Monday, June 29, 2009

The Great Recession of 2007-2010

As promised in the previous post, here's a brief synopsis of our Recessionary adventures thus far.

To recap--many individuals lost their shirts last fall and again this spring when they first failed to pay attention to their investments (mostly in mutual funds via 401(k)s) and then refused to look at the carnage afterwards, as if it were going to go away.

My fiscal disaster was a bit different. Having been laid off by my employer last summer (oddly enough, by mutual agreement more or less), I first got my various retirement funds transferred into my own accounts so I could move the funds around into high-yielding investments whose interest and/or dividends promised to give me enough income to undertake a completely freelance writing career while improving my rental home portfolio.

Well, that plan went in the tank when pretty much everything that I or anyone else owned in the way of stocks and bonds went the way of the dodo in two phases. This is nothing I haven't been through before as a former stockbroker myself in the late 1970s and early 1980s. In fact, I distinctly remember the great Hunt Brothers silver crash which took silver from roughly $55 an ounce down to about $10 or less in what seemed like the twinkling of an eye. Paul Volcker's Fed jawboned Federal authorities who simply raised the margin requirements on silver from 10% to 50%. And the brothers who--similar to speculator Curtis Jadwyn in Frank Norris' excellent and mostly forgotten novel "The Pit" had almost cornered the market on silver--were forced to liquidate on margin call but found no buyers at $55. More like $10. Wipe out. (BTW, it mystifies me why some flavor of this wasn't put into force when speculators drove oil up to an unsustainable $147 a barrel last spring.)

Anyhow, back in March 1980, people went nuts, came in off the street to look at our tape (the old Dean Witter Reynolds, no PCs back then) and babble in terror. I myself stared blankly at my console (a green CRT) watching the plunging numbers as the market squealed in terror. I figured I'd be out on the street corner the next day selling apples. I remember breaking into a cold sweat. You had to be there.

Well, it was mainly the Hunt Brothers who got wiped out, actually. The market not only stabilized. It quietly and almost imperceptively began to morph into what eventually became the great Reagan Bull Market as interest rates peaked in the stratosphere and began to decline. Meanwhile, as Reagan's tax cuts took hold business got juiced as well.

Our current financial megadisaster, however, is different from the silver crash, different even from the brief, terrifying 1987 crash, and different from the short, savage "dot bomb" that first hit in the spring of 1999 (during Clinton, not Bush whom revisionist economists prefer to blame for it). The current meltdown--which I first regarded as "Great Depression II" but have now decided to call "The Great Recession of 2007-2010"--is turning out to be far more systemic than 1999 because it actually involved savaging most Americans who worked for a living. It hit their phantom nest eggs (their homes, which plummeted disastrously in value) as well as their own retirement portfolios. Many will never recover because they don't understand what happened or how to fix their portfolios, courtesy largely of a public education system that teaches people about multiculturalism but ignores the simple mechanics of wealth building.

The reason for the current debacle, the massive housing bubble, was in fact a house of cards that actually began to be built in the early 1970s by Democrats in Congress who slowly turned Fannie Mae and Freddie Mac into a free money pot for unqualified homebuyers who eventually sought the American dream on no money down, no documented income, and interest-only payments. The more unqualified people who were given mortgages they couldn't afford, the more pressure built on house prices. And the higher the prices, the more individuals and lenders panicked either to buy housing at any price or to loan money for them without even the most rudimentary kind of financial vetting.

This was, in short, a Ponzi scheme that only accelerated in the Clinton era. Unfortunately, it blew up on Bush's watch, even though he tried to get some sensible legislation through Congress to throttle this runaway train during his second term. It went down to defeat. The American people were next.

The Great Recession was and is the result, in the end, of the greatest credit binge in history, led by a left-leaning Congress that never really had a clue as to what was in store. And to their discredit, even the Repubs who led Congress from roughly 1994 through 2006 climbed on the train rather than putting the brakes on gently before it was too late.

That's where we are now. Lending standards have now tightened to where it's tough to get credit anymore unless you have a pristine record AND a job--a rare combo these days. And, ominously, Congress is scheming to impose ruinously inflationary and business busting nonsense like nationalized healthcare and cap-and-trade (read Luther in this blog). But I'll rant about some of this later. Our next installment is a brief update on how I personally began to climb out of the current economic mess. You can do it, too.

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