Banking is the great octane booster of the engines of economy. It can make many people feel rich. Albert deposits $100 in the First National Bank. Bertrand borrows $100 from the First National Bank and deposits the funds in the Second National Bank. Clyde borrows $100 from the Second National Bank ... and so on ad infinitum. Everyone has $100 in their bank accounts at the same time! There is a lot more spendable funds now than if Albert had just kept his $100 under the mattress. A whole lot more. Whee!
This sort of dementia has been going on for a couple hundred years and has reached a fevered pitch in the last ten or so. How could this go on so long without it all crashing down like the house of cards that it is? That is the marvel of economic growth. As long as the economy, and consequently income, keeps growing in the aggregate, there will be plenty of funds to keep all those plates spinning.
When banking goes into reverse though, it is deadly. Sufficient losses on loans cause banks to become unprofitable. Unprofitable banks have to pull the loss out of their equity and shrink lending, because loans cannot exceed a regulated ratio of bank equity. Roughly $10 of lending has to be cut for every $1 of losses. When lending is cut, borrowers have to pay back loans (if they can) instead of rolling them over. When they can't pay the loans back, the banks have further losses, and must restrict lending even more.
It gets worse. When borrowers have to pay back loans they have to cut other spending. If their income is falling, this causes their spending to fall disproportionately. One person's spending is another's income, so income tends to fall. When income falls, debt becomes harder to pay back, and many borrowers default, causing more loan losses for banks, and more restrictions on lending.
Around and around this destruction goes, and where it stops nobody knows. The entire World's economy is wildly indebted. Households, businesses, and governments have never been so in debt as they are now. What goes up, must come down. The bottom could be shockingly low.
Showing posts with label credit bubble. Show all posts
Showing posts with label credit bubble. Show all posts
Sunday, December 13, 2009
Saturday, November 14, 2009
The Big Bank Problem No One Talks About
Consumer credit in the USA is falling, falling, falling. Whatever numbers you pick, there's no massaging the data to make it look innocent. This all is well known, as is the concern that lack of consumer borrowing will be a drag on the consumer portion of the economy.
Something else about this situation seems to be slipping through the cracks of public awareness, however. Once upon a time, maybe twenty years ago, when lenders cared a lot more about credit quality, it was well known that subprime could never work as a profitable lending model. Too many companies had come and gone promising to be profitable lending to high-risk customers. Their seeming profitability was a trick of accounting legerdemain: a growing book makes loss ratios look lower than they actually are since ageing loans are more likely to sour than fresh ones.
In the huge, recent credit bubble when almost everyone (and sometimes their pets) were receiving credit offers, loan books were growing smartly and loss ratios were low. Now that credit is contracting, people who can pay back their loans tend to be doing so. And those who can't (but are not yet to the point of defaulting) are just trying to keep them rolling over. The net result is that the overall quality of bank's loan books is deteriorating rapidly.
Banks are becoming less solvent over time, not more so, in spite of their efforts to improve their condition. Banks efforts to reign in credit by jacking up interest rates and cutting credit lines will actually backfire because better borrowers will simply pay off their loans. Borrowers who accept the barrage of insults are in such poor condition financially they can only subject themselves to usury.
In conclusion, the end state of this process will likely be the Federal Government (having had to bail out the banks and then the FDIC over and over) holding consumer loan portfolios that have little to no value. Cost to taxpayer: something like two trillion dollars, and further debauchment of the Dollar. Banks will be kept in business to keep up appearances, and may even book a nominal profit.
Something else about this situation seems to be slipping through the cracks of public awareness, however. Once upon a time, maybe twenty years ago, when lenders cared a lot more about credit quality, it was well known that subprime could never work as a profitable lending model. Too many companies had come and gone promising to be profitable lending to high-risk customers. Their seeming profitability was a trick of accounting legerdemain: a growing book makes loss ratios look lower than they actually are since ageing loans are more likely to sour than fresh ones.
