The financial crisis hits IT hard

The recession that started in January 2008 looks to be four phased. The first phase, The housing collapse, actually started in August 2007. The financial meltdown hit in September 2008, and likely will continue through to March 2009 or so.

The business firestorm is really just getting underway now, and will be the dominant theme for the next 8-12 months whlie the final phase, currency collapse, will (if it occurs at all) likely not happen for another 12-18 months.

The business collapse itself is taking place in a number of different verticals, which differentiates it from a traditional oversupply recession.

In an oversupply recession, the market produces too much of a good or service for the available demand, which usually means that either companies have to cut back on producing goods (and consequently reduce their own profitability) or they fail and fall out of the market. In time, demand rises to meet supply, and the industry in question recovers.

The housing collapse was a classic oversupply recession - too many houses on the market at too high a price, and eventually demand couldn't meet supply.

Had the housing market not been fueled by low interest rates when they weren't needed, had the financial industry not done a dice-o-matic on the resulting mortgages, and so on, chances are pretty good that we would be about 2/3 of the way through this by now, IT, except for the specific housing IT vertical, would be relatively unscathed. The problem now is that risk became baked into the very core of the global financial system like a series of fault lines, and the collapse of the mortgage business was like a deeply buried mortar going off in that mess.

This in turn exposed the very ugly truth about finance - that prices are psychological, and when no one knows the value of things, the ability to plan for the future ends.

This fear has manifested in the credit crunch, when banks are terrified of lending money out because they know that the assets that the carry are far below what they should carry in order to stay solvent - and that if they loan out money, they won't have it when the next wave of credit defaults occur (either credit cards or commercial real estate, take your pick - they'll hit about the same time). There's currently an effort to reliquidate the banks by most of the world's governments, though with at best limited success (more on that in future articles).

The business collapse is occurring because of two factors. First companies that had depended upon having readily available lines of credit are finding these lines being cut or dramatically reduced, which makes them much more vulnerable to the variability of incoming contracts ... at a time when everyone else is facing the same problem.

The second is that this has put significant downward pressure on household incomes, as these same lines of credit (in the form of second mortgage refinancing, credit cards and so forth) are now becoming scarce at the consumer level (along with financial investments having plummeted in the last few months). This has resulted in a consumer strike, as people save rather than spend.

For those businesses with a direct consumer face (or those that IT companies who supply services to these businesses) this translates into reduced revenues and shrinking demand, which in turn has a direct impact upon both those people that produce retail hardware and has an indirect effect upon IT companies that produce software to support these retailers. It also means that companies that had projects in the work for FY 2009 are scaling these back or putting them on indefinite hold until they get a clearer read of the economic situation.

One of the problems with recessions is that while there is an underlying economic aspect to most of them (many people just don't have the money in the first place), there is also a psychological aspect. People stop spending (and start saving), in anticipation of two things - first, that when they need the money, they may not have it, and second, that when the economy is receding, the overall price of both goods and services drop.

It makes little sense to take on new purchases (whether new projects or new goods) when demand is dropping and the possibility is fairly strong that they can get those things for cheaper in a year or two. At an individual level, this is a rational response. The problem comes when everyone does it.

At that point, demand dries up, companies go out of business, reducing the overall stock of those same goods and services. This happens with all goods. The problem that we face right now is that the goods that are at the root of the problem - houses - tend to have a comparatively long shelf life compared to Tickle-me Elmo dolls or iPods.

They can't be inventoried or written off, which means that it will take considerably longer for demand to meet supply, and as capital investments destroying houses and restoring the property to a usable state can be painful at best.

Unfortunately, this means that the psychological aspects of businesses far removed from housing will be very much held hostage to the housing cycle.

Eventually (for a number of reasons) housing prices will stabilize at a new level of equilibrium (which, if reversion to the mean is any indication, should be about 15% below where most prices are now), though it is also likely that any markets will overshoot this level to about 25% or so below current levels before eventually returning to this mean.

While estimates vary as to how long it will take, most economists feel that it will be at least another nine to eighteen months, putting the "bottom" of the recession at or around late 2009 or early 2010.

Yet even that won't necessarily be the end of the troubles. A deep financial depression is a lot like a deep cyclonic depression (a.k.a, a hurricane).

In a hurricane, a great deal of damage is done by the winds, as windows break, cars go flying and in some cases houses go sliding into the depths or get turned into kindling.

- Internet