Toxic Assets 2.0
The extent to which toxic assets still remain on some banks' books is still unknown. According to industry sources, only 20 percent of the troubled assets have been fully recognized. In addition to existing troubled assets, new loan classes are getting into trouble, especially consumer credit and commercial real state loans. Also, the leveraged private equity segment of the private equity market may be at risk, due to the lack of effective exits for M&A activity taking place from 2005-2008.
Small Business Credit
Critical to economic growth is financing for small businesses, which accounted for 64 percent of net new job creation over the past 15 years. Despite the SBA's efforts to cut lending fees and increase guarantees for several of its lending programs, credit for small businesses is difficult to obtain due to divergent objectives by lenders. Once large banks have rebuilt their capital structures, their next priority is to return TARP funds back to the government, rather than lending to small businesses that, as a result of the impact of the financial collapse on the economy, now are perceived as high-risk investments.
In addition, current Fed policies of lending to banks at an almost zero rate and paying interest on excess bank reserves makes banks cautious of taking any lending risk. With the money borrowed from the Fed, banks invest in Treasuries and profit from the interest spread at no risk. Similarly, with the Fed paying on excess bank reserves, they have an incentive in accumulating capital in their vaults rather than facing a risky borrower. As a result, according to reports by the Federal Reserve on Dec. 10, net bank lending contracted by $1.5 trillion since early 2009, with about $854 million of that contraction taking place in the third quarter of 2009. Although regional banks have been a source of financing for small businesses, they are now facing the collapse of the commercial property market, to which they are highly exposed. As their losses in the commercial property segment grow, they will have to allocate more funds to cover those losses, at the expense of releasing lending to small businesses.
The Job Market
The still-depressed labor market has been reducing its losses since the first quarter of 2009. While employment losses in the quarter averaged 691,000 per month, the job market averaged a loss of 69,000 jobs per month in the fourth quarter, and in November recorded the first gain (4,000 jobs) in the past two years. The unemployment rate, at 10% in December 2009 according to the most recent data released in January 2010, shows an increase in long-term unemployed workers and does not fully reflect the rising number of discouraged job seekers.
While job losses continued in construction, manufacturing, and wholesale trade, temporary help services and healthcare industries continue to add jobs. For example, the healthcare industry has added 631,000 jobs since the recession began two years ago.
The U.S. occupational market will experience substantial changes in the years ahead. Recommended reading is the recently published "Occupational Outlook Handbook, 2010-11 Edition. Overview of the 2008-18 Projections." The importance of Hispanics to the U.S. labor force is expected to continue increasing, from a 14.3 percent share to 17.6 percent, reflecting 33.1 percent growth, according to the report. From now through 2018, total U.S. employment is expected to increase by 10 percent, or 15.3 million jobs. The top four industries with the largest job growth will be healthcare and social assistance (4 million jobs); professional, scientific and technical services (2.7 million jobs); educational services (1.7 million jobs) and Administrative support (1.4 million jobs).
While the U.S. and global economies seem to have weathered the worst, the possibility that remaining threats will either reduce growth or return the U.S. economy to a recession is considerable. Active policies from Congress and the Administration are a must until consumer and business reach a confidence level indicating the economy is stabilized.
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