Why I Am a Bear

In case you hadn’t noticed, the economy is in the clear… at least according to some top politicians:

Rep. Chris Van Hollen, head of the Democratic Congressional Campaign Committee says in today’s USA Today: “At the same time, things have been improving. Clearly the economy is growing again.”

Treasury Secretary Tim Geithner said yesterday, “We are coming back, and we are coming back faster and stronger than most people predicted — faster and stronger than Europe and Japan.”

And White House officials Christina Romer and Peter Orzag also agree with Geithner that “the country has bounced back from the depths of the recession,” according to ABC News.

This kind of optimism is confusing. At least when looking at all the fundamentals, and a few bearish signs.

  1. Housing is still a mess. Despite all the government programs to help housing, negative equity is still a massively important issue with mixed foreclosure problems, there is a growing shadow inventory that will keep downward pressure on prices for a while, and Fannie and Freddie continue to distort the market.
  2. Despite gains in the bond markets, bank reserves still haven’t moved. Banks still have a lot of toxic housing debt. And banks are still concerned about the oppressive hand of the government coming down on them.
  3. Unemployment between 10 percent and 20 percent (depending on your measure) can’t be just accepted as the “new norm.” It is more than just people out of work. It represents a limit on economic productivity and a long-term fiscal drain on states and the federal government.
  4. The fiscal stability of the federal government is growing more tenuous by the day, and solvency is a serious question for many states around the country.
  5. Long-term unfunded liabilities continue to be an issue for federal and state budgets—social security and pensions are just completely out of control.
  6. The growth in the stock market could reverse at any time, with current investors just banking their profits right now to avoid losses from a drop off this summer. That drop could come from a spike in commercial real estate delinquencies, a reaction to financial services reform, or just plain nervousness (in a nod to Keynes’s animal spirits ideas). And that is not even to mention the statistical likelihood of a bearish decline.

Furthermore, pretty much any economic recovery thus far has been built on government supports. And the government is also preventing downward pressure on housing and banks from letting the market fully reset. These props aren’t sustainable. At some point they have to go away. And at that time any recovery built on those props could collapse in on itself. This is a long-term issue and thus harder to conceptualize than the short-term pain we see, but it is arguably more important in public policy terms. If today’s policies are imperiling the future of the country, that should be very seriously considered.