IT’S STILL THE ECONOMY, STUPID!
By: Thomas M. Wells
Experts are telling us the recession is over, and it very likely is, at least by the numbers. Eight months ago I predicted unemployment would reach ten-percent. Now, with just a couple tenths of a point to go, I am less sure, but still think it will go to about that number, and only then start to decrease….but very slowly. Customers are nervously coming back to retail stores, ….cash for clunkers sold some cars….interest rates remain low…….the real estate market is starting to find its bottom……..are happy days here again? For sure, not yet. However, second great depression has been avoided (unless you are one of those who believe we could have a double-dip).
If imminent disaster as been avoided, then the news now is the march back to prosperity is going to be a slow one indeed. Several reasons account for the likely slow recovery. First, re-employment is going to take a great deal of time. Part of this is for a good reason. American workers continue to be more and more productive, and thus are able to produce more goods and services with less people. This is good in the big picture, but certainly does not help the job numbers. Further, employers will be very slow to add the additional cost of more employees until they are sure the need for goods and services is immediately around the corner.
The second big reason for the slow recovery is, most all of us “got scared…..good” this time. Actually, not a bad thing, either. It is hard to find any segment of the American economy, whether it be business or individuals, that was not “over-leveraged.” Businesses, of all shapes and sizes, including those big and small banks, with less capital and more risk than they should have had, and individuals buying and enjoying all kinds of goods based on the increased value of their homes, tapped through endless cheap home equity loans, just plain borrowed too much money.
The resulting pull back is painful, but necessary. The good news is that most everyone is deleveraging some, putting more into our piggy banks and lowering our tolerance for debt. However, this is also the bad news, as less money lowers purchasing power for new goods and services. On the balance, I believe the the lower tolerance for debt is good. We will just need to wait longer for the savings to increase and the spending to return.
A cautionary note, is that most banks, whether it be those big “too big to fail” institutions that got all the help from the government, or the myriad of smaller community banks that so many of our clients and individuals deal with, are still not lending like they should be. Many financial institutions, not just those that got involved with sub-prime lending, and other esoteric financial products, but many community banks in high-growth markets, are still struggling with real estate and sometimes business loans that became “toxic” as a result in the precipitous drop in the economy.
The result was that these institutions had to worry about their own “balance sheets,” and thus, inevitably to begin hunting for deposits and new capital. Despite what advertising might say, these folks are not lending, at least not yet. An unhappy result of this is that, I have more than once in recent months, gone with a client looking for a what would have been a very reasonable business loan, only to be sent home empty-handed by a financial institution that would have been a willing partner up until recently. We are capitalists here in the United States and in the end the economy needs capital to run, so this must be corrected, even if it requires more government stimulus money to happen. This will not be particularly popular if it is needed.
The smaller community banks (what I call “the too many to fail”) still very likely will need some assistance. The alternative is Friday night bank closings every week for many months to come, an empty FDIC insurance fund, and banks that will not lend, thereby postponing the recovery. However, what goes with this help, must be that all financial institutions (not just banks, but also brokers and hedge funds, certainly investments banks) need long-promised regulation that will prevent greed overwhelming common sense again in the future. The government has more work to do here as well.
The biggest thing we all need while this happens is patience. Something the American people are not famous for. Jobs will come back slowly, spending likewise. The government may even have to help some more—–as disturbing as that is. Our banks will not really start lending until they are no longer afraid of going out of business. Businesses need loans and capital to grow. Regular folks will not really start spending until jobs become more certain and futures more certain. Round and round it goes. We just need to make sure we circle up the mountain, not down.
Yes….the recession is over…..but all of the small businesses and individuals we represent, will do well to remain cautious as the economy gets to a point where we can all just start putting one foot ahead of the other marching back up the hill.
Thomas M. Wells is the Senior Partner
of WJ&L who works in both our New Jersey and Vermont offices. Among his areas of expertise are business, corporate, non-profit and banking law.