A snorkel or an aqualung?

Seems like just yesterday that voices were saying that the Dow was going to 5 000. United States President Barack Obama’s big rescue plan was too small, and internationally coordinated fiscal stimuli were too uncoordinated to be of any use.

Then Citigroup said it had been profitable for the first two months of the year and hallelulah, the market raced upwards. There have been other, small signs that the worst may be in the past, notably the fact this week that new homes under construction in the United States increased for the first time after seven consecutive months of falling.

Federal Bank chairperson Ben Bernanke, taking an uncharacteristically high profile, has also been saying that the recession will end this year and that the economy will begin to recover in 2010. He cautioned that there would be no recovery without first stabilising the financial system. “We’re working on it. And I do think we will get it stabilised.”

But there is no shortage of analysts who say that stabilisation will be achieved only once housing prices in the United States have returned to their pre-bubble, long-term sustainable average.

These analysts point to a study by Yale economist Robert Shiller, which tracks the inflation-adjusted value of US homes back to 1890. The recent housing boom saw prices increase by 83% since 1987. The meltdown has seen these prices fall by more than 25%, but they still need to fall a further 20% to reach the average price, which this market has sustained since the 1950s.

Another way to think about the prospects of recovery is last week’s US wealth data. Americans lost a collective $12.7-trillion last year.

“This is the largest decline in US household asset values ever recorded over a 12-month period,” says Stanlib’s Kevin Lings.

US household assets were still an impressive $65.7-trillion at the end of last year, he says, although he expects losses since then to be about $2-trillion.

Lings says that US household debt amounted to $14.2-trillion at the end of 2008. This is mostly in home mortgages (74% of total) and consumer credit (18%).

Mortgage debt increased by $5.3-trillion in just seven years, fuelled by Alan Greenspan’s irrationally cheap money, while 10.8-million new homes were built between 2002 and 2006.

“Around 14-million homes are currently vacant, the highest on record. This is likely to create further downward pressure on house prices,” says Lings.

Reuters reported last week that 8.3-million Americans are underwater on their mortgages, meaning that they owe more than the house is worth. They have been surviving with a snorkel, but if prices fall further, they’ll be reaching for an aqualung.

The Obama administration would like to stem the tide. It wants to keep nine million families in their homes through a $275-billion rescue plan, which aims to write down the mortgage principal and refinance the smaller outstanding debt.

Critics say that the plan means that when you make your monthly bond payment you will make an additional payment of $100 a month “for some deadbeat who bought more house than they could afford, is still watching a 52-inch HDTV, is still eating in their perfect kitchen with granite countertops and stainless steel appliances”.

The news is bad, but not all bad. At least a major re-think is taking place. One idea now consigned to the dustbin is that of shareholder value. This is the idea, credited to luminary Jack Welch, and linked to a speech he made in 1981, that management had a single goal in life: to maximise shareholder value.

Welch now, in an interview with the Financial Times, now says this is wrong. “On the face of it, shareholder value is the dumbest idea in the world,” he said. “Shareholder value is a result, not a strategy … Your main constituencies are your employees, your customers and your products.”

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Kevin Davie

Kevin Davie is M&G's business editor. A journalist for more than 30 years, he has worked in senior positions at most major titles in the country. Davie is a Nieman Fellow (1995-1996) and cyberspace innovator, having co-founded SA's first online-only news portal, Woza, and the first online stockbroking operation. He is a lecturer at Wits Journalism. In his spare time he can be found riding a bicycle, usually somewhere remote.

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