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Normally, consumers pull the U.S. out of a recession. This year, they may push us into one. Consumers have loaded themselves with far too much debt. With housing prices plummeting, the game of using the home as a piggy bank — financing consumption by tapping rising home values — is over, while unemployment and inflation both rise. For years, consumption was buoyed by that housing bubble. POP!! Trips to the shopping mall are already shorter and less frequent.

In theory, San Diegans should feel the pain more because they experienced the earlier ecstasy much more intensely. Some local economists, however, are keeping their fingers crossed. They hope that strength in industries such as telecom and tourism will offset the decline in consumer spending. None of these experts can be considered bullish, however. All expect an economic slowdown, and all realize that San Diego, the rest of coastal California, and the East Coast could be more vulnerable than inland areas that plodded along during the boom years.

Consumers are wading in deep debt dung, economist and Forbes columnist A. Gary Shilling of Springfield, New Jersey, points out. The payments that families make to service their mortgage and consumer debt are now within a hair of the all-time high of 140 percent of spendable income; in 1994 such payments were below 70 percent. The personal savings rate is zero. In the early 1980s it was above 12 percent. Shilling thinks a national recession has already started. He predicts that housing prices will decline 25 percent from their peak of October 2005 to a trough in 2010. “On average, anyone with a mortgage has only 31 percent equity, so a 25 percent price decline will be devastating,” says Shilling. He predicts that housing sales will drop 60 percent over the period.

Shilling believes the recession will be the second worst since World War II. Economic growth will shrink by 3.4 percent from the fourth quarter of last year to the fourth quarter of this year. The only worse recessionary decline since the war was the 3.7 percent contraction in 1957–1958. In the current recession, he expects consumer spending to drop by 1.6 percent, peak to trough. In 1957–1958, consumer spending dropped by only 0.6 percent. Ditto for the severe 1973–1975 recession. In six of the other eight postwar recessions, consumer spending actually grew.

Today, “The states that had the biggest housing bubbles are suffering the biggest busts,” says Shilling. That includes California, of course. “In a number of cities, foreclosures for sale are more than 50 percent of listings,” says Shilling. Uh-oh. That suggests San Diego is among the worst. It is. Foreclosures here are 49.7 percent of total sales listings. But if it’s any comfort, the data are worse in other large California markets: Riverside–San Bernardino (55.2 percent), Sacramento (62.7 percent), and Oakland (63 percent).

San Diego’s housing bubble expanded farther and faster than the bubble in almost any city. Already, prices are down more than 17 percent from the peak in fall of 2005. Home sales are already down 72 percent from the peak. So San Diego’s price plunge is already getting close to Shilling’s 25 percent prediction. The sales drop has already exceeded Shilling’s national forecast of 60 percent. And Shilling is known as a pessimist.

“San Diego had a bigger run-up in prices, so it’s vulnerable to a bigger fall-down,” says James Hamilton, economist at the University of California, San Diego, who specializes in studying both housing and economic contractions. “The data coming in suggest house price declines in Southern California are bigger than in most parts of the nation. I think there is reason to be more worried [about consumer debt] than elsewhere. To the extent our real estate price declines are going to be bigger, we are more vulnerable to a negative shock.” Hamilton, however, is “not as certain as some people are that the equity withdrawal [from homes] was the whole story for the consumption boom, although it must have been part of it.” One offset: San Diego’s tech, biotech, telecom, and tourist industries are still strong.

Hamilton is not sure whether the United States will go into recession. His fellow UCSD economist, Ross Starr, thinks the national recession has already begun. It won’t be particularly deep and will end in the middle of this year, “but then there will be a couple of years of what people will call a ‘jobless recovery,’ ” because of continued weakness in housing. “Because San Diego and all of Southern California had such a vigorous residential sector the last five years, the decline in construction will have a strong regional impact.”

Alan Gin, economist at the University of San Diego, says that San Diego’s last downturn in the early part of the century was caused in part by the bursting of the stock market bubble. “One of the things that helped lift us out was rising equity in homes,” he says. People used a variety of financing methods to borrow on those rising values “and spent it on cars and remodeling.” But he is not sure that in the 2002–2005 housing price run-up San Diegans pulled all that much out of their homes. “If somebody’s house ran up from $300,000 to $700,000 and then dropped to $500,000, how much equity did they tap?” he asks. Possibly in an economically depressed city such as Cleveland, people may have pulled out relatively more in a house that went up from $150,000 to $200,000. As Cleveland and other old industrial cities attest, some of the biggest foreclosure woes are in depressed cities. “In San Diego, East County and South County are where people are having the biggest problems. Those are lower-income areas.”

