In 2008, "it's the economy, stupid"

Several weeks ago, I wrote an article explaining that the economy is in bad shape and how the Republican Pollyannas on the campaign trail and in the White House couldn’t see the consumer-led recession approaching the country.

Unfortunately, I was wrong. The economic condition is far worse than I feared. In fact, I believe the economy is going to deteriorate so much in 2008 that it will be the No. 1 issue in the upcoming presidential elections, which says a lot considering the Iraqi quagmire still facing the country.

The first major economic headwind Americans will face in 2008 is plummeting home values. The real estate market is still reeling from the bursting housing bubble, which began in 2001 with prolonged periods of low interest rates coupled with poor enforcement of credit standards for mortgage applicants. In fact, there is still such an excess supply of homes that the CEO of Wells Fargo (the nation’s fifth-largest bank) said, “We have not seen a nationwide decline in housing like this since the Great Depression.”

The suffering housing market is important because it will send massive shock waves throughout the broader economy, resulting in growing unemployment and restrictions on credit access for millions of Americans in 2008.

According to U.S. News and World Report, in economically critical states, like Florida and California, approximately one in five jobs is housing-related. For example, the number of real-estate agents in Florida has increased by more than 40 percent since 2001, to 305,000; in California, there are more than 500,000 people working as realtors. Juxtapose these high job numbers with the “Depression”-like housing market and it’s obvious that hundreds of thousands of these workers will have to be fired in 2008 – and that’s just on the sales (realtor) side. What about the construction, designing and planning sides of the real estate market? A scary thought indeed.

In addition to growing national unemployment, which is estimated by some Wall Street firms to rise by 30 percent in 2008, the housing market burst will also put a stranglehold on consumer loans and credit, the life blood of our economy. Without credit, consumers will nearly be forced to stop spending altogether. For the last six years, Americans have been compensating for their stagnant wages by essentially using their appreciating homes as their own personal ATM (via home-equity loans) to fuel their consumption. According to The International Business Times, at the height of the housing bubble (winter 2005), Americans were able to extract $105.5 billion in home equity every quarter to fund their spending. The amount of credit now available to consumers in 2008 is already 35 percent smaller than that available in 2005 and will only continue to shrink as home equity disappears.

What’s worse is that Americans are now increasingly turning to credit cards to offset this loss of home-equity loans available to them. Government data shows that credit usage by Americans grew at a frightening 8.8 percent annual rate in the fall of 2007, which is 30 percent above the previous three months.

The problem here is that credit cards charge ridiculously high interest rates (typically 15 percent). How much longer can U.S. consumers pile on this 15 percent interest rate debt before they collapse from the economic weight of it? The answer: not that much longer, as I have already begun to read that 401k withdrawals in the past six months are reaching the highest levels seen. The point here is that Americans will tap every resource necessary to continue their standard of living, and without any form of serious government assistance, the U.S. consumer will eventually be all tapped out.

So what is the solution to all of this? Will the federal government intervene, fire up the economic printing press, bring back the days of easy credit and replace much of the lost capital from loan defaults? I can’t see how the government wouldn’t do this. I mean, last time I checked, it’s their job to prevent events like the “Great Depression.” Granted, this intervention would certainly spark inflation, but that inflation is “shockingly” due in large part to this current administration’s irrational energy policy, which revolves around oil, ethanol and more oil. (Just for the record, I am in favor of ethanol, just as long as it is made of sugarcane, not corn.) However, looking at all the fundamental problems in employment and credit access, even if the government does intervene with a stimulus package, it won’t immediately fix the problem. Six-year bubbles of epic proportions don’t get fixed in 12 months time, no matter what politicians do. The economy is already on the fast track toward a serious downturn in 2008. Hold on, it’ll be a bumpy ride.

Patrick Molnar is a business junior and a Mustang Daily liberal columnist.