned up so people have actual money for consumption again.

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Millionaire Mommy Next Door March 23, 2009 at 11:34 pm

Stephanie, great way to put it.

Something else expected to come into play is inflation. Inflation is good for those in debt because yesterday’s borrowed dollar is cheaper to pay back with tomorrow’s inflated dollar. Since most consumers AND our government are in debt, inflation is being encouraged.

However, inflation is bad for savers. I find it frustrating that once again, we’re supporting a spending, borrowing culture.

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Bobby March 24, 2009 at 1:55 am

Personally, I was actually waiting to see what you thought and I’m glad to hear it what you think. I agree with your C answer, MMND. I believe things need to get worse (worse is different perception to some) before they get better. Otherwise, adding more fat to the fat causes a heart attack down the line.

Thanks for sharing your insight.

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Mike S March 24, 2009 at 6:11 am

I’ll agree with C. But C is too busy pointing their finger at A and B to realize they are the problem…

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Jan March 24, 2009 at 6:19 am

IMHO too many people are still hoping we’ll soon get back to “normal”. Normal being for them the unsustainable credit bubble we were in. The longer everyone stays in denial, the longer we’ll suffer. (just look at Japan who kept its zombie banks alive to save face)

Bankruptcies of the least competitive could free up market share that would allow the others to survive and prosper. This could prepare the economy for a fresh start. I personally think subsidizing the doomed is bad for everybody. But if I had to be re-elected I might not say that. ;-)

Do you have any expectations regarding deflation/inflation/hyperinflation?

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Jan March 24, 2009 at 6:25 am

To answer your question: “all of the above”.

- Government being foolish with credit (spending money they don’t have on wars abroad and on the “war on drugs”),
- Corrupt banks giving loans to people who can’t afford them and hiding the true risk of repackaged loans,
- Consumers spending money they have.

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MissM March 24, 2009 at 6:39 am

C. I believe that the gas prices skyrocketing here, was the wake up call / catalyst for the “average consumer.” A podcast I listen to pointed out that a basic knowledge of math would’ve protected all the consumers on those loans they couldn’t afford, but were hoping the banks would allow, as if the banks are looking out for the individuals, and not their bottom line. “Caveat Emptor”

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Christina March 24, 2009 at 8:59 am

I agree that it could be D (all of the above) but I too would choose C out of the three choices you gave. As a nation, we need to get out of the situation we have gotten ourselves into. I also think that if people are just hoping that we go back to the way things were after all this is “done” that is a major problem in my mind. We should be learning from this situation, getting back to the basics.

I know the market is deflating – I think I fear inflation more. Any thoughts about what is on the other side of this situation?!

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Millionaire Mommy Next Door March 24, 2009 at 10:15 am

Certainly, lax government oversight and greedy banks fueled the flame, but ultimately it boils down to the fact that the consumer has been spending more than they make. This could not continue forever.

My point is this: even if gov’t gets the banks lending again, WHO can afford to take on more debt???

Re: my thoughts on inflation/deflation: This one threatens to keep me up at night. As a saver, I will be “penalized” for my saving behavior if/when inflation hits. (Doesn’t this sound odd?) If the gov’t keeps printing money, my dollars’ value will erode. Debtors’ debts will also erode (which is good for those in debt!). So once again, debtors are encouraged. When will this unsustainable cycle stop?

But without enough jobs, how are debtors going to get the economy going again, especially when the cost of things inflates?

I think hyperinflation is a risk because of the amount of money the gov’t is injecting.

If deflation were allowed to happen, the strong businesses would be left standing while the others were weeded out. People who still had a job could afford to buy again because prices would fall. However, the ones who lost their jobs (because they worked for the weeded-out businesses) would be in trouble.

No easy answers here. In the end, I just hope big lessons are learned from this fiasco and that a more sustainable lifestyle evolves from it.

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fortuna March 24, 2009 at 10:45 am

I think if we see a recovery quickly we should be very suspicious that new tools are being created that will cause similar periods of volatility in the future – artificial expansion, quick contraction.

