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Jon Talton

Analysis and commentary on economic news, trends and issues, with an emphasis on Seattle and the Northwest.

May 7, 2009 at 10:20 AM

Why the recession will likely stick around for some time

Top of the news: Is the recession coming to an end? No.

This isn’t the beginning of the end, but the perhaps, if we’re fortunate, it’s the end of the beginning — an easing in the frightening, unprecedented in modern times, drop in economic activity.

For example, we’ll get a sense of national unemployment on Friday (and the state on May 19th), but it’s likely to show continued layoffs — just at a lower rate than the steep drop of recent months. While those job losses would have been considered very bad in recent recessions, in this calamity they will be “good news.”

Still, several big problems will continue to dog the economy. Among them: an inventory of some 1 million unsold houses; 20 percent of U.S. house owners owing more on their mortgages than their houses are worth; an overbuilt condo market; commercial real estate facing huge credit and tenant challenges, and an over-leveraged business sector in general.

A huge weight around everyone’s neck is the synchronized global, cross-sector nature of the downturn that swamped everyone at once. Just ask Boeing.

We are a poorer country than in 2006. The 401(k)s of average Americans have lost 40-50 percent of their value. Wage stagnation has been replaced by falling wages in many cases. Some 5 million have become officially unemployed; more are underemployed and all are fearful of losing their jobs. It’s very unclear how the labor marker will recover. This — along with a huge debt burden — will make it difficult to revive consumer spending to “recovery” levels.

On top of all this, the first real signs of renewed growth will send oil prices rising again. This has been happening already, and will work against recovery.

So we may have hit bottom — barring another shock. We could rattle around there for some time.

The Back Story: This recession has been very much a financial crisis, so until the banks are healthy, the light at the end of the tunnel will be a train. The stress tests on major banks have been completed and six pass, including the owner of Washington Mutual, JPMorgan Chase. Seven institutions will have to add $65 billion to bolster their capital.

What do you make of this? Consider how much power banks wield in Washington — they negotiated intensely with the government over the stress tests and Treasury Secretary Geithner and White House econ adviser Summers are very much a part of the bankers club.

Adam Posen offers an interesting cheat sheet on grading the stress tests. Much will depend on the transparency available to the public. The chiefs of these publicly held, nationally chartered and taxpayer supported institutions didn’t want you “looking under their hoods.”

But even if the tests show none of the big banks are insolvent, they don’t get at the bigger issues: the independence and effectiveness of regulators; the danger and risk of “too big to fail” institutions, and the largely unregulated shadow banking system. Without reform and transparency here, another crisis is waiting to happen.

Today’s Econ Haiku:

If Eddie Bauer

Were like Jack, then twenty-four

Would fix its troubles

Comments | More in Banking, Macro/Big picture


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