The Economy, And Why It's Taking So Long to Fix It

Nobody wants to listen to Ben Bernanke - even though the Federal Reserve Chairman has been a pretty effective soothsayer.

Last fall, he famously predicted catastrophe if the government didn’t step in to help stabilize panicky financial markets. That was on the mark: Even with more than $2 trillion worth of government intervention since then, the economy is in tatters.

Bernanke has said we’re in a “severe” recession, which has now been borne out by the biggest decline in GDP since the punishing 1982 downturn. He has also said that 2009 will be an awful year, with a modest recovery starting in 2010 – if everything goes right.

[See how to tell when the economy’s getting better.]

We don’t want to believe it. That’s too long. We don’t want to wait till next year. We want things to get better NOW.

Stock market investors are the worst offenders. They’re continually looking for signs that a quick fix is right around the corner. Then they grow despondent when it doesn’t materialize, madly selling and sending the markets into yet another nosedive.

Homeowners are guilty, too. Sellers in many neighborhoods are still clinging to unrealistically high prices, sure that a housing rebound is coming soon. Workers who still have jobs refuse to prepare for a rainy day, hoping they won’t be among the 1 or 2 million Americans still likely to lose their jobs this year. Most of us, in one way or another, want to believe it can’t really get much worse.

[See 5 pieces missing from Obama’s stimulus plan.]

Sorry to say, it can. Here’s why it’s taking so long to resolve the biggest problems our economy faces:

The housing bust. We know now that we’ve been living through a classic bubble in the housing market, where frenzied buyers sensing a rush bid prices far higher than they should have gone. So the market crashed. And now everybody wants to know when home prices will stop falling.

There have been half a dozen government programs to stem foreclosures and help stabilize the housing market. But too much help would falsely subsidize prices once again, and prolong the problem. For the most part, bubbles need to work themselves out.

After the tech bubble burst in 1999, technology stocks took a beating similar to today’s housing market. The tech-heavy Nasdaq stock index sank for about two-and-a-half years, bottoming out in 2002. But it didn’t come roaring back to where it had been. Instead, it began a steady climb out of the basement, aided by Alan Greenspan’s interest rate cuts. By 2007, many of the tech shares that survived had regained ground lost during the bust. But it took nearly a decade.

[See why the feds rescue banks but not homeowners.]

Home prices peaked in 2006, so we’re more than two years into the bust. It’s plausible that the slide in prices will end later this year or in 2010. But keep in mind that tech stocks recovered during a booming economy – which obviously we don’t have right now. In some areas it could easily take another five years for housing markets to return to normal.

Broken banks. The markets rise and fall on every whisper out of Washington about the direction of President Obama’s bank-bailout plan. But whatever the plan, it will take years before the balance sheets of teetering titans like Citigroup (C) and Bank of America (BAC) are healthy again. An effective plan might generate confidence that the feds are on the case, but there is no conceivable plan that will repair the most troubled banks anytime soon.

[See why bank nationalization is so scary.]

Part of their problem is a mountain of losses stemming from mortgage foreclosures, which helped make the last quarter of 2008 one of the worst ever for the nation’s banks. But bigger losses are coming, as the recession deepens, more workers lose their jobs, and default rates on other kinds of consumer loans spike. Then there are those trillions of dollars worth of mortgage-backed securities and other assets that nobody has wanted to buy for almost a year. They’re worth something, but nobody knows what, and until that starts to become clearer, buyers will sit and wait.

The government has bailed out and wound down many banks before – and it’s usually a muddle-through affair that lasts a long time. That’s because failing banks are usually saddled with assets that have plunged in value and are hard to sell. After the Resolution Trust Corporation took over several thousand S&Ls in the 1980s, it took more than five years to sell much of the real estate and other assets that brought these banks down. It could take just as long to unwind the huge portfolios of troubled securities at Citigroup and other banks.

[See what Citigroup and AIG will look like in a year.]

