The Obvious: Bankers Told Recovery May Be Slow

“I’m more worried than I have ever been about the future of the U.S. economy,” said Allen Sinai, co-founder of the consulting firm Decision Economics and a longtime participant in the symposium. “The challenge is unique: poor and diminishing growth, a sticky unemployment rate, sky-high deficits and a sovereign debt that makes us one of the most fiscally irresponsible countries in the world.”

Editor’s Comment: It is only natural that the setting for this event was in a place with the word “hole” in it. Carmen M Reinhart, an economist at the University of Maryland told 110 central bankers and economists that they were deluding themselves. While they were congratulating themselves on having weathered the storm, the economy is clearly in freefall.

They keep using the term “jobless recovery” as though that was something real. With GDP falling under 2% under the latest calculation, which probably excludes between 30 and 50% of all human activity worthy of measurement, we clearly do not have a recovery nor do we have an economy that under any scenario could generate more jobs than those being lost. In a nutshell, unemployment is virtually certain to increase.

Before we start blaming the current president or even his predecessor for the current state of events, let me point out that it took more than three decades for the financial sector to grow from less than 15% of the nation’s GDP to over 40%. In simplistic terms we allowed the economy to create a system in which the financial community was taking a 40% commission on every transaction of every nature because they had been permitted, without regulation, to literally issue the equivalent of money.

The hard truth is that 25% of our current economy as it is currently measured is pure vapor. We don’t make anything or provide any services within that gap which adds value to our society or anyone in it. Reality has a nasty way of catching up. There is a 25% contraction waiting in the wings. The only way to avoid such a calamitous result is to use our strongest resource, American ingenuity, to create new businesses, new industries, and new jobs at an unprecedented pace that will shock the economy back into normal sinus rhythm.

With the vast majority of bankers and economists holding on to old ideas, unrealistic perceptions of reality, and an aversion to the risk of trying something new, the economist from the University of Maryland is merely stating the obvious––and doing it in the most gentle way possible. Stating that the recovery may be slow is the equivalent of saying that we will be on the ground shortly after it is obvious that the engines and wings have fallen off the aircraft.

August 28, 2010

Bankers Told Recovery May Be Slow


JACKSON HOLE, Wyo. — The American economy could experience painfully slow growth and stubbornly high unemployment for a decade or longer as a result of the 2007 collapse of the housing market and the economic turmoil that followed, according to an authority on the history of financial crises.

That finding, contained in a new paper by Carmen M. Reinhart, an economist at the University of Maryland, generated considerable debate during an annual policy symposium here, organized by the Federal Reserve Bank of Kansas City, which concluded on Saturday.

The gathering, at a historic lodge in Grand Teton National Park, brought together about 110 central bankers and economists, including most of the Federal Reserve’s top officials. In 2008, the symposium occurred weeks before the Lehman Brothers bankruptcy nearly shut down the financial markets. At the symposium last year, officials congratulated themselves on weathering the worst of the crisis.

But the recent slowing of the recovery cast a pall on this year’s gathering. As economists (some wearing jeans and cowboy boots) conferred on a terrace with a sweeping view of the 13,770-foot peak of Mount Teton, or watched a horse trainer tame an unruly colt at a nearby ranch, they anxiously discussed research like Ms. Reinhart’s. (Participants pay to attend the event, which is not financed by taxpayers, a Kansas City Fed spokeswoman emphasized.)

“I’m more worried than I have ever been about the future of the U.S. economy,” said Allen Sinai, co-founder of the consulting firm Decision Economics and a longtime participant in the symposium. “The challenge is unique: poor and diminishing growth, a sticky unemployment rate, sky-high deficits and a sovereign debt that makes us one of the most fiscally irresponsible countries in the world.”

Ms. Reinhart’s paper drew upon research she conducted with the Harvard economist Kenneth S. Rogoff for their book “This Time Is Different: Eight Centuries of Financial Folly,” published last year by Princeton University Press. Her husband, Vincent R. Reinhart, a former director of monetary affairs at the Fed, was the co-author of the paper.

The Reinharts examined 15 severe financial crises since World War II as well as the worldwide economic contractions that followed the 1929 stock market crash, the 1973 oil shock and the 2007 implosion of the subprime mortgage market.

In the decade following the crises, growth rates were significantly lower and unemployment rates were significantly higher. Housing prices took years to recover, and it took about seven years on average for households and companies to reduce their debts and restore their balance sheets. In general, the crises were preceded by decade-long expansions of credit and borrowing, and were followed by lengthy periods of retrenchment that lasted nearly as long.

“Large destabilizing events, such as those analyzed here, evidently produce changes in the performance of key macroeconomic indicators over the longer term, well after the upheaval of the crisis is over,” Ms. Reinhart wrote.

Ms. Reinhart added that officials may err in failing to recognize changed economic circumstances. “Misperceptions can be costly when made by fiscal authorities who overestimate revenue prospects and central bankers who attempt to restore employment to an unattainably high level,” she warned.

Several scholars here cautioned that it was premature to infer long-term economic woes for the United States from the aftermath of past crises.

The Reinharts’ research “has not yet tried to assess the extent to which different policy stances mitigated the length of the outcome,” said Susan M. Collins, an economist and the dean of the Gerald R. Ford School of Public Policy at the University of Michigan. “But the reality is that we need to have an understanding that the issues we are dealing with are severe, and that we should not expect them to be unwound in a few months.”

