Rana Foroohar

Rana Foroohar is TIME's assistant managing editor in charge of economics and business.

The company’s plan to make things again is a test for the entire American economy

If one company mirrors the travails of American business over the past decade, it’s General Electric. The manufacturing giant founded by Thomas Edison in 1892–and the last of the original firms in the Dow Jones industrial average still listed on that index–grew into a multinational powerhouse that made everything from lightbulbs to locomotives as the U.S. became the world’s lone superpower. Its nickname said everything: Generous Electric. But by the time the 2008 economic crisis hit, GE had gone from being an industrial innovator to being the country’s sixth largest bank, relying on financial wizardry rather than engineering to satisfy investors.

Perhaps the most enduring quality of the broader economic recovery since then has been the gap between reality and perception. While growth and jobs are up, only about 1 in 4 Americans believes the economy is getting stronger, according to a recent survey by the investment firm BlackRock. The reason is clear: personal incomes aren’t rising, except at the very top. Historically, the key to achieving broad income growth has been creating more middle-income jobs. And those have traditionally come from the manufacturing sector.

Which is partly why, in order to save his company, CEO Jeffrey Immelt borrowed $3 billion from Warren Buffett and vowed to retool GE–away from complex financial schemes and back toward making things. GE, in other words, is trying to do what the U.S. as a whole needed to do: rebalance its economy and get back to basics.

So, six years on from disaster, how is it going?

Immelt has made progress. With the recent spin-off of GE’s consumer-finance division, which peddles financial products ranging from private-label credit cards to auto loans, the share of profits that comes from finance has gone from more than half to about 40%. The target is to get it back down to around 25%. As CFO Jeff Bornstein recently put it to me, “We had to decide whether we wanted to be a tech company that solves the world’s big problems or a finance company that makes a few things.”

GE’s executives are betting on a few megatrends, including the belief that emerging-market economies are entering a period very much like the post–World War II period in the U.S. Those countries will need new houses, bridges, roads, airports and all types of consumer goods in unprecedented quantities. The McKinsey Global Institute estimates that by 2025, emerging-economy nations will spend more than $20 trillion a year in this way. That means that future economic growth may well be centered on making things, rather than trading on their value.

To help capture its share of that action, GE is trying to copy some of Silicon Valley’s methods. The company has set up a “growth board” that operates like an internal venture-capital firm, vetting new ideas presented by employees and then dishing out a bit of time and capital to explore them. The result is that production cycles for projects like new oil-drilling equipment or LED lighting systems are shortening dramatically. An idea that once took two years to test might go from paper to production in 45 days.

The firm is also sourcing new ideas from the crowd. One recent design for a bracket on a jet engine came from a 22-year-old in Indonesia who had tapped into a website where the company posts problems and offers payouts to whoever can solve them.

Still, the big question is just how many good new jobs America’s industrial firms, small and large, will actually create in the coming years. So far, the trends are positive. In October, the Boston Consulting Group’s annual survey of senior manufacturing executives found that the number of respondents bringing production back from China to the U.S. had risen 20% in the past year. GE’s new hub in San Ramon, Calif., which was launched more than two years ago to explore the burgeoning “Internet of things” (i.e., machine-to-machine communication via the Internet), has gone from zero employees to more than 1,000. The company is also using more local small and midsize suppliers, thanks to new technologies like 3-D printing that let startups achieve more speed and scale.

Such trends at GE and elsewhere have yet to replace the 1.6 million manufacturing jobs lost in the recession. The good news about our postcrisis economy is that it is smarter and nimbler and growing in the right sectors. The bad news is that it still doesn’t have enough good jobs for those who need them. The way forward may be clear, but getting there is another story.

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For the last few years, markets were from Mars, and the real economy was from Venus. The two literally occupied different worlds, as stock prices kept rising, even as wages were stagnant and growth was slow. As of yesterday, that divide has been bridged. Stock prices finally plunged into a real correction of the kind we haven’t seen since the apex of the European debt crisis three years ago.

The question is, why now? The answer comes in two parts. First, with Europe in danger of tipping into recession, and China’s growth much lower than the official statistics would indicate (that’s one of the big reasons oil prices are down since China is now the world’s major consumer of energy), investors have realized that a wimpy recovery in the U.S. isn’t enough to buoy global growth. Sure, growth numbers were a bit better this year than last, but we’re still in a 3 percent economy that doesn’t look or feel much different than the 2 percent economy (see my Curious Capitalist column on that topic). If you think of the global economy as three legs on a stool, the legs being the U.S., Europe, and the emerging markets led by China, what’s becoming very clear to markets is that a 3 percent economy in the U.S. isn’t enough to sustain global momentum. Indeed, the U.S. may grow faster than the world as a whole this year, which is an odd thing for a developed market. It speaks to how weak the global economy as a whole still is.