Gin doesn’t think San Diego will have a recession, “but it will feel like a recession to a lot of people,” he says. Jobs will grow this year by only 5000. The county has been doing around 20,000 a year in this century and hit 50,000 in 1999 before the stock market and tech bubbles burst. “Real estate will continue to suffer,” he says, but the tech-related sectors should do well unless the U.S. economy becomes as weak as Shilling says it will. Then there could be problems.

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Anon92107 Feb. 28, 2008 @ 3:26 a.m.

Re "Normally, consumers pull the U.S. out of a recession." The difference today is that we exported far too much our manufacturing, expertise and jobs to Asia, so there are far fewer consumers producing goods and far too many as a percentage of total jobs producing services. So the debt bomb has exploded, which is at least better than a nuclear bomb.

Too bad we couldn’t even keep housing construction growing by building 1000 square foot and smaller dwellings like we used to live in, and the Davies/U-T totalitarian larceny has bankrupt our ability to start a miniWPA to upgrade our rotting infrastructure in the meantime. But that’s what happens with a political leadership vacuum controlled by the money and politics Mob that continue to suck the lifeblood out of a community like a bunch of vampires.

There goes Wealth of a Nation, Land of Opportunity, etc. It's only the bogus stats that are keeping us from defining reality today as some hideous combo of recession, inflation, stagflation, whatever, it’s bad right now.

Thank God for the U.S. Navy. Especially since too many tech, biotech and telecom opportunities have gone to China and India, giving a whole new meaning to Go West Young Man. Pretty soon San Diego-Tijuana will look like one continuous supervillage.

Thanks for ruining my week again with another reality check-update Don, I think I’ll go off in a corner somewhere and study Matt Potter’s cover story history lesson for the week while I’m waiting for Erie’s book to come out.

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Don Bauder Feb. 28, 2008 @ 6:45 a.m.

Response to post #1: The loss of the U.S. manufacturing base is quite serious. It is pathetic that to stave off a recession this year, the nation is reverting to a Keynesian stimulus (the rebates) to get consumers to spend. Consumers have come from 67 percent of the economy to 72 percent. They spend far too much already, relying on far too much debt. What's needed is infrastructural spending. But the powers decided this money wouldn't get into the economy fast enough, so they opted for more addictive consumer spending juice. The federal government can't afford those rebate checks and the consumers can't afford any more spending. Best, Don Bauder

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Anon92107 Feb. 28, 2008 @ 12:16 p.m.

Response to post #2:

What worries me most right now is that Bush held a special news conference a couple hours ago to proclaim that he believes the country is not headed into a recession.

I really can't remember the last time Bush was right about anything truly important anymore because he has been so hideously wrong so many times.

And it sure didn't help the stock market when it sold off after Federal Reserve Chairman Ben Bernanke announced there could be some bank failures about the same time that Bush made his "forecast".

Is there some kind of a shell game going on here?

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Don Bauder Feb. 28, 2008 @ 2:33 p.m.

Response to post #3: Three decades ago, the stock market was a reliable indicator for what was going to happen in the economy six months hence. That is no longer true. Between 80 and 90 percent of the trading is done by institutions, not including a whole bunch done automatically by computer. The institutions -- hedge funds, pension funds, mutual funds, money managers of all kind -- buy one minute and sell the next. Wall Street has zero long term vision. So you can't tell what's going to happen based on what the market is doing. Another factor this year: it's an election year, and the Federal Reserve is pushing down interest rates despite obvious inflation, and the federal government has a rebate plan. Everybody will do whatever they can to prop up the market and economy until the election. After that: god help the incumbent! Best, Don Bauder

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Anon92107 Feb. 29, 2008 @ 4:09 a.m.

Response to post #4:

Actually it's god help America time right now!

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Don Bauder Feb. 29, 2008 @ 6:53 a.m.

Response to post #5: And San Diego, too. Best, Don Bauder

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MarkScha Feb. 29, 2008 @ 9:56 a.m.

I get most of my business, finance and economic news from the Economist, Bloomberg TV/Internet, and PBS' Nightly Business Report. They have pointed out that the Fed is lowering short term rates and the Euro zone central bank (ECB) has not. Don, can you comment on the pressures that lead two linked economies to act differently? Thank you.

