On August 11, 2009, the Congressional Oversight Panel on the bailouts issued a report saying that small and medium sized banks are especially vulnerable, the report will say, in part they hold greater numbers of commercial real estate loans, "which pose a potential threat of high defaults." [47]
That could spell real trouble for employment by small businesses since (1) smaller institutions are disproportionately responsible for providing credit to small businesses [48], (2) credit is essential for many small businesses, (3) commercial real estate is crashing even faster than residential [49], and (4) industry experts forecast that the commercial real estate market won't bottom out for three more years. [50]Indeed, largely because of the commercial real estate crash, the FDIC expects 500 banks to fail in the coming months. [51]
Unfortuantely, the crash in commercial real estate is occurring world-wide. [52]
The Congressional Oversight Panel report also says that banks remain threatened by billions of dollars of bad loans on their balance sheets, more could fail if the economy worsens, and that - if unemployment rises sharply or the commercial real estate market collapses � ��" the banking system could again crash:
The financial system [still remains] vulnerable to the crisis conditions that [the bailout] was meant to fix...As Reuters notes:
Financial stability remains at risk if the underlying problem of toxic assets remains unresolved. [53]
The chairman of the congressional oversight panel, Elizabeth Warren, said no one even knows the value of the toxic assets still on banks' books...Loan Loss Rates"No one has a good handle how much is out there," Warren said. "Here we are 10 months into this crisis...and we can't tell you what the dollar value is."[54]
Loan loss rates in could also be worse than the Great Depression, at least in the United States. Specifically, during the depths of the Great Depression, the loss rate which banks suffered on their loans climbed as high as 3.4% (it is normally well under 2.0%). [55]
Last month, banking analyst Mike Mayo predicted that loan loss rates could go as high as 5.5%, which is substantially higher than during the 1930s. [56]
But the Federal Reserve's more adverse scenario for the stress tests - which everyone knows is too rosy concerning most of its assumptions - predicts a loan loss rate of 9.1%, nearly three times higher than during the 1930s. [57]
As US News and World Report wrote in May 2009:
For most of the past 50 years, the loss rate on all bank loans has stayed well under 2 percent. The Fed estimates that over the next two years the loss rate could reach 9.1 percent. You know all those historical comparisons that end with "the worst since the Great Depression"? Well, 9.1 percent would be EVEN WORSE than during the 1930s. Still looking forward to a soft landing or a quick recovery?[58]Consumer Spending
Consumer spending accounts for the vast majority of the economy in the United States. The figure commonly cited is that consumer spending accounts for 70% of U.S. Gross Domestic Product. [59]. (Consumer spending has been a lower percentage of GDP in most other countries. [60])
But the economic crisis is driving consumer spending downward. Economist David Rosenberg [61] says that consumers have undergone a generational shift in spending habits, and will be frugal for a long time to come. [62]
The head of Collective Brands, Matthew Rubel, states :
Consumer spending as a percentage of GDP has moved down, will probably continue to move down through the end of year, and then normalize as we get into somewhere in early-to-mid next year, from our point of view. [63]
The chief economist of IHS Global Insight, Nariman Behravesh, says consumer spending will decline to 65 percent of GDP:
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