As I prepared the New Digest last Friday, I was bombarded with a long list of positive economic data that I found hard to digest. I did not feel I could include this in the digest without some context, yet I felt that we run the risk of being simple fear-mongers if I report only the pessimistic news and not the happy stuff too. I'm going to try and have it both ways today.

Now understand that I am not an economist and nothing I write here should be taken as advice for your own personal financial situation. I could be completely wrong, but I don't believe the main-street part of this recession is over or, more importantly, that the hardest financial crisis we will face as a nation is now behind us. I'm going to give you my thinking here, but first I will start with the positive news.

  • The Federal Reserve believes the recession is ending. Now I understand that the term "recession" is very specific and that, indeed, economic statistics may reveal that the recession is ending. Is it a V-shaped recovery, a U-shaped recovery or are we in for a double dip? The Fed seems to be predicting the U with a long back side where unemployment stays high and interest rates low for at least another 12 months.
  • Median housing sale prices are up from first to second quarter. This is said to be a stabilizing force that will get consumers to spend again - instead of continuing to lose the $4 trillion in housing equity that has been lost, stable housing prices should restore confidence. The article does acknowledge that one out of three sales is due, at least in part, to new homebuyer subsidy from the Federal Government.
  • Personal spending is up, although here again the article points to the billions spent on the infamous Cash for Clunkers program as the catalyst for this statistic. If personal spending is up, the consumer-based economy can start to grow again and that will lead to an upward spiral of good news.

James Kuntsler, who is intelligent but hard for me to read because he is incapable of writing a sentence without sarcasm, responded to the wave of economic news this week with a posting on his blog that contained the following:

All this goes to show is how completely the people in charge of things in the USA have lost their minds. They seem to think this mass exercise in pretendwill resurrect the great march to the WalMarts, to the new car showrooms, and the cul-de-sac model houses, reignite another round of furious sprawl-building, salad-shooter importing, and no-doc liar-lending, not to mention the pawning off ofinnovative, securitized stinking-carp debt paper onto credulous pension funds in foreign lands where due diligence has never been heard of, renew the leveraged buying-out of zippy-looking businesses by smoothies who have no idea how to run them (and no real intention of doing it, anyway), resuscitate the construction of additional strip malls, new office park "capacity" and Big Box "power centers," restart the trade in granite countertops and home theaters, and pack the turnstiles of Walt Disney world - all this while turning Afghanistan into a neighborhood that Beaver Cleaver would be proud to call home.

I can sum this up by saying this: If you think things are going to return to the "normal" that existed over the past fifteen years, you have, as Kuntsler says, lost your mind. Here are my reasons why.

1. We have not solved the housing problem.

There are two sides to the housing problem, one we have partially fixed and one we have not started. The side that we have partially fixed is the one that the market has addressed - housing prices were overinflated, largely because many people who could not afford to buy houses were given access to capital to buy them. Those people can no longer buy homes, which has taken a huge amount of people out of the market and corrected the pricing somewhat.

What we have not fixed is that we have not dealt with the supposed problem of the banking crisis and gotten the bad housing assets off the books of banks.

“The nation’s banks continue to hold on their books billions of dollars in assets about whose proper valuation there is a dispute and that are very difficult to sell,” the [Congressional Oversight] panel said in its latest monthly report.

One out of four homes are leveraged more than their value (underwater). One out of four homes sold today has been repossessed. Even more scary, we have overbuilt single-family homes (6 in 10 housing units) in proportion to the market (6 in 10 households are single-person). As baby boomers continue to retire and seek to cash out their housing equity and downsize the lifestyle, there are not enough families to buy all of these homes.

Our long-term subsidizing of housing through low interest rates and mortgage interest deductions has created a bubble that burst. Short-term subsidies in terms of low interest rates and first-time homebuyer credits have stabilized the market. These subsidies will end, and we have not fixed the underlying oversupply problem.

