Posted by Michael A. Kamperman on November 1, 2009
The FDIC remains as busy as ever with its weekly Friday ritual of closing down banks deemed not to big to fail and therefore not allowed to sweep the losses under the rug. But the losses are real and an effective way to deal with them at the large Zombie banks has not been put forward by the Obama Administration. Since the beginning of the year consumer credit at the nation’s commercial banks has fallen by $45 billion through the end of August. The Zombie banks bailed out by the taxpayers have not only cut credit to consumers, they have jacked up the rates they charge as well. Congress passed a new law that was intended to protect consumers from abusive practices from the credit card companies. Once the law goes into effect near the end of the year it will be very difficult for the banks to arbitrarily change the terms on consumer’s credit cards. So the banks jumped out in front of a law no implemented immediately and dramatically raised credit card interest rates anywhere from 3% to 15%. This will increase the minimum monthly payments on millions and millions of credit cards at a time when the banks are borrowing money at near zero interest rates. The Obama administration which effectively controls the banks still holding TARP funds is complicity silent at this outrage. The banks have also cut the loans to businesses by approximately $170 billion since the beginning of the year. With the collapse of the shadow banking industry there are no real good sources of credit outside of the banks these days. The deflationary depression will continue unless the banks loosen credit terms and lower fees.
Yet with broken banks breaking the backs of businesses and consumers our in over his head Treasury Secretary Tim Geithner declared on Meet the Press this morning that a bright spot in the recovery is the banking system, which he said is “dramatically more stable” because of the government bailout. Yes the panic runs on the banks by depositors have ended. But the continuing shrinkage of credit to small businesses and consumers is a clear sign banking is not a bright spot in the recovery. When asked about another round of stimulus Treasury Secretary Geithner echoed the Obama Administration’s thinking that it is too soon to discuss more stimulus since most economists are predicting job growth will return as soon as the first quarter of 2010. The weekly jobless claims are still running over half a million a week despite the current stimulus program and despite the Dow Jones reaching 10,000. Yet the Treasury Secretary is willing to base policy of forecasts by the same people who didn’t see this problem coming in the first place. The econometric models will not predict the continuing downturn because they are all based on the post World War II inflationary economy that no longer exists.
The Treasury Secretary needs to understand the big banks will not lend as long as they continue to extend and pretend. He needs to put forward a credible plan for a “bad bank” to absorb the toxic assets held by these institutions so they will begin to lend again. He also needs to put forward a credible plan to place government backing on the asset-backed securities market so banks can make a loan, sell it, and then make another loan with the same amount of capital. President Obama is making the same mistakes President Hoover made at the beginning of the last depression by listening to liquidationist thinking that places an emphasis on maintaining monetary integrity and limiting federal budget deficits. President Hoover lamented that error in his memoirs. After President Obama is similarly thrown out of office in 2012 he too will lament the same errors in his memoirs. While there is time for President Obama to fire his economic team and start over, he doesn’t seem to have the recognition of the size and scope of the problems we face or the political will to fix them.
Posted by Michael A. Kamperman on September 1, 2009
The official U-6 unemployment rate is 16.2%. The official U-3 unemployment rate is 9.4%. After the last unemployment report I pointed out that the Bureau of Labor Statistics made an adjustment and removed approximately 1 million people from the labor force. Had this not occurred the official U-3 unemployment rate would be 10%, and not 9.4%. It turns out the statisticians have been systematically tossing Americans out of the official labor force for the last year. The civilian non-institutional population (not-in-prison) population has risen from 233,864,000 in July of 2008 to 235,870,000 in July of 2009. Yet the BLS statisticians claim those seeking employment has fallen from 156,300,000 to 154,504,000. Basically, the population of those over the age of 16 and not in prison has risen by 2 million people and magically those seeking employment has fallen by almost 2 million. The participation rate in the labor force is now calculated to be only 59.4%, down from 62.9% at the start of 2008. Are we to believe that the significant losses in the stock and bond markets over the last 18 months have caused 2 million extra people to retire due to increases in wealth? Anecdotally we know that many people that retired in the last few years have re-entered the workforce due to wealth destruction. Without this sleight of hand the official U-3 unemployment rate would be 11%, not 9.4%. Are the American people aware of this? Are members of Congress aware of this? Is President Obama aware of this? Shouldn’t this be the lead story on the ABC, CBS, CNN, FOX, and NBC nightly news shows?
If American people realized the official unemployment rate should be quoted as a minimum of 11%, then they would be demanding action. The kind of action we are not getting out of Washington. The unemployment crisis is particularly acute amongst people in their 20’s, many with college educations. This is why over 1 in 8 mortgages in America are 30 days or more past due. This is why the stress test designed to keep the ZOMBIE BANKS alive is a joke. This is why tax revenues at the federal, state, and local levels are collapsing.