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Don Bauder Feb. 29, 2008 @ 12:46 p.m.

Response to post #7: Europe has always been more paranoid about inflation. That is particular true of Germany, which suffered horrendous inflation after World War I. Also, the economies of the Eurozone are still strong. However, the Europeans do not want the dollar this weak. Exports are hurting. At some point, the ECB will have to lower rates for defensive reasons. More and more, it looks like the U.S. is in for two to three years of weakness. That will inevitably hurt Europe. The Fed will pressure Europe to lower rates -- in fact, is doing so now by not caring about the dollar's sharp decline. Bernanke has no business lowering rates this low with producer price inflation running at above 7 percent the last month, and various measures of inflation running 4 to 5 percent, perhaps above. Don't be fooled when Bernanke says he is worried about recession. We have recessions every few years; they are nothing to worry about. He is worried about a worldwide credit market calamity touched off by derivatives. The ECB is no doubt watching that, too. Best, Don Bauder

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Anon92107 March 1, 2008 @ 3:55 a.m.

Response to post #8:

Let us pray that the rest of the world will hold itself together until America restructures itself for the new era of globalization.

The egregiously destructive greed of Wall Street and Washington that has metastasized throughout America is taking a hideous toll and we are paying the price for our failures in morals and ethics.

You might be interested in knowing that Warren Buffett will answer email questions this coming Monday morning at 3am PST March 3, live for three hours from Omaha on CNBC's “Squawk Box” http://www.cnbc.com/id/23359277

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Don Bauder March 1, 2008 @ 7:17 a.m.

Response to post #9: In his annual commentary, Buffett once again criticized excessive profit expectations for pension funds -- something the City and County should take to heart. Buffett had some timely warnings about the overall economy. Best, Don Bauder

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Anon92107 March 1, 2008 @ 1:16 p.m.

Response to post #10:

If we don't start sending people involved in San Diego pension fund fraud to jail soon we should hire former Justice O'Connor to eradicate judges who have been influenced by money and politics to betray San Diego taxpayers.

There is only so much that Buffett can do to protect municipal bonds, but fraud makes it impossible even for him.

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Don Bauder March 1, 2008 @ 3:30 p.m.

Response to post #11: I'm afraid that, legally, only the voters can remove those judges. With some educational effort, it is not undoable. Best, don Bauder

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Anon92107 March 2, 2008 @ 3:28 a.m.

Response to post #12:

Let us pray that Justice Sandra Day O'Connor's grave warning "How To Save Our Courts - Politics is threatening the rule of law in the U.S. today" in Parade Magazine on February 24, 2008 will inform and ignite citizens to vote out judges who are influenced by money and politics. http://www.parade.com/articles/editions/2008/edition_02-24-2008/Courts_O_Connor

Do you have a list of judges who have been "selected" by Davies, as you discussed in "Brash Cash"? http://www.sandiegoreader.com/news/20...

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Don Bauder March 2, 2008 @ 6:44 a.m.

Response to posts #13: I don't have a list of judges pushed forward by Davies. Best, Don Bauder

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jv333 March 2, 2008 @ 11:46 a.m.

The stock market 'emerging internet-centric' bubble of the 90s (coupled by the passage of the Private Securities Tort Reform Act of 1995 over the veto of Bill Clinton) which removed corporate criminal sanctions for false financial reporting...led to the parade of bogus numbers put up by the Worldcoms, the Enrons, and their many fellow corporations upon which investors relied ... then the ultimate burst ...

Investors salvaged what they could, ran from the stock market and into the last, best American 'supposed recession-proof' asset: real estate....the stampede caused another bubble in another market, driving prices up to giddy levels.

Unfortunately, financial institutions do not like regulation and have a habit of getting state and federal office holders in their hip pockets. Just as we saw during the "junk bond-S&L scandals" of the late 80s ...and the energy re-reg in the 90s that led to the electricity crisis and the rape of the consumers in the early 2000s ... with no help from, and probably with the assistance of in the planning, by those at the highest levels of the Executive Branch.

On top of all this are the daunting price increases for oil and retail gasoline...the lifeblood of the American economy. When Bush took office, gas at the pump was $1.46 ... it is now well over double, in spite of reduced demand. As those billions are siphoned out of the consumer pocket, it's no wonder that debt and foreclosures are soaring in the face of inflated real estate prices.

