Unemployment is likely to rise to 13 percent or higher and will weigh on the economy for several years, countering government efforts to stabilize the banking industry, analyst Meredith Whitney told CNBC.
While Whitney raised her short-term outlook for banks, causing stocks to open in positive territory after pointing lower earlier, she said the long-term outlook for the economy remains murky.
Consumers will not be able to spend as they continue to lose jobs and credit conditions stay tight, she said in a live interview. The result will provide a vivid display of how critical housing and lending are to economic growth. Unemployment is currently at 9.5 percent but is expected to keep rising.
"We underestimate how much the whole economy is dependent on the mortgage industry, and that has to change," Whitney said. "This is what happens when you delay the inevitable. We're buying time here, but we're not restructuring the economy."
Prior to the interview, Whitney raised hopes for banks when she said Goldman Sachs is in for a hugely profitable quarter.
She expanded her remarks during her CNBC appearance, saying the Wall Street titan probably will earn $4.65 per share for the second quarter, $20 for the year and more than $22 for 2010.
Banking stocks will be good buys at least in the short term as the industry takes advantage of "the mother of all mortgage quarters," Whitney said.
Little-noticed new Safe Harbor Mortgage Modification rules that went into effect May 20 prohibit mortgage investors from suing loan servicers. The legislation is significant in that it offers added protection for large servicers from investor litigation as the institutions modify mortgages for distressed homeowners.
President Obama endorsed the changes as part of his administration's efforts to head off foreclosures, protect consumers and support the flailing mortgage industry.
Whitney said the new rules will be a boon for larger banks, but the momentum may not last.
"It's a trading call," she said, adding that "you don't want to be short these names."
Banks as a whole could see a 15 percent gain in the short term, "then you flatline, then I think you have another leg down."
Outside of Goldman, Whitney said Bank of America is "bar none" the cheapest of bank stocks compared to its tangible book value, and said JPMorgan Chase's earnings will provide a bellwether for institutions plagued by large consumer loan losses.
It is joblessness, though, that poses the industry's greatest risk.
"Unemployment continues to drive higher and the banks are not prepared for double-digit unemployment," she said. "That's going to be an issue for them that doesn't go away for the next year and a half."