Is the financial system stabilizing?

Over a year ago Fed Chief Ben Bernanke made a very clear statement for what needed to be done.

“If actions taken by the administration, the Congress, and the Federal Reserve are successful in restoring some measure of financial stability -- and only if that is the case, in my view - - there is a reasonable prospect that the current recession will end in 2009 and that 2010 will be a year of recovery,” Bernanke said in remarks to the Senate Banking Committee in Washington.

It seemed to make sense. The collapse of the financial system was what caused the Global Recession, so stabilizing the financial system appeared to be a necessary condition to get out of it.
Eight months later the IMF declared that stability was returning to the financial system. There certainly are signs that the financial system, because of massive government intervention, is repairing itself. Borrowing costs have dropped. Securities markets have reopened. Large banks are better capitalized.

But is that the whole story? I've taken a look at the raw numbers and they show something very different.

Prepare to be buried in charts.

You would think that any economic recovery would start with business loans, but that is not happening.

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If the businesses aren't borrowing then the consumers must be, but that isn't happening either.

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Without new borrowing the economy can't recover. Businesses won't build new factories and hire new workers.
The question is why is no one borrowing money? The answer for that is in the financial system itself.

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The banks are taking massive losses on their current loan portfolio. These loss levels are much worse than anything the financial sector experienced in the last two recessions, and more importantly, the trend is heading towards much worse levels at an increasing rate.

This is stabilization in the financial sector? It looks a lot more like a continuation of a financial sector meltdown.

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The Federal Reserve has injected trillions of dollars into the financial system, and the banks have vacuumed up that cash in an effort to keep itself solvent. For every dollar the Fed creates, only 82 cents are making it to the general economy.
To put this into perspective, the normal ratio during the 1980's and 1990's was $2 or $3 would make it to the general economy.

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The lack of a true money multiplier means that there is simply less money in the economy. It really is as simple as that.
So how can a debt-laden economy grow with less available money?

Those that look at the "shadow banking" system of asset-backed securities, commercial paper and repos say that things aren't improving.

Issuance of asset-backed securities and reverse repurchase loans, as well as total financial market capitalization "have failed to improve much if at all," the economists said.
"Whereas existing measures of financial conditions show the current level of financial conditions to be back at or slightly better than 'normal' levels, our index has deteriorated substantially over the past two quarters," they said.
"Indeed, the index has retraced nearly half of the sharp rebound that had occurred earlier in 2009," the panel said.
"This setback suggests that financial conditions are somewhat less supportive of growth in real activity than suggested by other financial condition indexes," the economists said.

Since the financial system led us into this mess, Ben Bernanke is probably right that it needs to be stabilized before we can get out of it.
It doesn't appear it will be stabilized any time soon.



It's stabalizing for the uber-rich

and probably the MNCs. At least from the stock market. What I want to know, because we have record profits from the Banksters, is precisely the details on where they are making their money. We haven't talked about mark-to-market and FASB accounting for a while, or what the Fed is now holding in terms of MBS and supposedly that's going to stop.

More Tinkering to Achieve Desired Results

Imagine what the banks books would look like if Mark to Market was still in effect?

They just now stopped buying MBS on the market. Lets see what effects that has on mortgage rates over the next year.

The artificial stimulus is fading away and they cannot go to the cookie jar for more this time. Game over.

The Fed is All Wrong about Inflation

Government intervention in the housing market - most notably the first-time homebuyer tax credit - "have distorted the inflation numbers," he says.

This is hugely important because shelter is 40% of CPI, Bianco notes. "The other 60% has been in an uptrend since last summer," helping explain why most Americans feel like they're experience in the real-world is much different than the government's inflation stats.

If anything, this argues for less inflation

Most are assuming that home prices will drop after the tax credit expires, the later half of this year. We just had a blow out in terms of new home sales, all attributed to the expiring tax credit. This affect should be into July.

Rents have dropped as well, due to doubling up, yet some regions they are increasing.

