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Monday Mornings with Madison

MADISON COMMERCIAL REAL ESTATE SERVICES MADISON COMMERCIAL REAL ESTATE SERVICES
#49

A DEPRESSION?
We all create scenarios in our minds about what’s going to happen tomorrow. For better or for worse, we spin stories about the future that are either encouraging or paralyzing. 

Right now, some people are deeply pessimistic about the future of the economy. They envision a coming depression similar to the one we had in 1929, when people were standing in soup-kitchen lines to get a little food. These people foresee a future where things will only get worst; where it will be years before the economy grows again; where the current financial system will be proven broken beyond repair and nothing that the government can do to help will make a difference.

In reality, however, we are very far from the Depression of 1929, when the country was not tied into a global economic system and commercial banks were not insured.  In the 1930’s, more than 9000 U.S. banks simply closed their doors; their customers lost all their deposits. There were also no mechanisms in place among countries to try to resolve financial crises in concert with one another, rather than in isolation.

Then and now
Today almost all banks are federally insured, so our deposits are safe. America has become part of a global economic system, which means that industries can find markets as long as they stay competitive and innovative — two notable attributes of the U.S. economy. Isolationism is recognized as counter-productive and fiscal policy is used to regulate the economy, to greater or lesser success. So another truly Great Depression, when 25% of the work force was unemployed, when trade and construction virtually stopped, seems unlikely.

If it’s not a depression, could we then be entering a deep recession? For example, in the 1980’s the GDP shrank over 5 quarters, including a one-quarter drop of 7.8%, the prime rate was at 21.5% and the unemployment rate hit 11%. But judging by the numbers, we are very far from that scenario as well. We have had one quarter with the GDP down and then only by 0.3%, the prime rate is at 1.00%, and unemployment is at 6.1%. While these numbers may change for the worse over the next few months, we are not yet facing the type of economic catastrophe that some envision.

Getting back in the black
In fact, the optimists among us feel that great opportunities exist today. They believe that you can now get good deals on almost anything you need and find plenty of talented people to help you grow your business to the next level. They see the economy stabilizing in the second half of 2009 with new regulations in place for banks and lending institutions to ease the credit freeze and jumpstart business growth.  And some experts predict the government may, in the end, make money from all the bad debt that is now being bought at bargain prices, since many of these debts are not as bad as investors think.  As the economy gets back to normal, many of those loans will be repaid, allowing the government to come out in the black.

Even if you are in one of the industries directly affected by the credit crisis, there are new opportunities every day. For example, some in the real estate market are making money by helping people find better loans and thus avoid foreclosure. Others are investing for the long term by seeking the bargain deals that are currently available. The point is that our chances for success are improved when we stay cautiously and prudently optimistic, so why not look for new opportunities today? We will get out of this current downturn sooner rather than later and emerge in the end stronger than before.

QUOTE OF THE WEEK
When one door closes, another door opens; but we so often look so long and so regretfully upon the closed door that we do not see the ones which open for us.  Alexander Graham Bell


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