One out of six construction loans in trouble – still a sunny forecast?

Many of my colleagues have been recently wondering how the media regarding the American economy could be so sunny in the face of increasing unemployment. Indeed, how could any recovery happen having doubled the unemployment rate? The U-3 unemployment rate hovers around 9.7%, while underemployment is at a record 16.8%. How can an economy supposedly based on consumer spending come back with twice as many people unable to spend?

Americans have a strong bias toward good news. We are historically, as a people, motivated and entrepreneurial, so rather than dwell on things like history or future trends, we would prefer to get right back to work. This is an admirable trait in general. So long as you are focused on the right things, unthinking hard work is preferable to endless bureaucratic meetings in which you decide a suitable course of action, only after multiple hearings from all parties, et cetera.

There are moments where a sunny disposition is the wrong thing. To be sure, there’s no point in whipping people into a depression-related psychosis, causing a run on the banks and prodding people to fling themselves off bridges because the end is nigh. And economics is at the end of the day a social science; sometimes when people simply think positively, things turn around.

This is not the average four-quarter recession, or so we were told last year as trillions of collerateralized fakery came due and future taxpayers sprung for the bill. This was supposed to be the Great Moment of Reckoning In Which Everything Was Different.

Suddenly, a few trillion dollars in bailouts later, our leaders of business and government began talking about a quick snapback, how we could go back to the same old great economy from before. Why, some people have even suggested making Hank Paulson a national hero and that Bernanke saved the world.

Curiously, most of the voices promising speedy return today were the same voices denying fissures in the subprime market and even growth and recovery in late 2008. Meanwhile, a chorus of analysts are rising up with numbers that suggest sunny optimism is precisely wrong.

How else to describe recent reports that fully one in six construction loans are in default? This flies in the face of Dow 12,000 and GREAT second quarter bank earnings, but makes complete sense given our decade-long orgy of fake real estate-driven growth. All of those projects for luxury condos and Class A office space green-lighted in 2005, financed in 2007 and started in 2008 should cause a great number of developers to go up in flames, taking a few banks with them.

We basically freaked out last fall, and with good reason. Our suburbs have spilled out beyond our reasonable capacity to sustain them, the Boomers will stop their historic spending spree, too many manufacturing jobs have hollowed out the Middle Class, and the country as a whole has gorged itself on debt that will never be paid, personally or nationally. It is time for a new model of economic growth. The transition will be painful. We must be adults about things and make plans for this new reality.
As leaders we should eschew sunnny rhetoric backed up by fake numbers, and turn instead to less fun but more useful reality that The Crisis is far from over. And remember, never waste a good crisis.