The bank crisis isn’t the only worrisome difference from past recessions. The speed of the collapse is another. In just three months consumer confidence has plunged to levels normally seen only at the bottom of a recession. More important, overall consumer income shrank in the fourth quarter last year. That usually happens only in the deepest of recessions, and then only after months of decline. Finally, there is the war scare, a massive depressant not present in the earlier declines.
Yet the banking crisis is clearly the most ominous threat. To be sure, most banks avoided the excesses of real estate lending that brought down the BNE. But the FDIC admits that a couple hundred more banks with $50 billion in assets will fail this year alone. Several of the nation’s biggest banks are borderline, and David Cates, a respected analyst with Ferguson & Co., has compiled his own list of 1,500 banks that are vulnerable to failure. They hold a staggering $1.2 trillion in insured deposits-40 percent of all banking assets.
Does that mean we’re in for a repeat of the 1930s? “The parallels are there, but I don’t think so,” says Barry Eichengreen of the University of California, Berkeley. Eichengreen and other historians insist that government spending, unemployment and deposit insurance and other stabilizers built into the economy since the 1930s will avert a disaster. “The Great Depression was caused by a collapse of the whole banking system,” says Eichengreen. “Depositors today know that they’ll get back 100 cents on the dollar no matter what. So banks fail; depositors don’t.”
The cost to taxpayers of this commercial-bank crisis could still be enormous. The Bush administration and the banks are talking about an additional $25 billion needed at the FDIC right now - a sum they are trying to raise from healthier banks, not the taxpayers. But that’s based on assumptions about future bank-failure rates that seem wildly optimistic. “It’s going to cost taxpayers $50 billion to $75 billion before this bank crisis ends,” says David Hale of Kemper Financial Services.
Even if the bailouts avert a depression, the economic outlook is grim. The most common expert view has the recession ending in the second quarter, with a good rebound starting in the summer. But the conventional wisdom has underestimated the force of this recession from the start. The Federal Reserve Board can push more funds into the banks, but consumers and businesses already tapped out on too much debt aren’t going to be in the market for new loans. As Richard Fisher, of Fisher Capital in Dallas, says, “the normal Federal Reserve pump priming that is now underway is going to suck a lot of air.”
The credit crisis promises to make this recession both deeper and longer than the experts forecast-and the eventual recovery slower. After the seven fat years of the 1980s, are we now in for the proverbial seven lean years? Probably not. “But seven quarters?” says Hale. “Distinctly possible.”
