For many Americans, 2008 was a year of hard lessons. We learned that things we've taken for granted for years, like easy credit and solvent banks, can evaporate with little warning. Unthinkable developments—like the collapse of once mighty corporations—actually happen. We've even begun to question one of the core tenets of life in America, the virtue of homeownership.
[See the 10 Worst Assumptions of 2008.]
As economists might say, we're re-evaluating our assumptions, the core beliefs we use to make choices and plan our lives. And while we're at it, we should be careful about our expectations for the coming year, which could be even more challenging than 2008. As the recession deepens and job losses mount, here are some of the riskiest assumptions we could make in 2009:
Obama will fix things. It's obvious that President-elect Barack Obama's top priority is a stimulus plan of $500 billion or more for road and bridge projects, alternative-energy investment, and lots of other job-creating ventures. That will help keep a listing economy from springing more leaks—but it won't stop the recession or keep unemployment from worsening in 2009. The recession will end only when the falling home prices bottom out, companies resume growing, employers stop firing and start hiring, and consumers begin to believe that the worst is behind, not ahead.
If Obama's stimulus plan passes early in 2009, it ought to help boost consumer spending modestly by the middle of the year, through an increase in unemployment benefits that will give laid-off workers a bit more money to spend. But infrastructure projects and job programs have a delayed effect, because it takes time to designate the projects, fund them, and hire the workers—especially if it becomes a political battle over who gets the money, which seems unavoidable. A rapid-fire infrastructure program might help modestly in 2009, but it won't really kick in until 2010 and beyond.
[See why the feds rescue banks, not homeowners.]
There's more where that came from. The government's bailout fund is vast but not bottomless. Obama's stimulus plan will add to the $700 billion that Congress has already set aside to help ailing banks (and anybody else who manages to claim a few billion dollars). But if you think your company, your town, your favorite stock, or your mortgage is sure to benefit sooner or later, think again.
The recent battle over a mere $14 billion in emergency loans to keep General Motors and Chrysler alive indicates that bailout fatigue could become an epidemic that sweeps Washington in 2009. Hundreds of companies and even a couple of dozen states have their bailout applications filed in Washington—and most won't get what they want. The same goes for many distressed homeowners hoping that some kind of government program will help them hold on to their homes. Obama has said he wants to do more to help limit foreclosures, but there are major limits on what the government can do. Besides, it's clear by now that while federal intervention may have prevented a financial catastrophe, it hasn't been able to forestall a recession. For all the government largess, you're still better off finding a way to bail yourself out than waiting for somebody else to do it.
[See why the bailout tally so far is twice the entire government budget.]
Gas will stay cheap. If there's anything good about this recession, it's the plunge in energy prices caused by reduced economic activity and falling demand for oil. Since peaking at more than $4 per gallon this summer, gas prices have fallen 50 percent, in effect a massive rebate for consumers.
So should you go ahead and buy that plush, heavily discounted SUV? Only if you budget for $80 or $100 fill-ups a few years from now. Nobody's sure where energy prices will go, of course, but there's plenty of reason to think they'll head right back up once the global economy recovers, drivers start racking up the miles once again, and emerging countries like China and India resume breakneck construction. Billionaire oilman T. Boone Pickens predicts that oil prices will once again crest $100 per barrel in 2010 and keep rising to $200 or $300 per barrel within 10 years. Pickens has been wrong recently, but many energy analysts agree that strong demand will push energy prices higher in coming years—perhaps even making $4 gas seem like a bargain.
Consumers will bounce back. Maybe. In some income brackets. In some parts of the country. But the housing bust and ensuing credit crunch have fundamentally changed the consumer economy, at least for a while. Remember home-equity loans? Millions of Americans used them to buy fancy cars or go on lavish vacations, figuring it was free money they'd pay back after a few years as their homes rose in value. But with home values falling, home-equity loans are rare these days, and a major source of funding for big purchases is gone. Many consumers have also found that all of a sudden they can't get a car loan or a mortgage, even though they never had a problem before. That's because banks have dramatically tightened lending standards and in some cases give money to only the best credit risks. And many people who thought their credit cards were a last source of funding are getting shut out, too, as banks lower credit limits.
For consumers with top credit, the crunch will probably ease a bit in 2009. But at many banks, defaults on mortgages, car loans, and credit cards are going to get worse, not better, over the next couple of years. They'll need to hold more money in reserve to cover those losses, which means less money to lend. And with a recession and job losses intensifying, they'll be more selective than ever about whom they lend to. "We will see credit come back to the haves, but then it will become real clear that the American dream will actually be further out of reach for the have-nots," says Charles Payne, CEO of the research firm Wall Street Strategies. We won't revert to an all-cash economy, but anybody banking on a loan in 2009 might have to change plans: It will be a pay-as-you-go year.
[See how to tell if you're rich.]
It's hopeless. For all the bad news, probably the worst thing that consumers, workers, and business owners can do is barricade themselves in a fortress. It's tempting to hoard cash, minimize all your risks, and hope for a sunnier day. But recessions are times of "creative destruction," and while the destruction tends to dominate the headlines, new opportunities often sprout as companies seek new ways to grow and those resistant to change drift into obsolescence. Plus, recessions end. And when this one does, we'll all be ready for a party—on a careful budget.