Ben Bernanke needs some help. This is my contribution:
In 1969 Elisabeth Kubler-Ross described, with great specificity, the five stages human beings go through to cope with tragedy and grief, especially in regards to terminal illness. This led to ground-breaking research and new treatment models throughout the medical diaspora, and is now taught as an essential part of any Psychology 101 class.
The following are the five stages, more universally known as DABDA:
Stage 1 Denial "This isn't happening to me"
Stage 2 Anger "Why me?"
Stage 3 Bargaining "I'll do anything if I can live on."
Stage 4 Depression "Why should I do anything? It wont matter."
Stage 5 Acceptance "This is inevitable. I will make the most of what's left."
Before reviewing current economic conditions through the lens of these five stages, understand the terminal patient in our model is the old Western Financial Model, not America, which will re-emerge.
Stage 1 - Denial
It is quite simple to point at Summer 2008 as America's "period of denial", though I have a differing theory.
The Denial Stage started in September of 2006, a month after home prices peaked, sending lenders (Banking Institutions) into an industry-wide panic as to how to fight off the inevitable fall in the Housing Sector/Recession, sure to occur during that year's 4th Quarter or the 1st Quarter of 2007.
The solution these lenders came up with was to open up the housing market to the only people in America that did not currently own the housing they lived in, people unable to afford to the costs of making such a large purchase, many of which where low-income racial minorities.
As ridiculous as it sounds (Literally giving money to people that CANNOT repay the loan), the rush of new home buyers had the duel effect of: continuing the home building boom in the country (intended), while simultaneously causing prices of existing housing inventory to rise precipitously (unintended).
The bad loans were securitized (bundled, chopped up and re-bundled) by the lending institutions, then sold to others on the world financial market, thus leaving the lenders with zero risk for the very risky, highly predatory loans.
The endgame was set before the first loan was made. The system's death sentence was set before the first loan was made. This was the ultimate form of denial.
Stage 2 - Anger
The Anger Stage set in as you started to hear reports of "waitresses buying million dollar homes." Although the wider public had no idea of what was coming down the road, the lending institutions started putting the onus of impending doom on the people at the bottom of America's totem pole, the working-class.
"Why did they take such big loans?", they asked. "What were these people thinking?", newspaper headlines screamed. The term "sub-prime" entered the lexicon of American public as a negative connotation for, not the predatory lenders, but instead, the borrowers.
False outrage from the banking institutions gave rise to real outrage in communities throughout America, as home-owners began to find it harder to sell their homes.
Whether the difficulty arose from lack of interest from new home-buyers, sliding home values due to unkempt or abandoned vacancies in their neighborhoods, or the lack of loans available to those that truly qualified, home-owners with inventory to sell found themselves at the front line of a problem they could never have seen coming.
To home-owners, anger was the only rational reaction to the unpredictable circumstance which had befallen them. To lending institutions, faux anger was the only way to keep the public eye off trail of the actual culprits.
Stage 3 - Bargaining
The Bargaining Stage is perhaps the most perilous stage in the process. In is the stage the full extent of the problem crystallizes, which in turn often leads to drastic measures being taken to improve the diagnosis.
The Bargaining Stage for this financial crisis was characterized by the Federal Reserve making steady cuts to the Interest Rate, all the way down to virtually nothing, to help reverse the future which was set in motion so long ago. Additionally, the TARP ($700 billion) bill was passed in haste by Congress and signed by the President, and an
additional $2 trillion dollars in "emergency loans" was issued by the Treasury Department to the same lending institutions that brought the crisis to bear. The thinking being, everything was on the table to save the old system.
For home-owners the bargaining stage was disastrous, characterized by actions that only worsened their collective situations.
Upon the first evidence of a slow-down in the housing market, instead of reporting the origins and culprits of the problem, media cranked up their output of their perceived solution to the problem, home improvement. The HGTV network best exemplifies the new attitude, changing the majority of it's programming from a theme in line with What You Get For the Money - a show built around sharing how much home you can buy for the same price in several different cities, to more programming like Curb Appeal - a show about enhancing you ability to sell your home by making minor changes to your home. And for the most part, home-owners went for it wholesale.
