March 2008 Edition

EDITOR'S CORNER

Uh, oh, There's Talk of the 'R' Word

Hard landing or soft landing, there's bound to be an economic reckoning — with the bogeyman Recession peaking out of the closet — now that the housing bubble has burst and consumers are up to their necks in debt

It's fortunate that we commemorate the birthday of the Rev. Dr. Martin Luther King, Jr. on the third Monday in January. The civil rights leader deserves to be remembered, not only because of his role in our history, but because his birthday is a holiday for many institutions, especially the stock market.

While stock markets in countries around the world panicked on January 21, 2008, when they realized their economies couldn't keep sucking the blood out of the U.S. without repercussions, they dropped like the late Evel Knievel over Snake River Canyon [whose birthday is not observed as a holiday].

Since the U.S. markets were closed that day for King's birthday, there was a time buffer during which the Federal Reserve Board, in an action unprecedented since 9/11, jumped in with an interest cut to keep the U.S. trading markets from tanking. That action by the Fed, too, had the smell of panic about it. Be that as it may, it kept trader confidence high enough so that while the markets fell, there wasn't a dreaded "correction" of significant magnitude.

A Love / Hate Relationship

What made the foreign markets run scared? The U.S. credit problem, led by the burst of the housing bubble. For all of their vaulted braggadocio about their economies rivaling that of the U.S., it's still true that when we sneeze, the rest of the world's economies get pneumonia. A weak dollar, typified by its slide against the Euro and the rise of petroleum to $100 per barrel levels, finally made foreign markets realize that if the U.S. economy goes sour, the rest of the world will quickly follow.

"E-Z Credit" once touted by subprime lenders infected more staid financial institutions, and "house lust" by consumers has brought about another whirlpool of economic turbulence.

It's part of The American Dream to own one's own home, but that dream became over-inflated when lenders were willing to finance mortgages for properties just barely within the means of the buyers.

People were no longer satisfied with homes with less than four bathrooms, five bedrooms, a great room, a family room, and a living room. Television programs showcasing McMansions of 10,000 ft² made a lot of buyers think that an interest-only mortgage would suit them. Fueled by banks eager to make loans, these buyers didn't treat homes like domiciles, but instead thought of them as investments, sure in the foolish notion that property prices would increase faster than the values of their loans.

In his book, House Lust, Newsweek reporter Daniel McGinn documents some of the wretched excesses taking place when people no longer wanted to keep up with the Joneses, but do them ten-times better. So what if that balloon mortgage payment was just at the edge of what they could afford, they now had a house with more rooms than a bed-and-breakfast.

Taxpayer Pockets May Be Deep, But Not Bottomless

Now, those of us who were reasonable and thrifty are expected to somehow bail out the greedy spenders.

As banks are trying to recover from their own greed, credit rates are in flux and that's going to hurt shops. Very few job shops are engaged in "machine lust." Just because manufacturers offer better, shinier machines, most shop owners take a hard look at what they need to serve their customers' demands and purchase accordingly.

There's nothing wrong with attending trade shows like IMTS, EASTEC, and WESTEC [see our WESTEC pre-show coverage, starting on page 30] to kick the tires of the new machines being offered by manufacturers, but with the dreaded word, "recession," being bandied about, it will pay most shop owners to make sure there will be a true return on investment for any purchase, and not think that they can outrun the economic forces that caused the downfall of the housing market.