I agree all three are players in creating the situation, and the third is the one who has not yet been exposed at all for what it represents in the broader economy.

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Momma @ 3princessesmomma.com March 24, 2009 at 11:15 am

I think you’re right. There were a whole lot of wrong things, but it’s going to take the hard work and pain of the general population to right this ship… and it’s going to take a long time. However, I think it’s a lesson that had to be learned and I’m glad to have learned it…. even though having our income drop by 75% for 2 years sucked!

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Laura March 24, 2009 at 12:31 pm

I agree with (Mike S 03.24.09 at 6:11 am).

I wonder if the US Consumer may turn into a true Main Street Citizen after this fiasco?
Will Main Street change by Voting with their Dollars and start to buy more Locally?
Or will Main Street wait for Wall Street who pays the Pennsylvania Ave inaugurates & cronies via pork and campaign contributions to change?

If no one learns a thing – that is the real Crisis and personally I don’t think the US is hurting enough yet. Because the C’s are still blaming the A’s and B’s.

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Colin March 24, 2009 at 1:15 pm

Continuing my first post, I can’t help but see the answer is anything but the free market.

1) If banks are required to be fully responsible for each and every loan then it’s to their detriment to make bad decisions. Too many bad decisions and they go under. The market should be dictator of bank behavior.

2) An FDIC capital ratio of anything but 100% means the bank cannot repay all of the savings. A bank that cannot repay its savings should not be trusted by consumers. I wouldn’t, but the FDIC makes it “ok”. Really, it’s like the bank making debt for debt at the expense of the saver. If I put in $1000 then @ 10% they can make a $900 loan but until that loan is repaid then $900 of my dollars are in jeopardy. But the kicker is the bank gets the interest profit from the loan when they had little liability for it! (The double kicker is it’s perpetual since every loan payment coming in can be put out again as a loan.) I put money in a savings account to…save it, not as “venture capital” for a bank to risk. Tax payers should not, again, be on the hook for bad loan decisions: neither should savers.

3) Not even sure this requires explanation. The government should neither encourages nor discourage loans of any type. Don’t encourage banks to make loans to people who are getting mortgages beyond their ability to repay. See (1).

4) The baby boomers are “crying” that their retirement savings have gone way, way south because their dollars were in the stock market (I know my parents have). Doing that is fine if you’re 25 but dangerous if you’re 60. Stop encouraging people to save for retirement by using the stock market when they cannot tolerate the risk.

Really, the problem I see is people making bad decisions about debt. Everyone, except those debt-free. If I, as a bank, can make decisions knowing the government (read: tax payers) is effectively underwriting a lot of the risk then what’s to stop me from being extra risky?

I am a tax payer, not a honey pot for “emergency” funds to exploit.

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GoEverywhere Team March 24, 2009 at 1:17 pm

“…the C’s are still blaming the A’s and B’s.” Well put!

I think the economy can/will turn around when all of us consumers, whether we have made bad choices or not, stop looking for someone to blame the whole mess on and get busy finding a way to turn your personal situation around by being smart and adjusting our thinking and efforts to the current situation…instead of wishing it was different than it is.

In every recessionary period, the ticked off masses suffer while the smart and savvy few find a way to benefit from the “trouble”. So which side will we choose to be on.

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Curt March 24, 2009 at 4:32 pm

In short, there will be no sustainable recovery until the government gets out of the way. The unprecedented bailouts that we have seen over the last few months are only prolonging the situation and making it worse. Look at Japan for the last 15 years. They have been ‘stuck’ in a recession and continue to offer ‘bailouts’ and stimulus packages that do nothing because the underlying problem has not been dealt with.

No one likes to think about losing their jobs or loved ones losing their jobs. But if you work at Ford and the business has been run poorly then – like any other business – it needs to be liquidated. The market will reward companies who were run smartly. History has proven this time and time again.

