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Warped speed

8 November 2011 By Antony Currie

How long does it take to recover from a crisis? It has been five years to the day since the first signs of the great credit crunch hit. That’s when Meritage Mortgage became the first notable subprime mortgage lender to fail, presaging a far broader collapse that exacted a heavy toll on individuals, banks, investors and governments worldwide. While there are some signs of progress, the U.S. financial system still hasn’t fully recovered.

American stocks have rebounded nicely, of course. And the nation’s banks also look more stable, with tighter lending standards and average leverage of 11-to-1, down from 16-to-1, according to SIFMA, the Wall Street lobby group. They also face more stringent regulation to keep them in check and prevent them amassing hundreds of billions of dollars of losses again.

On top of that, federal, state and local deficits have, on average, improved this year and the unemployment rate has fallen a tad. But all of these measures are still blinking red. At $1.3 trillion the federal budget deficit is five times bigger than it was in 2006 and the 9 percent unemployment rate is almost twice as high. And many banks are still trying to offload old toxic assets.

Granted, corporations look pretty healthy, with robust earnings, bumper reserves of cash and a growing, if modest, appetite for borrowing from banks. But consumers are still struggling. And it’s hurting most where the crisis began – in mortgages. More than four million homes are in foreclosure. U.S. household debt now stands at $13.3 trillion, according to the Federal Reserve – 3 percent higher than in 2006 – while the value of household real estate has plummeted by almost a third.

Government aid, from direct assistance for homeowners to the Fed buying mortgage bonds, may have softened the blow. But none offers a long-term solution. Meanwhile, mortgage finance remains hamstrung as Washington dithers over what to do with Fannie Mae and Freddie Mac, which currently account for some 90 percent of new home loans.

Considering how slowly the wheels turn in the capital, that may not get resolved for at least another five years, according to Amherst Securities. And with Europe wrestling with its own weighty debt problems, there’s no obvious end in sight to the mess. Even after five years, it looks like there will be further credit crunch anniversaries to celebrate.


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