It was 4 years ago this month that the facts regarding housing started to make me worry about the looming mortgage market disaster and immenent house price decline following the great debt unraveling.. The Minneapolis Federal Reserve, the REALTOR Organization, and all the other “housing” experts said I was wrong. It is now almost 1 year since the financial meltdown that caused two administrations, in transition, one Republican and one Democrat, to push Bank/Wall Street bailouts and the recent auto bailout plan.

With unemployment already above 10%, regardless of what the government data tells us, common sense, consumer debt, and consequent spending restraint, more single family home foreclosure, not less, credit card “foreclosure” and significant failure in the commercial real estate market do not bode well for a “typical economic recovery.” When the recovery is announced by the experts, the economy will look anemic and will remain so for several years (maybe as long as 2012 or more). The reasons, as we have stated in this space before are demographics, too much federal and consumer debt, too many assets tied up in real estate. So, we are in the midst of the great unraveling of consumer and government excess. This is not like other, more traditional business cycle downturns and no one knows how it will, exactly, play itself out.

All of this is occurring against a back drop of increasing federal debt, high but declining consumer debt (weak consumer demand for goods and services), concerns by China and others about the future of the dollar, higher unemployment in the months ahead, and on and on. I have been trying to be optimistic despite the elephants in the room (baby boom demographics + politicians ignoring the impending Medicare and Social Security busts while creating even larger future liabilities with Climate Change Legislation and Health Care Reform). As many of you know, when it comes to politicians, I am a tad skeptical of their ability to “see the forest for the trees.” Large institutions that do not function with the pressures of the market are monopolies and we all know what happens when monopolies have no external accountability pressures. Recall Wall Street Investment Banks where “the market” was a ruse for monopolistic financial chicanery—derivatives, CDOs, LDOs, etc.

So, this is what I think will happen in the neophyte third quarter: flat and declining corporate growth, despite massive federal spending, increased state and local government financial pressure (we haven’t heard from them yet on unfunded pension and health care liabilities for baby boomers, but we will), more layoffs, 20-30% commercial vacancy around the country in the next year, a weakening consumer spending sector (70% of GDP is consumer spending), and lots of happy faces---like lambs to slaughter.

We are in a massive economic sea-change driven by baby-boom demographics, past political promises that cannot be kept, increasingly skeptical trading partners on the future strength of the dollar, and politicians who are compelled by the circumstances of their professions to look like they are solving “the people’s problems.” Of course, all of this will resolve itself, but not without economic pain for us all. Those of us who have lived in a financially responsible manner will suffer along with the irresponsible while the political left and right cast aspersions on each other, doing nothing to improve our collective lot. They, the left and right, and many of their political representatives at the federal, state, and local levels are secure because they work for government, have God on their sides, are smarter than everyone else, etc.

As for the rest of us, the transition to a more prudent, personally responsible world will continue relentlessly and, I am afraid, cruelly, until we (collectively) realize that the enemy is us and until we accept responsibility, little will improve in our lives. “They” (the immigrant, the other) are not the enemy but rather a convenient scapegoat for the ignorant and irresponsible. Unfortunately, not much has changed in this regard.

My best,

Glenn

http://www.washingtonpost.com/

Treasury Works on 'Plan C' To Fend Off Lingering Threats

Troubling Issues in Lending Could Still Disrupt Economy

By David Cho and Binyamin Appelbaum
Washington Post Staff Writers
Wednesday, July 8, 2009