2. We may have stabilized Wall Street finance (for now), but we have not fixed Main Street finance.

We're all very happy that Wall Street didn't melt down and spiral the entire world into the financial abyss. The fact that they actually could have has made many ordinary people just a tad wary of the economic reality they thought they knew (and are being encouraged to partake in again). While the financial sector has grown to be a tremendous percentage of the economy, that position is tenuous and dependent on all of us playing our part. To assume we will, or can, is a great leap.

But while Wall Street is back to paying out bonuses, banks are not able to lend. One in four small banks nationwide is losing money. These are the neighborhood banks that, in the spirit of It's a Wonderful Life, invest in the small businesses that create jobs and stand the greatest likelihood of inducing a recovery (as opposed to a large business like GM, for instance, which returns relatively little on the public investment but was simply too big to fail).

I will not quibble that what we did on Wall Street was not necessary - I'm willing to concede the point, although my better nature tells me we made a mistake there too, especially when banks too big to fail have now grown even bigger. We just have not gotten banking working at the neighborhood level and, until we do, I don't see how we have a solid recovery.

3. Real pain in government has not been felt, but must be.

We've had this really odd debate over whether or not government spending generates economic growth. Some say yes while others argue no. The answer is both. Of course government spending creates economic growth in the short term. Of course it destroys the economy in the long term.

The problem is not that we disagree on the approach, but that we are completely incapable of switching from the first to the second when the time is right. We have a massive budget deficit this year and all indications are they will continue to be mind-numbingly high for the foreseeable future.

Governments across the country were spared any really difficult choices by the stimulus transfers from this year. So much so that a state like California, which has a deficit of historic proportions, is actually able to add public sector jobs while the private sector melts down.

Transfer payments from the federal government cannot continue. States will be starved of increasing property tax collections in a declining property market, sales tax in a slowed consumer economy and lower income tax due to wage stagnation and unemployment. This is going to ultimately manifest itself at every level of government, which is when the real pain is going to be felt. There are no cheap schemes that can close these billion dollar gaps, and this is before our growing future needs are factored in.

As we are trying to emerge from a recession, do we slap large tax increases up and down the government ladder on those remaining in the private sector workforce? If so, what are our chances for solid economic recovery? There is at least one sage who thinks our chances are poor.

4. Consumers are not in a position to spend.

I believe we all acknowledge that the strength of our market is based largely on consumer spending. Consumer spending was 70% of the total economy, after all. I have to believe that there are few among us who will simply slide back into the old way of doing things. I can't put it any better than the Times did:

Millions of Americans spent years tapping credit cards, stock portfolios and once-rising home values to spend in excess of their incomes and now lack the wherewithal to carry on. Those who still have the means feel pressure to conserve, fearful about layoffs, the stock market and real estate prices.

“We’re at an inflection point with respect to the American consumer,” said Mark Zandi, chief economist at Moody’sEconomy.com, who correctly forecast a dip in spending heading into the recession, and who provided data supporting sustained weakness.

“Lower-income households can’t borrow, and higher-income households no longer feel wealthy,” Mr. Zandi added. “There’s still a lot of debt out there. It throws a pall over the potential for a strong recovery. The economy is going to struggle.”

5. Without a large shift in policy, America is locked in what will at best be a long, slow decline.

We're overextended. We're overleveraged. We overcommitted. Are we capable of dealing with these large problems in new ways that can transform our economy in the process?

Up to this point, we have resoundingly demonstrated that we can't. Whether it is a double dip recession or the long, jobless recovery we will be asked to celebrate, we are a nation that seems to be following in the footsteps of history's great empires and their eventual declines. 

While the news may be spun by politicians and interest groups to put the most optimistic face on our future, it seems to me there is more to be concerned about than to give comfort. This all creates even more urgency with the Strong Town concept. Whether government subsidy collapses or goes away slowly over time, it is hard to believe our small towns and rural areas will be able to count on anything but themselves in the future. When that happens, the Strong Town approach is the only viable strategy.