Posted by Michael A. Kamperman on September 11, 2009
Treasury Secretary Timothy Geithner was on T.V. twice yesterday. First he testified before the TARP Commission headed by Elizabeth Warren. Then last night he held a Town Hall meeting hosted by CNBC. He is a very good politician and should consider running for public office. But he is not the person we need to lead us out of the economic crisis. When asked by Dr. Warren if we could re-run the stress tests on the banks since unemployment is now higher than the worst case assumptions used in the test, he said banks losses were better than the worst case estimates used in the tests. When asked if we could run the stress tests on the 9,000 banks that weren’t tested, he said it was unnecessary since they only represented one third of total bank assets. When asked if we had Zombie banks that don’t go insolvent but are too weak to lend, he said he didn’t believe any of the largest banks are Zombies. I guess he has been too busy appearing on T.V. to notice that consumer credit dropped by a record $21.6 billion in July. I guess his view is the banks have plenty of money to lend; they just don’t have enough credit worthy borrowers to lend it too. In front of the commission he bobbed and weaved and got out of there relatively unscathed.
It was at the Town Hall meeting that we got to see some real insights into Timothy Geithner’s view point. He believes the U.S. economy and the global economies have returned to growth. He believes the banking system needs to take less risk so that another global financial crisis doesn’t emerge. He doesn’t want to end some of the support programs put in place for financial companies too soon. He believes Americans need to save more. He believes once the economic crisis is over the deficit needs to be reduced substantially with higher taxes on relatively wealthier Americans. When asked if Meredith Whitney’s call for housing prices to drop another 25% was a real possibility, he dismissed it by stating the mortgage modification program has already refinanced 350,000 mortgages over the last year. Perhaps he missed that in the month of August alone 355,000 notices of foreclosure were sent to homeowners mirroring the record pace set in July. He basically believes the federal government has done enough to solve the crisis, but will do more if necessary. He thinks we just need more time and patience to slowly crawl our economy back up the hill.
My take is Treasury Secretary Geithner is a deficit hawk at heart and doesn’t want to spend any more resources or political capital than is necessary to solve the economic crisis. But he doesn’t get it. He doesn’t understand that we are in a prolonged debt-induced deflationary depression. He doesn’t understand that we need shock and awe policies to revive the economy. He is part of the economic team advising the President that a slow recovery has started, and while the next few months will be rocky eventually the economy will heal itself. This means he is advising the President to wait and watch rather than to act. The economy has reached the point where the straw has broken the camel’s back. The weight of the debt is too much for the economy to carry. The U-6 unemployment rate is 16.8% and 1 in 8 mortgages are over 30 days past due. By this time next year the U-6 unemployment rate my pass 20% and most of those mortgages that are delinquent will wind up in foreclosure. He is a nice sharp technocrat. But he has no vision on how to lead the economy to the Promised Land. We need a person of economic vision guiding our President. Where is our modern day John Maynard Keynes?
Posted by Michael A. Kamperman on September 9, 2009
Gone is any glimmer of hope that President Obama is beginning to understand that creating jobs is the key to claiming victory over the economic crisis. Tonight President Obama opened his healthcare speech by mentioning the struggling economy. While acknowledging that it would be several more months before the economy fully regains its footing, the President claimed that the risk of entering a new great depression has been avoided. He then moved on to talk about healthcare. The message I received was that he believes his economic team has done all that is necessary and no additional significant help for the economy will be coming from Washington anytime soon. The President needs a new economic team. Just yesterday we learned that consumer credit sank by a record $21 billion in July. Last Friday we learned that the official unemployment rate rose 3 tenths in one month to 9.7%. The broadest measure of unemployment rose to 16.8%. Where will the economy be in the fourth quarter when cash for clunkers and the first time home buyers $8,000 tax credit are no longer driving sales of new homes and new cars? While the tax credit expires on November 30, new homebuyers must close on the transaction by that date to receive the credit. Since it now takes up to 60 days to close on most mortgages there will therefore be few homes sales benefiting from the tax credit in the fourth quarter.
The President and his economic team have not grasped what it means to be in a deflationary depression. It is not about falling off of a cliff and having every business in America close overnight. It is about an inability to generate enough cash from income and from asset sales to service debt. As time goes by savings accounts are drained and foreclosure is the only option left. In New York City the owners of Stuyvesant Town and Peter Cooper Village, two large apartment complexes, only have enough cash to stay solvent until February. At that time they face certain default. The rental income from the apartments has dropped 25% from when the owners purchased them for $4.4 billion two years ago. This story is being repeated by both businesses and consumers in communities all across the country. Some one is going to lose a portion of the $4.4 billion loan. As a result of the losses more people will lose their jobs. Those people then default meaning other people will lose their jobs.
