The recession is real. The economic downturn will not be another Great Depression, but it will hurt, and there is no avoiding it.
The sickness of finance has been worse than almost anyone knew. In April, Washington Mutual announced a $7 billion injection of capital from the investor group TPG. These were very smart guys — but they didn’t know. They looked at the big Seattle bank and they cut a deal with the board of directors that looked sweet. Five months and one bank run later, their $7 billion was gone — and the board of directors had no bank.
The Aerospace Machinists didn’t know. Their eyes were on an airplane company with a fat order book, not at an economic body about to go into convulsions. They thought it was a fine time to have a strike against Boeing. They were going to hold out. I guess they still are.
Two weeks ago, the chief financial officer of a large municipality visited The Seattle Times to talk about their 2009 budget. The numbers had been calculated in September, he said, just before the crisis. We asked him: Shouldn’t you get new numbers? No, he replied. After the market crash of 1987, tax revenues had not been affected at all. Maybe this would be the same. We’ll wait and see, he said.
That is the attitude Gov. Christine Gregoire took until August. For many months, a deficit had been forecast for the 2009-2011 biennium, and she had blown it off. It was just a forecast, she said, and experience showed it could be wrong. Which was correct: It was wrong. It was not gloomy enough. The governor now scrambles to reduce spending and to assure the people she is the right person to lead the state for another four years.
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Here are some data points. On Monday, the state said its latest monthly revenue was down (see accompanying chart). For the Aug. 11-Sept. 10 period, the value of the average real-estate transaction in Washington was 25 percent below a year earlier. Tax collections from car dealers — a measure of car sales — were off 18 percent. Sales of building materials and furniture were down. Restaurants suddenly seem less busy. Ron Sims announced layoffs at King County government.
The recession is real. Every Washington resident with a stock portfolio or a mortgaged home feels it. Word on the street is that retailers expect a seriously subprime Christmas. Feel poor, spend poor.
I’m not suggesting another Great Depression. The system is different. Then, we had a gold-backed currency, which was better for controlling inflation but worse in a panic. Today, the Federal Reserve is freer to cheapen money, and it does. We have deposit insurance now, so that when banks fail, people still have their savings. We have safety nets, both of the governmental type and the plastic-card type. We have foreign trade, which during the Depression was strangled by import taxes.
We will get over this, and with less pain than our great-grandparents went through after 1929. But there is a mess to clean up. Some of the cost can be redistributed, but it has to be borne.
There is a call for regulation to prevent future messes. Some things can be done: “liar loans” and other subprime abominations can be banned, and daylight brought to mortgage securities, so that buyers can see what’s under the wrappers.
But bank regulation of the type imposed from the New Deal to the 1970s would be a different thing. Bank customers would not welcome a return to savings rates being capped by the government, interest on checking accounts forbidden and savings banks and credit unions forbidden to offer checking accounts. WaMu was forbidden to offer checking accounts until the late 1970s.
Government imposed these and other rules to stop banks from injuring themselves by competing for the people’s business. Lenders competed instead by offering cheesy little gifts. That was the world I grew up in. That was regulation. You could not sell it now.