In the huge, recent credit bubble when almost everyone (and sometimes their pets) were receiving credit offers, loan books were growing smartly and loss ratios were low. Now that credit is contracting, people who can pay back their loans tend to be doing so. And those who can't (but are not yet to the point of defaulting) are just trying to keep them rolling over. The net result is that the overall quality of bank's loan books is deteriorating rapidly.
Banks are becoming less solvent over time, not more so, in spite of their efforts to improve their condition. Banks efforts to reign in credit by jacking up interest rates and cutting credit lines will actually backfire because better borrowers will simply pay off their loans. Borrowers who accept the barrage of insults are in such poor condition financially they can only subject themselves to usury.
In conclusion, the end state of this process will likely be the Federal Government (having had to bail out the banks and then the FDIC over and over) holding consumer loan portfolios that have little to no value. Cost to taxpayer: something like two trillion dollars, and further debauchment of the Dollar. Banks will be kept in business to keep up appearances, and may even book a nominal profit.
Tuesday, September 8, 2009
The Worst-Off Places
Based on our proprietary stress index and the ongoing parade of bank failures, we are coming to the conclusion that the worst off states in the USA are (insert drum-roll, please) Arizona and Nevada. Both of these States are in the top ten of bank-failures-to-population, and losses-to-assets; additionally, unreleased data from our stress index shows that both States have moved into the top ten of stressed states. Further evidence includes the above-national-average unemployment rate in Nevada and house foreclosure rates in both states.
We suggest the acuteness of distress in these two states is a telling commentary on the nature of the present Depression. This Depression is not just about economics, but habitability itself - that is, the very appropriateness of a place for human habitation.
These two, desert states are the quintessence of artifice. They are full of cities that have no business being there and only exist because developers wanted to make a fast buck. Now the easy credit bubble which drove the process of unsustainable colonisation has popped, these states are entering a tailspin faster and harder than the rest of the Union. We posit that the drying-up-and-blowing-away process will be much shorter and more catastrophic than the aforementioned colonisation.
Generally speaking, people appear to have forgotten that Arizona and Nevada are predominantly deserts; indeed, they seem sublimely convinced that those states are somehow permanently sustainable. This can easily be contrasted with, say, Michigan, another severely distressed state, which has an enviable natural endowment - the Great Lakes, ample rainfall, fertile farmland, vast forests.
Simply put, however bleak the future might be, Michigan's population has one. The same can not be said for Arizona and Nevada. As the Federal highway, water, and electric systems upon which these two states are utterly dependent decline, the capacity of these two states to support human population will diminish and the dream of the Desert Paradise in the American Southwest will expire.
We suggest, as part of Depression preparedness, our readers ask themselves how habitable is it where they live? How would you get around without cars and highways? Where is the nearest source of fresh water? of electrical power? In the deserts, how would you manage without air conditioning? In colder climes, what if it cost four times as much to heat your house during winter?
What answers you might derive, dear Reader, informs whether or not any given area will be able to support people. This includes both basic foodways, as well as the economic systems necessary to facilitate their interaction in the larger economy. We feel the national (and global) economy will not have sufficient 'fat,' if you will, to support places which, in the end, contribute nothing of any value or importance.
We suggest the acuteness of distress in these two states is a telling commentary on the nature of the present Depression. This Depression is not just about economics, but habitability itself - that is, the very appropriateness of a place for human habitation.
These two, desert states are the quintessence of artifice. They are full of cities that have no business being there and only exist because developers wanted to make a fast buck. Now the easy credit bubble which drove the process of unsustainable colonisation has popped, these states are entering a tailspin faster and harder than the rest of the Union. We posit that the drying-up-and-blowing-away process will be much shorter and more catastrophic than the aforementioned colonisation.
Generally speaking, people appear to have forgotten that Arizona and Nevada are predominantly deserts; indeed, they seem sublimely convinced that those states are somehow permanently sustainable. This can easily be contrasted with, say, Michigan, another severely distressed state, which has an enviable natural endowment - the Great Lakes, ample rainfall, fertile farmland, vast forests.