The President is intent on passing a signature health care plan that requires all Americans to obtain health insurance. But how can the 16.8% of Americans who are unemployed or can only find part-time work going to be able to afford to purchase health insurance? The President pledged to cut spending in other programs if the cost assumptions he put forth tonight proved to be to optimistic. The problem is the President and the Congress have not accounted for the fact that the unemployment rate in this country has doubled in the last 18 months and is still rising. The plans they are working on were put together when the economy was much healthier. Teachers are being laid off all over America despite the stimulus bill. The worst thing the President and the Congress could do is withdraw spending from other areas of the budget. The President is assuring us the healthcare plan will be paid for, but the country cannot afford to pay for it until the economy improves substantially. I agree with accomplishing many of the President’s goals on healthcare such as no life-time caps on coverage, no dropping coverage when someone gets sick, access to insurance for those who currently have pre-existing conditions, and no more free-loaders on the healthcare system. But these plans take money. The money will not exist to pay for a big new healthcare plan unless the President begins to grasp that we are in a global deflationary depression. Mr. President the number one issue in America is jobs.
Posted by Michael A. Kamperman on September 8, 2009
The Zombie Banks are suffocating the consumer. The latest data for July shows that consumer credit fell $21.6 billion in July. This is an all-time record low. Additionally, consumer credit for June was revised down with credit dropping $15.5 billion. Consumer credit includes almost all forms of secured and unsecured consumer credit, except for loans secured by real estate. The consumer is not being cautious with credit as many in the media report over and over. The consumer is being denied credit by the Zombie banks. The standards for consumers to receive a loan from a bank are getting tighter and tighter. There is no meaningful shadow banking system left to step in and provide alternative credit options to consumers. The consumer accounts for 70% of the nations GDP. Anyone thinking the U.S. economy is going to have inflation and a V-shaped recovery without consumer spending kicking in needs to have their head examined. Without access to credit, the consumer will continue to be forced to spend less and less. The reason the unemployment rate keeps rising is the consumer cannot access affordable credit to provide the spending that creates jobs.
This week Washington will continue to debate healthcare when they should be debating fixing the broken credit markets and finding jobs for the unemployed. The July credit numbers come after the Zombie banks either passed the vaunted Stress Test, or raised the amount of capital required by the Treasury. So why are the banks not lending in this zero interest rate environment? It is because the credit markets remain broken. The smoke and mirrors Wizard of Oz Stress Test trick to not look behind the curtain is a failure for the real economy. Unless real steps are taken by Washington to fix the broken credit markets the economy will remain mired in a deflationary depression.
The solution is to create a “bad bank” and clean up bank balance sheets once and for all. Then, the federal government needs to back the securitization market so banks have a place to sell their loans and recycle the cash into another loan. Finally, if Washington wants to see the economy move forward they need to open up credit to people with subprime credit scores. The moral high ground aversion to loaning to people who have been down on their luck in the last two years is killing the economy and causing large scale unemployment. Many people who said that people with subprime credit scores shouldn’t get loans last year have found themselves unemployed this year as business has dried up. We all know someone who is unemployed. Is our puritanical moral superiority worth seeing those people we know lose all of their savings, their homes, and their self-esteem? I think not. I think it is high time Washington got serious about saying the economic crisis is the biggest crisis facing the country. Then, I think both republicans and democrats need to sit down in good faith and negotiate solutions for the good of the country and not for the good of their own personal 2010 election prospects.
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 August 28, 2009
Japan just reported unemployment in the country has risen to 5.7%. While this is low by our standards, it represents a post World War II high for the Japanese economy. Additionally, Japan also reported that their core CPI for the last 12 months was -2.2%, which is also a post World War II low for deflation. It is widely expected that the Japanese people will vote out the ruling Liberal Democratic Party and change leadership. The Democratic Party of Japan is led by Yukio Hatoyama, who will become the Prime Minister should his party win. Mr. Hatoyama is promising to not raise taxes, cut wasteful government spending, and reign in the bureaucracy. Basically, Mr. Hatoyama wants Japan to revitalize its consumers to generate internal demand. He envisions Japan’s economy being less dependent on exports to the U.S. This is great news for Japan and for the world economy if the Democratic Party wins and Mr. Hatoyama is successful in implementing his vision. Japan will have a much healthier economy if it strengthens internal demand and is less dependent on exports. The people of Japan are voting to make their economy function more like the economy functions in the U.S.
