Wednesday, August 1, 2012

It's Unlikely Us Will Sink Into Depression

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Five experts on the cheaper say the United States isn't headed for a depression reminiscent of the 1930s even though just about every day it seems there's dire news of tens of thousands of citizen being thrown out of work or enterprise behemoths like Chrysler and Gm teetering on bankruptcy.

"I see limited risk of a repeat of the Great Depression because we've learned from that earlier experience," says Prof. Thomas Hopkins, an economist at the Rochester establish of Technology. "The actions now underway in Washington will be on equilibrium helpful in slowing the decline and hastening the recovery."

The D-word is seldom, if ever, mentioned in news dispatches ... Perhaps for fear of scaring people, or it's naturally too petrifying a possibility to contemplate. But International Monetary Fund managing director Dominique Strauss-Kahn did profess that the world's industrialized nations are "already in depression" after a speech in Kuala Lumpur in early February, and British Prime minister Gordon Brown used the word "depression" to enumerate the global economy, though his aides dismissed it afterward as just a slip of the tongue.

In any event, there's no approved definition of an economic depression. Suffice it to say that grim memories of the 1930s in America ... The stock shop crash, an unemployment rate of about one-third, farmers being foreclosed by banks, numerous banks failing, and ragtag unemployed old executives selling apples for pennies on the street ... Give most citizen sufficient evidence of what one would be like.

"No, we're not going into a depression, but we are in a severe recession," says Prof. Sean Snaith, director of the establish for Economic Competitiveness at the University of Central Florida. "Comparing the United States in the late 1920s to now is beyond comparing apples and oranges. Some similarities exist but today's cheaper is markedly different. There's globalization of financial markets for one thing, and federal deposit insurance for another."

At the height of the Great Depression, more than 20 percent of the municipalities in the U.S. Were in default on their bonds ... Commonly due to the collapse of their revenues. "Today, while revenues are declining, we're nowhere near those ultimate conditions ... Less than 2 percent of the nation's municipal-bond issuers are in default," says Michael Stanton, managing director of SourceMedia's Capital Markets Publishing group, which includes The Bond Buyer, the daily newspaper of collective finance.

What got us into our predicament?

"Americans have been on a consumption spree that has eaten up all savings and resulted in mortgaging of their souls," says Rod Klein, a capital financing specialist and University of Phoenix (Chicago campus) faculty member. "We believed the value of houses would keep up an explosive growth. Real estate was so alluring that many decided to spend in real estate ventures in lieu of more conservative savings options. A large part of the spectacular increase in real estate values comes from the simple principle of provide and demand. Demand has sunk!"

Klein also points out that the U.S. Government, beginning in 1977 with enactment of the society Reinvestment Act and sparked by fundamental changes in 1994 of bank lending practices, "loosened underwriting standards, along with the size of the mortgage payment relative to income, reputation history, savings history and earnings verification. A massive number of mortgages represented subprime ventures which homeowners would be unable to afford if the cheaper soured."

As a result, "the states most (currently) affected ... Florida, California, Arizona, Nevada ... Were the ones front and center in the housing shop boom," says Prof. Snaith. "Texas didn't partake in the housing run-up and has fared well by comparison during the housing bust. However, no one is thoroughly insulated from a retreat as deep and long as this one has turned out to be."

Veteran banker John Jackson, president & Ceo of Lending Cycle, Inc., Louisville, Ky., believes that "inflated wages and earnings in the 1990s, combined with absolutely obtained credit, created an environment that couldn't be sustained. Once those wages and earnings returned to normal levels, our cheaper couldn't continue at the heightened pace. citizen and fellowships prolonged to spend beyond their means."

What's getting us out of our predicament is basically a determined effort by the government to energize the cheaper via the massive bailout bill. "We're seeing a lot of rapid and dramatic policy action to prevent things from getting worse," says Prof. Snaith. "As for improvement, things have to stop getting worse before they can get better. There are some signs of that ... We're not seeing thousand-point swings in the market. We're out of the panic mode."

One danger as the U.S. Bounces back, if absolutely it does, is inflation resulting from all the forceful government activity.

"America will face persisting inflation owing to massive government and hidden debt burdens," Klein predicts. "At this time, the two sectors of the cheaper owe in excess of 0 trillion, half the debt to units of governments. The government quantum consists in general of collective safety and Medicare/Medicaid agenda obligations. Compounding this burden is the diminishing savings Americans have to meet resignation or personal debt obligations. Our citizens used to enjoy a high rate of savings. Not any more."

Prof. Hopkins notes that "the extensive rate at which the Fed is attempting to ease reputation does absolutely create a risk, once saving begins, of ratcheting inflation rates upward. But the Fed is qualified to swing into a credit-moderation role and should be able to prevent that problem from getting out of hand. At present, of course, there are more signs of price declines than increases, and deflation is just as damaging as inflation. But I am optimistic that the Fed will be able to navigate us between both extremes."

And the best possible outcome?

"We have the occasion to emerge stronger and smarter," says Jackson. "I am optimistic about our county's future."

By Gerry Storch

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