5 Doomsday Scenarios for the U.S. Economy

by Derek Thompson and Daniel Indiviglio
Friday, September 3, 2010

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It’s been a brutal summer for the economy. The housing sector, like a balloon batted in the air one last time by the government credit, resumed its inevitable fall. Economic growth slowed to a lead-footed 1.6 percent, and job growth is even more anemic. Meanwhile, consumers are cranky, the trade gap is gaping.

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Most signs point to a slow and steady recovery, but what if the pessimists are right, again? What if the United States isn’t in the slow-lane to recovery, but rather on the precipice of another decline — a double dip?

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To see where this re-recession might begin, my colleague Dan Indiviglio and I imagined five financial earthquakes, each with a single epicenter: housing, consumers, toxic assets, Europe, and the debt. The following five scenarios are listed in order of likelihood.

1. Housing’s Mini-Bubble Pops

Perhaps nothing poses as a big of a concern to the U.S. economy as its housing market. It’s unclear how the government’s efforts to stabilize the market through a buyer credit, ultra-low mortgage rates, and mortgage modification programs will pan out. Did it just create another mini-bubble that’s beginning to pop now that the support has been withdrawn?

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Here’s the scenario. Weak home sales and continuing foreclosures result in climbing real estate inventory. This has two effects. First, it makes new homes even less attractive which further reduces construction jobs. Second, it puts downward pressure on home prices, which makes it harder for struggling homeowners to sell their home to avoid foreclosure and also keeps strategic default rates high, exacerbating the problem. Lower home values encourage Americans to save more and spend less, since their wealth is effectively reduced. The Dow drops and credit markets tighten even further, suffocating private investment just as homeowners bunker down and slash spending. Growth turns negative.

2. You Break the Economy

You, the American consumer, are reloading savings after a debt-fueled decade. But as any general will tell you, when an entire squad reloads at once, it leaves everybody vulnerable. It’s the same with the economy.

Here’s the scenario. Consumer sentiment continues to fall slowly, and spending turns negative again. Small businesses hold off to replenish their inventories or add new workers. Wages and hours freeze, and unemployment takes a leap toward 10 percent in October. Congress is paralyzed, because it’s only weeks away from the mid-terms. The stock market sees business revenue trending flat, joblessness rising and Congress doing nothing, and it sparks a 300-point sell-off. Americans frightful for their savings cut back spending even more the next month, and overall growth turns negative.

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3. Toxic Assets Return

If you closely followed the bank bailout, then you know it wasn’t originally billed as simply throwing money at the banks. Instead, the Treasury intended to purchase the toxic assets from banks, which were the source of investors’ uncertainty concerning bank stability. But the Treasury couldn’t figure out a way to do this quickly enough to make it effective. As a result, the banks were largely stuck with these bad assets. We just don’t know how bad, yet.

Here’s the scenario. The residential real estate market’s problems continue. Even once foreclosures begin to decline, we see waves of defaults, as modification program participants re-default at rates of 30% to 50%. Commercial mortgage-backed securities continue to deteriorate, as some businesses struggle with weak consumer demand. Home and commercial real estate values keep declining, and so do the value of the assets that back them. Banks with exposure to these toxic securities see another round of losses, and investors question their stability. The market plummets, credit freezes, and growth turns negative.

4. Europe Falls Apart

Europe seems to have avoided an all-out collapse of confidence in its ability to pay back its debt. But things can change, and fast fast. Indeed, the Greek debt crisis went from ignorable wire stories to front page news in a matter of days.

Here’s the scenario. Slow growth in weak Eurozone states like Greece, Spain, and Italy turns negative and spooks investors, who demand higher returns on government debt. Europe’s bond rates spike. Countries announce further austerity — tax increases and spending cuts — which strangles our biggest export market. The EU central bank responds by announcing a plan to write down troubled debt, which dings some Americans banks.

In a flight to quality debt, the dollar appreciates. This hurts our exports even more. As the trade deficit gapes open and manufacturing’s good run dead ends, the stock market plummets, taking household wealth down with it. Families looking to restore balance sheets cut back on spending, and the American producer loses the American consumer and the European buyer. Growth turns negative.

5. Debt Finally Catches Up to Us

Interest rates on U.S. debt are low today for one big reason. Investors trust the United States, at least more than they trust other countries. If the people giving us money suddenly have as little faith in America as Americans, that could change, and quickly.

Here’s the scenario. The IMF recently said the United States has a 25 percent chance of seeing dramatically higher interest rates in the near future. But the bond market can strike without warning, as it did in Europe earlier this year. If uncertainty with our political process gets reflected in our interest rate, we’ll have a harder time affording debt, 55% of which has to be rolled over in the next three years. Pension and mutual funds with government debt would be written down, causing Americans to save even more of their paychecks. We’d be left with two bad choices: tax cuts to juice consumption or tax hikes to please our lenders. But at that point, it would be too late to avoid a double dip.

