William C. Davis

Two years ago, William Davis, Past President of the Florida Association of Mortgage Brokers, told the Economic Forum that the crisis then rippling through the mortgage industry would spread. Back in the Fall of 2007, he warned that the the economy was about to get a lot worse. In an October 2009 return visit, however, he said he underestimated just how bad things were going to get, and he had few encouraging words for what lies ahead.

Many in the audience were probably hoping for better news. But Davis mostly talked about the deep systemic problems that will cause economic pain for years to come. For example, even as the economy comes back, jobs are unlikely to because during the downturn businesses have learned how to make do with fewer employees. “So jobs are lost forever,” Davis said.

Even before the U.S. economy went into a tailspin, it was being undermined by a ballooning national debt – one that is now growing even faster as the Obama administration tries to spend its way toward economic recovery with stimulus dollars. Part of the problem with appreciating this problem is the human difficulty comprehending numbers like a trillion. As Davis put it, “If you spent $1 million a day since the birth of the Lord, you would not have spent $1 trillion yet.”

The U.S. national debt is now about $11.5 trillion. “From George Washington through Bill Clinton, the debt grew to $5 trillion. So in the past few years it has more than doubled.” The deficit for the last fiscal year alone topped $1.4 trillion, he said, and within 10 years the debt is likely to top $20 trillion. “It becomes very, very hard to even fathom repaying that money,” Davis said.

Meanwhile, the combined shortfall in state government budgets suffering from falling revenues and climbing expenses is about $150 billion, so don’t be surprised when “the states go to the the federal government and say, ‘We want the deal you gave General Motors.’ ”

According to economic scorekeepers, the current recession officially began in December of 2007. In October, Davis had told an economic forum crowd that the mortgage industry’s troubles were about to spill over into other markets. Over the next year, he watched it happen as Bear Stearns failed (and got a federal rescue). Then, in September 2008 Lehman Brothers failed and, over a weekend, the feds announced no rescue would be forthcoming. “This was a weekend no one will ever forget if you’re in the financial world,” Davis said.

Partly, the federal government was trying to make a point about not rewarding bad behavior, as some critics had accused it of doing with the rescue of Bear Stearns. But Lehman’s failure made credit markets seize up, as financial institutions began to doubt each other’s solvency in an economy built too much on risky mortgages. Other major financial institutions like AIG, Freddie Mac and Fannie Mae were suddenly teetering on the brink as well, and major banks had to be rescued . “Now, the government was doing financial triage, deciding who lives and who dies,” Davis said.

Now, after a change of administration and many more bank rescues and stimulus measures, financing is still tight, suppressing the real estate market. The government still has only spent about 20% of the money allocated for the Troubled Asset Release Program, although that money is likely to start filtering out in time for the mid-term elections in 2010. Just as important to our economy, Davis said, is a change in “the psychology of wealth.” Homeowners who saw their home values soaring were also more likely to feel flush enough to buy a new refrigerator or pump other money into the economy, but today they feel a lot poorer.

“Sooner or later, the economy will show signs of life,” Davis said, but that was about as close as he came to an optimistic statement. “Nobody trusts anybody. No one trusts the government, and nations don’t trust each other. Without trust, you cannot restore confidence.”

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