Ironically, the let them eat cake leadership in Washington is looking to go in the opposite direction. The Obama Administration has decided to adopt the economic strategies of the very soon to be thrown out Liberal Democratic Party. Rather than fix the broken credit markets so that consumers and business can have easier access to credit, President Obama’s economic team has chosen to have Zombie banks that make loans only to the most credit worthy borrowers while leaving most others left out in the cold. Furthermore, rather than looking to stimulate internal consumer demand as the key solution to our economic woes, the Obama team is preaching a strategy of higher savings for U.S. consumers and more of a reliance on an export driven economy. Never mind that the Obama economists have yet to answer the crucial question export to whom?
The Obama Administration needs to take their cue from the Democratic Party in Japan. Empower the consumer and focus on an economy primarily dependent on internal demand rather than exports. To do this the Obama administration will need to get serious about fixing the broken credit markets. Unemployment will keep rising and deflation will keep going lower until the average U.S. consumer can obtain a loan to buy a new car or a home. Right now if your credit score is under 700 it is very difficult to obtain a loan. Many people cannot obtain loans that still have jobs and have credit scores over 700. Over half of the country has a credit score under 690. How can we sell all of the houses we need to sell when we have a supply of single family homes for 70% of our population and only about 40% of our population can qualify for a mortgage right now? To demonstrate the fallacy of the Zombie bank policy now over 9% of prime mortgages are 30 days delinquent, which is way above the normal average of 2%. Prime mortgages are made to people with good credit scores above 700. But a bunch of these people have lost their jobs because we no longer build houses or cars for the average American. Japan has learned that the traditional U.S. economic model is the best one available. So why are we trying to abandon it to develop a production based export economy?
Posted by Michael A. Kamperman on August 13, 2009
Don’t ask me because I don’t know the answer. For many years now the U.S. consumer has been the source of final demand and has driven the global economy forward. Because of the collapse of available consumer credit, the U.S. consumer has reigned in their spending as evidenced by today’s disappointing retail sales report. Why some were surprised that rising unemployment and restricted access to credit led to lower retail sales is the real mystery. They explain the aberration in their mind away by guessing that since 200,000 people purchased a clunker in the last week of July that caused 300,000,000 people to close their wallets for the whole month. Who are these people that get passed off to us as experts? Today it was also reported that the Euro-zone economy contracted less than expected and that France and Germany actually had a small amount of positive economic growth in the second quarter. But this growth came from the calculations of modern alchemists known as economists. Because imports dropped faster than exports fell in both countries, the alchemists claim they are now growing. Countries with declining imports are buying less from others because they have weak economies. In no way are they positioned to drive global growth going forward. Many will claim China is prepared to drive global growth forward. China’s has a production oriented economy that is dependent on selling goods to the West. The West is buying less and less. China calculates its economic growth based on production and not based on final demand. So if China builds something nobody wants and sticks it in a warehouse they claim positive growth. If China has such a strong economy why are their imports falling too?
My concerted opinion remains that the key to restoring global economic growth relies heavily on reviving the spendthrift U.S. consumer. With excess debt levels and deflation prevalent in the U.S. and the rest of the world, the only way to restore the U.S. consumer is for the Fed to pursue a much more aggressive policy of quantitative easing. A step they failed to take at yesterday’s meeting. According to the economic data the U.S. economy was still declining in July. The predictions that the recession has ended by some alchemists and the consensus of the alchemists that the U.S. will see positive economic growth in the second half of 2009 looks to be in jeopardy right now. The problem is these alchemists continue to talk about how long past post World War II recessions lasted and base their forecasts on the false assumption that we remain in the inflationary growth economy that defined the first 62 years of the post-war period. Those days ended in August of 2007 and we have returned to a debt-induced deflationary depression.
Fortunately, the Fed with at least three blind mice as voting members did not signal an end to further shots of quantitative easing despite wide spread media reports to the contrary. What the timid Fed did was they punted the ball to the next meeting to make a final decision. Hopefully they can open their eyes and see the economic truth between now and then.
Posted by Michael A. Kamperman on August 1, 2009
The happy talk President and media have declared that the second quarter GDP report contained “good news” and the contraction in the economy was less than expected. They are both signaling an expectation that slow growth will soon resume in the second half of the year. But are they reading the right tea leaves? Yes, the preliminary GDP report showed the overall economy contracted at minus 1%, which was a much better performance that the previous couple of quarters. However, they ignored the fact that there were downward revisions going back to the fourth quarter of 2007 that added an additional decline of 2% to GDP. Hence, the 1% decline was off of a smaller than expected base. But that is all looking back in time. What is the second quarter GDP report telling us about where we are now and where we are going? The real picture not in the headlines is not pretty.