If there’s any good news, it’s that the working parts of these banks will continue to function while the broken parts get dismantled. That’s what the federal interventions are supposed to do. In other words, they might resume something that looks like normal lending before all the problems are solved.

Other failing companies. If not for federal relief, other staggering companies like AIG (AIG), General Motors (GM) and Chrysler would be well into bankruptcy proceedings, and possibly headed toward liquidation. Federal aid has prevented that – but even so, the transformation of those companies is starting to look similar to a Chapter 11 reorganization.

AIG, for instance, is selling off many of its assets and lines of business, to raise cash it can use to pay back government loans. GM is killing off divisions, slashing its workforce, and making draconian deals with unions. To get some idea of how long this might go on, consider the bankruptcy of United Airlines (UAUA), which lasted more than three years. And that was under court-ordered deadlines. GM has predicted that even if it gets all the money it’s asking for from the government, it won’t break even until 2011 or have significant free cash flow until 2014. AIG may have to wait nearly five years just for its vast portfolio of credit-default swaps, one key source of its problems, to expire. So this sorry show will be airing for a long time. If you want to switch it off for awhile, that might be a good idea.

[See 9 bailout surprises from GM and Chrysler.]

Layoffs. As consumers spend less and the economy contracts, companies cut jobs. And they won’t add them back until they’re damn sure the economy is improving. The Fed and many others expect unemployment to rise to nearly 9 percent this year, from 7.6 percent now. That may start to come down in 2010 – but like everything else, slowly.

[See why the media is hyperventilating over unemployment.]

Plunging confidence. Americans are worth a lot less than they were a couple years ago. The Federal Reserve said recently that since the recession started in December 2007, the aggregate net worth of Americans has fallen by 23 percent, thanks largely to declines in home values and investment portfolios. And that was only through last October. Just about everything has gotten worse since then. So Americans feel poorer, and they’re a lot more worried about their jobs, too. No surprise consumers have sharply cut back spending – which makes companies cut even more jobs.

Americans will start to feel a little better when the biggest problems stop getting worse, layoffs subside, and there's less worry about getting or keeping a job. And when will that be? Not soon enough for most of us. But if you take a longer view, the recovery might not seem so far off.

Disclosure: No positions

Comments

[DownHillFro...:]

Couldn't agree more!!!!!!!!!!!!!!!!!!...


On Feb 27 06:06 PM User 365859 wrote:

> The mess we got into is 20yrs in the making. It started with the
> most favorite nation status to China(by Bill Clinton). Since then
> we have shipped 7 million manufacturing jobs to China. and the 20
> million support jobs that go with them This was done with the help
> of wall street and complicity of our managerial and political class.
> In order to maintain the standard of living in the face of these
> losses of good paying jobs american middle class borrowed too much
> and again wall-street was complicit in selling mortgages credit cards
> and every other form of debt that they knew people would not be able
> to laon back.
>
> Let the larger banks fail and create an RTC which will then sell
> those assets that are worth something to the next tier of banks.Wipe
> out the common share holders and start over. There would be much
> less pain in the medium term and we could make the medium banks the
> abilityh to make good profits and grow.
>
> The individual howeowner like me who has 70 percent equity is just
> going to suck it up. There are a few million too many homes in this
> country and we have to work through the inventory which could take
> a long time.
>
> I am my brothers keeper so we the better off have to help those less
> fortunate.
>

Feb 28 03:24 PM

[drevno:]

Any point in the business cycle (or any other other cycle related to the economy) is a sum-total of actions - economic, financial, political - of all participants. Big business included.

There's no doubt, however, that the behavior of big business, ( as represented by their management, management decisions, demands by their workers and their unions (or the lack of them), and the relevant consumer demand - perhaps driven by unbridled advertising) has had a large negative role in this mess.

The banks and financial institutions also clearly overstepped socially responsible behavior bounds. So their role in this mess - (recession/downturn/cr... is also extraordinarily large. Deregulation, as promoted by them, and eagerly agreed to by the either naive or chummy politicians, "helped" this mess enormously.

