Recession's reach quite complicated

By: Jordan Grummer

Posted: 4/29/09

This recession is far more complicated and widespread than previous ones, a UA economics professor said, and it all began with deregulating the banking system.

This recession has spread the pain more evenly than ever before. Job losses have hit both coasts, with Florida and California being among the hardest hit states because of the failing housing market in those states, and to the Rust Belt, where Detroit, Mich., is now in a crisis fueled by the failing automotive market.

"[Arkansas] was very fortunate as a region because we didn't suffer that much from the dot-com bubble bursting," Javier Reyes, an associate professor of economics, said in an interview. "But this one is different because it is so widespread."

For the class of 2009, Reyes recommended a job with the federal government as a safe bet.

"Try to get involved with government institutions and organizations that will deal with the crisis. Government jobs will be well paid right now, and they will be stable," Reyes said.

Students also should focus on states that are investing in the three sectors President Barack Obama is backing up, Reyes said: health care, education and alternative energy.

"Look for states focusing on these areas because they are sectors that are backed by the government, and therefore you know they will be ready to boom once the crisis is over," Reyes said.

Students should look for a state whose budget is not in a crisis right now, like California, Reyes said.

"What you see in California is that taxes are actually going to increase, and pretty soon, to cover the deficit," Reyes said.

How the banking system plays into all of this is complicated, and is not the only problem. But deregulating banking in 1999 is the root of the problem, Reyes said.

The Glass-Steagall Act of 1933, which separated banks into commercial and investment institutions and created the Federal Deposit Insurance Corporation, was repealed by Congress in 1999 with the passing of the Gramm-Leach-Bliley Act. This effectively deregulated the banking system, allowing them to offer investment, commercial banking and insurance services.

This also allowed a bank in a different state to insure deposits at a completely unrelated bank in another state. This made sense because they could diversify their portfolio and capital could flow to where it was needed, Reyes said.

The main problem with banks taking stakes in other states is that it leaves them open to a bigger risk for systemic crisis, said Reyes. That occurs when the failure of one system, in this case a bank, affects a broad range of other banks.

When the financial sector fails, the rest of the economy suffers, Raja Kali, associate professor of economics, said.

"Because the financial sector is essential to the economy, when they experience unemployment, it willa affect firms and individuals," Kali said.

Reyes broke down what can happen when banks become intertwined.

"For example, banks in Arkansas could be invested in California. When California mortgages stop being paid, it affects [the bank in Arkansas] and the [cash] it has to do its own day-to-day operations," Reyes said. "They can't satisfy their own clients' needs because of a mortgage investment they have in another state."

"People stop borrowing, and people stop consuming, and people stop paying sales taxes, which generates unemployment by itself," Reyes said. "So people lose their job and their income, which generates less tax revenue for the state."

The crisis was able to jump borders because of this, Reyes said.