***
Lenders have been pulling back on credit lines for businesses, mortgages, home equity loans and credit card offers, and analysts said that trend was unlikely to be reversed by the government's money.
Roger Freeman, an analyst at Barclays Capital, which acquired parts of the now-bankrupt Lehman Brothers last month [said] 'My expectation is it's quarters off, not months off, before you see that capital being put to work.' "[73]
And another New York Times article included the following quote:
"It doesn't matter how much Hank Paulson gives us," said an influential senior official at a big bank that received money from the government, "no one is going to lend a nickel until the economy turns." The official added: "Who are we going to lend money to?" before repeating an old saw about banking: "Only people who don't need it."[74]Reading between the lines, the bank officials are saying that they will not lend freely until the economic crisis is over.
In addition, the securitization market has largely collapsed, which in turn has destroyed a large proportion of the world's credit. As noted in an article in the Washington Times:
"Before last fall's financial crisis, banks provided only $8 trillion of the roughly $25 trillion in loans outstanding in the United States, while traditional bond markets provided another $7 trillion, according to the Federal Reserve. The largest share of the borrowed funds - $10 trillion - came from securitized loan markets that barely existed two decades ago. . . .Mr. Regalia [chief economist at the U.S. Chamber of Commerce] said ... 70 percent of the system isn't there anymore,' he said."[75]
The reason that seventy percent of the system "isn't there anymore" is because the traditional bond markets and securitized loan markets (part of the "shadow banking system") have dried up. As the Washington Times article notes:
"Congress' demand that banks fill in for collapsed securities markets poses a dilemma for the banks, not only because most do not have the capacity to ramp up to such large-scale lending quickly. The securitized loan markets provided an essential part of the machinery that enabled banks to lend in the first place. By selling most of their portfolios of mortgages, business and consumer loans to investors, banks in the past freed up money to make new loans. . . ."The market for pooled subprime loans, known as collateralized debt obligations (CDOs), collapsed at the end of 2007 and, by most accounts, will never come back. Because of the surging defaults on subprime and other exotic mortgages, investors have shied away from buying the loans, forcing banks and Wall Street firms to hold them on their books and take the losses."
Senior economic adviser for UBS Investment Bank, George Magnus, confirms:
The restoration of normal credit creation should not be expected, until the economy has adjusted to the disappearance of shadow bank credit, and until banks have created the capacity to resume lending to creditworthy borrowers. This is still about capital adequacy, where better signs of organic capital creation are welcome. More importantly now though, it is about poor asset quality, especially as defaults and loan losses rise into 2010 from already elevated levels.[76]Not only has the supply of credit been destroyed, but the demand for many types of loans - such as commercial real estate loans - is also drying up.[77]
So there is simply much less credit flowing through the economic system than there was prior to 2007.
The New Normal - Lower Economic Activity
As chief economist for the International Monetary Fund, Olivier Blanchard, said:
This recession has been so destructive that "we may not go back to the old growth path ... potential output may be lower than it was before the crisis." [78]
All
of the above trends force many economists to conclude that economic
activity as a whole will be lower for many, many years. In other words,
they say that "The New Normal" will be a much lower level for the
economy.
Pimco CEO Mohamed El-Erian says elevated unemployment and record wealth destruction will keep growth at 2 percent or less for years. [79]
As Bloomberg writes:
The New Normal theory predicts that the recession will leave unemployment, forecast to reach 10 percent for the first time since 1983 early next year, higher for years. [80]
Indeed, the "overhang" of inventory [81]- that is, the inventory of unsold goods - in everything from housing [82 and 83] to cars [84] to consumer electronics [85] means that the newly reduced consumer demand is meeting up with very high levels of supply. This is a recipe for unemployment.
Many economists also point out that the length of time people are remaining unemployed is skyrocketing. As the Washington Post notes:
Another disturbing development was that the number of people out of work for 27 weeks or longer reached a record 5 million, accounting for a third of the unemployed. That suggests to some economists that those job losses were caused by structural changes in the economy and that many of those people won't be called back to work once the economy picks up. The longer people are out of work, the harder it becomes for them to find jobs and the more likely they are to exhaust savings or lose their homes to foreclosure. [86][87: for graphical updates on the state of the economy, see charts from the Cleveland Federal Reserve Bank posted at http://www.clevelandfed.org/research/data/updates/index.cfm?DCS.nav=Local]
Another Trend: Increased Productivity Means Less Jobs
All of the aforementioned economic trends point to lower levels of job creation, and thus higher unemployment.
In addition, the chief economist for MarketWatch, Distinguished Scholar of Economics at Dowling College (Irwin Kellner) points out that worker productivity is rising, and that increased worker productivity means less new people will be hired. [88]
Other Theories Regarding the Causes of Unemployment
The main cause of unemployment today is the economic crisis. For example, a report from the the National Industrial Conference Board pointed out in 1922 stated the obvious: depressions increase unemployment. [89]
The report also points out that seasonal variations, "immigration and tariff policies and international relationship" can affect unemployment figures. [90]
In fact, economists from different schools of thought ascribe different causes to unemployment. For example:
Keynesian economics emphasizes unemployment resulting from insufficient effective demand for goods and services in the economy (cyclical unemployment). Others point to structural problems, inefficiencies, inherent in labour markets (structural unemployment). Classical or neoclassical economics tends to reject these explanations, and focuses more on rigidities imposed on the labor market from the outside, such as minimum wage laws, taxes, and other regulations that may discourage the hiring of workers (classical unemployment). Yet others see unemployment as largely due to voluntary choices by the unemployed (frictional unemployment). Alternatively, some blame unemployment on disruptive technologies or Globalisation.[91 and 92]
For example, many Americans believe that globalization has increased unemployment because "American jobs" have moved abroad. Certainly, the American government has encouraged multinational corporations based in the U.S. to move jobs overseas. But quick fixes may lead to new problems. For example, a new American protectionism could stifle trade, further weakening the American economy.
Similarly, some economists believe that inflation decreases unemployment. However, that is only true where the workers drastically underestimate the extent to which higher prices are decreasing the real value of their wages. Indeed, as the Cato Institute notes:
This reduction in unemployment cannot occur unless workers systematically underestimate the inflation rate. When workers are aware of the inflation rate and, for example, have their pay adjusted according to the cost of living, they will interpret wages properly and not be misled into thinking that a normal wage offer is a relatively high wage offer.