Historians now agree that The New Deal was, overall, a failure. One of the reasons the Great Depression lasted as long as it did was because of intervention by the government – including the Smoot-Hawley Tariff Act. The current administration is trying to follow these same lines with NAFTA The New NEW Deal.

In short, we will feel more short term pain by letting the free market sort this mess out. But, while painful, the long term results and lessons learned (hopefully) would be worth it.

The politicians (all of them, perhaps minus someone like Ron Paul) are looking out for their own best interests. Can you pass the PORK?

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Michael March 25, 2009 at 2:36 am

There is only one cause to the problems we have today, and everything else is the symptom. The Federal Reserve is the engine behind what ails us (without Fed policies thee never could have been a gluttony of debt) and they will be responsible for continuing and deepening the crisis. For a good understanding of the genuine issues behind our current economic situation I would highly recommend Thomas Wood’s New York Times bestseller, Meltdown

Podcast with the author: http://tinyurl.com/crammn

Link to his book: http://tinyurl.com/d78cag

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Shanel Yang March 26, 2009 at 9:50 am

Fascinating discussion you’ve got going here, Jen! And, I really feel for you losing a big chunk of the value of your hard-earned savings now and quite likely in the future. If you could use some of your cash to take advantage of the government’s latest policies, that’s what I would do. Which, of course, requires keeping abreast of the latest tax laws, too. E.g., see “10 New Tax Laws You Need to Know” from Yahoo Finance at http://finance.yahoo.com/news/10-new-tax-laws-you-need-to-brn-14221646.html

Finally, Jen, I linked to your blog from my blog today as part of a meme. One of the rules is I let you know. Now, you know! ; )

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Anon March 26, 2009 at 11:42 am

I think that it is C. I remember in the 1970′s a girlfriend from New York told me that her grandfather paid cash for his home. Then, early 1900′s, cash was required. After WWII someone began marketing homes in the suburbs to the solders returning from the war. But guess what–they didn’t have the cash. So was born the 10 and 20 year mortgages. As homes became more expensive and consumers wanted not only a new home but car, furniture and to take that summer vacation, the 30 year mortgage was born. In the 1980′s someone came up with the 5 year term mortgage, then the interest only mortgage. These mortgages did not present a big problem because they were marketed to top salaried executives whose salary increased in 5 years and/or was relocated and was able to sales their home. And if their mortgages increased after that 5 year period it was only by $100 to $200 and not by $700 to $1,800 experienced in the past year. The homeowner was also fully employed. In the 1990′s builders decided that more people needed larger and more expensive homes. So they turned to lenders willing to sell term and interest only mortgages. But now the homeowners were not top executive whose salaries increased each year or people very knowledgeable of the type of mortgages they just committed to. Some lenders used only bank statements, to show proof of income and some falsified income for their bowers. The practice of using unorthodox mortgages and job loses has caused the crises we are in today. My opinion.

I enjoy your blogs.

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Joe March 26, 2009 at 7:57 pm

@Curt
I believe the Smoot-Hawley Tariff Act rose tariffs, whereas NAFTA is a free trade agreement that lowers them. And I don’t believe that there is universal or even near universal acceptance among historians that the New Deal was a failure, of which Smoot-Hawley was not a part.

Joe

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Curt March 27, 2009 at 6:42 am

Joe,

Didn’t edit my comment so I realize how it could be confusing.

I realize what NAFTA is. Almost everyone agrees (economists with any objectivity) that NAFTA has been a good thing. Obama has said and already has taken action that would dismantle part of NAFTA. He is pandering to his large Union base.

In fact, in the recently passed earmarks bill the Teamsters Union got in a provision making sure that 98 Mexican trucks would not operate in America. Even though the US laws specifically state they can.

This is very similar to what happened with Smoot-Hawley.

You can say what you want about economists agreeing on something (I did). But anytime you raise tariffs, other countries also raise their tariffs in retaliation. The long term effect is more expensive goods for you and me. This is not opinion, this is fact. If there are economist’s who think that is a good thing than they haven’t read their history books.

