'Old Time Religion' For The Economy

August 27, 2009|By Peter Morici

Will the economic recovery be enduring - V shaped? Or will it collapse after a short time - W shaped? For the middle class, it may be none of the above - an X.

By conventional wisdom, the housing bubble, credit crisis and collapse in consumer spending caused the recession. With home sales rising, new cars flying off lots and Wall Street profits soaring, analysts see an imminent recovery. But the economy is running on steroids.

About 90 percent of existing home sales are distress sales: foreclosures and homeowners in financial difficulties. New home purchases are juiced by the $8,000 first-time buyer subsidy that expires Dec. 1. And summer car sales were pumped by the just-expired cash-for-clunkers program.

Regional banks are still failing under bad commercial loans and mortgage-backed securities purchased from Wall Street financial houses. In part, Wall Street posts big profits by shifting its debauchery onto smaller brethren, and the Federal Deposit Insurance Corp. may run out of cash to guarantee regional banks' deposits.

Clueless behavior by big players is frightening. Automakers are boosting production, assuming car sales will continue at their torrid summer pace. Wall Street is planning big year-end bonuses instead of shoring up capital for a possible second dip in the recession.

Consumers, recognizing danger, stay away from the malls and hoard what dollars they have.

The economy will be lifted by businesses rebuilding depleted inventories and replacing outdated computers, and by federal stimulus dollars. But those measures simply will not deliver annual GDP growth greater than 2.5 percent. Nor will they produce many new jobs.

The stock market will rally with modest growth, because U.S. multinationals produce so much in Asia where growth is robust. To Wall Street, the recovery will appear V-shaped - but for ordinary workers, it will be an X. Unemployment will reach 10 percent and stay there until President Barack Obama stops obsessing about redistributing wealth by nationalizing car companies and health care and raising taxes on energy and the wealthy.

The country needs pro-growth policies - fixing the huge trade deficit and the banks. Dollars spent on imports that do not return to purchase exports can't be spent on American products. That saps demand for American-made products, keeps factories and offices shuttered, and idles workers.

The trade deficit is mostly oil and Chinese consumer goods. Export more and import less, or the economy flops. Without bank credit, businesses can't expand, entrepreneurs can't create and workers don't work.

Mr. Obama dodges the toughest aspects of the banking morass. Compensation structures built on the too-big-to-fail doctrine permit Wall Street to take huge risks, shift losses onto smaller investors and the government, and suffer too few consequences for their calamities. Regulatory reforms to rein in excessive compensation are needed to ensure that banks put aside enough of their profits in good years to keep them afloat in bad years. Until that happens, Wall Street bankers will be too busy chasing rainbows to adequately re-establish lines of credit to regional banks essential for business expansion.

This is not complicated: Buy only as much as you sell, pay reasonably for honest work, and let the reckless fail.

Old-time religion, you say? Well, yes. That's what made America great.

Peter Morici, a professor at the University of Maryland's Robert H. Smith School of Business, is former chief economist at the U.S. International Trade Commission. His e-mail is pmorici@rhsmith.umd.edu.

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