But what also needs to be rethought is the mentality of entitlement based on the buy/use/play now - pay later (or never) approach by the population at large. Credit does have its place in the economy but clearly should not be mistaken for the disposable income, as someone else already pointed out in his post.

So, until all these negative influences are neutralized, and all the economic and political players playing by commonly understood and agreed rules, this crisis and recession will go on.






On Feb 27 07:39 PM dw57 wrote:

> not sure that this is part of that cycle. this was a mess created
> by big business. by their fraud and stupidity.
>
> it doesn't fit that business cycle

Feb 28 03:54 PM

[PeteK:]

Just let the terminally ill die.
Before this country is being sucked dry.

Feb 28 05:26 PM

[303820:]

PETEK...IF YOU'RE REFERRING TO DETROIT AUTO...REMEMBER ONE THING... IF THEY GO DOWN SO WILL THIS COUNTRY... AND YOU CAN TAKE THAT TO A HEALTHY BANK!!!!!!!!!

Feb 28 06:24 PM

[atlasman:]

303820 -

I feel the pain in your posts. My reply is that the Government does not create the type of jobs you want. This has to come from private enterprise. Obama (and the many adminstrations since Reagan) have done so many things to hamper business (tax code, SOX, options treatment, feel-good but largely useless laws the create frivolous lawsuites that only drive up legal and insurance costs, the list is really endless) that frankly make creating good US-based jobs in a globally hyper-competitive market almost impossible and with the planned higher taxes more trouble than it is worth. If you really want jobs that will turn this situation around, go talk to some local entrepeneurs and find out what is stopping them from being successful and fix it. Anything else is just a waste of time and money.

CP

Feb 28 06:31 PM

[MarvinMBA:]

Normally each country does what it can do best...it seems much manufacturing has moved overseas...its seems that much of what America does has moved overseas....I'm having a tough time trying to decide what can we do best except ship our genius overseas for profit and production...Everyone cannot work in the medical/drug development field. It would be like giving each other enemas and charging a weeks wages for it....is this all we can do??????

Feb 28 07:18 PM

[atlasman:]

Interestiing Comments from Warren Buffet:

"This debilitating spiral has spurred our government to take massive action. In poker terms, the Treasury
and the Fed have gone “all in.” Economic medicine that was previously meted out by the cupful has recently
been dispensed by the barrel. These once-unthinkable dosages will almost certainly bring on unwelcome
aftereffects. Their precise nature is anyone’s guess, though one likely consequence is an onslaught of inflation.
Moreover, major industries have become dependent on Federal assistance, and they will be followed by cities
and states bearing mind-boggling requests. Weaning these entities from the public teat will be a political
challenge. They won’t leave willingly."

So, do you think Obama is up to the challenge?

Feb 28 07:47 PM

[E Nuff Sed:]

Excellent article. We are less than half way through this recession (or a mini depression). It will take 5 - 10 years for us to recover fully.

This is an economic reset for many of us who were lulled into complacency. I for one thought I could send my kids to college and retire at 55 - but did not realize I was living in a bubble. I am now happy I am employed and fully expect to keep on working to 65 - 70 - who knows?

For the future when the economy starts recovering I think Inflation will be a problem, the US currency will devalue sharply and interests rates will rise putting pressure on the markets again.

The biggest positive is that Bush is gone. I think the Obama administration is trying its best to make the best out of a bad situation. I wish it luck.

Feb 28 07:50 PM

[h peskin:]

The downturn has just begun. In the area of illness, one may develop a condition overnight and it may take weeks, months or even years to effect as cure. In this instance problems began to mount over several years and yet most of our so-called experts failed to see the signs of impending doom. In retrospect, it was the allowing of Lehman Bros. to go into bankruptcy that was the single most serious cause for the susbsequent
havoc. When this situation will bottom out is anyone's guess.

