MAKE THAT ONE DIP OR TWO?

No, I am not selling ice cream with sprinkles. The term, double dip, refers to a second recession that may collapse an already fragile economy and trigger the second Great Depression.

About two weeks ago, I discussed the possibility in this post, The Looming Unemployment Bomb. To recap some key points:

When you look at this multimedia visualization, you can see why joblessness represents an even bigger threat to economic recovery than the credit crisis that triggered this mess. Watch the black death of unemployment sweep over the country in 30 seconds or less. And notice the data feed: It does not even include the latest unemployment figures. The visualization gives you a snapshot through September 2009 when the unemployment rate reached 8.5 percent.

In fact, the current official unemployment has reached 10.2 percent and still rising. When you count real unemployment, the one that includes discouraged workers who have stopped looking for jobs and those marginally working part-time jobs, the true unemployment rate (also known as U-6 - Alternative measures of labor underutilization) is closer to 17.5 percent.

Paul Krugman has joined the ranks of pessimists with a Double Dip Warning:

I’d be more sanguine about all of this if there were any indications that private, final demand is taking off — consumers, business investment, whatever. But I haven’t seen anything suggesting that sort of thing (…) The chances of a relapse into recession seem to be rising.

The stimulus has run its course, and all leading indicators suggest a continuing downward trend. One problem is that the econometric forecasting methods used by Washington assumed an unemployment rate of 10.3% by the end of next year. In fact, we arrived at this level a year earlier, and the worse case turned out worse than expected and sooner than expected.

The problem with the stimulus may not be the stimulus, although Krugman advocated for more robust aid, but the TARP bill that was cobbled together in the closing months of the Bush administration. If you recall, then Secretary of the Treasury Hank Paulson sounded the alarm in the form of a one-page memo that would have given him unbridled power to distribute the almost $800 billion in TARP funds with no controls. The compromise bill rushed through Congress did not anticipate the chicanery that would render it ineffective. Here is what the TARP bill should have accomplished:

Rule #1. Never leave it up to banks to decide for themselves what to do with public funds. Tell them how and where the funds should be allocated. The purpose of the funds was to unlock frozen credit markets. Why this did not happen? The banks used the money to improve their balance sheets when they should have been making commercial loans.

Rule #2. When banks are bailed out with public funds, make sure banks get out of the lobbying business. How is the public interest served when public money is used to buy influence that may go against the public interest! Post-bailout lobbying smacks of double-dealing, self-dealing, and conflict of interest. That is why current reform efforts are stalled in Congress.

Rule #3. No bonuses or wage increases until all public money has been paid back. The hubris of Wall Street offends us and turns upside down our basic values: We should reward merit, not failure, nor entitlement.

Rule #4. Community banks play a larger role in distributing commercial loans to local businesses than big banks. Why were these NOT included under TARP?

On the subject of reform, I have two more pet peeves. First, there are other professions - doctors, lawyers, real estate brokers, and teachers - that undergo some form of accreditation or licensing. Why not those on Wall Street to whom we entrust our assets, our retirements, indeed our lives. The same fools who authored the credit default insurance swaps that brought down AIG are the SAME fools who authored the junk bond crisis 25 years ago. When you recycle fools back into the system, you perpetuate their culture.

Second, if a bank is too big to fail, it is too big to exist. The regulatory system installed during the Great Depression and dismantled in 1999 must be restored and the Glass-Steagall Act reinstated. Regrettably, our diversified financial institutions are bigger, more arrogant, and more dangerous than before. To suggest that it is too unrealistic to put the genie back in the bottle is unacceptable.

Cross-posted from The Swash Zone.