By Anthony Burke Boylan – Common wisdom suggests the financial sector got us into this mess, so is that what we need to get us out?
In short, yes.
While there seldom is one cause for any major economic trend, experts largely agree banking and financial services had a lot to do with the state we are in now. Assign various point values based on your economic and political stripe, but the Gramm-Leach-Bliley Act, exponential growth in the sale of mortgage-backed securities, weak regulation and a failure to reign in speculation in the housing market all seem to be near the top of the list.
This banking-driven recession yielded job losses untold since the Joad Family was making its way to California. History suggests jobs lost during a recession don’t return, but that growth comes from new economic sectors, new technology and new firms.
All of those things take capital, which means a healthy financial industry is critical to recovery.
The Brookings Institute released a paper last month that can be paraphrased as thus: If banking doesn’t get its house in order with the help of government programs, this recession could keep going for a long time.
Citing studies by the International Monetary Fund, the paper does not paint a rosy outlook should the bank industry recovery efforts fall short or fail.
“In other words, if the financial sector remains broken after a crisis, then the recovery of employment and GDP is very slow,’’ according to “The U.S. Financial and Economic Crisis: Where Does it Stand and Where do We Go From Here.’’
Lest you miss the point:
“Past history shows that when a severe crisis damages the financial sector the impact can be prolonged. Thus it is vital that the US financial sector start functioning well again in order to move us out of this recession.’’
While the report does see hope, it singles out some issues that while good for some institutions, are not good for the economy as a whole:
A credit crunch is an ideal time to be deploying capital – risk-takers, such as banks, are being paid well now to provide loans or investments that are also being underwritten much more cautiously than during the boom. By the end of the credit bubble, banks were being paid badly to take lousy risk. Now they are being paid handsomely to take good risks
· While
bank lending has stabilized, other credit providers have not. Prior to the crisis about 40% of lending was
supplied by the buyers of securitized loan packages. It now stands at a
fraction of that.
Bank capital is unlikely to rise to a level that will replace securitization anytime soon, at least not until several years of significant profits have been recorded. Even then, banks likely will find more lucrative places to use this money. “Some of it is likely to vanish forever, having been an artifact of excessively loose credit conditions,’’ the paper states.
And the foreign institutions that used to provide capital flow to supplement our anemic savings rate now have troubles worse than ours, thanks in part to the U.S. banking system. An IMF report says European banks are well behind us in writing down bad loans are have a lot of harsh medicine still to take.
Other than Brookings’ subtle taunt of Wall Street by calling mortgage-backed securities and other such investing vehicles “innovative’’ – the quotation mark irony is theirs, not mine – reading this report doesn’t qualify as a good time.
Their analysis is that we might be on the right track, but not remaining diligent in fixing the financial sector before all else could lead us into another leg of the recession.
