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By Kevin G. Hall, McClatchy Newspapers Kevin G. Hall, Mcclatchy Newspapers
Tue Sep 8, 3:41 pm ET
WASHINGTON One year after the near collapse of the global financial system,
this much is clear: The financial world as we knew it is over, and something
new is rising from its ashes.
Historians will look to September 2008 as a watershed for the U.S. economy.
On Sept. 7 , the government seized mortgage titans Fannie Mae and Freddie Mac .
Eight days later, investment bank Lehman Brothers filed for bankruptcy,
sparking a global financial panic that threatened to topple blue-chip financial
institutions around the world. In the several months that followed, governments
from Washington to Beijing responded with unprecedented intervention into
financial markets and across their economies, seeking to stop the wreckage and
stem the damage.
One year later, the easy-money system that financed the boom era from the 1980s
until a year ago is smashed. Once-ravenous U.S. consumers are saving money and
paying down debt. Banks are building reserves and hoarding cash. And
governments are fashioning a new global financial order.
Congress and the Obama administration have lost faith in self-regulated
markets. Together, they're writing the most sweeping new regulations over
finance since the Great Depression. And in this ever-more-connected global
economy, Washington is working with its partners through the G-20 group of
nations to develop worldwide rules to govern finance.
"Our objective is to design an economic framework where we're going to have a
more balanced pattern of growth globally, less reliant on a buildup of
unsustainable borrowing . . . and not just here, but around the world," said
Treasury Secretary Timothy Geithner .
The first faint signs that the U.S. economy may be clawing its way back from
the worst recession since the Great Depression are only now starting to appear,
a year after the panic began. Similar indications are sprouting in Europe ,
China and Japan .
Still, economists concur that a quarter-century of economic growth fueled by
cheap credit is over. Many analysts also think that an extended period of slow
job growth and suppressed wage growth will keep consumers and the businesses
that sell to them in the dumps for years.
"Those things are likely to be subpar for a long period of time," said Martin
Regalia, the chief economist for the U.S. Chamber of Commerce . "I think it
means that we probably see potential rates of growth that are in the 2-2.5
(percent) range, or maybe . . . 1.8-1.9 (percent)." A growth rate of 3 percent
to 3.5 percent is considered average.
The unemployment rate rose to 9.7 percent in August and is expected to peak
above 10 percent in the months ahead. It's already there in at least 15 states.
Regalia thinks that it could be five years before the U.S. economy generates
enough jobs to overcome those lost and to employ the new workers entering the
labor force.
All this is likely to keep consumers on the sidelines.
"I think this financial panic and Great Recession is an inflection point for
the financial system and the economy," said Mark Zandi , the chief economist
for forecaster Moody's Economy.com. "It means much less risk-taking, at least
for a number of years to come a decade or two. That will be evident in less
credit and more costly credit. If you are a household or a business, it will
cost you more, and it will be more difficult to get that credit."
The numbers bear him out. The Fed's most recent release of credit data showed
that consumer credit decreased at an annual rate of 5.2 percent from April to
June, after falling by a 3.6 percent annual rate from January to March.
Revolving lines of credit, which include credit cards, fell by an annualized
8.9 percent in the first quarter, followed by an 8.2 percent drop in the second
quarter.
That's a sea change. For much of the past two decades, strong U.S. growth has
come largely through expanding credit. The global economy fed off this trend.
China became a manufacturing hub by selling attractively priced exports to U.S.
consumers who were living beyond their means. China's Asian neighbors sent it
components for final assembly; Africa and Latin America sold China their raw
materials. All fed off U.S. consumers' bottomless appetite for more, bought on
credit.
"That's over. Consumers can do their part spend at a rate consistent with
their income growth, but not much beyond that," Zandi said.
If U.S. consumers no longer drive the global economy, then consumers in big
emerging economies such as China and Brazil will have to take up some of the
slack. Trade among nations will take on greater importance.
In the emerging "new normal," U.S. companies will have to be more competitive.
