The Quitter Economy
Companies are liquidating; homeowners are mailing in the keys. Have we given up?
"Everything Must Go!" blares a bright-yellow sign at the Circuit City store on Broadway and 80th St. in Manhattan, N.Y. The revolving doors whir with curious customers looking for bargains. As can be inferred from the huddles of dejected employees wearing bright-red Circuit City polos, this store will soon be closing, along with the other 566 outlets of the nation's second-largest electronics retailer, leaving 34,000 people unemployed. Circuit City must liquidate some $1 billion in merchandise by the end of March.
There was a time, not so long ago, when a company like Circuit City would have stuck it out by filing for Chapter 11. A Chapter 11 bankruptcy filing gives companies breathing room from creditors in order to regroup and relaunch. Circuit City started down this path in November, but in mid-January it decided that rehab was too tough and threw in the towel. Sharper Image, Linens 'n Things, retailer Steve & Barry's, and the department store Mervyn's all filed for bankruptcy with the intent of reorganizing. And all have wound up liquidating. "The reason we're seeing liquation rather than bankruptcy from so many retailers is because people are hopeless," says Dean Baker, co-director of the Center for Economic and Policy Research at the Economic Policy Institute. "We're still looking at a very bad year in 2009 and probably most of 2010, so it's very difficult to be optimistic about reorganizing and coming out of it stronger."
Liquidation has become the corporate analog to residential foreclosures—with banks slow to restructure mortgages to help out shaky borrowers and borrowers quick to "mail in the keys" to the bank when the value of their house plummets. Foreclosures rose 79 percent in 2007 and spiked another 81 percent in 2008 to a record 2.3 million households. "It wouldn't surprise me if we approach 3 million households in 2009," said Rick Sharga, senior vice president of RealtyTrac, which compiles foreclosure data. At the same time, hedge funds, which helped foment the boom, have started mailing in their own keys. If a fund suffers losses in a year, the managers can't start earning lucrative performance fees unless the fund returns above its high-water mark. Rather than soldier on, many operators have opted to simply fold, returning money to investors.
Companies, homeowners, and money managers willing to quit rather than fight is both a symptom of the nation's deep economic woes and emblematic of the challenge the Obama administration faces. More than a mere "economic crisis" is facing Barack Obama. Our "Yes, We Can" president is going to have to fix a "No, We Can't" economy. In his inaugural address, Obama noted he was taking office "amidst gathering clouds and raging storms." That's almost an understatement. The macroeconomic numbers have been simply horrible, with job losses mounting, sales data plummeting, and the already frayed safety net coming undone. Several states' unemployment funds are in danger of being depleted. The crisis has rendered the last several years something of a lost decade. By the end of 2008, stocks had fallen back to where they were in 1997. Household net worth dropped from its peak of $62.6 trillion in the third quarter of 2007 to $56.5 trillion in the third quarter of 2008, below the level of 2005. The economy is losing jobs at an appalling rate.
The pessimism is most evident in the troubled sector that relies most on faith: lending. Champion Mortgage used to run ubiquitous advertisements that promised: "When Your Bank Says No, Champion Says Yes." Now all lenders seem to be saying no. In October 2008, about 85 percent of domestic banks reported having tightened lending standards on commercial loans, according to the Federal Reserve, while 70 percent said they had tightened standards on prime mortgages.
The challenge for Obama is twofold: dealing with the crisis of confidence and dealing with the crisis of economic reality. If housing doesn't stop imploding, the confidence businesses (i.e., credit) won't recover. But without the return of confidence, the credit markets will plunge further into dysfunction, hampering a recovery in housing and in every other industry. Through word and deed, Obama can try to exhort Americans to remain in the game. When Franklin D. Roosevelt entered the White House, he declared a bank holiday, putting a brake, for the moment, on the process of creative destruction. But FDR's most powerful tool may have been his rhetoric of reassurance, expressed so clearly in his fireside chats.
Of course, staged events and stunts frequently fail. John D. Rockefeller, who kept his financial affairs to himself, conspicuously invested in stocks after the 1929 crash. "Believing that the fundamental conditions of the country are sound, my son and I have been purchasing sound common stocks for days," he said. (Entertainer Eddie Cantor's response, "Sure, who else had any money left?") Obama's declaration that he would freeze salaries of top White House aides, saving $443,000 in the first year, is less than a droplet in the bucket. What's more, the markets and consumers have become increasingly immune to Beltway reassurance, especially since so much of it has been false.
Daniel Gross is the Moneybox columnist for Slate and the business columnist for Newsweek. You can e-mail him at email@example.com and follow him on Twitter. His latest book, Dumb Money: How Our Greatest Financial Minds Bankrupted the Nation, has just been published in paperback.
Photograph of President Barack Obama on the Slate home page by Ron Sachs-Pool via Getty Images.