Moreover, several of the imbalances that often prevail prior to recessions are for the most part not prevalent today. Real estate markets, for example, exhibit no significant sign of overbuilding. Overbuilt real estate markets are invariably prevalent prior to downturns and a severe contraction in construction activity is generally a large part of any broader economic downturn. The recession ten years ago was directly tied to a collapse in the California and Northeast real estate markets that were choking on vacant space. Financial intermediaries, including banks and thrifts, remain profitable and well-capitalized.
Lenders often struggle with weak balance sheets prior to recessions.
Without inadequate capital they have but little choice to limit their lending and risk-taking. A decade ago, commercial banks had record low capital ratios and the thrift industry was under siege, which resulted in the credit crunch of that period. Today, in contrast, bank capital ratios are near record highs and the thrifts that remain are highly profitable. Lenders have tightened up on their standards, but it is not a question of whether they are able to extend credit, only if they are willing. Unexpected events induce recessions when the economy is burdened with imbalances, since it is when households, businesses and creditors are overextended that they lose confidence when things go awry.