In last month's report, we expected to see rising charge-offs on bank's credit card receivables as more of their shrinking portfolios were dodgy. Sure enough, when the big banks reported their default rates last month, the results were impressive.
Bank of America - the USA's largest bank - reported a 12.5% default rate in May, up from 10.47% in April. This is a 19% increase in one month! The default rate is also perilously close to the interest earned on all credit card balances (according to the Federal Reserve at last report, 13.54% on all credit card accounts with balances nationally). Effectively, credit cards have become a money-losing operation for the Bank of America. We expect, over the coming months, that credit card defaults will destroy all the capital which the Bank of America allocated to its credit card operation - and then some. Other credit card lenders are suffering the same fate.
Speaking of the Federal Reserve, their most recent report on consumer credit shows a continuing and, to us, unsurprising decline in revolving loans. The drop in April was revised substantially upwards (as we predicted), now equivalent to a 28% annual rate of decline. The May preliminary data shows a moderating of the decline - which we consider to be highly suspicious. We expect next month's revisions to actually show an acceleration - as default induced charge-offs increase, and paydowns by still-solvent borrowers continue. Stay tuned...
Showing posts with label capital. Show all posts
Showing posts with label capital. Show all posts
Friday, July 10, 2009
Sunday, June 28, 2009
More about the Streets
In a recent post, we made the case for looking for the distress in the objective, as opposed to believing what people are saying. Upon further investigation, it seems decay in public spaces is fairly prevalent around the USA. Here's a short list of things to look for besides potholes: grass growing in the streets; wash-outs due to leaking or bursting water or sewer lines; gravel patchwork in place of asphalt resurfacing; crumbling curbs and sidewalks; grown-over sidewalks; rails, wood posts, wood planks, concrete, or other former roadways protruding through the asphalt; neglected safety-painting and centre lines; rusting signs and guard-rails, if present; obsolete guard-rails (does not apply to Vermont).
*****
As every profligate who has blown through an inheritance knows, at first - when your spending exceeds your income - the erosion of your capital is very slight. If spending is not cut, more and more of the capital is drawn upon and spent until it is completely exhausted.
Such is the position many households, and in the USA, society as a whole finds itself. Society is collectively taking draws upon its stock of sunk capital even as it degrades (for example, roads). Even worse, many investments made during the 'good years' are beginning to be seen as malinvestments, not only not producing any income, but also being a squandering of the resources deployed.
A good deal of the 'investments' of the last 50 years or so, are turning out to be malinvestments: the Interstate Highway System and Suburbia to name two stand-out examples. Not only will these investments stop producing income, there will be little to nothing to recover from their ruins to deploy elsewhere. Rubbing salt in the wound, so-to-speak, is the galling fact that the building of that Way of Life destroyed much of what came before and could still be producing value had it not been destroyed - for example, the enormous package shipping industry on the Nation's inland waterways and in its inland coastal towns, or the dense mixed-use neighborhoods of the Nation's cities.
If there is to be a recovery from this Depression, it will rest on a rebuilding of capital - both private and public. Savings rates will need to rise to levels currently considered inconceivable by almost everyone except East Asians: in the neighbourhood of 50% of income. We doubt that this might come to pass in any sort of timely fashion to halt further tremendous decay of the USA's cities, utility systems, and household finances.
*****
As every profligate who has blown through an inheritance knows, at first - when your spending exceeds your income - the erosion of your capital is very slight. If spending is not cut, more and more of the capital is drawn upon and spent until it is completely exhausted.
Such is the position many households, and in the USA, society as a whole finds itself. Society is collectively taking draws upon its stock of sunk capital even as it degrades (for example, roads). Even worse, many investments made during the 'good years' are beginning to be seen as malinvestments, not only not producing any income, but also being a squandering of the resources deployed.
A good deal of the 'investments' of the last 50 years or so, are turning out to be malinvestments: the Interstate Highway System and Suburbia to name two stand-out examples. Not only will these investments stop producing income, there will be little to nothing to recover from their ruins to deploy elsewhere. Rubbing salt in the wound, so-to-speak, is the galling fact that the building of that Way of Life destroyed much of what came before and could still be producing value had it not been destroyed - for example, the enormous package shipping industry on the Nation's inland waterways and in its inland coastal towns, or the dense mixed-use neighborhoods of the Nation's cities.