Simply put, however bleak the future might be, Michigan's population has one. The same can not be said for Arizona and Nevada. As the Federal highway, water, and electric systems upon which these two states are utterly dependent decline, the capacity of these two states to support human population will diminish and the dream of the Desert Paradise in the American Southwest will expire.
We suggest, as part of Depression preparedness, our readers ask themselves how habitable is it where they live? How would you get around without cars and highways? Where is the nearest source of fresh water? of electrical power? In the deserts, how would you manage without air conditioning? In colder climes, what if it cost four times as much to heat your house during winter?
What answers you might derive, dear Reader, informs whether or not any given area will be able to support people. This includes both basic foodways, as well as the economic systems necessary to facilitate their interaction in the larger economy. We feel the national (and global) economy will not have sufficient 'fat,' if you will, to support places which, in the end, contribute nothing of any value or importance.
Friday, July 10, 2009
July Credit Card Collapse Report
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...
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...
Thursday, July 2, 2009
More Evidence USA Entered Recession in 1999
Some months back we posted evidence that the last 10 years have been a period of recession in the USA, at least for the majority of the population. Today we present more.
In this Clusterstock Chart of the Day, one can see the amount of income that comes from Government Transfer Payments has risen from about 12% of all income to 18% over the last 10 years. This is a 50% increase.
We also offer John Williams' Shadow Government Statistics showing a GDP essentially in recession from 2000 onwards.
As we said before, the US economy is in worse shape than is generally recognised. It would appear the 'recovery' from the last official recession was chimerical. The debt-fueled consumption bubble only set the stage for a stronger crash.
The Clusterstock commentary helpfully points out, "thus the process of household debt becoming government debt takes place." In the debt-bubble, households borrowed money and instead of investing it, spent it as if it were income. Now those debts must be repaid or defaulted upon. In order to prevent a contraction of credit and debt-deflation, the US Government is borrowing enough to keep all debts in the aggregates rising. Among other ways of spending this borrowed money, it is handing out a larger dole - replacing, at least in part, spending money households can no longer borrow from home equity loans and credit cards.
At some point in the future not to distant, we expect the Government's ability to create new credit effectively cut off. At that point the inevitable debt-deflation will come - though we anticipate the debt will not be paid off, but rather destroyed by hyperinflation.
In this Clusterstock Chart of the Day, one can see the amount of income that comes from Government Transfer Payments has risen from about 12% of all income to 18% over the last 10 years. This is a 50% increase.
We also offer John Williams' Shadow Government Statistics showing a GDP essentially in recession from 2000 onwards.
As we said before, the US economy is in worse shape than is generally recognised. It would appear the 'recovery' from the last official recession was chimerical. The debt-fueled consumption bubble only set the stage for a stronger crash.
The Clusterstock commentary helpfully points out, "thus the process of household debt becoming government debt takes place." In the debt-bubble, households borrowed money and instead of investing it, spent it as if it were income. Now those debts must be repaid or defaulted upon. In order to prevent a contraction of credit and debt-deflation, the US Government is borrowing enough to keep all debts in the aggregates rising. Among other ways of spending this borrowed money, it is handing out a larger dole - replacing, at least in part, spending money households can no longer borrow from home equity loans and credit cards.
At some point in the future not to distant, we expect the Government's ability to create new credit effectively cut off. At that point the inevitable debt-deflation will come - though we anticipate the debt will not be paid off, but rather destroyed by hyperinflation.
Wednesday, May 13, 2009
The Cost of Renationalising Fannie and Freddie
A post on Bruce Kasting's "My Take on Financial Events" presents some original analysis on the subject and is well worth the read. He looks at the condition of the two government-sponsored mortgage companies under the same 'stress test' criteria applied so noisily to 19 large banks. The results are rather disturbing: they will need $400 to $700 billion in loss-covering capital infusions.