Even with a downturn in the housing market, retailers such as Home Depot, Lowes and Menard's saw brisk business through the entirety of 2007 and the very early part of 2008. Americans decided a new marble kitchen and/ or luxury bathroom would change their fortunes, with many taking out equity loans to make the necessary changes.
When home improvements did not work, home-owners turned to incentives in hopes of unloading their unwanted property. Covering closing costs, down-payment assistance, new paint budgeting and assessment deferrals became the norm. The problem with incentives was individual owners could not compete with Developers, who were giving the same incentives, in addition to free scooters, cars, upgraded appliances and gift cards. The problem remained unchanged.
Lastly, and begrudgingly, home-owners started to accept their ability to sell their homes at asking prices was illusory, so they started to discount the prices of the houses.
This is what the media called the "bubble" bursting.
With home prices peaking in August of 2006, many major cities had not seen an even 10% correction (price drop to reality) as of April 2008. However massive discounting across the country led the national average to see a drop in the high teens by June of that year.
Two months later, in August of 2008, banks had stopped lending money, even to qualified applicants, and the die was cast.
Home-owners were left with a home the did not want, at a price they could not pay, worth a lot less than was paid for it, and a home equity loan taken out to pay for the improvements and incentives offered to the increasingly shrinking home-buyer pool that found it virtually impossible qualify for a loan of any kind.
This led to the Stock Market failure in September and then, ultimately, to...
Stage 4 - Depression
In many ways, this is the stage we are currently in as of this writing.
There is so much confusion about what happened, why nothing is seeming to have an impact on the situation and how to move forward, Americans for the most part have chosen to just tune out.
We would rather just ignore this mess, not talk about it. "This to shall pass", seems to be the refrain of the moment.
The is unanimity in the understanding of where we are in our history, however there is no real mobilization by the leadership. Has anyone asked of us to sacrifice anything since this crisis began? We were told to, "get out there and grab those bargains" for Christmas.
The collective depression has led to stagnation in the housing market, with sellers holding firm on prices at hat are admittedly overly-inflated, buyers looking for new homes at foreclosure pricing, financially overly-extended families literally packing up and walking away from homes their kids grew up in, and banks too busy predating themselves to open up the credit instruments necessary to get the economy moving again.
We are all collectively stung...and depressed.
Stage 5 - Acceptance
The very final stage before transition, though it is not necessarily guaranteed that everyone makes it here, as depression can be a mutha!
The Acceptance Stage is so critical, in that it is made possible by accepting the idea of transitioning from what we have known and grown comfortable with, to something unknown, yet inevitable. The peace that comes in this stage derives from gaining the knowledge that what we have experienced is no longer possible.
For the American public, acceptance will come when we decide:
- That things cannot go back to the way they were in the 1990's.
- The house we own is going to be worth about 30-45% of it's 2006 value.
- Owning a home in their lifetime will not be a reality for a large number of people.
- There will be a rise in unemployment and an (almost) across the board reduction in wages in the near future.
- The ability to buy a new car, let alone every 4 years, has already been altered for a large number of the populace.
- Volunteerism, social activism and local purchasing decisions are going to be required to assist in this turnaround, and I mean from everyone.
- Government is not gong to solve this, at least not exclusively.
- Wild expansion & profiteering is a thing of the past, slow growth is the new way forward.
- Rampant consumerism does not have to go away, but needs to at least slow down in the interim.
All things that I would never hope for, but are required to find the peace we need as a country to move forward and regain our footing.
Four decades ago Elisabeth Kubler-Ross changed the way the medical profession deals with the aggrieved, including those with terminal illnesses. Perhaps, using her ingenious model, we can find our way, as a country, out of the darkness of our current situation.
Can we do it?
With apologies to Bob the Builder and the President-elect, Yes We Can!
