epilogue

There seems to be nothing but bad news for economic optimists looking forward to the Obama administration to come to power this January. Last month, USA TODAY, predicted that the US economy is expected to emerge from the recession sometime around mid-2009. Unfortunately, this may not be entirely true. In fact, if current events and happenings are to be believed, a contrary picture emerges. The US economy might be just stumbling from one crisis to another.

One of the major reasons for the crisis is the collapse of the housing market in the US. In December last year, 2008 the Case-Shiller home price index saw the largest drop in history (PDF). As housing prices tanked, a good amount of home owners were holding negative equity - a mortgage debt higher than the value of the property. Stocks of companies that had an exposure to such mortgage debts took a beating. Also, home owners with depreciating assets took to a selling spree in equity markets. Over-leveraged banks fell.

But it is not just banks anymore, billion dollar companies are going bankrupt. Tuesday this week, the American operations of the chemical manufacturing giant, LyondellBasell filed for bankruptcy. The reason: heavy debt and weakening demand. Conditions elsewhere in the US may not be the same, but are acute. In a bid to conserve cash companies have reduced spending and are trimming their labor force.

The US BLS reported a national unemployment rate of 6.7% (for November 2008) in December. For an economy whose corner-stone rests on consumer spending, an unemployment rate higher than 4.3% is unhealthy. As a result, housing demand and prices may well continue to fall, at least, until the home owner find job security.

Elsewhere, gummed-up money markets and declining investor confidence is already taking its toll. As Foreign Investors pull money out, the EU region, Japan and Russia are already knocking recessionary doors. In Germany, billionaire Adolf Merckle took his own life this week following trading losses and crisis in Volkswagen AG, Ratiopharm International GmbH and cement maker HeidelbergCement AG.

There is no doubt that lax regulatory practices in the US are responsible for the crisis. The Bernie Madoff issue is just a case in point. While the US Government (and governments elsewhere) are rushing in with financial stimulus packages for the near term, there are no visible efforts to fix the system. The only likely ways out seem to be slow and slumbering growth till confidence and regulatory frameworks are bettered; or, a fast recovery only to find a bigger pits in the future.

In any case, a lot depends on the housing prices and corporate earnings; and,  a complete recovery in these areas doesn’t seem likely till mid or late 2010.

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