bostonbubble.com

[Boston ITer]

http://www.fool.com/investing/value/2009/03/30/welcome-to-the-second-great-depression.aspx


Where I launch off, from the above, is that the reason why people don't have 6+ mos of expenses (the depression remedy) saved is the housing market.

Much of that money is used in the carry costs of owning a home. Having savings means being able to be a "migrant" worker. In a sense, imagine a type of white collar *dustbowl* where people need to be in numerous locations to maintain a semblance of white collar employment, since that's still the primary mode of employment in the post modern world.

[GenXer]

[Boston ITer]

[GenXer]

I was suggesting that you'd have a lot more worries than a job if we do get in a similar Depression. You'll have to worry about defending your life instead - as well as about food shortages. Who knows what may happen. We depend so much on products shipped across the country and the globe (and with local products being in a very short supply) that we may have bigger problems than work...

[ConcernedCitizen2]

http://blogs.wsj.com/economics/2009/04/03/the-full-picture-broader-unemployment-hits-156/

"But the Labor Department’s most comprehensive gauge of unemployment surpassed even its early 1980s levels. The government’s broader measure, known as the “U-6″ for its data classification, hit 15.6% in March — a big leap from 14.8% in February."

I was having a discussion with a colleague on this point - that if you count unemployment the way we used to (ie including those who've stopped looking), you get up to nearly 16% already, when we are just mid way through this recession. Add in the population who are in prison (something like 5-8% of the work force) and you raise it even further, because some of those who are in prison would likely be unemployed if out on the street.

And I believe we're only part way through this recession, because we're only part way through working out the toxic assets on bank's balance sheets.

Damage from commercial real estate and credit cards is just starting to impact balance sheets. When the sub prime mess started blowing up, I kept asking myself, this garbage is on somebody's balance sheet somewhere. Who has it? It turned out ALOT of banks and insurance companies had it, globally.

Coming back to commercial real estate, I ask myself the same question, who's holding this hot potato. Looking at the John Hancock tower auction the other day, a building that sold for $1.3 bn in 2006 has now gone for $660million, meaning someone somewhere is holding that loss.

I read a brokerage piece saying it's more complex than that, you can't assume necessarily that that loss is exactly on a bank's balance sheet, but some damage must be hitting someone.

I don't know if commercial real estate was securitised the way residential was, but if it was, then larger losses will occur, because those securitisations had so much embedded leverage.

Yes, systemic risk is lower now than it was before Lehman Bros went down because governments will keep bailing banks etc out, but I don't think we're out of the woods by any means.

However, my colleague and I said, if we're at 16% unemployment already and with the prison figures, make it 20%, why doesn't it feel like a Great Depression? There are no apple carts on the street yet. That's what we couldn't figure out exactly. I guess the whole debt system is keeping people above water for now (ie they keep rolling over debt where possible).?

[GenXer]

Markets are interconnected, so while it is easy to lose a lot, it is also easy to gain, as access to markets is...well, easy! Anybody from their home PC can get access to markets, whether to buy or to sell. I think global economy is a lot more resilient, and while it can bend and even break, in this case, its only the FINANCIAL industry which is broken, while there is still a huge demand for computers and other means of productivity. So don't try to apply last Depression's measure on a possible new one, it won't work! Even when unemployment is at (official) 15%, we will still be doing OK, at least most of us. What you don't see (but what we do know exists) is the decimation of the housing sector with jobs being slow. It is temporary, but will probably last many years. Same thing with financial industry. But other industries are going to do just fine, getting more done with less.

[admin]

[CC]

[GenXer]

True, everything may end up unlike anything we can think of. One thing is almost certain - there will not be a quick end to this because there is no mechanism for a quick end. We are overwhelmed with debt, and somebody someday will have to pay it back.

[nickbp]

Direct comparisons to the great depression are just a grab for attention. There have been so many social and financial changes since then that trying to compare the modern economy to the 1930's is just about useless. There's no need to rush out and put all your FDIC/DIF-insured deposits into a mattress.

You're much better off comparing our situation to the similar bubbles which have occurred recently in other countries. Conveniently, we've got the Japanese Lost Decade from only 20 years ago.

Here's a quick summary which was conveniently posted in May 2005: "When Japanese real estate (and stocks) started to sink, it infected the country's financial system. Bad loans throughout the financial system, together with the collapse in real-estate values, fed on themselves."

