The Difference Between Recession and Depression

Roger Schlesinger
|
Posted: Jul 09, 2008 6:02 PM
The Difference Between Recession and Depression

The difference is easy: when your neighbor is out of work it is a recession; but when you are out of work it is a depression. I would like to say that I made that up but I didn't. I would also like to say this discussion isn't very important today, but unfortunately it is very important. Furthermore, your financial future can be greatly affected by your understanding or lack of understanding of what I am trying to say. We are heading straight toward a very serious financial calamity in this country and are nearing the point of no return. A couple of days ago a major bank, Indymac Bank, quit doing residential loans in both their retail and wholesale divisions. One year ago I was negotiating with this institution to bring my Company into their fold. They were at that time a $2 billion bank. Now they have a market cap of about $50 million. How can a bank lose $1.95 billion in less than a year? Measured against what bigger and more prominent banks have written off it is peanuts. Is that why we don't care? Thirty four hundred people are losing their jobs in an industry that has shed over 500,000 jobs in the last 12 months. Unless you are one of these workers is it just a recession?

Now we hear that a major bank, very near to calling it quits, is being carved up in the board rooms of several other financial institutions. This will rock Wall Street and Main Street alike, but unless you are part of it it's just another aspect of the impending recession. Washington politicos are trying to show their hearts and souls are in the right place by passing some litigation that most likely won't work. The government will help to rewrite about 400,000 loans for borrowers that haven't any equity in their respective houses , but only if the banks are willing to take a loss. The banks are turning losing into an Olympic event with totals beyond any ones wildest dreams. But stop and consider this if you will. Who are the banks? Aren't they the institutions that are holding yours and my money. Is it okay with you if they lose your money, because it isn't okay with me?. But then again if it is your money it is only a recession to me; if it is mine, then we are beginning to talk depression.

I certainly don't want anyone to think that the banks are the entire problem, because they are just a small part. I watched a television commercial the other day that was from an automotive manufacturer. It went something like this: "We heard you didn't want to pay interest on your car loan so we created a loan without interest and the response was overwhelming". Overwhelming? The parent of the company that ran the advertisement had sales that were down over 20% for the month and now have announced the beginning of layoffs of their executive workers, not just the usual workers on the assembly line.. The advertisement lacked credibility, as so many advertisements do in light of what was happening. It was obviously geared to those who don't read the news, listen to the news or care about the financial condition of this nation. The stockholders should care, and I am sure do care, as this once giant has now fallen in market capitalization to about half of the capitalization of a door to door perfume and fragrance company. Is it now time to ask "What's going on in this country"?

What is going on is the possibility of the two largest buyers of mortgages in the United States, Fannie Mae and Freddie Mac, might need to be bailed out to the tune of $75 billion. That would take the brass ring for losses and would be akin to losing a mid sized state. While Rome was burning Nero was playing the fiddle, or so it was said. While we are creating a financial nightmare I find that there is a contest by the media to assess the blame for all of these problems. Now that will really help! It is time for everyone, not politicians, not the head of lending companies, brokerage companies or banks, but everyone who owns or plans to own a home to seek real answers.

I once had the privilege of playing golf with a congressman who told me that no one in congress is an expert in anything. They just get together and try to use their abilities to come up with the right answers as a group and move forward. There are several congressman and senators who are seeking to find out what has happened but when they have uncovered some of the problems they seemed to have come up with, from my perspective, the wrong conclusions. I have been in the mortgage industry for almost two decades, working on the front lines, and have never been asked or know anyone who has been asked by a politician to explain how the industry works and how it could have gotten in such a mess. That certainly is part of the problem because day to day operations can be much different than the instruction book. In my last column " Fixing the Economy is equal to Fixing Real Estate" I stated that to save the economy from dire straights you need to fix real estate. It is time to make the extra effort before it won't really matter.

If Fannie Mae and Freddi Mac cease to function I dare say we will have lost the bedrock of the mortgage market and will have no choice but to turn to foreign nations to help bail us out. Perish the thought! The fact that it is even remotely possible that this could happen is extremely worrisome to those who understand how the financial markets work.

Now before the warmth of summer turns to the chill of fall and the freezing associated with winter, just about six months away, we need to begin a counter attack on the falling financial markets. We must realize that the injuries that are being taken by the financial markets can leave the country paralyzed or worse. Don't think in terms of your neighbors problems (recession) but instead make these problems yours and by fearing depression get everyone demanding answers and being part of the solution and not the problem. In the coming weeks I will lay out what I think must be done and if you have the desire and the ability you should also do the same. That way we can have a national dialogue that might put an end to the nonsense that we feel helpless to do anything about.

Let me leave you with the thought that when this all began, the sub prime crisis, the natural reaction was to lower interest rates to help the mortgage market. I believed then, and still believe that it was the right move by the Federal Reserve, however it was a bit late and too timid. If they had moved faster and with more boldness it just might have stopped the problem before it got worse. Not only did it get worse, but the dollar weakened and consequently oil started increasing. Oil, which affects our life in so many ways, started the economy in a downward spin which hasn't stopped because of all the sectors oil touches. The various parts of our economy are all inter connected and my recession can easily become your depression if we don't realize what is going on and what we need to change the direction. No one is free to look the other way.