FDR’s own treasury secretary admitted that the New Deal was a failure. You can read more here:
http://fee.org/nff/three-myths-of-the-great-depression/

In short, the Great Depression was a result of our economic policies at that time. We have not learned our lesson. Our government (both Repub/Demos) will continue down the same road of pork spending in their own best interest and pandering to special interest groups. In two or four years they’ll spoonfeed you and I what we want to hear. Get elected. And then back to business as usual.

I hope the American people speak loudly before it’s too late.

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Deanna Cottrell March 28, 2009 at 2:06 pm

I believe every American needs to stand up and take personal responsibility for this mess we are in. The government contributed for sure, but we elected the idiots who made the bad decisions. We need to start by holding our politicians accountable for every vote they make. Then, we need to honor our own financial obiligations, if it means we have to flip burgers, wash dishes, or scrub floors to do so. I am sick of this lazy generation. Most of us haven’t touched the surface when it comes to knowing what smart/hard work will earn us. We have become entertainment whores and have neglected our own “vineyards” for far too long. We need to get back to the basics of management and discipline. That is our only hope.

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Chad @ Sentient Money April 2, 2009 at 6:28 am

Responsibility:
A) 5%
B) 15-20%
C) 75-80 %

This downturn is not just because of bad mortgages. If it was, it would not be so pervasive. We have lived off of future earnings too long (credit) in every aspect of our lives and we are paying for it.

The only solution is time. We, as a society, have to pay down debts we incurred for stupid things like eating out, a 3rd iPod, etc., before the economy will turn positive. We haven’t finished doing that yet. It’s time and reasonable financial prinicipals that will get us out of this mess…no extremes.

@ Jan & Curt
Everyone always brings up the Japanese economy of the last 15 years, as a comparison to what is going on here at this time. It is in apt comparison, but everyone only brings up half of Japan’s problem, as the whole problem. Everyone says how foolish Japan is to allow government stimulus packages and support of bankrupt companies, and most of this is true. The other half of the problem is consumer spending. The Japanese have an abnormally high savings rate (it has dropped recently, which is interesting), which has prevented a full recovery. I am by no means advocating the foolish negative savings rate we had, but there is a middle ground between the Japanese and American savings rates that seems to support a strong economy without it overheating. We are slowly getting back to that sweet spot, but let’s hope we don’t overshoot it. Of course, I save way more than the sweet spot, so I’m not helping.

Bottom or not? I do believe we are close to a bottom in the market. Of course, that just means I don’t think we are going to see another 50% drop. I do think we will retest the lows near DOW 6000 again, and we might see one more really scary drop into the 5000s. This doesn’t mean the economy will recover soon, as the market is generally well ahead of really good economic numbers.

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Curt April 2, 2009 at 7:28 am

Chad,

I respect your opinion on thrift. But, unfortunately, it holds no water. That’s the same argument that the Feds are using. The Feds are Keynesians.

With more savings comes more capital. The problem is the banks are now becoming nationalized which is essentially thrusting you and I into Fascism.

Smart investors know we have not hit bottom yet. I have no idea when we will. When we do and when they feel comfortable the capital will be there to invest.

Consumers and investors are scared. The governments actions are making everyone more scared. So we save more. When a recovery starts (if it does) investing will take off and the banks will have the money to lend prudently.

But with the government stubbornly intervening it is highly likely that massive inflation is coming our way as well as more and more government intrusion. This is not good for investors – and we all know it. So we wait on the sidelines to see what happens.

Savings is good. Getting the government out of Americans way is even better. Couple those two and things will take off.

I don’t see that happening anytime soon.

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Chad @ Sentient Money April 2, 2009 at 10:13 am

Curt,
My arguement holds plenty of water, just not with you, which is cool. I by no means am on the Fed’s side of the arguement. At no point did I laud the actions they have taken. Nor do I think they should have saved all these companies. However, heaping the blame on government is easy and a time honored practice in this country since the 70′s. So, yes, I do think they are making mistakes, but by no means do I place all of the blame on them. If in your eyes that puts me on the government’s side, so be it.

