Déjà vu

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deja vu  
Main Entry: dé·jà vu 
Pronunciation: ˌdā-ˌzhä-ˈvü, -ˈvue
Function: noun
Etymology: French, adjective, literally, already seen
Date: 1903
1 a: the illusion of remembering scenes and events when experienced for the first time b: a feeling that one has seen or heard something before
2: something overly or unpleasantly familiar

Source:  Merriam-Webster Dictionary Online

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 “American consumers and businesses relied on cheap credit, the former to purchase consumer goods such as automobiles and furniture [houses] and the latter for capital investment to increase production. This fueled strong short-term growth but created consumer and commercial debt [mortgages]. People and businesses who were deeply in debt when price deflation occurred or demand for their product decreased often risked default [missing payments] Many drastically cut current spending to keep up time payments, thus lowering demand for new products [recession]. Businesses began to fail as construction work and factory orders plunged.

Massive layoffs occurred, resulting in unemployment rates of over 25%. (US) Banks which had financed this debt began to fail as debtors defaulted on debt and depositors became worried about their deposits and began massive withdrawals [Bear Stearns] . Government guarantees and Federal Reserve banking regulations to prevent these types of panics were ineffective or not used [Hope Now]. Bank failures led to the loss of billions of dollars in assets.

The debt became heavier, because prices and incomes fell 20–50% but the debts remained at the same dollar amount. Bank failures snowballed as desperate bankers called in loans which the borrowers did not have time or money to repay [auction rate securities].With future profits looking poor, capital investment and construction slowed or completely ceased [stagnant GDP]. In the face of bad loans and worsening future prospects, the surviving banks became even more conservative in their lending. Banks built up their capital reserves, which intensified deflationary pressures. The vicious cycle developed and the downward spiral accelerated.”

Source: The Great Depression, Wikipedia

  • EastsideRE

    Time will tell.

    We won’t know if this downturn will be a depression for quite some time, because it is the depth as well as length of a downturn that make it different from a recession.

    Deflation and unemployment?

    Another difference is significant deflation. Outside of the housing market, which quite honestly still has room to come down, there hasn’t been significant and persistent price deflation on a broad range of commodities. In fact, most prices have been stable to inflationary. Also, there have been significant regional employment issues but nothing near the “massive” layoffs of the depression era. In historical terms even a 10% unemployment rate, while clearly recessionary, would be no where near the levels of the depression. On a national level we aren’t even close to that.

    Liquidity.

    What is troubling is the liquidity crisis that is going on right now. In my opinion, this downturn will only bottom out when house prices and reduced mortgage rates combine to make buying attractive again. The Fed has moved in the right direction by cutting borrowing rates for the banks and adding liquidity for the ones with the most exposure to bad loans. However, the banks have yet to significantly lower mortgage rates.

    Supply and Demand.

    What is worse is that lenders are tightening underwriting and Congress (is it just me or are they always late to the game?) is pushing them more in that direction. Whether you think this is good or bad policy, the net result is fewer buyers – reduced demand. This is at the same time that banks are unloading foreclosures which add to supply – further reducing prices. They are unwisely hurting their own portfolio values, much like the S&L’s did during the last major housing/liquidity crisis.

    The way out.

    So let’s all hope that at some point in the next couple of months that lenders or even the government wise up and lower mortgage rates enough to stimulate demand. How many buyers would jump in if 30 year rates were at 5% or 4.5%? There is still time to make this a shallow recession, but lenders and policy makers need to figure this out soon – and the sooner the better.