Feb 28 08:40 PM

[Bill Jencks:]

All these complex explanations...People seem to forget that economic problems and crises in different eras are all remarkably different. Currently we have a bad economic crisis - whose main unique characteristics are that it is a huge credit crisis which has gone massively global and currently - after a short period of inflation, we are now in a downward spiral and, possibly, in a liquidity trap. I say this because Bernanke has been pumping out the dollars with his printing press - trying to inflate the dollar - he's been doing this for some months now, but it isn't working. The M1, M2 and M3 money charts show this, and the CPI chart shows that inflation has stopped increasing, has turned and is moving vertically south right now. So despite plenty of money out there, the economy is in a rapid deflationary spiral at the moment - and Bernanke is furiously trying to inflate the dollar and is not succeeding - which could well mean that we are in a deflationary liquidity trap right now.

Currently Bernanke and the US govt. have tried tax cuts, buying up assets such as stocks, buying other currencies as well as printing mega-amounts of dollars in order to stimulate inflation. But this isn't working - institutions and US citizens are still not lending and hoarding cash. The velocity of money is at a standstill - there is no liquidity in the economy - so deflation is inevitable.

This is what has already happened and what will happen:

1. Inflation(already happened)
2. Deflation(happening now)
3. Hyperinflation(yet to happen)

Feb 28 09:57 PM

[name:]

The title of your piece (and the sentiment of the article) is reminiscent of the child passenger who repeats the phrase, "are we there yet?"

You make a dubious claim that the economy is taking "so long" to fix. So long relative to what sir? This credit crisis is borne of a grotesque project of Securitization begun over thirty years ago. Although the phrase is not often heard these days, it is still true that 'chickens come home to roost'.

Please visit Ritholtz: www.ritholtz.com/blog/.../

Feb 28 10:48 PM

[aarc:]

Despite the doom and gloom the United States is still getting the better hand out of this global economic crisis and the still being forecasted "potential" global political crisis.

The United States is the biggest exporter of "high-end" manufactured products - meaning military hardware and software. As the economic crisis deepens, more countries will start getting more cautious of future potential global political crisis and will allocate more of their GDP into defence - hence more exports for Uncle Sam.

If and when we get out of this economic crisis; the United States' megabanks (JPM, WFC, BAC, and C) assuming all of them survive, are well capitalized to take advantage of the global recovery programs that will sure to follow. Uncle Sam will again be the premier financier of the world as more money will be spent on economic recovery rather than on military defence or war deterence efforts.

We are still in the prevention of economic meltdown or catastrope with stimulus packages and bail out packages all over the world the main focus of monetary allocation.

The best thing the US can do to prevent global re-allocation of GDP into defence or war deterence as they would like to call it is for the US to start slashing down it's own military budgets as an example to all countries of the world. This is going to forestall most if not all future plans for stepped-up military spending by smaller countries who needed their income more for economic recovery rather than for military defence.

The less money going into military the more chance of a faster global economic recovery.

Feb 28 11:36 PM

[Joel87:]

Great Article, and Agree with mostly every. I also feel the Govt should not attempt to stabilize home prices, and let the market sort the true vales of these assets out. The gov will simply just kick the can down the road for later years

Mar 01 01:02 AM

[antiquary:]

It's not 20 years in the making, it's 30. The credit culture at the root of this addiction to leverage began with the US Supreme Court case Marquette National Bank of Minneapolis v. First of Omaha Service Corp. (1978). That case gutted state anti-usury laws by saying that nationally chartered banks can apply the interest rate laws of the state where they operate from, not the state the borrower is in. That, of course, set up the classic "race to the bottom" among states that we're now seeing in gambling; states without anti-usury laws attracted the big credit card companies and became addicted to the taxes on the huge amounts of money that began rolling in, providing the incentive for other states to repeal their anti-usury laws.

Congress, of course, should have then stepped in and amended the federal law to reverse Marquette National Bank, but they didn't.

