4 Risks to Recovery- Peter Morici

April 27, 2012

Guest Post by Professor Peter Morici.Peter Morici is an economist and professor at the University of Maryland School, and former Chief Economist at the U.S. International Trade Commission. 

The economy is growing too slowly for it to be considered robust- adverse developments in four areas could derail the recovery:

  1. China
  2. Dodd Frank Regulations
  3. EU
  4. U.S. Student Loans

Higher probability of economic disruption than zero...

1. China faces real challenges-falling property values, questionable accounting standards and state banks burdened with bad loans. Foreign investors cannot ignore the size of its market, and firms like GM, Ford and Apple will continue to invest to produce for and distribute products in China. However, rising labor costs and increasing revelations of corruption and intrigue, up to the highest levels of China’s leadership, are causing investors to cast a more jaundiced eye on the Middle Kingdom as a place to invest for serving markets in North America and Europe.

A crisis of confidence in China could disrupt both the Chinese and U.S. economies, and such an event has a much higher probability than zero.

"If I wanted to paralyze the recovery of American economy, I would use Dodd Frank to strangle the flow of cash to small business job creators and potential homeowners to do it." -Miles Free

2. Dodd-Frank regulations are severely handicapping small and moderate sized banks. Writing conventional mortgages has become an increasingly challenging activity, and securitizing commercial loans quite difficult. Despite the fact that these bank woes pose significant barriers to recovery in the housing sector and jobs creation among small and mediums sized businesses, Washington appears disinterested, and smaller banks are selling out to their larger brethren.

Wall Street banks now control more than 60 percent of deposits nationally. The absence of competition in many markets has driven down CD rates, and seniors are losing a lot of purchasing power as interest on their retirement savings shrink. Wall Street banks are less interested in making loans to Main Street businesses than were the regional banks they absorbed.

Not looking so rosy in Eurozone despite the easy credit of the ECB's.

3. The EU is in recession and remains in deep trouble-fixes for Greece, Portugal and Ireland are inadequate and eventually will need to be reworked. Spain is teetering on crisis-a failure of its government to meet budget targets or a further spike in unemployment, already about 23 percent, could set off a contagion beginning with Italy.

European banks are highly stressed. Those have not used the grace afforded by easy credit from the European Central Banks to properly add to capital and rework loan portfolios. Rather, they have often adopted gimmicks to paint up bad loans or move those into offshore vehicles-all reminiscent of tactics employed by U.S. major backs when mortgage backed securities became problematic before the financial crisis.

Average debt per Bachelor's degree holder was ~$18,300 in 2010.

 4. U.S. higher education loans-now more than $1 trillion-are a ticking bomb. Most education loans are not dischargeable through bankruptcy, and big debt coupled with disappointing pay will become an increasing drag on consumer spending.

Undergraduates are borrowing too much against future incomes, and many graduate students are borrowing to obtain degrees that will not markedly improve their circumstances.

In the face of all this, the U.S. private sector is proving remarkably resilient.

Neither policy missteps in Washington nor purposeful incompetence in Europe can keep American capitalism down.

However, the economy would be doing a darn sight better with better leadership on both sides of the pond.

Peter Morici

Professor

Robert H. Smith School of Business

University of Maryland

pmorici@rhsmith.umd.edu

http://www.smith.umd.edu/lbpp/faculty/morici.aspx

www.facebook.com/pmorici1

Photos:

China Real Estate Woes

Dodd Frank

Greek Riots

Student debt


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