Second, markets have realized that this recovery has been a genetically engineered recovery. It’s been engineered by the monetary scientists at the Fed, who’ve pumped $4 trillion into the economy since 2009 in an attempt to strengthen an economy that is fundamentally not as strong as it looks. Despite the Fed’s best efforts (and I agree that they needed to do something, especially in the beginning), the real economy simply hasn’t caught up to the markets. Unemployment has ticked down, but wages still haven’t ticked up. It’s no accident that weak retail sales in the U.S. were one of the economic indicators that triggered the sell-off. As I’ve said many times before, you can’t have a sustainable recovery, one markets can really believe in, until you have the majority of the population with more money in their pockets.

The reality is that this hasn’t happened in the last few years, and for many people, decades (the average male worker today makes less in real terms than he did in the early 1970s).

So does this mean we are in for a long, slow slide? Not exactly. I’d bet more on increased volatility (if you are a subscriber, you can read this piece I wrote on the coming Age of Volatility, back in 2011). Markets will go up and down, but as long as the U.S. is the prettiest house on the ugly block that is the global economy, money may stay parked in the largest American multinationals longer than you’d think. Whether or not our economy deserves the vote of confidence is another question.

Traditional lenders aren't doing their job. Enter a raft of startups to do it for them

You know credit is tight when the former chair of the Federal Reserve can’t get a mortgage. Ben Bernanke, who isn’t exactly hard up (he reportedly makes at least $200,000 a speech), recently lamented that he wasn’t able to refinance his home because of tight credit conditions. This is an inglorious reminder that the housing recovery is being driven not by first-time home buyers or people who want to trade up but by wealthy people who don’t need a loan. Since most middle-class Americans still hold most of their wealth as equity in their homes, we won’t achieve a sustainable recovery until we fix the housing market.

Banks would say the difficult credit conditions reflect the higher costs of complying with new regulations like Dodd-Frank. There’s some truth to that but not enough to justify turning down nearly any borrower who can’t put down 30% cash on a house. A more accurate explanation is that home-mortgage lending isn’t nearly as profitable as securities trading, which is where big banks still make much of their money these days. And so, hidden in the sluggish housing recovery is another revolution: American banks continue to morph into investment houses in ways that could ultimately put our financial system at risk.

Rather than Bemoan this, I am encouraged by some of the innovative companies trying take advantage of these shifts. A whole new category of nontraditional lenders is springing up to take traditional banking’s place. Nonbank financial firms, a category that includes everything from companies like Detroit-based Quicken Loans to peer-to-peer lenders like the Lending Club, are growing exponentially. (Peer-to-peer lending is the relatively new practice of lending money to unrelated individuals without going through a traditional intermediary like a bank.) This category of nonbank banks is taking up a lot of the slack left by traditional banks in the aftermath of the financial crisis. During the first half of this year, almost a quarter of mortgages made by the top 30 lenders came from nonbank firms, the highest level since the financial crisis began.

Many of these lenders use unconventional metrics to judge how creditworthy borrowers really are. They’re focusing not just on borrowers’ salary and tax returns, which are the basis of most traditional mortgage-lending calculations, but also on their field of work, what kind of degree program they are in or what their potential income trajectory might be.

Such metrics enable these lenders to take on risks that traditional banks now shun. “There’s a misperception out there that millennials don’t want to buy a home,” explains Mike Cagney, CEO of Social Finance, a company that has already done over $1 billion in crowdsourced student-loan refinancing and is now pushing into the online mortgage market. “But the reality is that they don’t have the credit to do it.” Cagney says many of his initial mortgage borrowers mirror the profile of the customers to whom he gives reduced-rate student loans–upwardly mobile young professionals, many with degrees from top schools, who have bright futures in high-income professions but little cash in the bank. Particularly on the coasts, where real estate prices are high, it is nearly impossible for a young person to buy a home with a traditional credit profile.

Of course, it’s not only upwardly mobile future members of the 1% who deserve a break on credit. Research shows that many low-income borrowers with steady jobs are much better credit risks than they look like on paper. One University of North Carolina study found that even poor buyers could be better-than-average credit risks if judged on metrics other than how much cash they have on hand. That’s not to say we should have runaway borrowing as we did in the run-up to 2008, but credit standards are still very tight relative to historical averages.

Nontraditional lending has already shown there is an alternative to the not-very-public-minded banking system we have in place now. That raises the question, Why should big banks whose primary business model is no longer consumer lending be government-insured in the first place? (Many would argue that the bailout guarantee implicit in such insurance was the reason the too-big-to-fail institutions were able to leverage up and cause the subprime crisis in the first place.) Perhaps the safest thing would be for banking as a whole to go back to a model in which institutions simply keep a lot more cash on hand, or have unlimited liability as a hedge against risk taking? Who knows? That might make mortgage lending look good again.