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Customer Centric Banking is Today. The banks are not allowing 2.0 technology to empower consumers to be financial stewards of financial destiny.

The time is 5am on a Friday in DC, and a consumer is signing online to verify a bonus check for $10,000 is direct deposited into a personal checking account. The online access is not inclusive to one bank or one account, but many financial service providers are available to the consumer including banks, investment companies, lending companies, credit unions, and private investors for small business lending and private mortgage lending. The consumer has predetermined the allocation move over $7,500 to an investment bank to allocate into stocks and mutual funds, and $2,500 to invest in a peer-to-peer lending company accessible via the same online account to be a partial investor in a business loan request.

As the consumer signs online, the consumer is in control of all the services via one online platform system with a dashboard customized to the consumer’s financial services ownership and future financial. The opportunity for both consumer and primary bank is vast as the online platform has matched the deposit and the linked suitability form submitted during initial sign-up for the online service. This feature has allowed the bank to recognize a cross sell opportunity via the consumer’s desire to buying a home as a top priority over investment’s in stock and mutual funds in the consumer’s financial priorities list use of the $10,000 bonus money.

The consumer clicks the dashboard icon for the bank checking account and an avatar appears on the computer screen to inform the consumer of the $10,000 direct deposit into the primary checking account, and the avatar explains about the bank’s new mortgage savers account in the same sentence. The mortgage saver’s is an account with a higher rate of return with partial allocation in Treasuries and retain the FDIC guarantee. The rate is fixed until the 20% threshold for a mortgage down payment is met with easy approval for a mortgage and discount on rates and fees via the same bank. The consumer is intrigued and leaves $7500 in the checking instead of moving over to the investment bank connected the online banking account because the consumer is going to the branch of the bank to obtain more information.

As the consumer begins the day, the consumer has been able to engage account money management with one platform. The consumer has made a decision to experience another financial channel to meet financial needs. The new bank has utilized the sharing of an online platform online platform not as a threat to offer new innovative product solutions. That opportunity and technology is available today.

Read more: http://bizcovering.com/business/the-future-of-banking-is-not-beyond-tomorrow/#ixzz0sUwrVfPI

Real estate is cornerstone in the US Economy along with Banking...

In a recent news report about past campaign coverage, the 1976 presidential campaign and debate was aired with Democratic Presidential Candidate Lloyd Bentsen discussing the challenges of the day including the threat of fiscal deficits to the economy. The short clip from 1976 was so relevant in words to the current economic situation of 2010. The visual aspect was a much different time where debate was civil and clothing was questionable. The two minute experience was enough to vaguely recall through life experience or history class the “boot on the throat” of economic growth in the United States economy. That brought to more recent historical event in our journey to the current scenario in the economy, job market, and excesses in debt that no segment of society can address the issues because of the enormity and the missing element of the common sense twist.

In addition, the impotence of TARP was discussed in a previous article, and the precedent of TARP was not consider during the drafting of reform legislation. TARP was established for high impact in the real economy through an establishment of broad objectives. The legislation was not tailored to insure objectives were met. The benefactors of TARP were banks, and the benefactors were the recipients of liquidity without any expectations or conditions set by Congress. The easing of credit, stabilization of the housing market, stabilization of job market, and widespread impact in urban and rural areas were broad objectives that did not come to fruition in TARP.

In review, the establish of broad objectives by Congress as a centerpiece to any final legislation could have brought the desired impact via implementation of TARP. As an example, the mock example is stated below in a realized set of Financial Reform objectives in a Consumer Bill of Rights.

The following example details a Consumer Bill of Rights in Financial Reform:

Consumer Rights under Traditional Banking Financial Reform
Banking Services and Opportunities from Wall Street to Main Street:

Seven Components in a Bill of Rights:
Primary Goal: Banking Services and Opportunities from Wall Street to Main Street:

* Localism
* Financial Literacy-Education-Schools, Banks, and Community Associations
* Savings First Products-Expansion of IRA programs-College,Mortgage,Long-Term Care
* Traditional Banking Facility separate from other business segments
* New Partnership- Banking 2.0 Technology-Fundamentals- 100% Servicing
* Credit Bureau Scoring – Fair and Inclusive to Banking Only
* One agency for traditional banking regulations and consumer advocacy

In conclusion, the Consumer Bill of Rights as the roadmap to Financial Reform would produce legislation that is tailored for high impact. In America, goal setting is must in life, and the restoration of a normal relationship of banker and consumer is a must for a vibrant economy. America is unable to spend enough money to fix a fundamental flaw in decoupling of trust between banks and consumers.

The current reform keeps the banks and consumer decoupled, and the last decoupling has one precedent in history to give insight to a possible outcome and this historical event was deemed the Great Depression.

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Published on zero hedge (http://www.zerohedge.com)