Other countries (like Spain) have their own real estate crises. And a weak economy means, more likely than not, more bank losses. Even were banks healthy, the deleveraging process and the associated loss of wealth means that, more likely than not, the economy will be weak. This is the rosy scenario.īut experiences around the world suggest that this is a risky outlook. In a few years time, the banks will be recapitalized, and the economy will return to normal. If nothing nasty happens - losses on mortgages, commercial real estate, business loans, and credit cards - the banks might just be able to make it through without another crisis. The American government, too, is betting on muddling through: the Fed's measures and government guarantees mean that banks have access to low-cost funds, and lending rates are high. And, if the bets don't pay off, the cost to the American taxpayer will be even larger. But this won't get the economy going again quickly. Some of the banks did report earnings in the first quarter of this year, mostly based on accounting legerdemain and trading profits (read: speculation). Worse still, they are being allowed to borrow cheaply from the United States Federal Reserve, on the basis of poor collateral, and simultaneously to take risky positions. the banks are using bad accounting (they were allowed, for example, to keep impaired assets on their books without writing them down, on the fiction that they might be held to maturity and somehow turn healthy). "Zombie" banks - dead but still walking among the living - are, in Ed Kane's immortal words, "gambling on resurrection." Repeating the Savings & Loan debacle of the 1980's. But, rather than welcoming the opportunity to recapitalize, perhaps with government help, the banks seem to prefer a Japanese-style response: we will muddle through. The banking system has just been tested to see if it is adequately capitalized - a "stress" test that involved no stress - and some couldn't pass muster. States are being forced to lay off workers as tax revenues plummet. But examine the fundamentals: in America, real estate prices continue to fall, millions of homes are underwater, with the value of mortgages exceeding the market price, and unemployment is increasing, with hundreds of thousands reaching the end of their 39 weeks of unemployment insurance. We are likely to see a recovery in some of these areas from the bottoms reached at the end of 2008 and the beginning of this year. Orders dropped abruptly - well out of proportion to the decline in GDP - and those countries that depended on investment goods and durables (expenditures that could be postponed) were particularly hard hit. The collapse of credit made matters worse and firms, facing high borrowing costs and declining markets, responded quickly, cutting back inventories. For, even if America's banks were healthy, household wealth has been devastated, and Americans were borrowing and consuming on the assumption that house prices would rise forever. That model has broken down, and will not be replaced soon. Before its onset, America's debt-ridden consumers were the engine of global growth. This downturn is complex: an economic crisis combined with a financial crisis. Hitting bottom is no reason to abandon the strong measures that have been taken to revive the global economy. But that does not mean that the global economy is set for a robust recovery any time soon. The bottom may be near - perhaps by the end of the year. #SYNDICATE PROJECT ZOMBIES FREE#The good news is that we may be at the end of a free fall. The world is far different from what it was last spring, when the Bush administration was once again claiming to see "light at the end of the tunnel." The metaphors and the administrations have changed, but not, it seems, the optimism. New York - As spring comes to America, optimists are seeing "green sprouts" of recovery from the financial crisis and recession.
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