6 Small Steps Toward a More Normal Economy

Some banks are making money, others are being allowed to fail. Just like the good ol' days

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The Great Economic Recovery Hunt has been underway for about half a year, and the quarry bag is still pretty empty. A few optimists have tried to wring hope from fuzzy statistics showing that retail sales or housing starts or some other indicator aren’t as bad as they could be. But with the unemployement rate at 9.5 percent and going higher, that’s been unconvincing.

A recovery that will actually feel like one is probably a year away, at best. But we may finally be seeing signs that some parts of the economy are turning the corner. Here are six:

Booming bank profits. Goldman Sachs earned a scorching $3.3 billion in the second quarter. JP Morgan Chase earned $2.7 billion. Citigroup and Bank of American reported less impressive numbers, but each still turned a profit despite mounting losses on consumer loans. To be clear, the banks’ profits have been subsidized by the government’s TARP program and a bunch of other emergency measures meant to provide very cheap capital to the banks. And it’s obviously problematic that a few Wall Street banks are earning a fortune with taxpayer assistance. But the whole financial bailout was intended, first of all, to get the nation’s financial system back on its feet. One toe at a time, it’s happening. The real test is whether a healthier financial system will help the broader economy recover—or bankers just gorge on the profits, keeping loans as tight as ever.

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CIT’s lonesome meltdown. Last fall, the feds were so panicky about the economy that just about any bank in a whiff of trouble got bailout funds. The CIT case suggests that the bailout spigot is finally closing. CIT Group is a nonbank lender that services a lot of small- and medium-sized businesses. It’s lost almost $3 billion over the last year and is at risk of declaring bankruptcy. So far, despite company pleas, the government has refused to toss a life preserver. If CIT goes belly-up, it could harm hundreds or thousands of businesses dependent on its loans. But unlike last fall, the government isn’t jumping in just to prevent borrowers and investors from worrying. We already have systems designed to deal with failing companies, like the bankruptcy process and FDIC takeovers. Letting those run their course might cause some pain, but it’s a sign that the system is once again working the way it’s supposed to.

The Federal Reserve’s reality check. The Fed has finally joined the mainstream in its outlook for job losses, after months of optimistic projections that seemed out of touch with the real economy. The latest Fed projections are for the unemployment rate to range from 9.8 percent to 10.1 percent for all of 2009, which means it will peak at some number higher than that over the next few months. The Fed’s prior forecast was about 0.6 points lower. It’s not good news that the Fed sees a worse job outlook than it did a few months ago. But the Fed’s rosy numbers were falling behind reality, making its projections seem more like government propaganda than the combined wisdom of the nation’s economic cognoscenti. More realistic numbers give the Fed’s outlook more credibility—and that is good news, especially since the Fed board members also predict that economic growth for the rest of the year will be a bit stronger than they believed a few months ago. It would be nice to believe that.

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The glacial P-PIP rollout. Relax. You’re forgiven if you can’t remember—or never knew—what the government’s Public-Private Investment Partnership was supposed to do. This is the plan to subsidize the purchase of “toxic assets” (now lovingly known as “legacy assets”) from banks, to get the worst money-losing investments off their books so they’ll start lending money again. It’s a complicated program funded by—you guessed it—taxpayer money, with dubious prospects that the money will be returned. Anyway, the P-PIP isn’t officially dead, but it hasn’t kicked off yet either, and it’s a couple of months past the original estimated start date. It turns out most banks have been able to raise money on their own, which could eliminate the need for yet another government life-support program. If P-PIP fades away with little notice, few will complain.

500 failed banks. Don’t’ worry, they haven’t failed yet, but FDIC chief Sheila Bair may have told a group of senators that 500 additional banks could close before the financial meltdown is over. That’s according to Republican Sen. Jim Bunning of Kentucky. The FDIC typically doesn’t predict bank failures, and an FDIC spokesperson has been downplaying the number and saying Bunning got it wrong. But it’s plausible. Many more banks than that failed during the S&L bust of the ‘80s and ‘90s, and even 500 failures would constitute a small chunk of the 8,000 or so banks in the United States. Here’s the important thing: Last fall, a rumor like this would have sent the markets plunging. This time, the markets didn’t even notice.

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Action at AIG. The disaster-prone insurance giant recently sold a car-insurance division for nearly $2 billion, and it’s rumored to be close to selling its valuable American Life Insurance Co., or Alico, to MetLife, for $15 billion or more. This is great news for taxpayers who have lent AIG more than $80 billion so it can wind down its business without triggering a panic. The only way for taxpayers to recoup their money is for AIG to sell off its assets at the best possible price. Since last fall, the only bidders have been bargain-hunters hoping for fire-sale discounts. But a thaw in the credit markets has finally brought out serious deal-seekers. We could even see bidding wars for some AIG assets. Ah, the good ol’ days.


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  • Rick Newman

    Rick Newman is the author of Rebounders: How Winners Pivot From Setback to Success and the co-author of two other books. Follow him on Twitter or e-mail him at rnewman@usnews.com.

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