It’s no longer just the official cheerleaders who are making less dire sounds about the state of the economy and the financial markets; now even the likes of Nouriel Roubini are backing away from talk of an “L-shaped near-depression” that lasts for many years.
Considering the hundreds of billions pumped into the financial system through TARP and the trillions in backstopping guarantees from the Fed, it should not come as a surprise that the machinery of finance is looking more stable. The U.S. stock market has gained back about 30 percent since March, and there finally appears to be a slowing in new unemployment claims and housing price drops, though both remain at dreadful levels. All these signs constitute good news as far as they go–one might even say very good news, considering the depth of the abyss we were staring at a few months ago.
But none of this means the economy is within shouting distance of good health. The market gains could yet prove to be another bear rally; after the initial shock of the fall of 1929, markets rebounded by 25 percent before the year was out, and mounted other brief but ultimately illusory rallies between then and 1933. And no one is really claiming that there’s any good employment news on the horizon. The economy is likely to keep shedding jobs even past the official end of the recession, and the deadly combo of staggering debt burdens and wage deflation will forestall any appreciable job growth for a long time to come. (Think 2003-style “recovery” on that front, only worse.)
And where the financial markets are concerned, we need to remember that “stability” is not the same as soundness. The same overarching problems of inadequate regulation and boatloads of bad debt–coupled with the continuing lack of political will to force banks and other institutions to start writing off that debt–leaves the system in a position where additional shocks could set it right back to square one. After all’s said and done, U.S. recovery efforts are still predicated on the belief that bubbled-up assets were not really overvalued, and that all will be well if we can get past the panic phase once and for all. You can sustain that impression for a while when you’re guaranteeing markets against losses on dicey assets–PPIP, anyone?–but it’s as fundamentally misguided as the policies that allowed the bubble to grow in the first place. It’s still tough to see how two wrongs make a recovery, or at least a sustainable one.
More: Financial Times, Bulls take the market by the horns; Bloomberg, U.S. stress test results delayed as early conclusions debated; Wall Street Journal RTE blog: 12 reasons to be (economically) optimistic; Krugman: Falling wage syndrome; Mike Whitney/Counterpunch: Economy on the ropes.