2008 will not completely be erased by 2009. The lexicon of terms that found their way into the average American’s conversation was unfortunate. We have learned what mortgage-backed securities were, how credit default swaps worked and many of us now know the name of the guy running the Treasury.
2009 will introduce us to new terminology such as PIK toggles (payment-in-kind switches that are triggered when rates go up), minibonds (a derivative which is a term that now suggests something sold as worth more than it is), debt accordions (nothing to worry about unless of course a business goes belly-up), cash-settled options (options that pay cash instead of shares which is fine if you can borrow cash to pay the option) and Ponzi schemes (now more aptly named Madoff miracles). We are not over this yet, it seems but there is a chance we can fix what has occurred.
Even with the new administration acting as busboy for the feast that has taken place over the last several years, the clean up from 2008 will be long and arduous. We wanted a global economy and we have what we wished for.
Despite comments from U.K. Prime Minister Gordon Brown during that November G20 Summit meeting “on the importance of rejecting protectionism” and the March 31st deadline for some sort of concrete plan on exactly what measures would not only solve his own country’s banking problems all the while keeping an eye on the economic path of the rest of the world, the possibilities are limited by only by a far we fall into economic nationalism.
Banks in each of the G20 countries are faced with the same Catch-22: how do you build up capital reserves and lend to stimulate? No matter how much we detest this sort of financial protectionism that each country is inclined to embrace, it may be the key to the swiftest recovery.
There is little argument that the dollar may be the real problem. The outgoing administration has held fast on their commitment to a strong dollar policy while allowing the opposite to happen. We depend on a weaker currency to help balance trade. But keeping the dollar weak, most easily done by keeping interest rates low and money is greater supply, will have the net effect of increasing the value of foreign currencies.
Ben Bernanke, the lame-duck Federal Reserve chairman is a proponent of such thinking pointing to the policies that were enacted in 1933 and 1934 as proof that this type of intervention can work. During that time, money supply was increased while interest rates fell to near zero. (Sound a bit familiar?) As a student of the Great Depression, Bernanke has pointed out that this sort of policy was key to ending the deflationary spiral that the US economy was in and because of those moves, it had the net effect of increasing the value of commodities.
In order for this to work the way it did during that period, some countries need to have much stronger currencies. And today, those that do, do not want the mantle of strength that comes with a more valuable currency and with good reason. The weaker currency policy helps “export” a country’s path out of recession. And no amount of financial transparency, increased regulation or banking actions will solve this problem – at least in the coming year.
There are simply too many economies in the game – a far different scenario than what occurred seventy plus years ago and too many finance ministers believing that their currency, even if it is pegged to the dollar, is the most important. Garnering global support will not be easy and may in fact stall any international recovery efforts well into 2010.
Everyone will do great in 2009 provided you don't lose your job, you don't lose your insurance and you manage to dodge a major medical setback. You will do just fine as long as you are not forced to rely on the credit card in your wallet to get by.
It will be a hard sell to convince homeowners to “ride out” their mortgages as the value of their homes continue to decline, possibly well into the third quarter of the new year. It will be equally difficult to help the folks who are eligible to revamp their poorly constructed loans. The recovery in housing will be with those who fall somewhere in the safe zone - able to pay for necessities. But will spend money on “what they think they need”?
I am all for renegotiating the bad loans with a plan where 20% of the re-worked loan is held by the Treasury, payable upon the sale of the home. Will the new Treasury be able to right the wrong in the next year, rekindle some confidence in the housing market and ultimately revitalize the economy with a simple restructuring of the mortgage industry? Possibly, but the costs will be high for not only taxpayers but for those set on buying a home. Mortgages in 2009 will force many of us to swallow a bitter pill.
The Obama Treasury will succeed if it buys what no one wants – not everything mind you but what is important to keep things moving forward. No bailouts are needed to do this. We can let the toxicity of bad business run its course.
In a December 29th column by Paul Krugman of the New York Times, he suggested the governors of all fifty states run the risk of acting like “Herbert Hoovers” even as the “true cost of government programs, especially public investment, is much lower now than in more prosperous times”. A Treasury focused on buying bonds from not only states but the municipalities in those states as well will keep the cost of borrowing down, allow state and local governments to finance not only their own programs but will also allow them to avoid the cuts to vital programs from occurring.
This is not a bailout by any means and we, as taxpayers will receive far more than just interest payments for the effort. Programs that train new workers and retrain others while continuing to help troubled teens and families will also achieve the infrastructure goals laid out by the new administration. This will not be public works so much as it will be a shift from unfunded mandates to measured federal support to state governments.
Mandates with funding will come as a surprise to many governors who have not wanted to raise taxes but instead, allowed budgets to fall into arrears. If Mr. Obama makes the infrastructure of this nation his priority, competition for state jobs will increase as they are created and once that happens, private sector jobs will attempt to draw the best away.
I have always had a clear understanding of what investments are and why they are different than savings. An investment is money put to work, the assumption of some risk, and the patient long-term approach to growing that money. When I hear folks speak of retirement savings, they often refer to portfolios with too much stock (and often too much of those individual holdings are shares in their own firm) or too much risk in the funds in those plans. These are investment choices – not savings.
Savings, on the other hand can be found in the static world of certificates of deposit or interest bearing checking accounts. As we enter 2009, folks now realize the mistakes they have made, have spent more than adequate energy seeking someone to blame other than acknowledging their own misinterpretation of what risk is and have had enough time to alter their thinking. And therein lies the problem facing the New Year.
The downside of that realigned thinking would be a too conservative approach of an investment in their future. Your perception of retirement should not have changed and should be based on two questions: How much do you plan on spending each year you are retired - for everything? and Can you do it on a withdrawal of just 4% annually? Answer those questions and you may find that you will have no other choice but to get back in the markets. No one can afford to recoil completely from risk, much of which has all but been whitewashed out of the current markets.
(2009 will see a decline in profits for many companies, outlooks for the future downgraded and some opportunities not taken. At the same time, many companies will emerge stronger, leaner and in a better position to grow. And when that occurs, employment will begin to rebound but not until the third quarter of the year.)
The people currently in retirement are going to see some of what they held (if they held on a didn’t sell everything) come back as the markets recover. But recovering markets do not end a recession.
I also see the credit ratings bar being lowered and the term sub-prime being redefined to include more people in 2009 rather than less. The risks for banks will remain and the new administration will need to be forceful (getting them to lend) and prudent (getting them to lend with some guarantees) and to do so while rewriting the standards for borrowers. Pre-payment may come with penalties on all loans. Interest rates will be bordering on usurious and folks will need to think differently than they did during the good old days of 2005-6-7. The cost of money will need to increase and that will be painful. The good news, it won’t be permanent.
Jobs will be saved through concessions and through state solvency. Recent reports have indicated that layoffs may slow but job losses will not. The difference rests solely on the solvency of the business and there is still much to shake out.
That is an awful lot riding on the shoulders of Mr. Obama but 2009 will go the way the White House leads it. Europe will follow reluctantly and emerging nations will continue to emerge. If the Middle East and China take note, they will see their prosperity follow the global recovery rather than their own xenophobic ideals.
The economy beyond that will be wholly different than the one left on 2009’s doorstep. Our prologue has been cast and the stage set:
“We all were sea-swallow'd, though some cast again
(And by that destiny) to perform an act
Whereof what's past is prologue; what to come,
In yours and my discharge.”