A Consultant's View

Prairie Trail Software, Inc. ............................................................. September 2008

Denial of the burst

When a bubble bursts, there are some who roll with that burst and start figuring out what next to do. Many other people stay where they are and "hunker down" in the same patterns of behavior. So, when the steel companies went bust, we saw a lot of people staying in the steel foundry cities and going broke.

We are in the middle of a double burst - first real estate, then living style. People used the real estate bubble to finance a lot of spending. A house is not a home unless it has "stuff" in it. Those extra rooms in that big house needed filling. The real estate bubble created a secondary bubble of life style and purchasing. That bubble is still continuing.

We are continuing to spend, but we are now doing it on credit cards. That means that the quality of debt on those cards is deteriorating and rapidly. The major credit card issuing banks have been taking on more and more of the risk that people were once putting on refinanced mortgages. We saw what happened to the banks that did the mortgages. We may see similar problems with card issuers.

Denial means that we keep on doing the same thing even when it isn't working any more. Denial in the mortgage bust meant that homeowners stayed in their homes even when they couldn't afford them any more. Denial meant that people were evicted and lost not just the homes, but often the food in the refrigerator, medicines, furniture, and family pets. Denial with credit card borrowing means that people will continue to borrow until the banks cut them off.

This means that banks that do not have a good risk management system will suffer large losses in their card issuing departments. It also means that we are facing difficult times as a country - both financially and politically. Denial means that people will look to the politicians to rescue them from what they have done but we have borrowed internationally and the politicians can't fix that. We are going to see more labor and social problems. Because of the international scope of the borrowing, we will see the pattern of "panics" come back instead of gentle "recessions" such as we had last century.

Denial is not just a river in Egypt. It is flowing through this country and will cause problems.

What it means is that there will be opportunities for people to scoop up assets when the denial is finally broken. There will be banks that fail. The credit issuing landscape will change. There will be a lot more foreclosure of homes. Just like other major economic changes, there will be political careers made and broken by this continued burst.