bank lendingIn a New York Times article on Nov. 6 by Gretchen Morgenson, "He Saw Trouble Coming. Now He Sees It Going," a private-sector economist with a track record better than most suggests that the U.S. economy is on the verge of a sustainable recovery.

According to Ian Shepherdson, chief U.S. economist at High Frequency Economics, the total stock of commercial and industrial credit has stopped falling, signaling that lending to businesses, especially small firms that play a key role in driving economic growth, could soon be on the upswing.

He should have stopped there. In what I view as an egregious example of selective memory and/or wishful thinking, Shepherdson attempts to bolster his argument by drawing parallels between what the U.S. has been going through and the experience of another country that faced a similarly devastating financial crisis in the early 1990s. Writes Morgenson:
The expansion of bank credit before the peak was similar in both countries. Furthermore, Sweden's boom, like ours, resulted in rocketing real estate prices and overleveraged consumers.

When the bubble burst, both countries experienced similarly awful contractions. Gross domestic product declined 5.1 percent in Sweden at the trough, compared with 4.1 percent in the United States.

Mr. Shepherdson hopes that the Swedish experience on the upside also repeats itself in the United States. After Sweden's output bottomed out in early 1993, the country began an upswing that soon became supercharged. The initial growth was at an annualized rate of 2.5 percent, but by the second year of the rebound, G.D.P. growth was 5.3 percent, annualized.

We may not end up with a recovery that hot, Mr. Shepherdson said. But if the credit expansion he is expecting does transpire, he said, we could achieve annualized growth of between 3 percent and 4 percent in the second half of 2011. And the year after that looks even more promising, he said, because "credit conditions will be back to something like normal."



Unfortunately, Shepherdson's comparison is seriously lacking. Unlike in the U.S., the Swedish authorities flushed their financial system clean after the crisis. They restructured the banks. They wiped out shareholders. And they got rid of management at the institutions that had contributed to the mess. They forced lenders to disclose loan losses and to assign realistic values to real estate and other assets. They shut down the basket cases and allowed only those with real potential to survive.

Riddled With Cancer

U.S. authorities did none of that. They rewarded failure. They threw taxpayer money at troubled institutions without extracting any real concessions. They allowed banks to pretend they were solvent and carry on with business as usual, which, in contrast to the "Swedish solution," was not in the best interests of the economy as a whole. Few managers suffered the consequences of their bad behavior, illegal or otherwise.

Consequently, America's financial system is now riddled with a cancer -- as in Japan, which is still suffering from the fallout of similarly shortsighted decisions taken over the course of two decades -- that will inhibit economic recovery in the U.S. for years to come.

As with so many other mainstream analysts nowadays, Shepherdson 's views on where the U.S. is in the economic cycle are colored by a myopic sense of history and a (completely understandable) desire to see the situation improve. However, history -- the long version -- suggests that it's better to see things as they are and respond accordingly.

With that in mind, persistently high unemployment, untenable domestic and global financial imbalances, and a banking system that's dependent on cheap money and other forms of public assistance are among the many realities that suggest now is not the time to be making big bets on better times ahead.

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hi cat

Make no mistake, we are in a financial WAR no less dangerous than a hot war. What chance do we have as a nation to survive, TO WIN, when the "controllers" inside our CAPITOL pledge their allegiance to overseas profits. Protected banksters without borders. Oh Yeah, Those hot wars are paying them pretty handsomely too Ya know what I mean??!!

November 08 2010 at 10:00 PM Report abuse +2 rate up rate down Reply
hi cat

Perot and the rest of us warned y'all about that flushing sound you were gonna hear! But you let Clinton and Bushes outsource our manufacturing base and our homeland financial security to slave laboring countries. I recently bought an American car and was seeing red when I discovered 85% of the parts were from outside the US.

