Saturday, January 14, 2012

The Dismal Science

To show you how little things change over the years, here is one of the earliest "Stickles" cartoons to ever be printed in the MIT student newspaper.

According to the notation, the date is March 17, 1975. The economy is in recession (sound familiar?). We have a president who is coming up for re-election. And gas prices are high ("high" in those days meant over a dollar a gallon). Because the price of oil is on the increase, inflation is a concern.

On the other hand, America in the '70s had not experienced the kind of mortgage meltdown that was to occur in 2008. In fact, the first time American banks got into trouble was in the '80s, when a rogue office of the Federal Savings and Loan Insurance Corporation (FSLIC for short) decided to practice extreme laissez-faire regulation, cozied up to the Texas banking industry and allowed them to engage in acts of finance you can't show on television or print in a family newspaper. However, instead of home mortgages, the catastrophe was precipitated by commercial lending. Billions of dollars were lent to build office buildings, subdivisions and shopping malls with money presumably set aside to finance homes, to the point where there were not enough tenants to fill all the spaces. When the price of oil suddenly and precipitously dropped in 1986, the real estate brokers ran out of tenants to fill their properties and went bust, and their problems became the problems of the Texas banks and savings and loans. In the end, the taxpayers were called in to bail out the lenders (to the tune of about $500 billion), a new agency called the Office of Thrift Supervision was created to clear up the muck, and the FSLIC was no more. The taxpayers were probably still paying to untangle the mess when 2008 came along and with it a new set of problems. It seems we never learn from our mistakes.

But that was not the proximate cause of our miseries in 1975. Instead we had runaway inflation - nothing like what we would experience in 1980, but bad enough, and triggered by gasoline getting expensive. In those days, we did not have solar and wind power, and we didn't have hybrid cars; the average Chevy got about 15 miles to the gallon, which is about what the average Hummer gets today. Our leaders vowed to Whip Inflation Now and our Fed raised interest rates, which led to a sharp, nasty recession in 1974 that spilled over into 1975. The cycle would repeat itself in 1980, which is when we experienced interest rates that briefly touched 20% (try getting a home mortgage at those rates!)

Today, of course, inflation is under 3% and interest rates, which were sky-high all throughout the '80s, are so low that you can get a 30-year mortgage for less than 4% fixed. But the bankers give you the stink-eye when you come in looking to borrow for a home. They ask you for everything but a blood test and your next of kin. Hence demand for homes continues to drag along. And people who depend on homebuilding for a living can't find work. But if you want to borrow $20 billion for a leveraged buyout, bankers can't do enough for you. After all, debt is therapeutic.

Gerald Ford lost the election in 1976; the electorate remembered how bad things were a year earlier and gave the Republicans a thrashing. Barack Obama stands for president again in 2012, having only a marginal amount to show for all his efforts since 2009 to revive the economy. That he stands any chance at all of re-election is testament to the quality of his opposition.

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