When we figure out how to legislate integrity and accuracy re: financial instruments and reporting of publicly-held corporations, we'll arrive at a better time for investors and this country.

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Anon92107 March 2, 2008 @ 1:06 p.m.

Response to posts #14:

I think we need a list badly, even John Davies is hiding his "contributions" because they don't show up on the CPI website anymore.

By coincidence, the U-T did a another hatchet job against Aguirre this morning "ONLY IN SAN DIEGO Maienschein run for city attorney rocks boat" http://www.signonsandiego.com/uniontrib/20080302/news_1m2braun.html

Note their arrogant Screw San Diego admission of flagrant out in the open judicial corruption: "On the Republican side, it took some effort to lure Superior Court Judge Jan Goldsmith into the race, and for that matter, into San Diego. First, a pesky deputy district attorney had to get out of the way. He did, once a plum judicial appointment was dangled in front of him."

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Don Bauder March 2, 2008 @ 2:11 p.m.

Response to post #16: I didn't think Gerry Braun's column this morning was a hatchet job against Aguirre. I think Maienschein didn't come off well. I don't think Goldsmith came off well, except in one sense: there is a lot about Goldsmith that hasn't come out yet. But it will. Best, Don Bauder

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Don Bauder March 2, 2008 @ 2:07 p.m.

Response to post #15: You make some excellent points. The Federal Reserve helped inflate the stock market bubble of the 1990s, and was pretty much to blame for the real estate bubble of the early 2000s, when the Fed pushed rates down to 1 percent and left them there entirely too long. Was it any surprise that con artists in the mortgage field were able to convince people that housing prices only went up, that lots of mortgage money would always be available, and that exotic mortgages with big rate resets were not dangerous? As to corporate earnings, Warren Buffett has something to say about them in his latest letter. Earnings are still overstated. Inflation is understated, deliberately, by the government, which says with a straight face that inflation is overstated. For ideological reasons, there was no regulation or oversight of any kind on financial derivatives; these egregiously complicated instruments could cause a calamity. The Fed says it is lowering rates, despite high inflation, to fight recession. Balderdash. We have recessions every few years. The Fed is deathly afraid of a derivatives unraveling, but it won't say that. Best, Don Bauder

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Don Bauder March 2, 2008 @ 10:21 p.m.

Response to post #19: Shhhh. In due course. Best, Don Bauder

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Don Bauder March 3, 2008 @ 6:33 a.m.

Response to post #21: Good questions. I spent much of the weekend working on them. Lockyer says California should be rated AAA? What has he been smoking? Best, Don Bauder

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JohnnyVegas March 2, 2008 @ 7:06 p.m.

18.

there is a lot about Goldsmith that hasn't come out yet. But it will. Best, Don Bauder


I take it Don that you know something that the rest of us don't (we already now Goldsmith wears a rug, and a very bad one at that!!)...... Please-do tell!

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Anon92107 March 3, 2008 @ 2:37 a.m.

Response to post #19 & 20:

It's about time judges were exposed Don, go for it ASAP before the election because nothing is happening in our courts to end the pension crisis right now.

We've definitely got a judicial problem in San Diego when power brokers can dangle judicial plums.

Did you notice the NYT column today "States and Cities Start Rebelling on Bond Ratings"? http://www.nytimes.com/2008/03/03/business/03bond.html?ex=1362286800&en=4b6dc630d31e4d35&ei=5088&partner=rssnyt&emc=rss

What's really going on here, especially relative to San Diego's pension crisis and bonds?

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Don Bauder March 3, 2008 @ 1:25 p.m.

Response to post #23: Buffett is in his late 70s. He must be surviving the salt. Best, Don Bauder

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Anon92107 March 3, 2008 @ 12:20 p.m.

Response to post #22:

Watched Buffett on CNBC this morning, and he said "by a 'common sense definition' the U.S. economy is already in a recession, current conditions are 'nothing like' the downturn of 1973 and 1974, he's waiting for when stocks become 'very cheap,' best opportunities he sees right now are in bonds rather than stocks, and each generation will live better than the one before it."

In perspective, he actually made me feel better about most things, however he did confirm my concern for something that should be obvious to everyone, that this is an era of decreasing natural resources plus increasing population and competition for resources.

And he did worry me about one thing, he uses too much salt on his food.