Washington needs a wake-up call. Hello Washington, is anyone up their listening? It seems Washingtonians are more interested in esoteric theories like fiscal discipline, balancing the federal budget, moral hazard, no more bail-outs, healthcare reform, global warming, and positioning for the 2010 elections than they are about sitting down and solving the greatest economic crisis since the Great Depression. Where are our statesmen? Where are our leaders that care more about our people than they do about their own party and their own chances for re-election? We need massive quantitative easing. We need a “bad bank” to absorb the toxic assets and end the ZOMBIE status of most of our largest lenders. We need to open up credit for homes and autos to people with credit scores lower than arbitrary lines like 700. We need to give significant federal aid to our states. And we need a serious stimulus program for our people, such as lowering the age of eligibility for Social Security and Medicare. We need economic shock and awe Washington….WAKE-UP!
Posted by Michael A. Kamperman on July 2, 2009
The U.S. lost another 467,000 jobs in June. The unemployment rate rose to 9.5%. While the headlines were bad enough, the devil was in the details. According to the U.S. Department of Labor statisticians, the number of people in the labor force shrank by 155,000 even though the population grew by an estimated 203,000. People are giving up looking for work. The number of people working for federal, state, and local governments shrank by 52,000. Tax revenues for state and local governments are falling. The State of California alone is trying to close a $27 billion projected budget shortfall for the new fiscal year that started yesterday with some combination of program cuts (jobs). The average work week went down to 33 hours per employee. For the first time in a long time average hourly earnings were unchanged from the previous month. The clincher is the average weekly paycheck fell by $1.85 to $611.49. Finally, the number of people unemployed 27 weeks or more rose by 433,000 to 4.4 million. To put that stat into English, well over half of the people that lost their job last November have been unable to find a job.
With weekly wages now beginning to fall the ability of people to pay back their debts is diminishing. And these are the people that still have a job. The natural reaction to working in an environment where you are uncertain about keeping your job, and you know there are no raises, is to save more and spend less. The natural reaction to being unemployed for more than 6 months is to lower your sights and to look for a position that pays less and is in a less desirable working environment. Real wages fell during the great depression and it was one of the main reasons the economy was never able to fully recover. The U.S. is now on the cusp of declining wages. If hourly earnings actually begin to decline along with the number of hours worked, then shaking off deflation will become extremely difficult.
There is an available solution. The Federal Reserve could print enough money to buy up almost all of the outstanding U.S. Treasuries. Additionally, the federal government could establish a “bad bank” and take all of the toxic real estate related securities off the books of the banks and replace them with a long term loan of freshly printed cash. The banks would then have time to pay off their problem assets and they would have cash to lend into the real economy. The federal government could also guarantee newly issued state municipal debt and new mortgage-backed and auto-backed securities. The U.S. does not have to suffer and see its economy slide into the abyss. But we will continue to sink until our leadership in Washington quits staring like a deer in the headlights at the economic crisis and gets moving.
Posted by Michael A. Kamperman on June 9, 2009
Today Elizabeth Warren spoke truth and said we need to redo the stress test of the banks because the economy is already worse than the worst case assumptions used in the stress test. She also called for making public the criteria used in the stress test. This strong rebuke of Treasury’s stress test comes from none other than the Chairperson of the Congressional oversight panel for the $700 billion TARP fund. We all know the worst case assumption for unemployment in 2009 used in the test was 8.9%. By the end of May the unemployment rate had already reached 9.4%, and the consensus opinion is that unemployment rates in the U.S. are still rising. But why bother with another exercise that doesn’t fix anything. This time, let’s focus on helping the banks to heal so that we have lending banks and not zombie banks.
The first step in this process is to go back to the drawing board and establish a “bad bank.” Every bank in the U.S. should be required to move their troubled securities and troubled in-house real estate loans to the “bad bank.” The banks should receive a cash loan from the “bad bank” backed by the troubled assets as collateral. The federal government should not issue more debt to fund the “bad bank.” Instead, the federal government should print money to fund the “bad bank.” Each bank should be allowed to transfer their troubled assets to the “bad bank” based on the 2008 year-end carrying value of those assets. The banks will be given a very long time to repay the “bad bank.” The banks will have cash to lend to the economy and earn an economic profit to help pay back the “bad bank.” Importantly, all of the cash-flow from the troubled assets will go directly to the “bad bank” to pay back principal and interest. If the cashflow from the assets do not fully pay the loan the banks will be on the hook for the difference. The interest rate charged should be a variable rate based on the current Fed Funds rate. The banks will ultimately bear the economic gains or losses from the troubled assets they pledge as collateral to the “bad bank.” The FDIC will still have the authority to close a troubled institution, even if it has a loan at the “bad bank.” And, there should be a complete moratorium on the sale of foreclosed real estate held by the “bad bank.” Vacant real estate can be leased out by a property manager, but not sold, for as long as the economy remains in a deflationary depression. This arrangement allows banks to buy the time they need, and it will give the economy better access to affordable credit.
Other steps will need to be taken to fix the credit markets. Specifically, the U.S. government will need to guarantee jumbo-mortgage-backed securities and auto-backed securities. Without an improvement in the credit markets there will be no real recovery in the broader economy. The time for waiting for things to get better on their own is over. The time for more gimmicks is also over. If the economy doesn’t turn up soon, then the enthusiasm for green shoots in the markets will fade and everything will take another leg down ala 1931. Elizabeth Warren and her Congressional oversight committee are right to say more needs to be done. However, this time let’s do it right.
