Lessons learned — part II

By David Helscher

It has been said that two emotions drive markets: Greed and fear.

We all have a tendency to project our current situation into the future. When times are good, we think the party will last forever. When the economy turns, as it has, we forecast a collapse of the global economy.

There are mechanisms in place to protect us from ourselves and extremes of emotion. Some are responses to market cycles.

We have added some built-in safety nets. These include Social Security, Medicaid, Medicare and unemployment insurance. In the 1930s, the FDIC was created to protect savings and this program was expanded last fall, at least temporarily.

A variety of agencies have been put in place to oversee economic activity, including the Federal Reserve, created in 1913, charged with maintaining the safety and stability of the economy. In 1929, the government was about 3 percent of gross domestic product. Currently, this figure is close to 21 percent.

The source of its spending power isn’t going anywhere. This makes the current economy more stable than during past periods of downturns. This figure is likely to grow in the short term with the expansion of government or government funded infrastructure stimulus programs.

In this period of extreme pessimism, consumers and businesses have delayed purchases and are saving money. The most recent annualized personal savings rate has jumped to 5 percent, the highest rate in many years. At some point, as we all adjust to the new reality and pessimism subsides, consumers and businesses will begin to spend again. Businesses that have been discounting and selling existing inventories will need to replace and restock. The production caused to fill these orders will increase, causing an uptick in the economy.

Despite all the publicity of the problems of money-center banks, non-financial domestic corporations are in relatively good shape. The percentage of cash held as a percentage of total assets of these corporations was near historic highs. The downturn provides these businesses with an opportunity to improve their competitive position by investing in their future, by acquiring new technologies and replacing old equipment.

On the housing front, over 85 percent of homeowners with mortgages are current on their payments, according to the latest statistics. The ratio of household debt service, comparing debt payments to disposable income, through last September stood at 14 percent. This was up slightly from the second quarter of 2008 but at its lowest level since early 2005. The recently announced Home Affordable Modification Program seeks to help those experiencing high debt ratios due to loss of jobs, medical emergencies and similar predicaments.

Other members of the global economy are in relatively healthy economic condition. The Chinese gross domestic product is about a third of the U.S. GDP.

That country has implemented its own stimulus program and is rumored to be considering expanding this. China may emerge from the downturn more quickly and spark orders from our exporters.

The current recession is severe and is affecting most of us. The end of the pain cannot be currently predicted with any measure of certainty. However, the pendulum of emotion has decidedly swung to the negative side, as decidedly as the irrational euphoria of the recent past.

David Helscher is a senior vice president and trust officer with Clinton National Bank.