Mind you, this is under the rather tepid 'stress' presented by the famous test. Obviously conditions could become much worse (and we expect them to). In any case this represents a low-end on the range of estimates. Our high-end estimate is close to $10 trillion, or substantially all of their assets. We are not being silly - actually. We expect housing prices to crash in a big, big way, and most owners with mortgages to simply 'walk away'. After neglect remediation and legal fees there will be little or nothing left for the mortgage companies.
So if the creditors of Fannie and Freddie are to be made whole (and this seems to be the plan), an awful lot of money is going to be anted up.
In our humble opinion, though, the greatest loss of all is the epic failure of these two Government programs. They distorted their original mandate to make mortgages widely available into creating mortgages for far too much money from people who couldn't afford them. The result was the housing bubble (as part of a larger, grotesque credit bubble and concomitant pseudo-economy) and subsequent real-estate led Depression. Beyond the loss of hundreds of billions (or trillions) of taxpayer dollars just for these two companies, are tens of trillions in losses throughout the economy, to say nothing of the shattered lives, suicides, homelessness, blighted communities, and who knows what horrors to come.
It is rather pathetic that Fannie and Freddie are being ordered to write more loans when they should just be liquidated. The attempt to 'keep the party going' will just make the damages and subsequent revulsion worse.
Mind you, this is under the rather tepid 'stress' presented by the famous test. Obviously conditions could become much worse (and we expect them to). In any case this represents a low-end on the range of estimates. Our high-end estimate is close to $10 trillion, or substantially all of their assets. We are not being silly - actually. We expect housing prices to crash in a big, big way, and most owners with mortgages to simply 'walk away'. After neglect remediation and legal fees there will be little or nothing left for the mortgage companies.
So if the creditors of Fannie and Freddie are to be made whole (and this seems to be the plan), an awful lot of money is going to be anted up.
In our humble opinion, though, the greatest loss of all is the epic failure of these two Government programs. They distorted their original mandate to make mortgages widely available into creating mortgages for far too much money from people who couldn't afford them. The result was the housing bubble (as part of a larger, grotesque credit bubble and concomitant pseudo-economy) and subsequent real-estate led Depression. Beyond the loss of hundreds of billions (or trillions) of taxpayer dollars just for these two companies, are tens of trillions in losses throughout the economy, to say nothing of the shattered lives, suicides, homelessness, blighted communities, and who knows what horrors to come.
It is rather pathetic that Fannie and Freddie are being ordered to write more loans when they should just be liquidated. The attempt to 'keep the party going' will just make the damages and subsequent revulsion worse.
Monday, January 19, 2009
Warren Buffett and the Fear
Oh come on! Can Warren Buffett be serious? Fear is what is causing the Depression?
Mr. Buffett was interviewed recently and according to the report:
OK, people: the world economy is not falling apart because Mr. and Ms. Average suddenly got the heebie-jeebies. There was a massive CREDIT BUBBLE that exploded and sent trillions upon trillions of dollars, euros, pounds, and yen to money heaven. Mr. Buffett knows this, by the way, as he coined the term 'weapons of mass financial destruction' to describe banks' use of derivatives.
The world could use a little honesty here. Mr. Buffett is proving very disappointing in this department. We suspect more disappointment will follow.
Mr. Buffett was interviewed recently and according to the report:
Buffett said Americans are in a cycle of fear, "which leads to people not wanting to spend and not wanting to make investments, and that leads to more fear. We'll break out of it. It takes time."Mr. Buffett is not stupid, and we certainly hope not senile. Is this then just the new Administration party line? (Just to clarify, Mr. Buffett is an adviser to the US president-elect. ) Is Mr. Obama going to serve us warmed over "We have nothing to fear but fear itself" pablum?
OK, people: the world economy is not falling apart because Mr. and Ms. Average suddenly got the heebie-jeebies. There was a massive CREDIT BUBBLE that exploded and sent trillions upon trillions of dollars, euros, pounds, and yen to money heaven. Mr. Buffett knows this, by the way, as he coined the term 'weapons of mass financial destruction' to describe banks' use of derivatives.
The world could use a little honesty here. Mr. Buffett is proving very disappointing in this department. We suspect more disappointment will follow.
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