Also, based on your reasoning high savings rates eventually become capital for business (I don’t entirely disagree with this). This would suggest that after 15 years of significantly higher than historical savings rates Japan should be booming. It’s not, so you blame the stagnate economy entirely on their government? I’m not saying they are blameless, but entirely? Highly unlikely. As with everything there is a middle ground somewhere that works best. Yes, we need to save to have capital to invest. However, if we save so much we don’t spend any money, why would anyone want to give their capital up for an investment idea? They wouldn’t.

Plus, if high inflation is coming, and I agree, it is a possibility, traditional savings will be foolish. Any traditional savings in a high inflation era will be destroyed, so either you have to find investments that would weather this storm (there are a few, but most regular people don’t play in these areas) or you buy something because it will be much more expensive in the future.

To be clear I’m an advocate of saving a lot, but I’m hoping most of America falls in the 7-10% savings range.

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Curt April 2, 2009 at 10:44 am

Chad,

I appreciate your arguments but you are basing your disagreement with me on me blaming it all on the government-which I have not done.

I have heaped blame on them because of their interventionist tactics.

But blame falls on greedy and misguided consumers as well as unethical and greedy corporate behavior.

Those things happen and will correct themselves, but not until the government gets out of the way. This is the crux of the problem in Japan.

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Chad @ Sentient Money April 3, 2009 at 8:30 am

“Those things happen and will correct themselves, but not until the government gets out of the way. This is the crux of the problem in Japan.”

I agree you are putting blame for the creation of the problem on forces other than the government, but you are saying the government is the entire cause behind the continuation of the problem. Thus, the government gets all the blame right now….thus, you are blaming whether this crisis ends or not, all on the government. They are definitely a problem, though the real problem is time. No matter what the government does or doesn’t do, time is ultimate cure. Yes, the government’s reactions probably increased the time necessary to get through this, but their actions are by no means the only variable in the length of this economic downturn.

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Curt April 3, 2009 at 9:35 am

Chad,

One more try.

You said,

“but you are saying the government is the ENTIRE (emphasis mine) cause behind the continuation of the problem. Thus, the government gets ALL (emphasis mine) the blame right now….thus, you are blaming whether this crisis ends or not, all on the government.”

That is not what I said. Nor is it what you even quoted me as saying.

You quoted me as saying (which is correct):
“Those things happen and will correct themselves, but not until the government gets out of the way. This is the CRUX (emphasis mine) of the problem in Japan.”

Websters defines CRUX: a main or central feature (as of an argument). It does not say the ONLY feature or figure. But a main one. There are other players. Which is what I have continually said.

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Marya April 4, 2009 at 3:39 pm

I’m no economist but your item (C) and Stephanie’s observation makes the most sense. I think the country as we remember it is going to be a distant memory for a long time while this works out.

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Chad @ Sentient Money April 7, 2009 at 10:11 am

@ Curt
We will have to agree to disagree then, because I can’t see how anyone can read those two sentences differently:

“Those things happen and will correct themselves, but not until the government gets out of the way. This is the crux of the problem in Japan.”

Sure the word “crux” indicates other variables, but your first sentence clearly states they don’t matter until the government gets out of the way. Thus, the other variables don’t matter per your argument.

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mysticaltyger April 17, 2009 at 6:54 pm

I also think it’s “all of the above”. Nobody is innocent in this. The accumulation of debt by consumers, the government, and businesses has been building for decades. If we want a good economy for the long run, ALL 3 sectors are going to have to get debt levels down significantly from where they are now. And that’s going to take years, not months.

Of course, if we go for the usual quick fix crap like we have been since the 1970s then things may improve temporarly only to come crashing down again in a year or two.

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Jan April 19, 2009 at 7:29 am

From a comment by “Jimmy Havok” on a different blog: “Elizabeth Warren, chair of the Congressional Oversight Panel on TARP, pointed out that banking crises came almost like clockwork until the regulatory structures following the Great Depression were put into place, and that every unraveling of regulation that has followed has led to another crisis.”

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