Six Big Risks to Economic Recovery

by Aaron Task

Like most economists and pundits, Diane Swonk, chief economist at Mesirow Financial, believes the worst of the crisis is behind us.

But the road to recovery will be very rocky, Swonk says, citing the following major risks:

1. The Global Economy Remains Weak: For all the talk about how America is an import-dependent economy that doesn’t make anything anymore, S&P 500 companies derived about 48% of their sales from overseas in 2008, Reuters reports. In other words, we need the globe to recover to sustain a rebound. Swonk is concerned about global growth generally and, specifically, that Germany’s second-quarter growth was a “dead-cat bounce.”

2. Credit Markets Still Damaged: The current relative calm in the credit markets is likely to end next year as another round of foreclosures and debt defaults hits, Swonk says. This will put pressure on bank balance sheets and lead to another round of credit tightening, putting further constraints on growth.

3. Small, Regional Banks Left to Sink or Swim: Swonk is confident big bank holding companies are reasonably sound today, in part because she has faith in the stress tests, for reasons detailed in the accompanying video. But she’s worried that smaller and regional banks have been left to fend for themselves, meaning more failures are likely forthcoming.

4. FDIC Reserve Fund Being Depleted: Fewer banks have failed than in the 1980s but absolute losses have been bigger, putting the FDIC reserve fund under pressure. That could become a problem if/when more small and regional banks fail.

5. Big Banks Now Really Too Big to Fail: Related to nos. 3 and 4, Swonk says the government’s policy of forcing failed banks into mergers (vs. receivership) and bailing out the teetering giants last year has created even bigger behemoths who are “now the only game in town.”

6. Regulatory Uncertainty: As discussed here, Swonk is a big believer in financial innovation and the benefits for a “reasonable” amount of leverage. Uncertainty on the regulatory front is putting constraints on the use of leverage and, hence, recovery she says.

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