Denver Bar Association
March 2009
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The Worst (Fill in the Blank) Since the Great Depression?

by Doug McQuiston

It’s a new year. We have a new, history-making president. Yet we still cannot find a way to escape the daily news harangue that it (whatever statistic the talking head is discussing) is "The Worst Since The Great Depression." Enough already!

Sure, I have been just as battered by the economic downturn, and I, too, got the shakes when I saw my year-end 401(k) statement. But the steady drumbeat of references to the Great Depression are not helping.

It’s time to take a few deep breaths, find our qi, (see, and get a grip. In many ways, we think ourselves into recessions; we have to think ourselves out. Tough times have no power over us unless we let them. The sooner we decide to no longer participate in "the recessionary nightmare," the sooner it will be over. So snap out of it, channel your inner Phil Gramm and travel with me on a little statistical reality check.

Reality Check No. 1 — The latest unemployment numbers. They’re no reason to celebrate, to be sure. But Great Depression? Hardly. At 7.6 percent, the numbers aren’t even close. During the 1930s, 25 percent of Americans could not find work. It got so bad then that in 1933, more than 100,000 Americans actually applied for visas to go to the Soviet Union to look for a job — any job — to avoid starvation.

Besides, since the Depression ended, there have been at least eight years with worse unemployment rates than we have now, according to the U.S. Bureau of Labor Statistics. In the Carter years of the late 1970s, (and even into the first two years of the Reagan administration), unemployment rates reached over 10 percent. Furthermore, during the Carter years, unemployment checks didn’t go very far. Inflation had reached a paralyzing 13.5 percent. Our current levels are so low no one is noticing.

Home prices and mortgage rates? Here’s Reality Check No. 2. Historically, until about 2000, your home was the place you lived, not a market play. Home prices remained fairly static in real dollars. That all changed in 2000, thanks to the explosive growth of Fannie Mae and Freddie Mac. All of those "no-credit-check" mortgages, written to millions of borrowers with no hope of ever repaying them, brought rampant speculation in residential real estate, causing the "housing bubble." Then, as night follows day, came the Wall Street crash, trillion dollar "TARP" bailouts and the nationalizing of huge swaths of the American economy.

Even with this "crisis," home values averaged around $225,000 in early 2008, compared to the average $150,000 home value a decade ago.

So, change your perspective a bit. What the talking heads are calling the "Worst Housing Catastrophe Since The Great Depression" is instead just a long-needed readjustment of prices to less speculative, more sustainable levels.

Besides, all of those dreaded "short sales" going on now are blessings in disguise. They offer overextended debtors a way out of a situation that was doomed from the start. They offer new homebuyers a more affordable deal on a new home than they could have dreamed of even a year ago. They even give the mortgage banks a chance to reorient their risks, take their losses and start the climb back to profitability.

Although folks who bought homes in the last year or two may be a bit nervous for the next few years, (while their home values catch up to their mortgages), the news is actually exciting for people just entering the home market. On a personal note, my son is one of them.

He is currently home shopping in his new hometown of Chicago. Last year, he couldn’t have hoped to afford a home of his own. He likely will be moving into one in the next couple of months. He is joining a few million other homebuyers in their 20s. They’ll be able to afford it, too. The interest rate they’ll pay for a 30-year mortgage will be below 5 percent. My son still doesn’t believe me when I tell him that our first mortgage, in 1982, had a rate of more than 12 percent and we were lucky to find one "so low."

Dark cloud, meet silver lining. That new home will need new cabinets, new paint and new furniture. Multiply that by the millions of "short sales" and foreclosure auction purchases now underway, and you’ll begin to see the truth of the axiom that "…by the time we realize we’re in a recession, we’re probably on our way out of it."

But what about the stock market, you say? Time for Reality Check No. 3. A tougher sell, sure, but follow me on this one. Did the market really "lose trillions of dollars of value" last year? Unless you sold at the low, you haven’t "lost" anything; you never had it in the first place! The skyrocketing highs of the 2007 market were made out of paper — cheap loans, high leveraging and Madoffian Ponzi schemes.

Sure, it was fun looking at our Fidelity statements last year. Seeing those big "gains" was like a trip to Disneyland — it’s great fun to go for a visit, but we can’t stay!

The stock market was never intended to provide huge gains. It is a long-term investment that, if you’re lucky, will grow your retirement fund a little faster than inflation. Over the long haul (which is the only stock market play that makes any sense), even at the current Dow trading range (around the 8,000s), anyone who has been in the market for at least a decade or so (particularly those who have taken advantage of their 401(k) and the employer-match they provide) has done just fine, according to Yahoo Finance data from the Dow Jones Industrial Average from earlier this year.

There is good news even here, for those with the patience and resolve to see it. Those 20-somethings who are shopping for houses are also putting money toward their brand-new 401(k)s — they’re seeing deals on stocks that in the coming decades will make our puny little gains over the last few decades look like spare change. They’ll need the money, too, because they may yet go broke trying to pay for our Social Security!

So buck up out there, for crying out loud. This is the United States of America. Our best days are always ahead of us. We descend from ancestors who turned their backs on their feudal poverty and boarded ships to come to the New World. We didn’t huddle in our huts back then, and we won’t let a little setback slow us down now. The future’s waiting — let’s go meet it.

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