More than three years have now passed since the French bank BNP Paribas was forced to suspend depositor withdrawals when the bank could no longer sell its underlying portfolio of subprime mortgage assets on the open market to generate cash. That action, largely unnoticed at the time, is now considered the spark that ignited what many call “The Great Recession.”
While economists rarely agree, there is consensus that the economic debacle of 2007–09 was anything but typical. A study of 19 major American recessions shows that the average “bear market” lasted 29 months with market values declining 56 percent. Everything about the most recent recession, though, appears accelerated. This time around, the decline lasted 17 months with U.S. equity markets declining 56.8 percent. Historically, a major bear market is followed by a “snap-back” rally lasting 17 months with market values regaining, on average, 70 percent. Our most recent rebound—March 9, 2009, to April 23, 2010—lasted just over 13 months with market values regaining 79.9 percent.
History also suggests that a second period of market decline will occur—the much-talked-about “double-dip” recession. This time history did not repeat itself. While market indices moved erratically after April 23 of last year, the overall movement of the stock market was positive with the S&P 500 Index up by 15.1 percent for the year on December 31.
Yet more than three years after it began, most Americans believe that financial disaster is still with us. Despite huge government stimulus spending and promising Wall Street averages, the Great Recession continues. For many individuals, the promise of growth is an illusion, and unemployment levels seem to confirm our worst fears.
Keynesian economic theory argues that the antidote for the current financial malaise is lower interest rates and more stimulus spending. Yet the midterm congressional elections suggest that increasing the federal deficit through stimulus packages is not an acceptable choice. And how can the Federal Reserve use lower interest rates to spark a recovery when current rates are already near zero?
Assuming the United States does not enter into a period of prolonged stagnation, what does the near future hold? My personal hope is that this nation will lose its desire for more of everything—larger homes, more goods, more debt. Many forecasters believe that American consumers, who account for nearly 70 percent of economic activity in the nation, are looking to simplify and to cut debt.
Another option open to the children of God is the gift of optimism. Granted, the economy still feels bad for a reason: it is! But things are much better now than they were in the spring of 2009, when we were at the bottom of the worst downturn since the Great Depression. It takes a long time to dig your way out of a hole that deep. Yes, the current period of subpar growth and high unemployment is real, but it need not persist. Lowering our expectations for the future, however, is not a helpful response.
Some economists are suggesting that broad macroeconomic policies must change if we are to prosper in the months to come. Since early 2008, the fiscal authorities have sought to fill the hole left by economic decline through large stimulus programs—checks in the mail to spur consumption, short-lived housing rebates to raise demand, one-time cash-for-clunkers to move inventory, and temporary business tax credits to spur investment. These programs may well have boosted gross domestic product for a quarter or two, but they have done little to put the economy on a stronger, more sustainable trajectory.
We consumers might benefit from following a different pattern as well. Granted, a strict economic diet of financial austerity will not have great appeal. Call it penance, if you will, for the excesses of the past. Higher personal saving rates coupled with family budgets based on cash, not credit, are reasonable and right responses to unpredictable government policies. It is not within our power to manage the federal deficit. However, our personal levels of debt and savings are another matter. There lies the essential groundwork for greater, sustainable prosperity.
James G. Mentzer, CLU, ChFC, has been a financial planner since 1986. He is currently director of planned giving for the United Methodist Foundation of Raleigh, N.C.