Shiller's Bad Recession

We are almost a year past the 2008 market break. Everyone has had a chance to review their personal outcomes and make whatever plans are possible to respond to the changed conditions.

Because the real estate market is still eroding, albeit slowly now as described in this article, household wealth continues to be under attack. Also because of the near ten percent unemployment rate, it is also true that most incomes are terribly vulnerable. In this environment, most folks who get new jobs will be accepting lower incomes.

So far, government action has produced little that is concrete. They certainly have prevented a total banking implosion by printing money to fill the shortfall produced by massive asset write downs in the banking sector. At this point that sector knows were it stands and if they begin supporting lending in the housing sector which I expect them to do we will see that sector quickly sort itself out.

With luck, we can have a land rush through 2010 and see the bulk of the inventory cleaned up over the next two years, driven by buyers prepared to rent the houses.

The big present concern is to get the economic core back into economic expansion and hiring mode. As I have already posted, our best chance there is to backstop a massive expansion of the power business in preparation for electrification of the personal transportation business. A lot of metal must be cast and shaped to build all those windmills and it is all best done in the Midwest.

This is where the government can get the biggest response for effort and outlay.

In answer to the question of can the economy deteriorate much more? The answer is not that likely. It would require a further attack on household incomes more than anything else. We are still losing jobs and that should have largely run its course.

The restoration of consumer spending will be slow for another year but then should start recovery. Credit cards will have been paid down and the credit system should then be fully functional.

This should all add up to a sharp rally this fall, instead of further declines.

Economist Shiller Sees 'Bad Recession,' Stocks Could Drop Again
Sunday, July 19, 2009 5:34 PM

Esteemed economist Dr. Robert Shiller was among the very few to warn of a housing bust before it happened.

Now he tells Newsmax and that, although the housing market could be approaching a bottom, prices might remain in the “doldrums” for years to come as the United States remains in a “liquidity trap” comparable to the one it faced during the Great Depression.

Though stock market prices are valued fairly now, Shiller said, equities remain a “risky” investment because the United States has not turned the corner on its fiscal crisis. He warned that stock prices “could fall dramatically.”

Editor's Note: To see Dr. Shiller’s full video interview,
Go Here Now.

Shiller is the co-creator of the closely watched S&P/Case-Shiller Home Price Indices. His books include "The Subprime Solution: How Today's Global Financial Crisis Happened, and What to Do About It."

During an interview in 2006 with Newsmax’s Financial Intelligence Report, Shiller accurately warned of a looming price bust in housing. During a recent interview, Newsmax.TV’s Dan Mangru asked Shiller where he sees the housing market going from here.

"In the United States, home prices have been dropping at a rapid clip," Shiller responded.

"However, in the latest S&P/Case-Shiller data, the rate of decline seems to be reduced, and in fact, in seven of our 20 cities, home prices were rising in April. So it does seem to me that we are getting closer to a bottom at the very least."

Last week, demand for home-purchase loans decreased and the unemployment rate now stands at 9.5 percent, Mangru pointed out, and asked: Are home buyers just scared?

"I think having really high unemployment is naturally scaring people," Shiller said.

"And we don't know that it's over yet. We had a really bad unemployment report, and unemployment could easily exceed 10 percent. People know that. That's one reason the personal savings rate has risen to 6.9 percent, levels we haven't seen in decades.

"Even though the confidence surveys seem to be relatively upbeat, I don't know if it really translates into willingness to purchase yet."

Unlike other analysts, Shiller doesn’t believe the key to a U.S. economic recovery lies in the housing sector. He argues that the United States should first get its credit markets in order and get banks lending money again.

He told Newsmax.TV he doesn’t think some proposals calling for increased tax credits for all home buyers is a good idea.

He sees the $8,000 tax credit for new home buyers as stimulative because it forces new home buyers into the market rather than existing homeowners who would put their existing properties up for sale.

In discussing the overall economy, Shiller said the United States had avoided an economic “catastrophe” because of intervention by the Federal Reserve and Treasury, but the nation remains in a “bad recession.”

Instead, Shiller foresees a “risk of a weak economy for years to come.”

He advises conservative investors, especially those who are retired and on fixed incomes, to be wary of stocks.

Shiller compared the country’s economic crisis to the same “liquidity trap” the United States faced in the Great Depression. The federal government needs to pump more economic stimulus, via increased spending or tax cuts, into the economy, he said.

He thinks the first stimulus wasn’t enough and has unwound too slowly.

Asked whether he sees the Fed's increase of the nation’s monetary base as inflationary, Shiller said no, at least for the near future.

However, he suggested that the economy could face “the possibility of substantial inflation” a “few years down the road.”

He believes that investing in commodities is a “smart thing to do,” regardless of whether inflation hits.

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