Treasury Admits Economy is Still in Trouble

The perma-bulls say that the economic crisis is over.

But a new report from Treasury entitled “The Next Phase of Government Financial Stabilization and Rehabilitation Policies” indicates that the banks and the financial system will need to remain on life support for the indefinite future:

Although we are rolling back emergency support programs that are no longer needed, significant parts of the financial system remain impaired. Unanticipated events could intensify pressure on the financial system. In this context, it is prudent to maintain capacity to address unforeseen developments [i.e. life support] …

The normalization of financial markets achieved to date is partial and fragile, and the economic recovery is, at best, in its very early stages. In residential real estate, although the rate of deterioration has slowed, the market has not established a firm bottom … and foreclosures continue to rise across all classes of mortgages, with prime mortgages now leading the way. The restructuring process for the commercial real estate market has only recently begun. The pace of bank failures has increased and it is expected to remain elevated for some time. However, liquidity-induced failures have steadily decreased given the existence of deposit insurance and the orderly resolution of failed banks. Moreover, the FSP in general and the SCAP in particular were designed to ensure that the financial system as a whole had the capacity to continue to perform its vital functions while dealing with these challenges.

During this difficult period of adjustment, the system could be sensitive to unanticipated market events. Further, in those markets where conditions have improved, it is unclear whether the improvements achieved to date will persist without a period of continued government support.

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