Is this what real economic ‘Green Shoots’ look like?

Did you catch Federal Deposit Insurance Corporation (FDIC) Chair Sheila Bair on C-SPAN’s Newsmakers program this past Sunday? Her remarks during the interview about ongoing US community bank failures are worth highlighting, but have received little coverage from the MSM.

Bair was asked by a reporter during her C-SPAN appearance about the pace of FDIC-initiated bank closures and “how painful“ the closure process is for communities that lose their local banks.

Bair’s answer: “It’s never a happy thing for a bank to be closed…but like foreclosures, it’s a necessary thing when banks [are] no longer viable. To prolong it doesn’t do anyone any good – a very sick bank isn’t going to be doing much [in terms of] extending new credit…It’s a necessary process.”

(Kudos to Bair for her frank words – few Washington officials, whether elected or appointed, have the guts to talk about the bank closure issue at all.)

Bair also drew a parallel with the difficulties facing the US banking sector at the moment and the S&L crisis of the ‘80s and ‘90s. She said one lesson from that debacle relevant today is that it often costs more over the long term to try to “prop up” ailing banks while hoping their balance sheets will become healthier, rather than acting swiftly and closing them down.

In preparing for the interview, Bair sounded as if she had anticipated criticism that federal agencies and authorities are not doing enough to help small community banks ravaged by the Great Recession. To head off this line of attack, Bair pointed out on C-SPAN that the FDIC is working to preserve “diversity in our banking sector” by making sure that many troubled community banks “are being sold to other community banks,” to soften the impact on the sector as a whole.

Bair predicted that, while there will likely be more bank failures this year than last year, “we are turning the corner this year, as we thought we would” and US bank failures should peak in 2010. (As of last Friday, 132 banks have failed in 2010. In 2009, 140 banks failed.)

Does this sound like a reasonable economic forecast? Is it wildly overconfident?

Are these the economic “green shoots” that we’ve all been looking for?

Before anyone rushes to celebrate the end of the Great Recession, recall that Sheila Barr has made similar predictions before, including at least as early as May of this year.

A reduction in the rate of bank failures would be most welcome as a sign of economic recovery. But that alone won’t close the book on this recession.

There are still missing pieces to the recovery story, including the restoration of traditional American strength in manufacturing and exporting. (And let’s not forget the foreclosure epidemic.)

To paraphrase GE CEO Jeff Immelt, a real US recovery would require downgrading the economic importance of “financial engineering” (creating mounds of worthless financial derivatives, toxic mortgage backed securities, etc.) and putting the emphasis back on “real engineering” (of actual products, of tangible goods) to create jobs and stimulate growth. That shift back to “real engineering” is still a long way off.

I don’t want to sound like I am automatically rejecting Sheila Bair’s optimistic words out of hand. But I cannot help thinking that a reduction in the rate of bank closures won’t be enough on its own to help those eagerly-awaited “green shoots” to thrive.

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