Intersecting Minds: Education, Business and Technology at the North Carolina State Jenkins Graduate School of Management

More Economic Pessimism | October 7, 2009

A few weeks ago, I wrote about how I was still fundamentally pessimistic about the economy. Politico has a front page feature today talking up the possibility of a double-dip recession. The article cites a number of reasons for concern about the possibility of a U-shaped or W-shaped recover:

  • Unemployment: Now at 9.8% and expected to climb further. Alan Greenspan suggested a few days ago that he expects the unemployment rate to top 10% before all is said and done
  • Consumer Spending: With the expiration of the Cash-for-Clunkers program came the expiration of car sales. September saw a huge plunge from 14.2 million units to 9.1 million units
  • Commercial Real Estate Bubble: The last, and most certainly the worst indicator of all

Nobody has really been talking about just how bad a collapse in the commercial loan market could be. As the Wall Street Journal notes, the Fed is starting to take notice. “Banks will be slow to recognize the severity of the loss” is code for another potential financial meltdown requiring hundreds of billions of government dollars to prevent a massive disaster. Does the US have the strength and wherewithal to deal with a repeat of last fall’s calamity?

I don’t really think so. The underlying causes of the first financial crisis: horrendous incentives for investors and banks to take huge risks (i.e. ease of credit, unregulated derivatives market) and large, impossible-to-value-correctly assets haven’t been removed or really dealt with at all. We are in the same situation we were in last year except substitute commercial for subprime in the equation. This could get really ugly, really quickly.

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