If there is to be a recovery from this Depression, it will rest on a rebuilding of capital - both private and public. Savings rates will need to rise to levels currently considered inconceivable by almost everyone except East Asians: in the neighbourhood of 50% of income. We doubt that this might come to pass in any sort of timely fashion to halt further tremendous decay of the USA's cities, utility systems, and household finances.
Wednesday, May 27, 2009
The Impossible Task
Pity the poor American Consumer. She has to buy a new car to restore automobile production. She has to buy cheap plastic crap to jump start world trade. She has to buy a new house to revive the housing market. And all this on a shrinking income, and with significantly less credit available.
Any way you look at it, near-term recovery seems improbable. Lurking in the background are any number of serious problems which make any kind of lasting economic growth seem remote: resource constraints; massive financial and contractual liabilities; stocks of capital which are being run-down instead of maintained; government diktat which allocates scarce resources to non-productive use - to name a few.
Against this backdrop, we ask: Is collapse - economic and social - inevitable? Sadly, we have to answer, yes. Inevitable, not because of technical incapacity to adjust to new economic realities, but because of lack of will to do so.
The fact of the matter is that people want things to go 'back to the way they were'. Political leadership reflects this. If people wanted to move on to the future as it needs to be, the leadership would reflect that.
Over 35 years ago a book called Limits to Growth was widely read and discussed. It modelled the overshoot and collapse of Industrial Civilisation which would occur in the 21st Century unless remedial action were taken. The World was warned, but few listened. Instead, population continued to explode; economic growth and expanding materialism were taken for the end-all of human existence.
Now the very crisis that Limits to Growth foretold is upon the world, and yet actions which could be taken even now to ameliorate the effects of the impending decline find voice only on the margins of society. The mass of people and its leaders are, in the words of Mr. James Kunstler, attempting to sustain the unsustainable.
Exactly what is unsustainable? Simply put: A growing population with an economy that requires growing flows of money and physical goods. An affluent, comfortable lifestyle for all is sustainable only when it can be maintained on ever-decreasing flows of resources - i.e., continuously more efficient.
Speaking of new cars, Mr. Obama wants 14 to 15 million new cars sold per year to replace those "old clunkers." Time to go shopping!
Any way you look at it, near-term recovery seems improbable. Lurking in the background are any number of serious problems which make any kind of lasting economic growth seem remote: resource constraints; massive financial and contractual liabilities; stocks of capital which are being run-down instead of maintained; government diktat which allocates scarce resources to non-productive use - to name a few.
Against this backdrop, we ask: Is collapse - economic and social - inevitable? Sadly, we have to answer, yes. Inevitable, not because of technical incapacity to adjust to new economic realities, but because of lack of will to do so.
The fact of the matter is that people want things to go 'back to the way they were'. Political leadership reflects this. If people wanted to move on to the future as it needs to be, the leadership would reflect that.
Over 35 years ago a book called Limits to Growth was widely read and discussed. It modelled the overshoot and collapse of Industrial Civilisation which would occur in the 21st Century unless remedial action were taken. The World was warned, but few listened. Instead, population continued to explode; economic growth and expanding materialism were taken for the end-all of human existence.
Now the very crisis that Limits to Growth foretold is upon the world, and yet actions which could be taken even now to ameliorate the effects of the impending decline find voice only on the margins of society. The mass of people and its leaders are, in the words of Mr. James Kunstler, attempting to sustain the unsustainable.
Exactly what is unsustainable? Simply put: A growing population with an economy that requires growing flows of money and physical goods. An affluent, comfortable lifestyle for all is sustainable only when it can be maintained on ever-decreasing flows of resources - i.e., continuously more efficient.
Speaking of new cars, Mr. Obama wants 14 to 15 million new cars sold per year to replace those "old clunkers." Time to go shopping!
Friday, April 3, 2009
The Worst is Yet to Come
What caused this Depression? Can anything be done to make things better? Can anything be done to make them worse?
A lot of things caused this Depression. It might be easier to to list what didn't cause it. At the top of the list would be 'a loss of consumer confidence'. In a nutshell, the origin of the Depression can be found in the prosperity which preceded it. Flaws in the economic system eventually crashed the system. There are many theories of what causes Depressions - many of them have much merit and they are not mutually exclusive.
