Seattle Courant

A Shimmer of Hope as Dow Closes Up 380 Points

By Keith Vance
March 10, 2009 09:03PM

Unemployment will continue to increase throughout this year, Joseph M. Phillips said. Phillips is the dean of Seattle University's school of business and economics, and he said that we may start seeing signs of economic improvement by the end of the year, but the recession is not over.

According to Phillips, what's happening now is a major market correction, and it's bigger than the recession in 1981 and '82. After years of questionable lending practices in the sub-prime mortgage financial markets and lax governmental regulation, all of the fictitious wealth that was created in the housing market has evaporated, therefore a market correction is in order.

What happened was that after the dot-com bubble burst in 2000, money was pumped into the housing sector. "We over-invested in home construction," Phillips said.

And as that wealth flooded into the real estate sector, greed took over and government regulators sat by and watched homeowners get played. Phillips said that while it's important that the Obama administration not over-regulate, this recession is "clearly related to a regulatory failure."

To make matters worse, besides being given loans for homes they couldn't afford, many homeowners also over-extended themselves by leveraging home equity that no longer exists, if it ever did.

According to Phillips, for the recession to end another sector of the economy needs to replace the losses being realized in real estate. "We're not going to bring home construction back to where it was," he said.

Phillips corroborates what economist Paul Krugman wrote last December in the New York Times. "Whatever the new administration does, we’re in for months, perhaps even a year, of economic hell." He continued that "things can’t just go back to the way they were before the current crisis" because the prosperity of a few years ago "depended on a huge bubble in housing, which replaced an earlier huge bubble in stocks."

Basically, there aren't any more bubbles.