They must sell into big developing markets; yet as the recent Cash for Clunkers
effort underscored, the competitive hurdles are high: Foreign-owned automakers,
led by Toyota , reaped the most benefit from the U.S. tax breaks for new car
purchases, not GM and Chrysler .
Need a loan? Tough luck: Many U.S. banks are in no condition to lend. Around
416 banks are now on a "problem list" and at risk of insolvency. Regulators
already have shuttered 81 banks and thrifts this year.
The Federal Deposit Insurance Corp. reported on Aug. 27 that rising loan losses
are depleting bank capital. The ratio of bank reserves to bad loans was 63.5
percent from April to June, the lowest it's been since the savings-and-loan
crisis in 1991.
For all that, the U.S. economy does seem to be rising off its sickbed. The
latest manufacturing data for August point to a return to growth, and home
sales are rising. Indeed, there are many encouraging signs emerging in the
global economy.
It's all growth from a low starting point, however, and many economists think
that there'll be a lower baseline for U.S. and global growth if the new
financial order means less risk-taking by lenders and less indebtedness by
companies and consumers.
That seems evident now in the U.S. personal savings rate. It fell steadily from
9.59 percent in the 1970s to 2.68 percent in the easy-money era from 2000 to
2008; from 2005 to 2007, it averaged 1.83 percent.
Today, that trend is in reverse. From April to June, Americans' personal
savings rate was 5 percent, and it could go higher if the unemployment rate
keeps rising. Almost 15 million Americans are unemployed and countless others
are underemployed or uncertain about their job security, so they're spending
less and saving more.
A few years ago, banks fell all over themselves to offer cheap home equity
loans and lines of consumer credit. No more. Even billions in government
bailout dollars to spur lending haven't changed that.
"The strategy that was stated at the beginning of the year which is that you
would sustain the banking system in order that it would resume lending hasn't
worked, and it isn't going to work," said James K. Galbraith , an economist at
the University of Texas at Austin .
Over the course of 2008, the nation's five largest banks reduced their consumer
loans by 79 percent, real estate loans by 66 percent and commercial loans by 19
percent, according to FDIC data. A wide range of credit measures, including
recent FDIC data, show that lending remains depressed.
Why? The foundation of U.S. credit expansion for the past 20 years is in ruin.
Since the 1980s, banks haven't kept loans on their balance sheets; instead,
they sold them into a secondary market, where they were pooled for sale to
investors as securities. The process, called securitization, fueled a rapid
expansion of credit to consumers and businesses. By passing their loans on to
investors, banks were freed to lend more.
Today, securitization is all but dead. Investors have little appetite for risky
securities. Few buyers want a security based on pools of mortgages, car loans,
student loans and the like.
"The basis of revival of the system along the line of what previously existed
doesn't exist. The foundation that was supposed to be there for the revival (of
the economy) . . . got washed away," Galbraith said.
Unless and until securitization rebounds, it will be hard for banks to resume
robust lending because they're stuck with loans on their books.
"We've just been scared," said Robert C. Pozen , the chairman of Boston -based
MFS Investment Management . He thinks that the freeze in securitization
reflects a lack of trust in Wall Street and its products and remains a huge
obstacle to the resumption of lending that's vital to an economic recovery.
Enter the Federal Reserve. It now props up the secondary market for pooled
loans that are vital to the functioning of the U.S. financial system. The Fed
is lending money to investors who're willing to buy the safest pools of loans,
called asset-backed securities.
Through Sept. 3 , the Fed had funded purchases of $817.6 billion in
mortgage-backed securities. These securities were pooled mostly by mortgage
finance giants Fannie Mae , Freddie Mac and Ginnie Mae . In recent months, the
Fed also has moved aggressively to lend for purchase of pools of other
consumer-based loans.
Today, there's little private-sector demand for new loan-based securities;
government is virtually the only game in town. That's why on Aug. 17 , the Fed
announced that it would extend its program to finance the purchase of pools of
loans until mid-2010. That suggests there's still a long way to go before a
functioning securitization market the backbone of consumer lending returns
to a semblance of normalcy.