Meredith Whitney, the famous banking analyst who has called for the cutting of dividends and the problems of the banking industry for the last year or so has continue to suggest that the end is not close for the financials which has risen in the face of such criticism but now everyone is suggesting that banks are safe and that we are on the way back because it seems that the banks are now profitable again.  But let’s take a look at how profitable they can be.

Most banks are now saying that they expect to make a proft as long as the economy doesn’t fall off the face of this earth.  Ken Lewis suggested that Bank of America and even pay back the TARP this year.  CEO after CEO has been making promises only encouraging the gains in their stocks.  But to me, it seems that there are too many lurking problems to make these promises.  What Meredith was stressing on her appearance on Charlie Rose was not about more write downs or more subprime problems because those are almost behind us but the problems caused by the housing fall as only starting to materialize.  Here is probably the most important thing that Meredith said:

“Look, you have credit continuing being pulled from the system, and until it stabilizes, there is nowhere to go but down. And from an unemployment perspective, no one is pricing in low, mid teens unemployment in any of their assumptions. So it is just a question of not if the banks need to raise capital, it’s when, and, you know, let’s get some capital back in the system by looking at who can provide it, like the local banks”

While everyone is not questioning that unemployment will climb no one is factoring in that unemployment can reach double digits or even mid double digits.  There is a huge misconception that this cannot happen.  But if we look at the numbers, some states are close to hitting record highs for the last few decades while 9 of the 50 states have unemployed 9% or higher already and this is the very beginning as corporate and business bankruptcies are barely beginning with the credit crunch.  So while we are trying to fix the credit problem, housing prices goes lower and more businesses are closing their doors, pushing unemployment to be even higher.  It seems that the market believes that the stress test and the TALF programs will solve the problems but that seems to be still just a band aid because it is difficult to buy up housing when no one can qualify for the loans.  While I am glad that we are doing something, it doesn’t seem like we are attacking the problem that caused this mess in the first place which is housing.

There has been the suggestion of allowing immigrants to apply for citizenship in return for buying a house which seems sensible because it sucks up all the excess inventory, increases consumption from a new rich middle class, and provides a talented and able workforce to help retire the baby boomers.  But of course, America shouldn’t become a nation of immigrants…right?  Oh wait, that’s what America began as.

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