The Four Things That Destroyed The US Economy–SF Fed

John C. Williams the President and CEO of the Federal Reserve Bank of San Francisco gave a presentation in which he enumerated the reasons for the economic collapse, and why the recovery will be a very long time coming. Almost all of his observations are obvious to most people who followed the causes of the recession in any detail, but are worth repeating.

Williams said

I’d like to turn to why the recovery has been so weak. The answer is that the bursting of the housing bubble and the resulting financial crisis unleashed at least four powerful forces that have sapped the recovery of its vigor: First, it destroyed household wealth. Second, it left the housing market in a deep depression. Third, it made credit hard to get. And, fourth, it left a legacy of uncertainty that clouds the future.

Because these forces were and are so great, he remains pessimistic

The broadest barometer of economic conditions is gross domestic product, which measures the nation’s total output of goods and services. My forecast calls for GDP to rise about 2¼ percent this year and 2¾ percent in 2013. That’s an improvement from 2011, when GDP grew only a little over 1½ percent. Unfortunately, such moderate growth will not be enough to keep taking big bites out of unemployment. The unemployment rate is currently 8.3 percent. I expect it to remain over 8 percent well into next year and still be well over 7 percent at the end of 2014.

If Williams is right, recent unemployment data and consumer confidence data are a false signal. The unemployment rate, at normal levels, is about 5.5%. The economy may not reach that point until 2015. Ben Bernanke told Congress that the jobless numbers as they were presented for January should not be taken too seriously. Focus, he said, on underemployment as well, and the picture is still bleak.

Williams articulated the trouble in the housing market, but no in great detail. Corelogic recently reported that the were 828,000 foreclosures last year and 1.4 million in the foreclosure. And, those numbers are below what other research firms have posted. Home prices may not recover for a decade in some regions, and in places like Nevada, they may never reach 2006 levels again.

Much of the wealth destruction in the US is permanent, which means that consumer confidence will remain depressed for years.

Douglas A. McIntyre