Traditionally bullish Dick Berner of Morgan Stanley has issued a scathing appraisal of the state of the US economy. In the extremely bearish report released today, the analyst warns that it may already be too late to prevent a recession given the rapidly expanding credit problems and the collapse of the housing market. (Telegraph: Morgan Stanley issues full US recession alert.)
Citing a third quarter foreclosure rate of 5.59%, Berner stated, "As delinquencies and defaults soar, lenders are tightening credit for commercial, credit card and auto lending, as well as for all mortgage borrowers."
That one sentence pretty much sums up both the current state of affairs and the cause of the current state of affairs. Lenders are struggling with the number of foreclosures in the housing market yet they have yet to acknowledge that they created the problem in the first place. There was a time where mortgage lenders required an applicant to earn their entire mortgage payment in one week after taxes. That requirement fell by the wayside years ago as the housing market rose to new heights, guaranteeing the lender a profit even in the event of foreclosure.
Right up until the collapse, mortgage lenders were handing out sub-prime loans with no money down like they were candy. Now these same lenders, faced with billions of dollars in write-downs are crying poverty and warning of a recession that they themselves created. The housing market is only the tip of the credit iceberg, however. This same lending crunch is about to hit the credit card industry. Business practices by credit card companies such as Bank of America and Discover are such that they virtually force people into default through the highly unethical manipulation of interest rates on even good credit accounts. Congress has taken up that challenge, not that I hold out any hope for something worthwhile coming out of that body.
The Morgan Stanley report, written prior to yesterday's FOMC announcement but released today, predicted a 25 basis point cut in rates this week (which did happen yesterday) and also predicts at least three more cuts in 2008. In so forecasting, Berner stated, "We expect the Fed to insure against the worst outcome."
Perhaps if you make the wrong move often enough, it will become the right move. It hasn't worked yet, but there's always next time. Continuing to lower interest rates in this fashion is counter productive. Not only do the lower interest rates add to inflationary pressures, but they continue to weaken the value of the US dollar against foreign currencies, they continue to exacerbate the credit problem, and they put increased financial pressure on banks already suffering from an inverted yield curve. Somehow, this does not sound like a good strategy to me.
What the report doesn't say is the impact the price of energy will have on the overall economy or what fourth quarter retail sales are going to look like. Anyone that has glanced at their November utility bills can answer the first question. The average consumer is going to be squeezed pretty hard this winter, especially if the current weather pattern continues. While oil may have retreated below $90 per barrel, utility costs are still skyrocketing. That's coming directly out of the household budget and will have an extremely negative effect on discretionary spending.
Likewise, anyone that has been Christmas shopping over the last couple of weeks can tell you what retail sales will look like for December. If you haven't noticed, the stores are empty this year. That's not surprising given the cost of actually driving to the store with gas prices holding firm above the $3 per gallon mark. Online sales will likely be up this year, but as a whole people will be spending significantly less on Christmas gifts thanks in no small part to the soaring fuel costs.
So are we headed for a recession? Absolutely. Growth may appear strong in the most recent reports, but the reports are deceptive and are currently a trailing indicator. Even new housing starts were up in the last report which surprised an awful lot of analysts. But this growth is not sustainable give energy and credit pressures. The average consumer is already being hit very hard by an inflation rate that everyone except the federal government seems to acknowledge as climbing significantly.
While banks have not caused the rising energy costs, they have certainly caused the credit collapse and the housing collapse. What's missing is accountability. The very real result of their unethical business practices goes far beyond lower profits at the larger institutions. The real effect is the toll it takes on the average family that was just scraping by. The number of real families that are losing their homes or going into bankruptcy because of corrupt corporate business practices is staggering, and that is something for which corporate executives need to be held accountable.
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