Thursday, October 30, 2008

Problems Causing the Recession Are Complex

This is the fourth of a six part series, running this week, on why you can expect that the downturn will be deeper and longer than currently expected by most. Each day, I will post about one of the six reasons why I have come to this conclusion. Here is Reason #4.

Many prognosticators on the likely depth and duration of the downturn hypothesize that the downturn cannot reach the depths of the Great Depression because of all the tools that the government now has to slow the downturn. Well, as covered in my last post, I am not encouraged by the results of the turnaround efforts to-date.

My pessimism as to the likely depth and duration of the downturn…or should I say my “realism”…is based, in part, on what I believe to be the complexity of this downturn. Let’s take just one problem, of the many problems, as an example: How do we fix the housing problem?

Does the government just indemnify the holders of toxic paper. If so, what about those who have lost money along the line from this toxic paper, i.e, past holders of the toxic paper? Or, is this to be like musical chairs and whomever has the problem when the government finally acts, gets bailed out?

Or, go down a level and focus on the challenges of dealing with the ultimate borrowers. David Leonhardt of the NYTimes wrote a very thoughtful article on the conundrum of dealing with this group in his October 22 piece. His construct for analyzing the problem is to divide those with housing loan (mortgage) problems into two groups: (1) those who may not be able make payments, and (2) those who have the cash flow to make payments but question the sanity of continuing to make payments on a property where the mortgage debt far exceeds the fair market value of the property. Do both deserve to be bailed out? What do we do with those who have recently lost their homes? Do we just say “sorry, you weren’t in the chair when the music stopped.”

After studying just this one problem, i.e., that of the housing market, Leonhardt ends his analysis and article with this sage conclusion:

“But this financial crisis is not going to be solved by a magic bullet. It is going to require a smorgasbord of programs – some aimed at homeowners in trouble, some aimed at the credit market, some aimed at the job market – as well as a whole lot of time and patience.” (emphasis added)
The more the federal government involves themselves in direct bailouts, whether at the company level or the individual level, the more the risk of disparate treatment. Disparate treatment means debate, and lobbying, and other actions that introduce more risk of yet more delay and more unfairness.

And, this is true in many other industries beyond housing. Already there are screams from some financial institutions that the bailout efforts are favoring a chosen few. You have the auto industry clamoring for direct bailout of their industry. Are they really more deserving than say the restaurant industry? Or the appliance industry? Or???

The policy implications of the turnaround moves that need to be expeditiously made are immense. There will be fortunes made and lost based on the decisions made. And, where there is so much at stake, the risk for poor judgment, or even corrupted judgment, increases.

I am not an economist. I am not a social scientist. And, I am certainly not a politician. What I know is turnarounds. And, from my vantage point, this is the most difficult turnaround since the Great Depression. And that leads me to conclude that the downturn will be deep and relatively long in duration. And, I get absolutely no satisfaction in reaching that conclusion.

Up Next: The fifth of the six reasons for pessimism about the duration and depth of the downturn; The Ripple Effect is Acceleration the Downturn. Follow this series all week as I layout one of the six reasons every day. And, remember that although I believe that these are tough times, I believe that…with the right actions…the agile can prosper. Stay tuned to next week when each daily post will address specific ways businesses can prosper in these tough times.

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