One theory is that disparities of income and wealth create Depressions. These disparities were glaringly obvious in both the 1920s and the 1990s. So, to answer the second question, perhaps ameliorating these disparities would be helpful - some novel approaches could include creating a maximum wage, or introducing property taxes on financial assets. And, to answer the third question, if the opposite direction is being taken by public policy, it is probable that policy is actually making things worse.
In the present bailout-of-banks mode, financial assets are being protected even as millions of ordinary workers lose their jobs. The result of this is that the very wealthy are becoming less poor than they otherwise would in a freer system, while workers become comparatively much poorer. Thus disparities of wealth and income are not being allowed to narrow and lay the groundwork for a healthier economy. Public policy is actually making the situation worse.
Another theory of Depressions is that too much capital has been allocated towards uses where it is not really productive. This applies very neatly in the present circumstances to - say - automobile manufacturers or making McMansions in exurbia. What could be done to make things better is allow capital to slip away from these uses and towards what people want. Unfortunately, public policy is attempting to prop up both failing automakers and sagging house prices. Again, this will make the Depression worse.
We could go on. At almost every step, the reaction of policy makers is not only to not do helpful things, but to do exactly the worst possible thing. It's going to be a rough ride, folks.
A lot of things caused this Depression. It might be easier to to list what didn't cause it. At the top of the list would be 'a loss of consumer confidence'. In a nutshell, the origin of the Depression can be found in the prosperity which preceded it. Flaws in the economic system eventually crashed the system. There are many theories of what causes Depressions - many of them have much merit and they are not mutually exclusive.
One theory is that disparities of income and wealth create Depressions. These disparities were glaringly obvious in both the 1920s and the 1990s. So, to answer the second question, perhaps ameliorating these disparities would be helpful - some novel approaches could include creating a maximum wage, or introducing property taxes on financial assets. And, to answer the third question, if the opposite direction is being taken by public policy, it is probable that policy is actually making things worse.
In the present bailout-of-banks mode, financial assets are being protected even as millions of ordinary workers lose their jobs. The result of this is that the very wealthy are becoming less poor than they otherwise would in a freer system, while workers become comparatively much poorer. Thus disparities of wealth and income are not being allowed to narrow and lay the groundwork for a healthier economy. Public policy is actually making the situation worse.
Another theory of Depressions is that too much capital has been allocated towards uses where it is not really productive. This applies very neatly in the present circumstances to - say - automobile manufacturers or making McMansions in exurbia. What could be done to make things better is allow capital to slip away from these uses and towards what people want. Unfortunately, public policy is attempting to prop up both failing automakers and sagging house prices. Again, this will make the Depression worse.
We could go on. At almost every step, the reaction of policy makers is not only to not do helpful things, but to do exactly the worst possible thing. It's going to be a rough ride, folks.
Monday, March 30, 2009
Bring Back Bank Branch Laws
In the present popular discourse, a great deal is said about how to clean up the financial mess, but not much about how to prevent a future financial catastrophe. Vague calls of "more regulation" fill the air, but not many concrete proposals can be found.
Our very concrete proposal is to return banking to a fragmented industry where the preponderance of financial assets are held by tens of thousands of institutions instead of a few global behemoths.
In the past, fragmentation was enforced not by heavy-handed regulation, but by a simple principle of law: a bank could have only a few branches, or even in the most restrictive jurisdictions, just one.
For example, from 1870 to 1967 in the State of Illinois, banks were not allowed to have even one branch in addition to its home office. In 1967, banks were allowed to open a separate drive-through building, so long as it was withing 1500 feet of the main office! Gradually the law was liberalised, and by 1993 Illinois banks could open an unlimited number of in-state branches.
In 1994, the US allowed interstate branch banking for the first time, and since then banks have expanded and consolidated across state lines. As a result of this 'reform', there has been an enormous concentration of banking assets in the hands of the nations largest institutions.
Interestingly most of the problem assets currently involved in 'rescue' schemes are held by these largest institutions. In other words, these super-huge banks that have grown up over the past few decades have made terrible investment decisions, blown their capital, and are now giant purse-sucks on the US taxpayer.