PPI this week was a blow out and I expect that to affect CPI.

So, button line it looks good that barring another oil speculation/futures bubble, inflation will be tame, at least for awhile, but it is showing up.

Rents Way Up Here

Everything is relative.

Rhode Island Rents Skyrocket

This is happening despite record foreclosures here. They are making a fortune charging banks to board up houses.

Unemployment officially at 12.6% but much higher in all reality.

If they kept mark to market the banks would have willingly sold house for whatever they could to get them off the books and much of the pain would be over now instead we acted in the best interests of the banks and not the taxpayer. They have been trying to hold onto houses in a wait for housing to go up so they don't have to show a loss.

Issues like this don't get much ink.

Again people are losing the ability to pay for things but things aren't getting any cheaper. In this case because we certainly can't have the poor banks losing money.

Credit Crisis

The credit crisis is a consequence of the massive over leveraging of debt. Current US policy is making our debt problem worse, resulting in a financial system that is now more fragile and at a greater risk of deflationary collapse than when the recession started in December, 2007. Recent accounting changes allow banks to no longer mark their toxic assets to market valuations which results in bank financial statement numbers that are now pure fantasy. Get a good understanding of the $684 trillion dollar OTC derivatives market—including credit default swaps (CDS)—and why Harry Markopolos, whistle blower on Bernie Madoff, believes, “the evildoers that come to light when the unregulated OTC derivatives market goes bankrupt will make Madoff look small time.”

Blame game

Oh no, no, no. Don't you all know that "it" is really the government's fault? Who better to tell us this than Steve Wynn who knows. . . "The governmental policies in the United States of America are a damper, a wet blanket," Wynn said. "They retard investment; they retard job formation; they retard the creation of a better life for the citizens in spite of the rhetoric of the president."


Bad debt got us into this mess so why would we want to see a revival in borrowing? Our economy won't recover to pre-meltdown levels because those levels were created by bad debt predicated on loose money and unregulated financial instruments.

We are trying to eliminate all of those. Right? So how could the economy return to pre-meltdown levels without them? Unemployment is going to be high for quite some time in this scenario because bad debt, like bad credit card debt, won't fuel a booming recovery. Do you want a recovery fueled by bad consumer debt?

Question for midtowng

I know this blog shuns Bonddad because of a “slander”. But, sometimes debates get heated and one should not throw out the proverbial “baby with the bath water.” Bonddad and NDD put up some very significant empirical data (‘numbers and charts’). Today for example, they show significant numbers and charts that I would characterize as “the V recovery is in” as indicated by increases in shipments of Crushed Stone, and Lumber; both NY Times and WSJ reporting, “Consumers are spending again”; Economic Cycle Research Institute very bullish; and other positive leading and lagging indicators

My question to midtowng: Given these and many other positive economic numbers the Bonddad blog has been posting for months now, where is the money coming from to support this economic activity if not credit?

Good question

I have a few ideas, but I'm not sure how significant they are:

a) $10 Billion a month is saved by people not paying their mortgages. Are these people stupid enough to turn around and go on buying sprees with that money? It's possible.

b) the corporate bond market unfroze last year. In fact, junk bonds are back to 2007 levels, a sure sign that things are out of hand in the bond market again.

c) Tax refunds are 10% higher than last year. That's one way of getting money into consumer hands.

I'll add to that

With this post Consumer loans spike, all time high.

I've yet to track this down due to some sort of mark-to-market FASB accounting change but I personally received "increases to my credit limit" on my cards, at once, no request from me, so frankly I suspect they did increase consumer credit on revolving. It's too huge of a spike to claim it's accounting (but disclaimer, I never could chase it down past the analysis I put up).

bonddad likes to draw fictional lines that are not real regression analysis onto graphs. nuf said. although more later on the "C" demand claim.

Revolving Credit Down for February

this is march data

and it's an all time high spike. If you follow the link it's all graphed out, including the 02/10 data.

