Are we out of the woods?  No.  Is this an identifiable trend to recovery?  Not yet. 

From the charts, you can see that job levels are still 3.4 percent lower than they were at this time last year.  Also, the ranks of the long-term unemployed, those workers who have been unemployed for 27 weeks or longer, have grown to almost 6 million.

You can also see that the unemployment rate fell in July, before rising by more than 50 basis points during the next three months.  Hopefully, this time, the unemployment rate will not rise in December, but continue falling.

A key dynamic that has been going on for about a year now appears like it will continue at least through the middle of 2010, and that is the negative feedback from jobs to residential real estate.  This recession started in residential real estate with deflation of an over-leveraged housing bubble.  It then spread to virtually every other sector in the economy, and once job losses started, the negative feedback loop started.  Certain aspects of the housing correction were worsened by the job losses – especially foreclosures.

With high unemployment rates, lots of long-term unemployed persons, and job-levels still relatively low this feedback will continue.  The most recent United States residential foreclosure rate data indicate that the foreclosure problem is worsening.  The most recent data on commercial real estate loan delinquencies also indicate a steadily worsening problem.

What drove jobs down?  One of the biggest factors was the tremendous fall in consumption during the second half of 2008.  Our interpretation of that fall was the household sector moved to correct over-leveraged balance sheets.  With ongoing real estate loan delinquency problems, we are not convinced the household sector will be motivated to increase their spending levels in the near term.

This sad state of affairs is presumably brought about by an evil collaboration between “irresponsible lenders,” governments, and credit counselors who “scare and shame borrowers into making what is in many cases a bad financial decision to stay in their home.”

Before we begin, we need to recognize that Professor White is a law professor and not an economist. We can therefore forgive his bombastic quotes and apparently incomplete analysis.

Unfortunately, we now need to take a small detour to discuss the economics of lending. There are two types of credit default: strategic and inability to pay. Since Professor White’s article is about people who could pay, we are discussing strategic default.

It is well understood and generally accepted among economists that, absent an enforcement mechanism, the risk of strategic default results in the under-allocation of credit. Fewer loans are made than are optimal. For the law professors across cyberspace, that means that some people who should get credit won’t get credit.

So, society has created disincentives for strategic default. Over time, those disincentives have been weakened. We no longer have debtor prisons, and the stigma attached to bankruptcy or foreclosure has declined. However, we still have disincentives. Default on a home may make it difficult to finance another home, or to obtain future consumer credit. Foreclosure is also a very public process, and it could damage some people’s reputations.

With these disincentives, it is often entirely rational for a homeowner to pay for an under-water home.

But I don’t think Professor White was truly saying that homeowners were being irrational. From the quotes I’ve read, I think Professor White was complaining about the very existence, small as they are, of disincentives for strategic default.

That’s just muddled thinking. I would ask that we consider the possibility that current disincentives for strategic default may be too small. I’m not advocating debtor prisons. There are plenty of disincentives between debtor prison and what we have now. Eliminating limited liability comes to mind. As things now stand in California, a person can walk away from under-water home while having, say, $1 million in the bank. Having to pay any deficiency when ability exists would be a formidable disincentive to strategic default.

If we do accept wholesale strategic default, as Professor White apparently advocates, credit availability will decline.

There you go. This is a bump in the road in a widening recovery, the existence e of which is generally accepted, with only some lingering doubts.

Even if you don’t buy our analysis, which is pessimistic, the quotes reflect a remarkable confidence. Given the massive weaknesses in our economy—over-leveraged businesses, banks, and consumers; continuing defaults on loans of all type, the worst job market in decades, and the ineffectiveness of both monetary and fiscal policy are just a few that come to mind—I can’t see how anyone could be so sanguine. Seems to me that analysts that have only “lingering doubts” are the letting their hearts lead their analysis.

We all hope for a recovery. The recession is ruining families and lives, but I don’t think analysts do a service when they let their analysis or forecasts reflect their hearts. The public is best served by our best detached analysis.