The whole housing bubble fiasco and consequent Depression might have been avoided if the Branch Banking Laws had not been 'liberalised'. It is true that a fragmented banking industry is more expensive in theory, but in practice the de-fragmented industry has turned out to be vastly more expensive.
Our very concrete proposal is to return banking to a fragmented industry where the preponderance of financial assets are held by tens of thousands of institutions instead of a few global behemoths.
In the past, fragmentation was enforced not by heavy-handed regulation, but by a simple principle of law: a bank could have only a few branches, or even in the most restrictive jurisdictions, just one.
For example, from 1870 to 1967 in the State of Illinois, banks were not allowed to have even one branch in addition to its home office. In 1967, banks were allowed to open a separate drive-through building, so long as it was withing 1500 feet of the main office! Gradually the law was liberalised, and by 1993 Illinois banks could open an unlimited number of in-state branches.
In 1994, the US allowed interstate branch banking for the first time, and since then banks have expanded and consolidated across state lines. As a result of this 'reform', there has been an enormous concentration of banking assets in the hands of the nations largest institutions.
Interestingly most of the problem assets currently involved in 'rescue' schemes are held by these largest institutions. In other words, these super-huge banks that have grown up over the past few decades have made terrible investment decisions, blown their capital, and are now giant purse-sucks on the US taxpayer.
The whole housing bubble fiasco and consequent Depression might have been avoided if the Branch Banking Laws had not been 'liberalised'. It is true that a fragmented banking industry is more expensive in theory, but in practice the de-fragmented industry has turned out to be vastly more expensive.
Friday, February 6, 2009
Will the Depression Make Everyone Poor?
If the World finds itself a good deal poorer in the coming years it will not be because the Depression made it thus. The Depression is only revealing the fact that everyone is poorer than they thought they were.
This is an important distinction that is lost on almost everyone. The Depression is happening because incomes are declining. Incomes are declining because the productive capacity of society is not as large as people imagined it to be.
Allow us to present a simple metaphor: Suppose you owned an apartment building. Suppose further you had two tenants: your hairdresser, and your stockbroker. Now suppose that instead of fixing the soft spot in the roof and the crack in the foundation, you took the rent and spent half of it on expensive haircuts and the other half on penny stocks. Then comes the day that the rain came in through the roof and through the foundation.
No problem, you say, as you've been creating a rainy day fund with your stockbroker by investing in penny stocks. Oops! The stock market crashed. Uh oh. Well, you'll just have to do all the work yourself, and get money for supplies by using the rent money, skipping the haircuts and further stock purchases.
Now the bad situation gets worse: because your stockbroker isn't making the commissions (largely on account of you) she once was, she is getting behind on the rent. So too your hairdresser - you were his best client - is also getting behind. This means you can't buy the supplies... so the rain will just keep pouring in.
We hope this metaphor isn't too obscure. It really does describe to an extent the pickle the world's economy is in. There are a complexity of reasons why capital and spending has gotten grossly misallocated for a long time before the consequences were revealed. It is well past the scope of this little post, but we plan to touch on some of it in the coming months.
This is an important distinction that is lost on almost everyone. The Depression is happening because incomes are declining. Incomes are declining because the productive capacity of society is not as large as people imagined it to be.
Allow us to present a simple metaphor: Suppose you owned an apartment building. Suppose further you had two tenants: your hairdresser, and your stockbroker. Now suppose that instead of fixing the soft spot in the roof and the crack in the foundation, you took the rent and spent half of it on expensive haircuts and the other half on penny stocks. Then comes the day that the rain came in through the roof and through the foundation.
No problem, you say, as you've been creating a rainy day fund with your stockbroker by investing in penny stocks. Oops! The stock market crashed. Uh oh. Well, you'll just have to do all the work yourself, and get money for supplies by using the rent money, skipping the haircuts and further stock purchases.
Now the bad situation gets worse: because your stockbroker isn't making the commissions (largely on account of you) she once was, she is getting behind on the rent. So too your hairdresser - you were his best client - is also getting behind. This means you can't buy the supplies... so the rain will just keep pouring in.
We hope this metaphor isn't too obscure. It really does describe to an extent the pickle the world's economy is in. There are a complexity of reasons why capital and spending has gotten grossly misallocated for a long time before the consequences were revealed. It is well past the scope of this little post, but we plan to touch on some of it in the coming months.
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