On the entire "V" claim, I say that's crap. We have a "U" going on at best, the economy is recovering but it's sluggish and unemployment is still in the tank. Every week we see initial unemployment claims that are way too high on top of things.

Consumer loans vs Consumer Credit???

Do I understand this correctly: “Consumer loans all time high” and “Consumer Credit Down"? What is the difference between loans and credit from an econommic point of view. With a loan the consumer is given the cash to buy the goods from the merchant vs credit the merchant gets the cash directly from the lender. In terms of the economy the same amount of money is put into the system - the same amount of goods purchased...NO?

where are you getting "down"?

Last I saw you are quoting last months data. This is April data and we have a spike up as in increase.

midtowng help me out here

I’m getting "down" from midtowng’s two graphs above: “Consumer Revolving Credit Owned by Commercial Banks” & “Total consumer Credit Outstanding”. Also, he writes: “The question is why is no one borrowing money”?
Isn't that the issue that midtowng is discussing?

To be fair

Selling bonds is technically borrowing, and that is going gangbusters, while still not showing up in the credit numbers.

I honestly don't know why the difference, although I can make a guess: implicit government backing of the bond market.

I think I see the problem that Tom is referring to

This post is using February graphs. But when it comes to consumer lending, see March Data (graphs here), released after you wrote this post I believe, show a sudden spike up, and it's dramatic, in consumer lending. Business has a small uptick but consumer is dramatic.

I think this is what Tom is referring to.

the bubbles are coming back

WOW! That is a mind boggling graph. I missed it when first posted 4/25. That goes a long way to explaining all the positive economic activity described at Bonddad. But, given the employment numbers and the total personal debt, it seems that the 'bubbles' are coming back. Bubble being wealth created by debt. I think that's what economist call monetizing the debt.

One other answer to your question

How is the consumer spending more if credit isn't expanding? a declining savings rate.

Despite the gain, the personal saving rate continued to move down in March, to 2.7% of disposable income.

It looks like the American consumer is a compulsive shopper. The least sign of a recovery and they are spending with abandon again.
The problem is that the America balance sheet is still a mess and loaded with debt. Another downturn could be extremely destructive.

Personal Income, ZH slightly incorrect

See Personal Income and Outlays March 2010 for details on the savings rate (this is graph-o-rama)

But I noticed Zero Hedge claims government transfers are 70% of the total increase in PI. I don't think that's quite right because gov. transfers are not having FICA removed, transferred to the gov. so I had to add back in the FICA to W-2 income (wages and salaries) and then divide by gov. transfers.

I mean gov. transfers is huge, no doubt about it and that clearly bumped up PI. I noted that the total increase equaled in private industries income was exactly equal to unemployment benefit checks!

Hey, how about reading EP posts on these metrics and don't link to those "other guys" first? They don't graph like I do on these posts. They also do not explain their calculations and this particular one means a skew.

"positive economic activity"

I haven't looked at the latest but last I checked they are still claiming a "V" recovery and that train left the station a long time ago. It's ridiculous and frankly, I would suggest reading the Chicago Fed national activity index. It's 83 different indicators, so I think it's fairly accurate. I'd have to go look at Fed leading, coincident, lagging indicators (which I didn't write up because the CFNAI is so detailed), but bottom line,
I mean come on, the data is what it is, there is clearly no "V" and frankly I trust the Federal Reserve (underlings! the ones doing the business cycle data, the geeky ones! Not the high level Bernanke politics thing) and their analysis, which plain says it's not there.

Anywho, that mind boggling graph, ya got it, when I wrote that post basically it blew my mind, went looking for changing in accounting, or something coming onto the books that was hidden and so on. I never could find anything so I'll assume MC/VISA plain upped the credit limits on cards, almost across the board.

Ya know what else? Almost no one caught that event. i.e. if a gov. data release isn't in the MSM, it's clear Journalists are not looking at raw data else they would have written that one up.