Reich - Why We're Not at the Beginning of the End, and Probably Not Even At the End of the Beginning

[Mass]

http://robertreich.blogspot.com/2009/04/why-were-not-at-beginning-of-end-and.html

Why We're Not at the Beginning of the End, and Probably Not Even At the End of the Beginning

Are we at the beginning of the end? Mortgage interests are now so low (the average rate on 30-year fixed mortgages was 4.87 percent Thursday, slightly higher than the 4.78 percent last week, but still the lowest level since 1971) that President Obama has begun urging Americans to refinance their homes so they can save money and start spending again. Presidential aide Larry Summers says the country is likely to see positive economic signs in the next few months. Wells Fargo Bank rallied stocks and surprised analysts Thursday when it predicted a strong $3 billion first-quarter profit, citing surging mortgage originations. And executives at the nation's biggest three banks -- JPMorgan Chase, Bank of America, and Citigroup -- say their operations were (at least by some measures) profitable in the first two months of this year, mainly because a resurgent debt market and equity trading lifted earnings in the investment banking divisions.

But we're not at the beginning of the end. I'm not even sure we're at the end of the beginning. All of these pieces of upbeat news are connected by one fact: the flood of money the Fed has been releasing into the economy. Of course mortage rates are declining, mortgage orginations are surging, and people and companies are borrowing more. So much money is sloshing around the economy that its price is bound to drop. And cheap money is bound to induce some borrowing. The real question is whether this means an economic turnaround. The answer is it doesn't.
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The only economic fundamental that's changed since then is that so many people got so badly burned that the trust necessary for consumers, investors, and businesses to repeat what they did then has vanished. Yes, banks will lend to highly trustworthy borrowers, and the low-hanging fruit of highly trustworthy borrowers is the first they'll pick. But there's not much of this kind of fruit to go around. And yes, some consumers will refinance and use the extra money they extract from their homes to spend again. But most will use the extra money to pay off debt and start saving again, as they did years ago. Most consumers continue to worry about their jobs, and for good reason.
Some of the big banks will claim to be profitable, but don't bank on it. Neither they nor anyone else knows what their assets are really worth. Besides, the big banks are sitting on over $500 billion over taxpayer equity and loans. Who knows how they're calculating profits? Most importantly, there's still a yawning gap between the economy's productive capacity and what it's now producing, and absolutely nothing will turn the economy around until that gap begins to close.
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[JVS]

1. In before the denunciations.

[marmar]

2. Robert Reich, a sober voice amongst all the financial koolaid.....

..... if only HE was Treasury Secretary.

[MarjorieG]

3. Obama says nothing changes until more jobs and how we earn changes.

I think we have to create enough of a working shell, and many banks are okay, to allow the harder tasks to happen.

I don't know that anything short of a huge infusion of a public works and money to states would make a difference. What we did for the banks was a minimum, considering the threat and reality, so we could concentrate on budget and stimulus.

[Mr. Hyde]

4. We ain't seen nothing yet.

Foreclosures are still out of control. Unemployment continues to spiral out of control (leading to more foreclosures eventually). GDP is shrinking rapidly and precipitously(leading to more unemployment and; thereby, more foreclosures and further decreases in demand for goods). Quantitative easing is undermining the dollars being earned by a labor force that is already being paid less (to do more). Baby boomers are retiring en mass and drawing benefits that have to paid out through more borrowing and/or higher taxes (on the aforementioned shrinking labor force). GM is about to go bankrupt and is about to nullify legacy contracts which will threaten all the remaining auto industry related jobs. Main street is going out of business and wall street is pretending like everything is fine so people will foolishly put their money back into a market that has no real hope for growth. Sure, let's be optimistic because there's so much to be optimistic about. My $.02 worth.