How Increased Unemployment ‘Directly Undercuts’ A Fix For Banking

banks.jpgLast week, the unemployment rate climbed to 8.1 percent, a problem that has further reaching implications than simply the sheer number of people out of work. As Fortune pointed out today, “increasing joblessness directly undercuts the massive efforts underway to stabilize the banking system”:

In fact, the pace and magnitude of further job losses is one of the most critical (and elusive) factors in the unrelenting struggle of policymakers to resuscitate the banking industry. The ballooning ranks of unemployed are steadily feeding the near-tidal wave of homes on the brink of foreclosure as well as delinquencies on auto loans and other types of consumer lending. This process inevitably expands the already dangerously high levels of toxic assets on bank balance sheets.

And this is a vicious cycle, because as the banks deteriorate, they tighten up on credit, denying businesses access to the funds they need, which requires them to lay off workers.

This comes back to what President Barack Obama has referred to as the “three-legged stool” required to repair the economy: economic stimulus (to keep people employed), a housing fix (to keep them from foreclosure) and addressing the banking crisis (to ensure lending and credit is available). Without the others, the effectiveness of each individual plan is blunted.