I told Professor Keith Schwer that if I learned one thing from his economics presentation, it's what a “cliff-diving chart” is.
Actually, I learned much from his review of trends in auto finance. But the cliff-diving charts stand out the most.
Those are graphs with trend lines that go up and up – then plunge. “I could show a lot of these, all related to today's economy,” Schwer says.
He could and did, at the recent Auto Finance Summit in Las Vegas, where civic leaders thought they were immune to hard times.
“When I first came here 20 years ago, they told me Las Vegas was recession-proof,” says Schwer, director of the Center for Business and Economic Research at the University of Nevada-Las Vegas. “They thought they figured out how to do it.”
They hadn't. Las Vegas is an epicenter of the nation's mortgage tremors. It's a place where housing starts got ahead of population growth. A deep-dive analysis isn't needed to know what happens when supply zips past demand.
“Builders overbuilt, lenders over lent and borrowers over borrowed,” Schwer says, Power-Pointing through his painfully graphic charts.
He shows those cliff-diving ones on such topics as falling auto sales, declining home prices and dropping consumer confidence.
The charts' trajectories resemble those of the real cliff divers in Acapulco. Before these human tourist attractions jump, they pray at the altar of the Virgin of Guadalupe. At least they have that. Is there a saint for national economic disasters?
Schwer starts his presentation, not with a prayer, but with a World War II story about how American GIs overcame hardship during the Battle of the Bulge, finding opportunity in adversity.
His aim is to draw parallels to our times, when “jobs, production and sales are off, and credit generally is unavailable.” Otherwise things are great. Where are General Patton and the Third Army when you need them?
In another then-now link, Schwer quotes American humorist Will Rogers, who said during the Great Depression: “Stupidity got us into this, can it get us out?” Well, we're working on it.
People learn from mistakes. When today's financial mess is over, we'll have assembled quite a lesson book. The first chapter should include this tip from Schwer: “Oversight is as important as insight.”
He says the economic crisis of 2008 to ? will bring three big changes:
- Increased government involvement in the nation's financial affairs. We're seeing that already. Buddy, can you spare a billion?
- More simplicity. A flaw of those convoluted derivatives and hedge-fund schemes is they masked real risk levels. “Transparency counts,” Schwer says.
- Greater attention to human nature. “We've got to focus more on human behavior and less on computer screens,” he says. “Some people with math degrees don't understand human behavior.” To wit: Eager lending plus reckless borrowing does not equal a good loan.
Like any economist worth his weight in crystal balls, Schwer has a forecast for 2009.
“Yes, a recession,” he says. “One view is it will be relatively short. That's based on the Fed being effective. The other view is it will be long. Like the big 'U.'”
In economics lingo, that's a chart so named because what's being tracked drops, sits at the bottom, then creeps back up.
U charts aren't pretty when they plot the path of a recession. But they look a lot better than the graphic equivalent of diving off a cliff and crashing on the rocks below.