On the road to recovery?

As 2009 winds down, there is no question that this has been a tumultuous year economically. Though there are now more headlines lauding a stabilized economy than a year ago, the ranks of unemployed and underemployed have increased dramatically over the last 12 months.

Often my cynical perceptions are not assuaged by the optimistic headlines heralding recovery. The statistics and market segments cited are often offered as isolated variables rather than as part of a larger mechanism. There is no way of gauging whether the system is sound while simultaneously infusing billions into the economy via governmentally subsidized programs.

The merits and shortcomings of the TARP program have received considerable attention this year. The Congressional Oversight Panel, created to review the current state of financial markets and the regulatory system, maintains that TARP stopped the financial panic of 2008 and stabilized the banking system. However they admit that bailout programs have fallen short in many areas. The panel even suggests that TARP may have done harm by making some banks and firms, considered too big for regulators to allow them to fail, even bigger and by creating a new expectation that big banks will always be saved. The panel wrote that "implicit government guarantees pose the most difficult long-term problem to emerge from the crisis."

It is obvious that the stimulus did not trickle down to the American consumer as it was intended to do. Lending guidelines are still tight. Homeowners have not recaptured lost equity. Temporary loan modifications merely allow the bank to spread the losses over a longer period of time. The financial institutions that received the bulk of the stimulus funds have been able to absorb smaller competitors for pennies on the dollar, utilizing mergers to boost deposits and asset holdings. Yet small businesses are closing daily due to an inability to access capital. Many households and small businesses cannot afford to wait another month or quarter for economic recovery to filter down to them.

The economy seems to have stabilized, in that the stock market is no longer vacillating violently, there was moderate growth in the GDP in third quarter, housing prices have stabilized in many regions and unemployment is increasing at a slower rate of speed. Whereas these ‘improvements’ are often cited as signs of stabilization, I can’t help but wonder how many of the statistics being interpreted were impacted by the stimulus package. How many of the statistics have been ‘tweaked’ via guideline changes? What happens when the stimulus programs cease? Does the economy have enough momentum to sustain itself in the absence of subsidies? Have the underlying issues in the financial markets been addressed? What measures have been put in place to prohibit another meltdown in the financial markets? What have we done to insure that corporate profit motives don’t collapse the global economic system?

Crafting a political response to an economic issue involves significant lag time between the emergence of the problem and the implementation of the solution. In that interim period the problem evolves, spreading like a virus to other sectors of the economy. In this case the financial market flash point set the global economy ablaze. Legislators have scrambled to put each economic brushfire out only to find that several more have emerged elsewhere. The economic ripple effect has stayed well ahead of the political response.

With mid-term elections approaching, I expect that the talking point will be unemployment. With over 10% unemployed, and more underemployed, anything less would be political suicide. Banks and large corporations can expect a challenging 2010, because politicians will be forced to publically spurn corporate influence and pay lip service to the need for regulation, and financial moderation, to placate a perturbed public.

I also realize that the long term alliance between Washington politicians and the heads of industry and business will remain intact privately, because it is those campaign contributors that pay for the advertisements that curry the favor of the electorate. In the absence of campaign reform, there is little hope of resolving the conflict of interest that persists in Washington.

The issues that brought the economy to the brink of collapse remain unresolved. How long can there be such significant disparity between our role as a global consumer and a global producer? When do we apply American innovation to reigniting the fires of American manufacturing? How do we remain competitive in the global economy of the future?

My concerns about the depletion of the American manufacturing base, the trade of unregulated financial instruments, creating artificially enhanced paper-wealth rather than asset-based wealth, unemployment and education as it pertains to the job market of the future, the decline of the dollar and global economic dependence in a diverse, politically autonomous world remain unaddressed.
If the economy is, indeed, on the road to recovery, we are at the beginning of the journey with a long road ahead.