The Economy Is Still Going South
By Larry Johnson on August 19, 2009 at 9:19 PM in Current Affairs
If you have bought in to the false hope that the economy has hit bottom and has turned a corner then think again. I had a chat this week with a banker friend who works for Wachovia. Wachovia, in case you forgot, was taken over by Wells Fargo. My friend told me that a spate of firings are coming up in the next two weeks. Several mid-level and senior bankers at Wachovia are going to lose their jobs. Their current jobs are basically duplicates of positions at Wells Fargo and, as the saying goes, “to the victor belongs the spoils.”
This is not an isolated instance. Remember the Colonial Bank take over?
Here’s what the Financial Times reported today on that bank collapse:
A consolation of failure should be lessons learnt from the experience. So it is troubling that bank collapses in this cycle are proving more expensive than in the past. Big bank busts, as a rule, cost relatively less than small ones. Estimated losses, say, from last week’s failure of Colonial, the Alabama-based lender with $25bn in assets, were unusually low at 11 per cent of assets. Its sale also included the first “clawback”, allowing the Federal Deposit Insurance Corporation to share in a buyer’s potential gains.
Yet analysis from Ely & Company, industry consultants, shows that across all failures in the past two years, the FDIC estimated its losses at a quarter of failed banks’ assets. That is much higher than between 1980 and 1995, when failures cost an average 11 per cent.
Regulators are at fault. The fact that banks are in such a sorry state by the time they fail suggests intervention should be occurring earlier – especially where soaring brokered deposits indicated rapid growth in low-quality assets. Meanwhile, drawn-out sales – such as that of Guaranty Financial, with $16bn assets – risk hurting the underlying business. Fears that the FDIC’s fund, which protects depositors, may run out are unfounded. True, its balance fell to $13bn at the end of March, or just 0.27 per cent of insured deposits – well below the statutory minimum. But that understates the funds available to absorb losses. The FDIC also had $28.5bn set aside for future bank failures. More important, it has a Treasury credit facility, increased to $500bn during this crisis. The deposit insurance fund is not a pot of cash that can be exhausted, but a way of keeping track of the premiums paid by banks versus the costs of failures.
Then there is the commercial real estate market. That shoe still has not dropped and when it does? Bye-bye more jobs. The USA Today offered this sobering analysis in Tuesday’s paper:
The commercial real estate downturn is deepening, threatening to slow the economic recovery.
To try to contain the damage, the Federal Reserve said Monday that it will extend into 2010 a program to help investors buy commercial property loans. But some say that will have limited impact.“We seem to be nearing the end of the recession but the situation in the commercial real estate market is getting worse,” says Patrick Newport, an analyst at IHS Global Insight.
About $83 billion of office, retail, industrial and apartment properties have fallen into default, foreclosure or bankruptcy this year, says research firm Real Capital Analytics. The default rate for commercial mortgages jumped from 1.62% to 2.25% in the first quarter and should hit 4.1% by the end of the year, says Sam Chandan, president of Real Estate Econometrics. The carnage will likely cut half a percentage point off economic growth this year and in 2010, Newport says.
Fueled by easy credit, developers built too many shopping malls and office buildings from 2004 to 2007. As the economy soured, vacancy rates rose. Property values are down about 40% from their 2007 peak, Deutsch Bank says, and loans for commercial properties have come to a virtual standstill.
Hundreds of smaller regional banks, which are heavily exposed to commercial mortgages, could go bankrupt the next two years, Newport says.
If you think this means “good” news then you know nothing about economics. Sad thing is that the so-called “stimulus” package does nothing for this sector. Until this implosion ends the economy will continue a downward death spiral.
Even some of Obama’s financial gurus are starting to sweat the implications of Obama-nomics. Did you catch Warren Buffet’s piece in the NY Times:
IN nature, every action has consequences, a phenomenon called the butterfly effect. These consequences, moreover, are not necessarily proportional. For example, doubling the carbon dioxide we belch into the atmosphere may far more than double the subsequent problems for society. Realizing this, the world properly worries about greenhouse emissions.
The butterfly effect reaches into the financial world as well. Here, the United States is spewing a potentially damaging substance into our economy — greenback emissions.
To be sure, we’ve been doing this for a reason I resoundingly applaud. Last fall, our financial system stood on the brink of a collapse that threatened a depression. The crisis required our government to display wisdom, courage and decisiveness. Fortunately, the Federal Reserve and key economic officials in both the Bush and Obama administrations responded more than ably to the need.
They made mistakes, of course. How could it have been otherwise when supposedly indestructible pillars of our economic structure were tumbling all around them? A meltdown, though, was avoided, with a gusher of federal money playing an essential role in the rescue.
The United States economy is now out of the emergency room and appears to be on a slow path to recovery. But enormous dosages of monetary medicine continue to be administered and, before long, we will need to deal with their side effects. For now, most of those effects are invisible and could indeed remain latent for a long time. Still, their threat may be as ominous as that posed by the financial crisis itself.
To understand this threat, we need to look at where we stand historically. If we leave aside the war-impacted years of 1942 to 1946, the largest annual deficit the United States has incurred since 1920 was 6 percent of gross domestic product. This fiscal year, though, the deficit will rise to about 13 percent of G.D.P., more than twice the non-wartime record. In dollars, that equates to a staggering $1.8 trillion. Fiscally, we are in uncharted territory.
Because of this gigantic deficit, our country’s “net debt” (that is, the amount held publicly) is mushrooming. During this fiscal year, it will increase more than one percentage point per month, climbing to about 56 percent of G.D.P. from 41 percent. Admittedly, other countries, like Japan and Italy, have far higher ratios and no one can know the precise level of net debt to G.D.P. at which the United States will lose its reputation for financial integrity. But a few more years like this one and we will find out.
An increase in federal debt can be financed in three ways: borrowing from foreigners, borrowing from our own citizens or, through a roundabout process, printing money. Let’s look at the prospects for each individually — and in combination.
Warren can’t bring himself to admit that Obama has screwed the pooch but here’s the reality. If Obama-care goes forward and the so-called stimulus bill is not recalled the mad spending spree is going to accelerate and our nation’s plunge into uncharted debt waters will accelerate. Warren senses the danger but is still having trouble blowing the whistle on the Messiah’s gross incompetence when it comes to economic policy.
by Ronald Scott
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