Recession-spawned caution may be a fiscal saving grace
By Aldo Svaldi
The Denver Post
Article Last Updated: 12/20/2008 10:29:35 AM MST


The loss of consumer confidence is a symptom, not a cause, of the current recession, say economists who believe greater consumer caution is warranted.

"This is not a crisis of confidence, this is a crisis of the fundamentals," said Peter Morici, an economics professor at the University of Maryland. "The real problem is that we are not making what we consume, and we are borrowing from abroad."

Trade deficits, federal deficits, household deficits — all show that the U.S. has become accustomed to living off other people's money.

Among the worst offenders were Wall Street investment banks that leveraged their capital 30 to 40 times to fund easy mortgages that inflated real estate values, artificially goosing the economy earlier this decade.

Consumers aren't running scared and deserve more credit than they are getting, Morici said.

He said they realize that this recession isn't a normal cyclical downturn but reflective of a broken system that needs fundamental changes.

"It is a big margin call on this generation," said Timothy Canova, an economic historian at Chapman University in Orange, Calif.

People maxed out on their credit cards and fearful of losing their jobs aren't going to suddenly start whistling a confident tune.

"Trying to shore up confidence with just words is a dead end. You run out of words, and they are not believable," Canova said.

Employers cut more than 533,000 payroll jobs last month, the largest monthly loss since December 1974, and new claims for jobless benefits surged earlier this month to a seasonally adjusted 573,000, indicating December could be even worse.

Telling consumers to spend, the message given with stimulus checks mailed out this summer and during the 2001 recession, is the wrong approach, some economists say, if overspending is what landed the nation in its current predicament.

Consumers instead are starting to save more, if they can. Outstanding consumer credit fell by $3.5 billion in October to $2.58 trillion, according to the Federal Reserve.

Also, many households that borrowed to compensate for incomes that fell behind inflation after the 2001 recession have had their credit cut off, Canova said.

Lenders have frozen home- equity lines in many parts of the country and raised down-payment requirements on conventional mortgages to 10 percent or 20 percent.

Credit-card issuers are expected to cut $2 trillion in credit lines over the next 18 months, a 45 percent reduction, forecasts Oppenheimer & Co. analyst Meredith Whitney.

Even affluent consumers are pulling in as their assets fall in value. The net worth of U.S. households declined $2.81 trillion in the third quarter to $56.5 trillion, according to the Federal Reserve.

The decline, driven by falling home and stock values, is the largest since records started in 1952, and the fourth quarter's decline will likely surpass it.

Consumer spending came to account for 70 percent of U.S. economic activity, too large a concentration, said Randy Frederick, director of trading and derivatives with the Schwab Center for Financial Research.

"That consumer spending portion of the economy has to be lowered, and it will be," Frederick said. "Do you really need four Walmarts within 10 miles of each other?"

The U.S. needs to focus on production rather than consumption, on building up its own internal savings rather than borrowing from others.

If businesses and households put themselves on a solid financial footing, eventually the U.S. economy will regain its footing.

"If I am able to work extra hard, pay down my debts and put away savings, then I have protected my family," Frederick said. "That is my final job."

http://www.denverpost.com/breakingnews/ci_11275581