A year after Lehman, the good news

September 11, 2009

Regular readers know how pessimistic I am about the economy. The “recovery” is little more than a government-financed credit bubble and it’s back to risky business as usual for much of the banking sector.

But that doesn’t mean there isn’t good news to report.

For instance, less credit coursing through the economy means deflation, and deflation means stuff is cheaper.

Start with the cost of necessities, like shelter. House prices are down 31 percent, according to the latest Case-Shiller data.

That may wreak havoc with bank balance sheets, but it’s great for buyers. Rents are down, too. I was thrilled to get two months free when I signed my new lease. Such terms were unimaginable just two years ago.

Energy isn’t cheap, but thanks to reduced demand it’s cheaper. Oil is down to around $70 per barrel after reaching $147 14 months ago.

Deflation can improve an economy’s competitive position, too. In the short run, it means higher unemployment, but in the long run it means improved productivity.

If, for instance, blue-collar workers can afford to work more cheaply America may stop bleeding manufacturing jobs.

A big reason we have deflationary pressures is that banks are lending less. Yes, that’s good news. It means excessive levels of credit are being wrung out of the system. Credit isn’t a bad thing, but too much of it inflates unsustainable asset bubbles.

On an individual level, this means keeping up with the Joneses no longer requires maxing out your credit cards and taking out a home equity loan. Sure enough, statistics suggest people are borrowing less and saving more. As of July, consumer credit had fallen 4.2 percent over the previous 12 months — the fastest rate since 1991 — while the personal savings rate reached 5 percent in the second quarter.

Banks are socking away more cash too. The biggest ones have raised tens of billions of new equity since the stress tests, giving them thicker cushions to absorb future losses.

And some of the government bailouts are going away on schedule. The Fed will soon stop printing money to buy Treasury securities, and FDIC’s debt guarantee program is being wound down, as is Treasury’s backstop for money-market funds.

For their part, state and local governments are facing up to budget realities, making cuts and raising taxes to put themselves back on a sustainable path.

A good example is Flint, Michigan, where city planners are now “planning shrinkage.” This reduces the city’s operating costs: There are fewer abandoned streets to police, fewer sidewalks to repair and shorter routes for trash collectors.

And who doesn’t love the occasional shot of schadenfreude that downturns deliver? Bernie Madoff got 150 years in prison. Lehman, Bear Stearns, Merrill Lynch, Wachovia, and WaMu are all gone, victims of their own hubris.

These are the kinds of adjustments that dynamic economies have to make in order to flourish over time. Higher unemployment is an unfortunate consequence early in the process — I should know, I lost my job at an internet company earlier this year as a result of the recession — but in the long run many people end up more gainfully employed.

Think of the thousands of investment bankers that lost jobs last year. Was that a bad thing in the long run? Think of all the talent that’s no longer wasted generating vigorish for banks.

We need more creative destruction, not less. It will make the economy more productive. And higher productivity is the magical ingredient that enables sustainable growth.

The Year Since Lehman — related columns:

Securitization survives the fall

Banking? Keep it simple, stupid

A year on, it’s still a housing story

15 comments

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Bah, humbug! ;)First, I am not a big subscriber to the “we’re getting deflation” argument. Yes obviously houses are down, and rents are weak. But the modest gains in those areas are offset by service costs that continue to rise, taxes, and most areas of basic necessities costs.Besides, once the dollar gets the full brunt of consequences of the stimulus spending, bailout commitments made by the Federal government, and entitlements, it will take it on the nose. And our imports (which is most what of we consume) will get much more expensive.Lehman and Bear were certainly justified implosions, but represent a bitter-sweet victory for society as a whole, since nearly identical competitors were arbitrary let stand. And Wachovia, Merrill and WaMu seem to have learned nothing. A few executives are certainly upset with losing control of their franchises, but what really has changed? Their toxic balance sheets have simply been folded into larger ones. Banking has become more concentrated. Inflated revenues have become a justification of inflated share prices. And the piper has virtually not been paid at all.And it is far from certain the government will be able to significantly scale back its bailout programs, including quantitative easing. Actually doing so threatens to spark a renewal of the crisis, as defaults will continue to mount, and fundamentals have not been repaired.And Madoff? Well, he’s dying of cancer. We’ll be lucky if he serves one year of penance.

We don’t disagree Aaron! It will take a lot more of the good to offset all of the bad from the last year…

Posted by Rolfe Winkler | Report as abusive

True, people may been feeling “less pressure to max-out their credit cards” to keep up with the Joneses, but they may very well still feel tempted to rely on credit to carry their households and even some basic costs while they await new employment or otherwise recover.

Posted by michandre | Report as abusive

Thank you for a positive reflection….However, there still needs to be more accountability analysis, including legal implications; otherwise, Congress will continue to fall on its nose….

