As the elections come to a close, we will find out soon enough who are next president is and the make up of both the House and Senate. Expectations are that Congress will become even more Democratic but the economic recovery will be well under way by the time the new guys, or gals, take office. Regardless of who sits in the White House or who dominates the Capitol, there are four things that need to happen for our economy to turn around.
First, we need to make sure we have all the pieces. In late 2007 we all thought the sub-prime situation will be contained, or at least that's what Bernanke told us. But then oil prices skyrocketed, credit markets froze, global growth slowed, and the consumer was halloweened into the lowest confidence index ever!! So first things first. Let's try to figure out what else is lurking in the shadows on all hollow's eve. Like Humpty, we can't fix'im if we don't have all the pieces.
Second, it's going to take time. It takes time for wounds to heal and it will take time for any financial aid to flow through the system. Many banks are still in the process of applying for capital. And although there are now doubts as to how the banks will use taxpayer money, more of them are committing to use the money for what it was intended...lending. There are still some details to iron out as to specific requirements the banks must meet, but two areas that have been mentioned are that the funds are used for lending to business and consumers, and that executive compensation will be limited. It's not clear how the Treasury will enforce these two requirements but at least the phased release of the $700B will allow for monitoring compliance with these rules and enable additional requirements to be defined.
So that leads us to the third thing that needs to happen to hasten the economic recovery. We need the banks to tighten their belts and come up with disciplined, attainable standards, that allow qualified borrowers to get loans. Banks have gone from lending to anyone at anytime with little to no collateral, to not lending at all. Well, we now know, that was stupid! However, setting standards so strict that no one qualifies is also stupid. Get some legitimate underwriting guidelines and get back to what you are supposed to be doing! By the way, the first sector to lead in an economic recovery is the financial sector but without the confidence to begin lending, the economic pain will linger, the situation will worsen, and like Halloween, things could get gruesome.
Finally, the consumer has to get rid of fear and trepidation. Some people have lost their jobs and estimates are that unemployment may increase to 8% (from 6%) before coming back down. However, even the gainfully and permanently employed are proceeding carefully, as if in the dark in a haunted house. Television stations and other media, vying for advertising dollars in an increasingly competitive environment, continue to dramatize the tiniest detail, often resulting in a highly influential, yet overblown perception in the mind of the average person. The result is a hesitation to spend, a minimalization of life's everyday pleasures, and constant conversation about how bad things are. Spurred by big media, the consumer ends up scaring himself even more. BOO!!
This trend and this mentality need to be reversed. It begins with an understanding that we've been in a downturn before. Sure, this one could be worse than any we've experienced since the Great Depression, unlikely due to aggressive action by the FED and US Treasury, but scary nonetheless.
In times like these we all need to have patience and stick to our long term financial goals.