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Anon92107 March 4, 2008 @ 2:28 a.m.

Response to post #24:

Hmmm, Buffett is 77 and has an incredible brain for details, common sense and decisions, so maybe salt is good for the brain.

Need to check that theory out with Edelman's Neurosciences Institute.

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Don Bauder March 4, 2008 @ 6:44 a.m.

Response to post #24: After I had my first heart bypass surgery in my mid-40s, I cut back quite sharply on salt intake. Maybe that's why the shingles are coming off my roof now that I am in my 70s. Shoulda thought of that. Best, Don Bauder

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Anon92107 March 4, 2008 @ 12:47 p.m.

Response to post #25: Don, as your columns and Blogs keep proving you have so many "shingles" on your "roof" that you can afford to lose a lot before anyone notices. I'm sure Warren has lost some by now also, and you are his counterpart in San Diego/Colorado.

I feel as long as I can read what you, Warren Buffett and Jonathan Clements have to say at least once a week I'll be able to survive as well as anyone.

Experts like Dr. Floyd Bloom at the Scripps Research Department of Neuropharmacology might be able to tell us if Warren's salt diet is the best way to go for maintaining the brain. Interesting that after his three hour interview on CNBC yesterday morning Warren "corrected" his earlier admission of salt on his hamburgers to really admit that he puts hamburgers on his salt, so there may be something for both of us to learn here. But then Warren has also lived on an Nebraska diet his whole life, so there may be more to his brain maintenance than salt.

I found it interesting that Warren correctly exposed ethanol as an incredibly bogus political and scientific idea because the amount of carbon dioxide emissions produced to grow corn negate most environmental advantages to burning ethanol. However his son is a very wealthy Nebraska corn farmer who disagrees with him.

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Don Bauder March 5, 2008 @ 7:12 a.m.

Response to post #31: If you continue following the Reader, I think you will conclude we are doing our best to do what you desire. Best, Don Bauder

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Justice4all March 4, 2008 @ 3:08 p.m.

Sadly, society has a debt-driven "keeping up with the Joneses" mentality. Everyone wants the status symbol cars, the huge home and spoils their kids with every gadget available (iPods, Nintendo Wii, latest cell phones, etc.) Meanwhile they are leveraged to the hilt, complain about gas prices for their gas guzzlers, complain about energy costs for their too big house and spend every discretionary dollar on Coach bags, the latest "name" clothes for their kids, etc.

The population mirrors the government where spending is out of control.

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Don Bauder March 4, 2008 @ 6:48 p.m.

Response to post #27: Omaha folks have a meat and potatoes diet. The weather is also ghastly, I am told, and it certainly was in the one week I spent there in the mid-60s. I understand Omaha people say they have only two nice days a year. Best, Don Bauder

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Don Bauder March 4, 2008 @ 6:55 p.m.

Response to post #28: You are right on every point. Americans overconsume, and go into excessive debt to do so. There was a time, many decades ago, when "economics" dealt with economy. People were told to make do with less -- conserve, save, be parsimonious in everything. Since Keynes, the focus has been on consumption. People are told to consume, consume, consume -- even in war time. (Remember Bush telling people to continue shopping during the Iraq war?) Governments at all levels are vastly overextended. The federal deficit is far too high, particularly with the current account deficit running at around 7 percent of GDP. State and local governments are in real trouble. Witness San Diego. And California. Corporations are in good shape now, because corporate profits as a percentage of GDP are at record levels. But Wall Street depends entirely too much on debt. The banking system worldwide is in trouble because of derivatives. Best, Don Bauder

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Anon92107 March 5, 2008 @ 5:04 a.m.

Response to post #30:

Don you are providing Great reality checks on economics, but the #1 problem today is the corruption of our federal, state and San Diego executive, legislative and judicial branches of our governments by special interests.

Specifically here in San Diego our current political, economic and social problems are caused to a great degree by the tyranny and avarice of the Davie/U-T interests that have proven for decades that they are ready, willing and able to sacrifice the lives and wealth of everyone else in San Diego to increase their own personal wealth and power.

“Now, the Hangover” is a great general lesson, but now it is time for the counterattack against the most destructive forces in San Diego that that still control and threaten our future.

The Reader is the only journal in San Diego that can make the right things happen during the election this year or we shall not be able to even begin a recovery.

We need your help more than ever before to end this era of corruption and destruction of San Diego by Davies/U-T.

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