Lessons to Be Learned One Year After Lehman Brothers Collapse Roiled the World

Housing

One of the root causes of the current recession was the housing crisis. Banks dished out subprime loans to borrowers ill-equipped to take on the burden of homeownership. Everything was predicated on housing values continuing to climb. But in the past year, home values have dropped more than 15 percent. Many homeowners found themselves "underwater," owing more money on their houses than the houses were worth. Foreclosures have soared to record levels. In July, the nation saw a record 360,149 foreclosure filings as the first wave of foreclosures, subprime borrowers, ended and a second wave, newly unemployed homeowners, began. Credit Suisse recently forecast that more than 8 million mortgages will go into foreclosure in the next four years.

To make matters worse, the Obama administration's mortgage modification has struggled to gain traction. As of the end of August, banks had modified loans for only 12 percent of the nearly 3 million eligible homeowners. The Senate's second-most-powerful Democrat, Dick Durbin, called the program "a waste of time" and said its approach had "failed miserably."

However, on the positive side, the fall in home prices has waned, while home sales have increased. In July, there were 571,000 total home sales.

"We're definitely at the end of the beginning and we're somewhere toward the beginning of the end," said Talbott. "There are a number of areas in the country where real estate prices continue to drop: California, Arizona, Las Vegas. In the rest of the country, we're seeing prices stabilize or even start to uptick."

Economic Growth

The broadest measure of the country's economy is gross domestic product. The nation's GDP plunged after last fall's near collapse of the financial system. But in recent months, the economic outlook has shown signs of improving, and government officials and economists believe we will see signs of positive growth in the months ahead. The nation's economy shrank by 2.7 percent during the third quarter of 2008, by 5.4 percent during the fourth quarter of 2008 and by 6.4 percent during the first quarter of 2009.

However, during the second quarter of this year, it shrank by only 1 percent. And 11 of the 12 Federal Reserve regions reported in the latest Fed Beige Book that economic conditions had improved or stabilized in recent weeks.

Still, there is cause for concern. Consumer spending accounts for more than two-thirds of all economic activity. The economy will not grow if consumers do not spend. Consumers will not spend if they do not have money. And consumers will not have money if they don't have jobs. During the current recession, consumers have tightened their purse strings, spending less money and saving more.

But, said Paulsen, as the fear and panic of last year disappears, consumers, just like investors and businesses, will become more optimistic and aggressive.

"The thing's that causing a recovery today is a reversal of the fear," Paulsen said. "People sold too many stocks; they've got to buy them back. People threw too many people out and purged too much inventory; they've got to rebuild that. People didn't buy cars for a year; now they have to buy them. In some regard the thing that made the crisis worse than it had to be -- fear -- is now the thing that's causing a recovery faster than people thought."

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