Recession For The Long Run


Every day it seems we see more signs that the expectations of economic planners and financial experts have not yet adjusted fully adjusted to the economic realities of the Great Contraction.

This week’s downside surprises included the news that the redefault rate on mortgages modified early this year, mortgages on homes held by owners who were perceived to be faily good credit risks in the first place, was far beyond even bearish predictions. The Office of the Comptroller of the Currency admits it has nothing but guesses about why things are so bad in the mortgage markets. AIG, just a couple of weeks after complaining that the terms of its bailout was too punitive, now needs $10 billion more. The General Accountability Office says the Treasury Department lacks any clear metric to figure out whether the TARP is working and can’t really track its money.

What’s going on? No one seems to have a satisfactory explanation. But new census data taken from 2005 through 2007 in nearly every community with at least 20,000 residents sheds some light. The facts show that for the vast majority of cities and towns surveyed, economic conditions never fully recovered from the crash at the beginning of this decades.

Among the findings as summarized by the Associated Press:

• Median household income dropped in 79 per cent of the cities and towns. Incomes dropped in the wealthiest communities as well as the poorest. Charleston, Ill., home to Eastern Illinois University, saw the biggest drop — 31 per cent — to a median household income of just under $21,000.

Nationally, incomes dropped by 4.3 per cent during the period, to $50,007.

• The poverty rate increased in 70 per cent of the cities and towns. Athens, Ohio, home to Ohio University, had the highest poverty rate, at 52.3 per cent, in the 2005-2007 period.

Nationally, the poverty rate increased from 12.4 per cent to 13.3 per cent since the start of the decade.

• The unemployment rate increased in 71 per cent of the cities and towns. Muskegon, Mich., a city of about 40,000 near Lake Michigan, had the highest unemployment rate, at 22.1 per cent.

Nationally, the unemployment rate increased from about 4 per cent in 2000 to 6.6 per cent in the 2005-2007 period.

• Median home values increased in 92 per cent of the cities and towns studied — doubling and tripling in many cities, mainly in California. Nationally, the median home value increased 26 per cent, to $181,800.

In short, much of the alleged prosperity of the past few years was simply illusory. Cheap and loose credit combined with Ownership Society policies pushed up housing prices. Rising house prices allowed people to take on more debt. People took on more debt than they could afford because they perceived that they were more propserous than they were. Businesses expanded beyond profitability because consumer demand built on credit kept expanding. Banks lent out more against inflated housing values.

Unfortunately, real economic prosperity never grew enough to support all this increased activity. Worse, the inflation of housing related assets directed a lot of investment into what ultimately turned into money losing enterprises. This probably means that a recovery is a lot further out than we might think. We never really recovered back to 2000 levels.