Posted by Bill Seiple | Report as abusive

What’s all this “we” stuff?Some things are inflating, some deflating.Wages will rise, cost of living will shrink.Workers benefit, layabouts will have to pay for the privileges.

Posted by John Bailo | Report as abusive

Duke Energy has requested and will likely be granted a 9.3% increase here in South Carolina. Gas is over $2.25 per gallon. Local, state and federal taxes will soon be on the rise to pay for all the looming deficits we now face. Retail food prices and other daily living expenses have not gotten any cheaper from what I’ve seen.Now that companies have trimmed all those jobs to keep their balance sheets looking better for stockholders who is going to have any money to reenergize the economy?As for me, like many, I certainly am not taking on any more debt and I think it will be a long time until I spend a nickel I absolutely don’t need to.Doesn’t sound like the recovery is just around the corner to me. And as for deflation, be careful what you wish for, lest it happen.

Posted by al coholic | Report as abusive

Dear Writer,Good and a lot of wit and humor.Yes.now, the word recession is slowly going to dictionary!s shelf.Those who have permanent jobs ,and entire family members on work only can buy houses in America.Whereas,other costs are going up day by day.Plastic money had taught many real lessons to Americans and to Disposal income segments.We should forget to hold cash for rainy days.Money what Money does.Without any ready cash,we may not able to do any rational buying,spending and investments in proper channels.Always,basic economic theories holds good.I have read from Indian Leading English daily!s writers words are still in my mind.In India,economists,and government agencies says, prices are reachable to common man.That writer had literally told like-broom stick cost about one dollar,that is,India!s traditional floor cleaner.That is not a affordable price to many low income groups.Positive thinking will lead us to positive living.Let us hope for the best.Yes

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Posted by sasha | Report as abusive

I live in Flint Michigan and there has been noshrinkage as of yet your article is 100% wrong wherewe are concerned.

Posted by c thrall | Report as abusive

Shrinkage in Flint was all talk no action at all

Posted by c thrall | Report as abusive

I agree, Aaron.There’s really not that much to be cheery about; short term affordable ‘benefits’ will be offset by short term ‘needs’–food, gas/transportation, water, energy costs, perishables that are not made in this country (which is most of them). All those things will more than make up for any ‘gains’ eventually.My next door neighbor is from Argentina. Her parents, a fairly well-to-do family, lost pretty much everything in 2001. Now she’s having problems with her own mortgage. She said that she could move there and it would be cheap to buy a house, but there’s nothing to do there because there’s so much unemployment. Sure, people opened little shops simply because they couldn’t find employment but they just hobble along.Even though pundits like Peter Schiff and others believe that there will be a revival of manufacturing in this country, the realities in other places seem to state otherwise. Is Argentina experiencing a manufacturing boom? Zimbabwe?I think we’re entering a long and far reaching arc of a downturn that’s due to last at least 15 years, most likely 20. Next year, a great swell of the baby boomers will start collecting Social Security necessitating more funds or more cuts or both. We won’t have that money to borrow from much longer. And, now, like Madoff, there will be hands out to collect.I”m a forensic loan auditor and I review loans all day. I can see the great tsunami yet to come–and, even those lucky to get a modification–we’re just seeing great pain pushed into the future when those five year modifications start ramping upward.My advice: Get out of debt anyway you can. You’ll be considered one of the lucky ones if you do and the future won’t be as harsh.

Good observations ! How about Congress kicks in and doesn’t give itself a raise! Better yet, donate pork to social security. Even better yet; vote out the current Congress so citizens can stop working for them and vote in a new batch that is controlled by it’s constituency! All bonuses of bailout-non-performers should be donated to charity –like the national debit. Most of us who are surviving this recession are doing so in-spite of the government’s reactionary railroading of the economy into record deficits. This Animal Farm psychology needs to include the guys in the big house.

Interesting C Thrall….I admit, I was relying on a New York Times article:http://www.nytimes.com/2009/04/2 2/business/22flint.htmlYou're saying none of that happened?

Posted by Rolfe Winkler | Report as abusive

Good one Rolfe !The Universe has no ‘central part’ mam, that’s the good part of it, the rest is pretty violent.

Posted by Casper Lab | Report as abusive

I share your pessimism about the economy. I see no industry that will emerge to lead us out of the current mess and it seems to me that there is almost a coordinated effort by some media to ignore the truth about the shoes still in the air.I follow several financial web sites, CNBC, various podcasts, trying to keep up with everything. At present, I am reading Chaos Scenario–about the disappearance of traditional media. On-line media takes enormous revenue from traditional media–like Craigslist gutting the newspaper classified advertising of billions and billions of revenue–while generating practically no revenue of its own. Not only is there no “saviour” industry, certainly the impact of the deterioration in a means to effectively market products just adds to the “perfect storm” for all corporate entities reagardless of what they have to sell.

Posted by dwillmo | Report as abusive