For starters, the headline number is based on a statistical quirk in the way GDP is calculated that needs to be revised. According to the second quarter GDP report, “net exports” rose and added a positive contribution to overall GDP of 1.38%. In reality actual exports fell 7% and actual imports fell by a larger 15%. Now who really believes an economy that exported less in the second quarter achieved significant export driven growth? Economists should revise the GDP net export calculation and base it on whether or not combined imports and exports were growing or shrinking. Based on a combined calculation imports and exports would have subtracted 1.5% from growth and not added to it. This would have made the reported GDP figure minus 4% rather than minus 1%. Next, federal government spending rose 11% overall. But this figure was juiced by a 13% increase in defense spending as President Obama expands the war in Afghanistan. Fighting in Afghanistan is not going to revive the domestic economy now or in the future.
The real problem in the GDP report is consumer spending, which accounts for 70% of GDP, shrank at a rate of 1.2%. Even in the 6.4% revised first quarter downturn consumer spending was positive. The consumer has finally thrown in the towel and is hunkering down. If this behavior continues we will only see further economic erosion and not positive growth. What economists are missing in their models is that credit is so tight to qualify for a mortgage or an auto-loan that consumers are being forced to forego spending. With a rising unemployment rate it is hard to see where the predictions of renewed consumer spending vigor are coming from. The other thing most economists are missing, because of a false faith in their econometric models that are based on a post World War II inflationary cyclical economy, is that inventory reductions are due to semi-permanent decreased demand. These economists expect a re-stocking of inventories to drive positive GDP growth going forward. But, if the consumer spends even less in the third quarter than in the second quarter, then why would companies add to their inventories? What we need President Obama is an economic prescription that does not include the currently preferred method of watchful waiting to get us out of the depression.
Posted by Michael A. Kamperman on July 27, 2009
An analysis by the Wall Street Journal showed that the total loan portfolios of the nation’s 15 largest banks shrank by an aggregate of 2.8% in the second quarter. Most of the lending that did occur in the quarter went to mortgage refinancing and credit renewals for existing business customers. Less than half of the loans that were made represented new commitments by the banks representing new transactions for the economy. The banks claim that demand remains weak from potential borrowers, and potential borrowers claim the banks have overly restrictive lending standards. The truth is both viewpoints are true. Many of the highest quality borrowers are looking to contract, not expand. Meanwhile, the banks have significantly raised the bar on what it takes to qualify for a new loan, whether it is a consumer loan or a business loan. According to the WSJ, loan portfolios at the nation’s 15 largest banks have decline by 10% from year ago levels after acquisitions are netted out. The fact that lending is still contracting at the same pace as it did in the last couple of quarters means there is a real possibility the economy contracted at a similar pace as well. Economists are looking for a much more benign contraction in U.S. second quarter GDP. I would not be surprised if the number is much worse than expected, just like it was in Britain.
Fed Chairman Ben Bernanke, in a much hyped Town Hall style meeting to be broadcast this week on the PBS News Hour program, claimed that back in 1929 and 1930 the world was experiencing a normal recession. Then, major Central Europe lenders (Austrian Creditanstalt) faltered and further panic set in causing the Great Depression. His thesis is that since the large “banks” have been rescued the crisis has been averted. But we have no way of knowing if the rumors of trouble with certain banks indeed kicked off the Great Depression. It could be that the event was just the next inevitable phase of the crisis and the back then hoped for “green shoots” of 1931 vanished. We have built up significant hope in 2009 that the worst is behind us and blue skies are just around the corner. However, the shrinking credit extended by our largest banks is painting a very different story.
What I think Chairman Bernanke is missing is the world of lending has changed since 1931. Back then most of the credit extended in the economy came from commercial banks. If the commercial banks were lost the economy would be lost with them. However, in the 2000’s the vast majority of lending has come from the shadow banking system fueled by the asset-backed securities market. This market is dead and as CIT can attest the shadow banking model is broken. Yet our largest banks have not only failed to pick up the slack, they too are shrinking the credit they extend to the economy. Perhaps the real cause of the Great Depression was the inevitable “Great Un-Ravel” (yes I just coined that term) that was destined to occur one way or another as a global economy with too much debt ran into contracting economies and deflation. Just like early 1931, we have a global economy with massive imbalances that are still unraveling. We just don’t know what will be the next shoe to drop.