On Feb 27 06:06 PM User 365859 wrote:

> The mess we got into is 20yrs in the making. It started with the
> most favorite nation status to China(by Bill Clinton). Since then
> we have shipped 7 million manufacturing jobs to China. and the 20
> million support jobs that go with them This was done with the help
> of wall street and complicity of our managerial and political class.
> In order to maintain the standard of living in the face of these
> losses of good paying jobs american middle class borrowed too much
> and again wall-street was complicit in selling mortgages credit cards
> and every other form of debt that they knew people would not be able
> to laon back.
>
> Let the larger banks fail and create an RTC which will then sell
> those assets that are worth something to the next tier of banks.Wipe
> out the common share holders and start over. There would be much
> less pain in the medium term and we could make the medium banks the
> abilityh to make good profits and grow.
>
> The individual howeowner like me who has 70 percent equity is just
> going to suck it up. There are a few million too many homes in this
> country and we have to work through the inventory which could take
> a long time.
>
> I am my brothers keeper so we the better off have to help those less
> fortunate.
>

Mar 01 12:14 PM

[PeteK:]

303820;
AIG & GM are too big and too damaged to fix.
If GM goes for chapter 11, this country will be saved.
GM will be much better off to have a new start.
All you care about is those overpaid UAW side.
Remember, they created their own demise, nobody else.
The unions of Boeing still follow the same path, why ? they never learn or read history. There's no arguements about it, there's just no cure for such terminal illness.

Mar 01 03:12 PM

[303820:]

Petek...you've never worked on the assembly line...so...when you make a statement that UNITED AUTO WORKERS.are over payed ,you do it out of ignorance or envy! and if you think that by loosing 3 millions jobs will save this country you're not too bright!...a good percentage of sales that GM is loosing right now is due to the bankruptcy chatter going around...if you don't believe that you're not too bright!...If you think that letting the Chinese take over the automobile marked is good for America and the American workers ...you're not too bright!
We're spending $800 billion to create 3 million jobs...if you think that spending $30 billions to save 3 million jobs...you're not too bright!
YOU DON'T SOUND LIKE AN AMERICAN!!!!!!!!

Mar 01 05:42 PM

[303820:]

THE END OF MY LAST POST SHOULD READ...if you think that spending $30 billions to save 3 million jobs is not the right thing to do...you're not too bright!

Mar 01 05:47 PM

[303820:]

PENEK...I don't mean to be rude...I get carried away...I apologize!

Mar 01 05:55 PM

[aarc:]

303820:

Americans are now penny pinching. It is only natural for us to think of today and not tomorrow while everybody is losing their accumulated wealth at an unprecedented rate.

You are very right. Spending $800B to save 3 million jobs gets the OK since it will go to the majority of the population while everybody seems bent on preventing $30B to go to the auto industry that is supposed to forestall a couple millions of lost jobs is penny pinching at it's best.

GM bankcruptcy, if it goes the wrong way, posess' massive threat to prolonging or exacerbating the recession or depression we are headed into with or without the $800B stimulus package.

UAW excessive health care is still the main cog in the wheel. As of now GM is an auto company specializing in health care. Is GM the biggest health care company in the world or what? Will it be the legacy by which UAW will leave to the Americans the whole world will be talking about for decades to come? An ignominous ending for the once proud American industry.

We have to remove that blockage in order for the wheel to turn around. Either the UAW helps to remove or dissolve the cog or GM and/or the govt will have to open the engine and/or dismantle the engine in order to remove the cog. A very expensive process but may be necessary.

When the whole country is in pain. UAW will have to share that pain.

Mar 02 03:01 AM

[303820:]

AARC...First, UAW will take over GM health care in 2010...our government should help fund this !we need to take care of the American workers! we love to talk about Canada's medical horror stories...what about the 42 million American that don't have health insurance?

second, UAW is sharing the pain...new hires @ $14.50hr, no wage increase for the duration of our contract, our sub pay drastic reduced, we pay our doctor's visit, reduced holiday pays...etc.

third. the 3 million jobs lost won't be in the auto industry only...those 1.2 million retirees won't be spending money that they don't have...the small business will loose more then the auto industry!

Mar 02 07:50 AM