FDIC Bank Failure Report - Impossibly Late Edition

Apologies to all, but it's been a busy week. We're wrapping up our summer efforts, and save a few last projects we will soon have more time to devote to this blog.

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This week, the Federal Deposit Insurance Corporation closed seven banks: Partners Bank, of Naples, FL; American United Bank, of Lawrenceville, GA; Hillcrest Bank Florida, of Naples, FL; Flagship National Bank, of Bradenton, FL; Bank of Elmwood, of Racine, WI; Riverview Community Bank, of Otsego, MN; and First Dupage Bank, of Westmont, IL. The total assets of the closed banks were $1,163,900,000, and total deposits were approximately $1,032,100,000. The cost to the FDIC is estimated at $356,700,000.

According to our methodology, the recoverable value of the bank was $675,400,000, or only 58.03% of the declared asset value. This makes this week's closure slightly above the cumulative recoverability since December, which stands at 57.46% (essentially unchanged from last week's 57.45%).

Cumulative cost-to-FDIC was brought to $46,457,800,000. This closure brings the total declared assets of FDIC-failed banks (since December of 2007) to $480,962,480,000, and total FDIC-insured deposits to $322,801,020,000. The recoverable value of all failed banks was only $276,343,220,000 (57.46% of the declared value).

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First off, we welcome Wisconsin to the 2007 Depression; the Land of Cheese has enjoyed the scent of its first - of many - bank failures. Additionally, we pat ourselves on the back, because at long last Florida is receiving the attention we predicted it would (see the commentary at the end of our piece). We called it almost a month ago, so please pardon us while we feel terribly smart. At any rate, Florida is in for a very, very painful time, have no doubt; the whole State's banking system is a morass of ultimate financial doom. We don't know if this is the beginning of that pain, or just a blip, but we're quite confident that Florida is going to see vast numbers of banks falling dead in their tracks from toxic mortgages, et cetera.

We noticed a surprising trend with this week's closures: a large percentage (95.27%) of the assets of all closed banks were successfully sold off, either outright or under a loss-share agreement between the FDIC and the acquiring institution. We don't have much back data (we'll work on that), so this might be a fluke of the week... but we wonder if the Federal Government's calling the recession over is actually working. Call us crazy, but we're just not feeling the love on this one. If the 'great recession' were actually over, we would expect to see that in improving quality of bank's assets. They have definitely not improved.

However, is seems that acquiring institutions feel the economy will be improving in the future, so they're happy to snap up most of the assets of the failed banks, no matter how toxic. The frisky animal spirits have possessed them at last, so they put on their war paint, do a victory dance, and march off to position themselves for the 'great recovery.' Apparently these acquiring institutions have forgotten they are akin to wolves; wolves can only consume fresh meat, and it seems these predators haven't noticed their prey is rotten. We don't know when the nasty effects of bad assets will start to bother the predator banks, but when the effects start it will be exciting. If acquiring institutions start to be closed by the FDIC, expect the U.S. to take the mother of all nosedives.

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On the basis of the ratio of bank closures to population (i.e. simply the number of failures in the State, with no account of assets or deposits), the ten most afflicted States are listed here. Only those States which have two or more closures are considered.

1. Georgia
2. Nevada
3. Illinois
4. Minnesota (up from #6)
5. Utah (down from #4)
6. Kansas (down from #5)
7. Oregon
8. Missouri
9. Colorado
10. Florida (new to list)

The recoverable value represents how much of declared assets are actually worth on the open market. The following are the ten States with the lowest recoverable value; only those States which have had two or more closures are considered in this analysis.

1. Florida (32.44%)
2. California (40.11%)
3. Colorado (42.76%)
4. Michigan (43.07%)
5. Nevada (50.13%)
6. Georgia (53.74%, down from 53.76%)
7. Utah (55.39%)
8. Arizona (56.08%)
9. Washington (56.18%)
10. North Carolina (56.7%)

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Well, shucks, more back-patting for us: Florida is now officially on both lists. We fully expect the State to ratchet up to the #1 spot on closures-to-population, and stay firmly in the lead on the recoverable value scale. The collapse of Florida's finances will likely be coupled with the final catastrophic implosion of the vast majority of well-off senior citizens' own finances. Why? We suspect that most of the elderly retirees in Florida have a big portion of their wealth in over-valued real estate, and when the State's real estate bubble pops and that value goes down, down, down, those seniors are not going to have much to fall back on. Social Security will not be enough to support them in the style to which they've become accustomed, and they will be forced out of their homes and into the homes of their children.

That's, of course, making the rash assumption that their children still have homes of their own. If the Baby Boomers have taken the hit at around the same time, the United States is going to see a large indigent population of elderly and Baby Boomers, whinging about how it isn't fair. No one in power will be listening, we suspect; the ear of the Federal Government is firmly owned by banks. Indeed, at that point the Government might not have any money at all to throw around - at least, no money that can actually buy anything.

The question rattling around in our mind is this: is Florida the first domino in a really big economic catastrophe? Or will it be another California, and simply be a bigger sag in the overarching, slow-motion collapse of the U.S. economy? We really don't know, but we could certainly see it either way. We'll be pondering that thought for a later blog post.

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.

Japan: The Evidence Mounts

The latest information out of Japan shows that the nation's economy has collapsed 15.4 year-over-year. Exports were also in the gutter, having fallen 26%, while imports were down 15%. This is the largest drop in the "world's leading economies," according to CNN.

