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