Real Estate Blog

Current Economic Crisis
October 23rd, 2008 8:21 AM

The following is an excerpt from Bedlam Asset Management which I think explains the progress of our current economic state. 

The eye of the storm has just passed over

As long ago as 1999, a long and thoughtful front page article in the New York Times highlighted the dangers of the world's two largest mortgage underwriters, Fannie Mae and Freddie Mac. They had just been blessed by the regulators, Congress and President Clinton to tear up the risk book: to offer large and easy mortgage terms to those Americans who could never realistically hope to own a home. This relaxation of prudent lending rules was soon widely imitated, particularly in economies with a property owning mentality. The consequence was a global economic growth chimera, accelerated by the reduction of the dead hand of bureaucracy in third world countries such as China and India. This allowed them to achieve far better growth rates.

From 1999 onwards the hurricane started to build, moving ever closer to the world's financial system, obvious even to the man in the street. Yet the near-term gains were so beneficial to individuals and government budgets that every Finance Minister threw prudence down the well. Chancellors even became popular. Bizarrely, the only people who did not recognize the inevitable were the regulators, senior bankers and fund managers. In 2007, the storm ripped into the banks. There was a brief calm as the eye came overhead, within which complete regulatory and political paralysis developed, even as institution after institution imploded. Now the eye is passing; we're back into the other side of the storm. Initially the winds will be extreme, but each crisis will be a little less than the one before. It is the best possible outcome, for the alternative was an immediate vertical drop into a deep economic Depression. This would have made the 1930s look a picnic. The 'positive' alternative may not seem that glamorous as many small countries are already in recession and the major ones will follow before the end of this year. Yet this recession will be a 45 degree slope, not a 90 degree fall. This is because the correct response is now in train. It means that as early as 2010, a stuttering recovery could commence.


As I read this excellent portrayal of what has happened with the banking industry, I can't help but hear those critics who are blaming President Bush for our current economic crisis.  That is not to say that there may have been some bad decisions or misguidance in the past eight years, but I think this crisis was staged before George Bush ever made it into the Oval Office.  Put yourself in his position.  As soon as you take office and are starting to get settled in, you are forced to deal with the largest, most devastating attack to hit American soil. I don't care how much denial we are hearing in this current political debate about the war.  I don't know of too many Americans who didn't want this war in 2001.  I think the American people need to remember that hind site is 20/20, especially in this election year.  It is easy to say what we should have done and what would have been best for this country but as far as I know, you can't change the past.  We can only use our experiences to make better decisions in the future.

Although this turn in the market and economy can be very painful (that includes for me as well), this downturn is a correction in the economy that is well needed.  If consumer spending continued to grow as rapid as it had been, think of what you would be paying for a gallon of gas or a gallon of milk.  We were all complaining about paying $4.00 for a gallon of gas.  If the economy didn’t slow down, the retail prices wouldn't’t either.  Look around the area now.  Gas is in the mid $2.00 range.  In fact it just dropped 20 cents in one day this past weekend.  Go to the grocery store.  The biggest drop I have seen is in cereal.  It is actually down to $2 something a box.  Think about it.  If we are in the mindset to spend, spend, spend, we will be paying for it.

Posted in:General
Posted by Betsy Hughes, SRA, AI-RRS on October 23rd, 2008 8:21 AMPost a Comment

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