Posted by Michael A. Kamperman on July 22, 2009
I personally like President Obama, a lot. He loves and plays basketball, and so do I. He is smart, articulate, inspiring, and personable. If he fails, America fails. If America fails, we all fail. So yes, absolutely I do not want to defeat him, I want him to succeed. But I’m afraid the economy was pushed into the back seat tonight at the President’s health care conference. We all know health care financing is screwed up in America and needs reform. We do not need to treat sore throats for people without both health insurance and money in the emergency rooms of hospitals all over the country. We do not need to see lower middle class people lose their life savings if they have an unexpected health care emergency. But a robust American economy is what pays for the best health care in the world. The President is wasting political capital on an important issue, but not the most important issue. The current estimates are that 1.5 million Americans will run out of unemployment benefits before the end of the year without receiving a job offer. Tonight, the President claimed that the stimulus bill not only saved jobs, it has created jobs. Mr. President, the only measure of job creation for a President is for the unemployment rate to go down, not up. Any other measure is arguing how many angels can sit on the head of a pin.
Unfortunately, the President is signaling that the economy will have to take a back seat to his more pressing issue of health care financing reform. Mr. President, there is no more pressing issue in America than good paying jobs. I will tell you what your advisers, so called, don’t have the guts to tell you. If unemployment keeps going up rather than down, then you will be a one term wonder. So please do not tell the American people your administration has “created” jobs. Instead, please create them.
Mr. President, how can you actually create jobs? First, fix the broken credit markets. Second, understand that America is the world’s leading economy, not an economy that “is unprepared to compete in the 21st Century.” We are the world’s leading economy in high tech and biotech. We have chosen to outsource our manufacturing to China and others and we can rescind that decision at anytime. The way forward to escape the new great depression is not to become the next export driven economy. My question to you is export to whom? My advice is shake up your Whitehouse team and get some economic advisers that will give you straight talk. You are not the next FDR. When FDR became President the country had an unemployment rate well over 20% and everyone knew we were up the creek without a paddle. But this is not the spring of 1933, it is the spring of 1931. In 1931 the vast majority of Americans did not realize they had already entered the Great Depression. Currently, the vast majority of Americans do not realize we have entered a new great depression. When they figure this out they will blame you, not President Bush. I’m not saying you shouldn’t reform health care. I am saying that if you don’t rescue the economy, then you can kiss your second term goodbye.
Posted by Michael A. Kamperman on July 21, 2009
Today, Ben Bernanke felt compelled to answer his inflation hawk critics rather than ignore them. He sought to assure everyone that the Fed has an exit strategy from its support for the economy and will pull the trigger when the time is right. Astonishingly, he did all of this while telling Congress that the economy remains weak, the risks remain to the downside, and unemployment should continue to rise. What Bernanke has done is box the Fed into a neutral policy of no more action one way or the other for the time being. He is content to wait and watch to see if the policies enacted so far are enough to stabilize and revive the economy. The Obama Administration has adopted the same watch and wait strategy. The question going forward is what are they waiting for? Since both the Fed and the Whitehouse have conceded that unemployment will reach 10%, will we see no more actions to aid the economy until unemployment reaches 11%? 12%? 13%?
Ben Bernanke, renowned scholar of the 1930’s great depression, missed a golden opportunity to confront his critics and declare that more needs to be done to revive the economy and that he is willing to adopt whatever policy is necessary to restore sustainable economic growth in America. He should have built public support for more action, not less. Instead, by tipping his hat to the need for an exit strategy he has made it much more difficult for the Fed or the Whitehouse to come forward with the next plan to revive the economy. Those that wonder if such a plan will be necessary should consider the plight of the states. The Financial Times is reporting the combined 2010 fiscal budget gap for the states that must be closed by spending cuts or tax increases amounts to $143 billion. This includes the extra money the states have received from Washington in the stimulus bill to pay for some of the state’s unemployment and Medicaid costs. The saying that as California goes so goes the country is economically ringing true right now.
The steps necessary to revive the economy will require significant public support to before they can be implemented. Mr. Bernanke is killing support for further action. He started talking about, and coined the term, “green shoots” this spring. Now this summer he blinks in the face of bond vigilante and China criticism and talks about potential exit strategies. While Chairman Bernanke has led the Fed to take unprecedented action in the post World War II era, the actions they have taken have been too little and too late. Now, he is compounding the problem by not pounding the table and cramming quantitative easing down the bond vigilante’s throats. Washington needs to tell the public the truth, that much more needs to be done or the economy will continue to slide. The Ostrich strategy Washington has adopted is no strategy at all.
