It could not last-and, it did not. The push toward increased home ownership, an admirable objective, came with a host of relaxed credit standards; generally referred to as subprime mortgages. Innovative, but relaxed credit standards, abundant funding augmented from expanding global sources; and a rush for quick returns triggered by some early highly profitable events set off a real-estate boom environment, often referred to as a bubble. As such, successes pushed things “a step too far.” A headlong push for returns without prudent assessment in too many instances, having generated an unsustainable environment, now faces a period of correction. We have now entered a period of risk-and-return rebalancing. A financially stressful period with a push to greater liquidity amid higher-than-usual problems of solvency is a greater risk environment than what we have experienced of late.
We see the pattern of a slowdown in the Nevada numbers. Housing activity, as reflected in residential-permitting activity, the first step in residential construction, is down sharply from year-ago levels. Overall, job growth falls short of the trend. Other indicators showing more subdued performance levels include gaming revenue and taxable sales, both show decidedly lower levels of performance than in the past. Moreover, the slowdown is apparent in both Las Vegas and Reno.
Nationally, slower growth is apparent in the national income accounts. GDP growth is down sharply, coming in at a seasonally adjusted rate of 0.6 percent. Still, other indicators are not as sanguine, suggesting slower growth ahead. If international monetary authorities, including the U.S. Federal Reserve, are able to keep sufficient liquidity and self-correcting forces work with sufficient rapidity and impact, a recession will be avoided. In short, we foresee slower growth ahead amid higher risks.
The current jitters follow a pattern of increased frequency of financial crises. Most recently was the Dot.Com market correction (2000), preceded by Long Term Capital Management crisis (1998), the Asian financial crisis (1997-1998), the stock market crash (1987), and the Savings and Loan Crisis (1985). Thus, looking back we offer one take away for forward thinking-the quickening pace of financial innovation is seeding increased financial volatility and that there is difficulty in detecting and limiting the spread of problems before they have broader consequences.