[nickbp]

Hey admin: Enable the edit button

Clarification for my last post:

The Japanese slump ("Lost Decade") was the result of poor policy decisions which were crafted in response to the collapse of their bubble ("Asset Price Bubble"). I should have used the latter text when referring to their crash, rather than the former.

I don't want you to think I'm saying that our crash will necessarily lead to an "American Lost Decade", because I think that depends a lot on our response to the crash. Given that we have this conveniently similar crash from only 20 years ago, I'm optimistic that we will have learned some lessons from that.

[ConcernedCitizen1]

Hi again
I agree that the Japanese lost decade case is probably a closer comparator than the Great Depression, but on the other hand there are significant differences:

#1
Japan was in its lost decade in the 1990s, a time of fairly robust growth in other places particularly the US (I won't get into the debate of whether that growth was real or fake and the whole IT bubble question. For now we can just look at the GDP growth numbers that were strong in the 1990s particularly in the mid to late part of the decade
Now we have a global recession, there is no place that's particularly immune. Even the BRIC countries who were going to pull everyone out of this are slowing down sharply.

#2
Japan entered its lost decade with high levels of household savings, so while corporations (the main culprits in their bubble) spent 10+ years restructuring and repairing balance sheets, Japanese households drew on their vast pool of savings to get them through. As the below article in the Economist points out, restructuring overextended household balance sheets is more difficult than corporate balance sheets.


http://www.economist.com/finance/displaystory.cfm?story_id=13110352

On the positive side it seems that Americans are much more able to react quickly to new paradigms and maybe this adaptiveness will help.

[Rental Lease]

There is no question that much of the world is suffering economically right now; he11 I'm one of them, after watching my real estate investments deteriorate and cost me all my savings in losses and carrying costs.
However, I think that we'll see some stabilization this summer, as real estate markets get their seasonal bump, agriculture and tourism start contributing more (again seasonally), and the effects of low oil prices continue to lubricate shipping and supply chains. Granted, we'll lose some more ground come winter, but I think we'll see increasingly stronger (and longer) summer boom seasons, until the global economy isn't quite so dismal.
That said, I would contend that we have some structural issues in America that aren't going anywhere quickly. First of all, we suffer from an ever-expanding juggernaut in the form of the US Government, which pays its workers somewhere around $7.50 more/hour (adjusted for benefits) than the private sector does. This creates an environment that encourages lethargy, lower productivity, and higher taxes.
Second, we have an aging population, and no way to pay for their increasing health care expenses. This is compounded by the fact that a lower percentage of our population will be working (and therefore contributing to the system) over the next 5-10 years, while more will be relying on public money.
There are plenty of other examples to illustrate this phenomenon of increasing expenses and stagnating income to our system, but these are two VERY troubling examples, that will not be fixed just because Wall St. has a good month.

[Rental Lease]

I'd like to add that one way people can contribute to helping the real estate market recover is to buy rental properties. This helps keep rents reasonable, and helps combat the withdrawal of homeowners and real estate investors from real estate ownership and investment in America.
If you want more information, here's a great resource for real estate investing information and free real estate forms... best of luck!
Brian

[GenXer]

Rental Lease: I fully sympathize with your plight. Many of us here do not want to see the housing market 'recover', at least not until it plunges another 50%, or maybe even more. This is because the rent we pay is actually much lower than the cost of buying the same property. My landlord bought his condo for around $200k in 1999, and he is barely breaking even right now. How's that for math? I think many owners of rental property got suckered into it by snake oil salesmen. Real estate is not safer or better investment than stocks, treasuries or municipal bonds. They are different, yet for all the complexities of the stock market, (a good portion of it, at least) it is much easier to understand and to price than real estate. Buying real estate and renting it out is just as prone to blow ups as buying stocks like GE, IBM and American Express to get dividend income. Once of these days, individual stocks blow up, and you get half of your portfolio left with no dividends because these are cut or canceled. This is how investment world works - wealth cycles around, and if you can not hold on to it, you lose it all. Until those who think they can become rich in real estate stop relying on blind luck and actually read something about how investments and risk works, you will continue to lose everything, if not during this cycle, then during the next one, because most real estate investors are not diversified enough (even if you had 100 houses for rent, you'd still be hurting).