From GDP to Jobs to Trade and Fear, Full Economic Recovery Could Take Years

And then there's the giant overhang of deficits and debts accumulated by households, consumers, and the worlds of business and finance, as well as cities, towns, states, and the federal government (follow California's fiscal collapse as a template of things to come). That is why the International Monetary Fund reported that U.S. banks have taken only about half of the write-downs they face, not to speak of those that will have to be absorbed by insurance companies, pension funds, hedge funds, and other nonbank institutions. Our four largest banks—Citigroup, Bank of America, Wells Fargo, and JPMorgan Chase—are menaced now by their conventional loan portfolios, separate from the $150 billion or so they have written off from the decline in the value of their securities. According to Fortune magazine, the big four hold $3.6 trillion in credit cards, student loans, auto loans, home equity mortgages, commercial real estate, and other consumer and business loans that are deteriorating at shocking speed. Default rates on credit card loans have already almost doubled, from 3.8 percent to 7 percent, since 2007. Rising unemployment rates can trigger more defaults on every type of consumer credit device: mortgages, subprime mortgages, home equity loans, credit card loans, student loans, etc.

The number of of credit cards issued to small businesses rose from 5 million to 29 million between 2000 and 2008, a credit card binge that resulted in an increase in spending from $70.4 billion to $296.3 billion over the same period, according to the Nilson Report. Today, business bankruptcy filings and associated credit card defaults have been rising faster than those on the consumer side, so card issuers have been aggressively scaling back available credit line balances by at least $500 billion today to those same small-business owners who relied on their cards to provide short-term financing, frustrating the attempts of the Federal Reserve to ease the credit crunch. Meredith Whitney, a banking expert, predicts that credit card defaults will exceed 10 percent.

Loan losses. The banks estimate that their defaults across this and other similar consumer loan categories will approach 1 percent above the highest unemployment rate, which, if the latter reaches 11 percent, will amount to a 12 percent loss factor, or $450 billion in losses over the next three years. If bank loans perform in this way, with such levels of default, we face the possibility of more episodes of acute distress. The financial sector still stands on a mountain of excessive, poor-quality loans made to the private sector at a time when the banks remain exposed to extraordinary debt on and off their balance sheets. The entire financial system is still, therefore, at risk.

There's no relief in sight through recovery in the rest of the world: GDP elsewhere has fallen faster. Global trade has decreased by nearly 10 percent and will decline more if President Obama and Congress succumb to instinctive (and primitive) protectionist policies advocated by unions and supported by populist demagogues. Our exports are already falling rapidly, although less so than in countries like China and Japan (down 40 percent). Mexico's economy has declined at the annualized rate of over 21 percent, Japan's and Germany's by about 15 percent on an annual basis. We are in the midst of the first absolute global contraction since the end of WWII.

Where do we go from here? We have assembled some construction materials for our bridge-building across the Grand Canyon: the stimulus program and the government support to the financial world from the Treasury Department and the Federal Reserve Board. The dismaying fact is that the $787 billion federal stimulus has devoted so many of its dollars to social welfare programs such as health, education, and general welfare—not to speak of pork barrel spending—that it is simply inadequate to fill in the $1 trillion-plus hole in annual demand that we may well experience. The Government Accountability Office estimates that from Oct. 1, 2008, through Sept. 30, 2010, only $160 billion in new spending will end up as stimulus. That report should have provoked an immediate outcry and resolute action, but it has been ignored. The economy may not be in a free-fall, but it is still rolling downhill, and the deeper the downward spiral goes, the more it will feed on itself. The Obama administration, in all its manifestations, is great at cheerleading (better than the Republican Party is at hollering), but it is little use talking the confidence game while failing to provide the resources necessary to justify that confidence and revive the real economy.