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Economist Describes the "New Normal"

Economic expert discusses financial “recovery”

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Listen as Reynolds Discusses "The New Normal"

Listen as Reynolds Discusses Our Economic Losses

Listen as Reynolds Discusses Ninja Loans

Listen as Reynolds Discusses Wall Street

Listen as Reynolds Discusses TARP and the Deficit

Despite the potential for financial catastrophe, the country hasn’t hit financial rock bottom — and it’s not going to, according to economic analyst Don Reynolds, who during the Texas Association of Counties Annual Conference compared the events that climaxed late last year to an “almost” economic hell.

“This country last September was this close to an economic meltdown the size of the Great Depression, and it didn’t happen,” Reynolds said to an audience of approximately 650 elected county officials. He recited some dismal figures: State sales tax receipts are down by 12 percent; property values are down by 4 percent; 37 states so far this year have raised taxes; 32 states have cut education funding; 28 states have cut funding to health care; eight states have decreased law enforcement funding.

Still, the country — and particularly Texas — rallied.

“You may not believe it, you may not know it, but I’m going to tell you the recession is over. I’m going to tell you this economy is going to get healthier,” Reynolds said.

But “we have been going through a traumatic economic environment, and in that process we have gone through what I describe as transformational change,” he added. “We have to understand that when we come back from that collapse and we go into the new world, we’ve created what I call The New Normal. The New Normal says that we are going to have government regulation. The New Normal says that consumer spending is going to be subdued. The New Normal says that unemployment is permanently going to be a little higher than we used to be familiar with. The New Normal says that inflation is going to start to come back.”

In other words, recovery is coming, depending on how it’s defined, but elected officials can’t expect a return to budgets as they were.

“Do we get back to where we were, which was 3.5 percent real economic growth and unemployment down to 5 percent? I don’t know if we do, and if we do, it’s several years away,” he said. “For those of you in county government, you’re looking at costs going up across the board, you’re looking at declining revenues…you’re trying to figure out, gee, maybe we can refinance the bonds. You better refinance now while you can because when inflation starts coming back, the rates will be higher.”

During his keynote speech, Reynolds attempted to explain how and why The New Normal came about, going back to Wall Street, the housing crisis and popular banking practices.

“Most banks work off a concept called the capitalization ratio, and what the capitalization ratio simply says is that for every dollars worth of assets that bank has, that bank can make $10 worth of loans,” Reynolds said, adding that for every dollar of equity lost, a bank loses $10 of loaning power. Unfortunately, major financial institutions in the country lost $2 trillion in equity during a relatively short period of time — which amounts to losing an additional $20 trillion in loaning power.

In addition to that, the United States lost $6 trillion in real estate equity between 2005 and 2009, and the stock market lost $4 trillion. So $10 trillion evaporated.

“For a long time, we all thought that you should never guy a house that cost more than three times your annual income,” Reynolds went on. “The problem is, is that housing went up and up and up. The average house in America was selling at six times average annual income. … The only way you could afford to buy a house selling that way was to get one of these newfangled mortgages. They were called Ninja Loans.”

And so in the pursuit of profits stemming from increased interest rates down the line, the mortgages on the homes bought with Ninja Loans were bought and sold and sliced and diced from mortgage brokers to city banks to hedge funds. That was largely happening in 2005; after three years went by and homeowners attempted to refinance their mortgages, they were told their property values had decreased to the point that refinancing wasn’t an option. In the first quarter of 2008, one out of every 194 U.S. households received a foreclosure filing, according to RealtyTrac, and soon afterward the federal government passed the Troubled Asset Relief Program (TARP) to keep the ailing banks afloat.

Though the foreclosure rate continued to grow, with 1 in 84 households receiving a foreclosure filing in the first half of 2009, Reynolds said there are signs both banking and housing are recovering. The average price of a home in America is back down to 3.8 times annual income, instead of six, he said, and home sales are up by 7 percent. In addition, several of the country’s largest banks have again begun showing the ability to raise private capital on their own; the government is making a profit off its investment in Citibank.

Still, that doesn’t mean consumer spending will return to its pre-recession normal, even given federal stimulus funds, which Reynolds said will begin showing their full (positive) impact during the second quarter of 2010. The unemployment rate and sheer amount of personal debt owed will keep spending low. That will result in revenue shortfalls and a growing national debt — currently at more than $38,000 plus another $191,000 in unfunded liabilities per citizen, according to some calculations.

“The only way you get out of that is you raise taxes,” Reynolds said. “It’s called inflate, and I think that’s what we do, we inflate our way out. … We’re talking about The New Normal.”