Ms. Collins added: “I’m very much a glass-half-full person. What we’ve seen in the past few years has been a policy success. Things are not where we want them to be, but they could have been a lot worse.”

The Reinharts’ paper was not the only one to offer somber implications for policy makers.

Two economists, James H. Stock of Harvard and Mark W. Watson of Princeton, presented a paper arguing that inflation, which has already fallen so much that some Fed officials fear the economy is at risk of deflation, a cycle of falling prices and wages, could fall even further by the middle of next year.

Inflation has been running well below the Fed’s unofficial target of about 1.5 percent to 2 percent. Ben S. Bernanke, the Fed chairman, reiterated on Friday that the central bank would “strongly resist deviations from price stability in the downward directions.”

Mr. Stock and Mr. Watson noted that recessions in the United States were associated with declines in inflation, with an exception being an increase in inflation in 2004, which occurred despite a “jobless recovery” from the 2001 recession. The authors said they could not explain the anomaly but also could not “offer a reason why it might happen again.”

5 Responses

  1. With the the outsourcing of our jobs and the banks playing with our money behind the curtains and lost on the consumers end, and the loss of value in the real estate market, and to mention now the banks want their money back now from bad debt from people that have lost everything that were good customers before this mess, THE BANKS SHOULD HAVE TAKEN THE HIT! The GREEDY banks are on good ground and leave the people to take the hit that will take decades to recover from, just go’s to show who has the power. now that a lot peoples credit has been smashed, that alone is ten years+ it will take to be able to borrow, so I would think we are in for a least that term of recession, sadly to say, if there is some way to get the people back the money they lost, that would spring loan pay offs and new business, and a decent mortgage rate would help a lot of people, lower payment would free up cash to repay loans, and not by loan mods, that’s my opinion right or wrong.

  2. Some decades ago the Canadians recognized that they were mere “hewers of wood and drawers of water,” which was not going to generate any societal wealth.So they set in motion a program aimed directly as “import replacement,” where local folks, start-up entrepreneurs and established businesses alike, were encouraged to manufacture domestically what was being imported. The result of this program was a large number of manufacturers which supplied the domestic market. And as many of these new plants were either owned or run by “immigrants,” the plants unsurprisingly started exporting, typically at first to the birth countries of the migrants.

    Shortly after adopting “free trade” with its trading partners the USA and Mexico, the manufacturing base started its collapse as production shifted to large-scale plants in the US, and cheap-labor plants in Mexico. Then the Canadian Dollar collapsed from par to about 58 cents, which yet once again started to stimulate domestic production (while making it prohibitive for Canadians to travel). Manufacturers geared to the new price levels. Then the C. Dollar rose to stabilize near par, with the result that Canadian manufacturers faced an effective 40% duty on exports to their trading partners – crippling their plants.

    Countries cannot operate where they have destabilized currencies, capital outflows, and no protected domestic manufacturing base. We are living large the Canadian experience, yet with more drastic and painful consequences.

    The solutions are not politically palatable. The W.T.O. is founded on an ideology loved by the “right,” that of “free trade.” Free Trade only is workable between economies of parallel cost structures; where workers are being paid 25 cents an hour, no matter how productive the domestic factory, it will never compete. You consign your domestic population to unemployment and poverty “forever” with such a policy. We have no basic steel industry, no shipbuilding industry, no passenger railcar industry, and our biggest export is waste paper. How do you propose to run a viable economy on that? Time to scrap the WTO.

  3. The bankers are parasitically basking in the sun while all of us sweat bullets. They’re raking in their profits as we sleep.

    This review of our economy is a little more realistic take than some of the ones I’ve seen in awhile. Unfortunately, with false GDP based on the “vapor” of 25% of the economy as spoken of here, this means that what “poop” is being generated out of DC is for pure political motivation and nothing else.

  4. Correct neidermeyer . I just read this morning in St.Pete Times, Germany will have 9 % GDP and the
    lowest unemployment for a long time. What is the secret. Germany is a manufacturer Country , USA not
    anymore .USA is a Consumer Country , who will take
    everythink from CHINA. We will not have new Jobs
    w/o stoping CHINA’s Import.I am woundering , what
    hapening ,if CHINA close the valve to USA , at least
    Walmart would be empty .The second problem here
    is corruption .If you bring in Germany your car in a
    Garage , you pick it up w/o pay , you have 30 days to pay your bill .I dont think that you could do it here.
    We need more manufacturer here , otherwise the
    recovering will take a long long time , and the Banks
    will seat on there money.

  5. It seems pretty obvious that propping up the banksters contributes nothing to the economy as a whole, indeed ignoring reality just makes what’s left of the productive sector suffer more ,,, I’m a bit uncertain about his 40% number though seems too high … if banking is 40% and the gov’t takes about 21% in taxes that means we have 39% that’s REAL economic activity trying to support the whole….

    Calvin Coolidge had it right ,, he created the “roaring 20’s” by decreasing the gov’t burden , firing federal workers by the boatload … In todays world that would include the banksters as they have been the recipients of gov’t largess in the forms of legislation favoring them for decades and a total lack of regulatory accountability.

    Of course in the 20’s the federal reserve hadn’t yet destroyed the value of the dollar and we had a superb manufacturing base … today the opposite is true and the G3 velocity has been stuck at less than 1.0 for a LONG time which means that any Keynesian “stimulus” is actually a DRAG …

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