Two years after Lehman Brothers collapsed in a $639 billion bankruptcy and the short-term financial markets seized up with terror, we've backed away from the brink. But skittishness in the financial markets hasn't gone away. It's just taken a different form -- for instance, driving gold prices up 56% from $805 an ounce on Sept. 3, 2008, to $1,253 Sept. 3, 2010.
Of course, that run-up won't lead to economic revival. To get that, the U.S. needs a new, business-productivity-boosting technology, among other things.
While the roots of the financial crisis dated back to the summer of 2006, it took two years for it to reach its peak in September 2008. That summer was when subprime mortgage issuers started collapsing. I remember it well because in a Dec. 18, 2006, post on DailyFinance's sister site, BloggingStocks, I recommended short-selling shares of subprime lender Novastar Financial (NOVS), then at $106. By Sept. 3, 2010, the stock was trading at 66 cents.
At the risk of repeating the obvious, subprime mortgages were the raw material stuffed into a range of poisonous financial sausages -- known as mortgage-backed securities (MBS) and collateralized debt obligations (CDOs) -- that Wall Street foisted onto yield-hungry institutional investors. And thanks to the AAA-ratings that ratings agencies supplied for those securities, the institutions felt safe in buying them.
We all know what happened next. Millions of unqualified borrowers who got the subprime mortgages couldn't make their payments. And as soon as the housing price bubble began dissipating, borrowers could no longer sell their properties at a profit to pay off the loans. Thus began the downward spiral that nearly brought the global economy to its knees.
The capital markets have recovered nicely since then. But fear has not left the building, and today the U.S. economy is at a crossroads. The good news is that job losses are way down from the nearly 800,000 shed in January 2009 at the recession's peak. Corporate profits are strong, and cash balances at $1.84 trillion are at a near record high. Moreover, the economy has been growing since the summer of 2009.
What America Needs Now
Unfortunately, if left to its own devices, the economy appears poised for stagnation. Consumers are more concerned about saving than spending, and business demand for credit appears to be down as banks have gotten a lot tighter with their money.
With roughly 70% of economic growth coming from the overall consumer category (which is a broad catch-all that includes far more than retail spending), it's hard to see how that spending will rise enough to get the economy moving again until businesses start hiring larger numbers of workers again.
To get to that point, the economy would need to be growing faster than 2.5% annually and creating at least 300,000 jobs a month. How can the U.S. achieve that? One way is to go back to what I think of as America's greatest strength: its ability to turn new ideas into robust entrepreneurial ecosystems. That's a topic Professor Srini Rangan and I addressed in our June 2010 book, Capital Rising: How Capital Flows Are Changing Business Systems All Over the World.
The nation can generate economic growth if it can create such ecosystems that would draw capital investment from the corporate sector into new technologies that boost business productivity. The U.S. has done it before, in the 1960s (mainframes), 1970s (minicomputers), 1980s (networked PCs) and 1990s (Internet).
The question of the moment is: "What powerful new idea will spur such capital investment in the 2010s?"