Monday, November 24, 2008

Next Time I Predict an Impending Economic Catastrophe, You All Better Listen

Damn, I'm good.

Written on August 5th, 2007 (or, over 13 months before Lehman Brothers collapsed):

The sandwich board-wearing doomsday crier in me tends to think that there will likely be a recession sometime in the next 18 months.


Let me first say that I’m probably in the minority opinion on this one (for what it’s worth), but the Cliff’s Notes version of this song and dance is that volatility in the housing and money markets will make the lives of people who live and die on credit or loans very difficult. That’s everyone from the private equity firm manager who needs to borrow tens of millions of dollars to buyout a company to the guy who uses one credit card to pay off another. It’ll be something of a credit reckoning that will force people and businesses to reassess just what kind of financial footing they stand on and I’m afraid that’s not something a lot of folks are ready to do and will likely result in a decrease in domestic consumer spending, a lot of which has been based on some form of borrowing of late.

Most people would say that any expectations of a recession are indicative of a Malthusian pessimism, that the market will “correct” itself soon enough. They could be right. But there hasn’t been a recession since the early 1990s (some people don’t count the economic discord that followed the dot com fizzle and 9/11 as a “real” recession) and there are those who would argue that we’re due.

The reason the “we’re due” line of thinking strikes me as a little more substantial than it may seem at first is that for about 20 years now the financial services sector has been developing or increasingly utilizing new institutions and methods that have made a lot of money for a lot of people. Some of these methods, like sub-prime loans, have turned out to be not as stable as they probably looked on paper not long ago – and I’d be willing to wager that there are a few other schemes out there that we just haven’t heard of yet that will suffer a similar fate.

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