The real state of the financial system

(9 am. – promoted by ek hornbeck)

  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.

10 comments

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    • gjohnsit on April 23, 2010 at 10:42 pm
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  1. It looks from this that we will be experiencing deflation before inflation.

    Of course inflation will wait patiently and the FED won’t take the foot off the gas until its too late to control it.  

  2. that we have an economy that is more divided than (I think) ever before.  I know people doing very, very well.  And others, really, really hurting.  

    I expect this to continue for many years, probably decades.  

    If you borrowed to build a business, had payments on a home, whatever before the crash. You’re screwed.

    So are your kids.

    If you were comfortable with no debt before the crash, you’re still good.  

    Basically, if you were out on a limb at the wrong time, you went from middle class to poor.

    If you were lucky–you went the other way.

    If you were already poor, you’re now even worse off.  

  3. a job, you were screwed.

    I wrote this back in SEP 2007. You can see the teriffic response I got. (snark)

    And earlier that year in Feb, I wrote:

    Thousands of homes owned by Wayne County or the city of Detriot are left empty, while there are thousands of homeless walking the streets. Hundreds of sick stay home or stand in long lines at the hospital emergency facilities, while hospital beds remain unfilled. Local schools are closing their doors, while those that stay open are overcrowded. Jobs are leaving as they outsourced overseas and abroad, while Michigan’s economy contracts and unemployment rises. The State is facing a $3.5 billion dollar deficit that cannot be covered, unless structural changes are made. Companies are eliminating pension plans, changing pension retirement formula calculations, eliminating employee savings plans, and reducing health insurance benefits while raising costs. There are tens of thousands of people underemployed. Higher paying manufacturing jobs are are being replaced by low paying service and retail jobs. Recently, there were a 1000 people lined up to apply for a handful of near minimum wage jobs at a new Walmart Super Store that was opening.

    Look folks, Michigan is bleeding and it is only predicted to get worse. Currently Michigan is ranked dead last among states in the latest index of economic momentum (quarterly changes in personal income, employment, and population). Michigan has lost 246,000, or one in four, manufacturing jobs since 2000 (Bureau of Labor Statistics). As news goes, it gets even worse, because recent history has shown that Michigan is usually the first state to become effected by economic trends. This does not bode well for the rest of the nation.

    • banger on April 24, 2010 at 4:56 pm

    They must have charts and figures to back up their contentions. I haven’t looked deeply into this but manufacturing and jobs, for example, have grown which indicates a recovery. What I would like to see you address or reference a strong critique of the figures used by the business press to back up its claims. Much of this recovery seems to be about MSM cheerleading–we all know that striking a positive mood in the press can actually increase spending and economic activity–clearly that is what is happening. But is the recovery really without basis? I’m not so sure.

  4. table 689 – 2010 statistical abstract of the u.s. – money income 2007

    about 13,000,000 OVER 100k,

    about 24,000,000 OVER 75k

    about 214,000,000 UNDER 75k

    about 187,000,000 UNDER 50k

    I’ve lived in boston or seattle since ’78

    I’ve been an o.k. paid serf to the over 75k crowd, and, while I’m 1 of the under 50k serfs I’m o.k. compared to being on f’king welfare like my family was in the 70’s when I was a teenager.

    I’m sure there’ve been some big shifts in those numbers from 2007, HOWEVER, 1 thing that has NOT shifted –

    too many of those making over 75 and making over 100k have NO real fucking clue what the rest of us are living on, or living close to, or living under.

    given they’re the ones running most everything, no wonder they endure AHIP AIG welfare??

    why the rest of us endure it … well, aside from the drooling idiocy of American Stupor Bowl Surviving Idol NASCAR, most of us are too close to edge to risk much???

    rmm.  

    • socks on April 25, 2010 at 3:05 pm

    ……….. I’m starting a call for our nations 1st Jubilee (forgiveness of all debt). I have little doubt that the ones owning debt of others will gnash their teeth.

    But what would it look like?

  5. So how can a debt-laden economy grow with less available money?

    By government spending on true investments including at least $200 billion grant to states so that they don’t have to fire key personnel such as teachers.  Infrastructure spending, direct jobs program, re-training program.  We have clearly bail out one sector of the economy and that sector did what several economists predicted – horde the cash and give huge bonuses to its own people.  

    It’s time for a true bailout – one that helps people:

    1) System-wide mortgage forgiveness – at least 5% across the board;

    2) $200 billion grant to states to be allocated on per capita basis for retaining teachers and other important personnel.  

    3) A direct jobs program plus a Jobs Guarantee.

    4) For those employed – a FULL payroll tax holiday until GDP growth increases and stabilizes (Don’t worry treasury can make payments to social security and medicare funds on behalf of employer and employee).

    The time for diddling around is over.  Our economic problems require drastic solutions.  

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