Has the Economy Gone to “L” in a Hand Basket?

Posted by Jim DeBellis on June 17th, 2011

Typically, the recessions we’ve seen in our lifetime slow us down for a while, and then things turn around.  The engine re-starts and we’re back up to speed, right where we left off.  Is that even possible this time?  We are used to V-shaped dips, with a steep decline followed by a rapid rise, but that’s not always the case.  In the 1990s, the Japanese economy experienced an L-shaped recovery.  That’s right: a precipitous fall followed by, well, no more falling.  Maybe this is the recovery.

Well, of course, things will have to improve eventually , if only gradually – and we won’t always have an endless parade and stockpile of foreclosures holding us down.  But there is an argument to be made that we are in a sort of endless loop Catch-22 that has become a self-perpetuating perfect economic storm.  Imagine that your house collapsed on you in an earthquake.  You’re trapped under one end of a heavy fallen door; the door is pinned down by a huge bookcase, which itself is held down by large rafters from the ceiling.  And those rafters can’t be moved because they are trapped by the other end of that same heavy door.

In this case, housing cannot start the economic engine,  If we look to our left, jobs and economic growth are stalled, so no one can buy; if we look to our right, a logjam of foreclosures is holding us down on the other side.  Consumer are cash poor because nearly $9 trillion in wealth from their homes is gone, which wiped out a lot of bank accounts, college funds, cash value insurance policies, and mutual fund accounts that people cashed in to try to hang on to their homes and pay their bills.  They can’t buy, so businesses aren’t growing and they can’t hire, so people can’t get the income to buy a house.  There is no savings left money for down payments or discretionary spending.  They can’t buy on credit, because either their credit rating is ruined or they don’t have the income to pay back new debt.

No cash > no credit > no spending > no business growth > no new jobs > no income > no cash… Not to mention, declining home values that continue to erode our equity will continue to feed more new foreclosures into the housing loop of doom, causing an on-going decline or stagnation of prices.

With the personal finances in the same state of chaos and decay as the housing market and general economy, where does one begin to dig out?