November 08 2010 at 9:47 PM Report abuse -1 rate up rate down Reply
jwmgrand

How in America a Country founded on Christianity ... can 1% control 43 % of the Wealth in the USA ... If the 1% of the Rich Control 43% of the Wealth ... why the hell do they need a tax break .. The numbers say just the opposite !

November 08 2010 at 9:46 PM Report abuse +4 rate up rate down Reply
manmi1

In Sweden, GOOD healthcare is free. Medicine is free. When you get older, but don't want to leave your home, you get people who come to your home for shopping, bathing, and anything they can do to assist you to stay in your home. If you need a nursing home, it's free.... not the $9,000.00 per month you'll pay here for a crappy one.

November 08 2010 at 9:23 PM Report abuse +3 rate up rate down Reply
manmi1

I have relatives in Sweden and have spent time there. I'm not sure about the person who made the comment that people there paid 51% income tax. It's more like 38 to forty percent. Now, that sounds high, but add what you pay plus the thousand you're going to pay for healthcare, medical care, medicine, nursing homes, assisted living, etc. You will pay FAR more than that in the long run, and will probably go completely broke if you get cancer.

November 08 2010 at 9:21 PM Report abuse +2 rate up rate down Reply
manmi1

One huge asset that Sweden and Japan have is healthcare for all, medicare for all, if you will. This has removed the whole bottom line issue and it is one huge thing employers do NOT have to worry about. This is true in most civilized countries, sadly, we lack much of what the world considers important here in America.

November 08 2010 at 9:18 PM Report abuse +3 rate up rate down Reply
Donald G

The paragraph Riddled with Cancer sums up the problem here.

November 08 2010 at 7:35 PM Report abuse +2 rate up rate down Reply
cubatraveler

So what if Swedish citizens pay 58% income tax? They also make more, save more and spend more money than the average American. Their system of government works better than the U.S. Their life expectancy is higher and their poverty rate is much lower than that of Americans. But Americans are convinced their own country is the best and they have nothing to learn from any other country, even when those countries have been around hundreds of years longer.

November 08 2010 at 5:37 PM Report abuse +10 rate up rate down Reply
4 replies to cubatraveler's comment
georgetroll4

The opposition by Panzier to the belief by Scheperson does not accept the supposition that the availability of credit to businesses is the way to increase employment in our experience (now), as availability of credit to businesses was able to increase the Swedish economy in the 90's. He seems to think that what he calls the "cancers" growing in our banks will not allow this to happen because we were too generous to the banks in 2009. But if the availability of credit to businneses is the important factor in decreasing unemployment, and the banks are able to extend the credit despite the so-called cancers, why should there be any difference in the results? If the banks were given too many nitrites because of our generosity, and cancers have appeared, they will have to get chemo to fight the cancers. But as long as the banks are doing as well as they are, and are extending the credit that is needed to help businesses expand, the economy will improve. If the symptoms of the cancers disable the banks, radiation or chemo for the banking sector will have to be looked into. But up to now, the MRI's the banks have been getting have been negative across the board. Georgetroll

November 08 2010 at 4:51 PM Report abuse +1 rate up rate down Reply
calicoerotica

The stock market cannot save the US economy. Neither can a political party. Tax cuts aren't going to help anyone at this point either. Why? Because it takes more than just the 1% highest earning people in this country to inject enough capital into the economy to keep it going. A handful of small businesses aren't going to prop up the economy either - many do not employ enough people to float a community. Until middle class families are working, and earning enough to SPEND money for things other than bare basic items, our economy is going to remain in the toilet. People who aren't working, can't buy things, and our economy is dependent on the consumer. Consumers right now can barely afford to feed themselves because our jobs are in China and India right now...which if you will look, have the two fastest growing economies in the world right now.

November 08 2010 at 4:43 PM Report abuse +8 rate up rate down Reply
1 reply to calicoerotica's comment
gardeningatnite

Corporate america just got bored with 'middle-class' america..............plain and simple!

November 08 2010 at 6:47 PM Report abuse +3 rate up rate down Reply