These numbers are, simply put, depression-level drops. Japan has a very powerful economy, and if it is showing such horrible performance, then other nations - such as the United States - are hurting about as badly.

At this point, with so much evidence coming to bear, it is ridiculous for OECD and other industrialised nations to continue the mantra of 'recession.' To perpetuate such patent disinformation is to assist in further destruction of capital, skills, and productive capacity. A depression requires entirely different planning than a recession.

Unfortunately, it is probably too easy to dismiss these numbers coming from Japan. Having suffered under an on-again, off-again relationship with recession, Japan's collapsing economy can be explained away as the battered nation's inherent 'sensitivity' to economic circumstances.

Instead of dismissal, Japan's collapse should be seen with great alarm. The nation's sensitivity means that it suffers from the 2007 Depression faster than most, but it points the way that other major economies will likely take. We suspect it won't be long before even official Government statistics from, say, the United States, show a similar catastrophic fall.

A New Rule for Profit in a Declining Economy

Whatever you might be hearing, reading, or wishing to believe to the contrary, the world economy is still declining. Looking ahead to 'the recovery' is premature. A practical question arises to those who wish to better themselves financially: How can one make sure one is better off tomorrow than today?

In a growing economy, it pays to take risks. For example, if you can borrow money at a low cost, you can invest the funds in an instrument that makes more and profit off the 'spread'. In a shrinking economy, this strategy typically no longer works. Lenders are not inclined to lend, and few investments yield positive returns.

In a shrinking economy it pays to destroy risk. For example, if you have debts - pay them off. You have a guaranteed return in avoided costs. Likewise, seek to reduce operating leverage in business, even if it means giving up work so that you don't have to take on additional costs (such as buying new equipment, or hiring employees).

This will be a tough lesson to learn. It runs counter to the experience of the last 60 years. Recessions may present buying opportunities, but a Depression - at least at the beginning - is a time to hunker down.

It is very important to measure your income and outgo and ensure the former is larger than the latter. If you economise and create safe, secure savings, your net worth will rise. At some point in the future it will be time to consider more aggressive investment strategies, but that time has not yet come.

Why Aren't Savings Rates Moving Even Higher?

From the last quarter of 2008 to the first quarter of 2009, the USA personal savings rate went up from just over 3% annualised to just over 4%. This movement is expected during economic decline, but we are asking the question: given how severe the decline is, why aren't people saving even more?

The USA has barely budged from a culture of consumerism to a culture of thrift. Given the depth of the crisis, we would expect the response on the part of the citizenry to be more urgent. There are several possible explanations as to why the increase in savings is muted.

One is that the citizenry is 'buying' the official story that the 'recession' will be ending this year and recovery will follow. Thus, with the difficulties apparently only of a short-term nature, people can continue their spending habits mostly as usual with some minor adjustments (e.g. shopping more at Wal-Mart).

Another explanation is that somehow the citizenry 'knows' that the 'recession' is short-term and is acting appropriately. Things really are aren't all that bad. In this scenario, our estimations are way-off, and our use of the term depression, over-reactive.

Perhaps there is just a lot of cultural lag. We have read quite a few horror-stories about people who lost their livelihoods, but just kept on spending as if nothing was going on - and, in the process, depleted their savings and ran up credit-card debts. Perhaps a large portion of the population is engaging in massive denial and unconscious, inappropriate spending.

Finally, at the depth of the Great Depression in 1932 and 1933, much to their chagrin, Americans dis-saved and personal savings rates went negative. It's possible that history repeats and although people may want to be saving more, circumstances are too harsh and spending patterns are adjusted too late.

USPS as Canary

The official story these days is that the U.S. economy is nearing 'the bottom' of the recession. This article from Bloomberg reports the latest unemployment estimates showing that fewer people were newly unemployed in April than in March is being heralded as somehow 'good news'. This particular expert quote from the article is especially giddy (complete with typo):

“We’re seeing a very clear bottoming pattern,” said John Herrmann, chief economist at Herrmann Forecasting in Summit, New Jersey. “This holds out the possibility that the fiscal stimulus, along with consumers resuming more normal spending patters [sic], will lift the economy into positive growth in the second half.”

We wonder how tens of millions of 'consumers' with vastly reduced incomes are going to find the wherewithal to be 'resuming more normal spending patterns' in just a few months time!

The United States Postal Service reported another dismal quarter. The demise of the nation's third largest (and most ubiquitous) employer seems to be flying under the radar. The real shocker in the story is a 15% drop in volume over the last year. Rationalisations aside, the USPS is the canary in the coal mine reflecting a significant drop in economic activity.

If Americans are receiving 15% less mail, they are probably doing a lot of other things 15% less too. Eating out 15% less maybe? Kentucky Fried Chicken and Pizza Hut sales are down 14%.

U.S. Industrial Output Does The Time Warp

One of the traditional ways to define a Depression from a recession (or "deep recession," as some prefer), is to see 1) a minimum 10% decline in Gross Domestic Product, as well as 2) a recession which lasts over three years. We have argued previously that the United States has been in a recession since 1999 or 2000, so the second proviso is probably well exceeded. The first is more difficult to pin down, since the GDP numbers in the United States are typically manipulated for political reasons.

One can find reasonable proxies for GDP data in the news organs of the U.S., as well as Government data. As our co-writer has previously noted, retail sales were down an adjusted 9.2% (source, see Table 2) year-over-year from this past February.

Additionally, the latest information suggests that U.S. industrial output has dropped a whopping 12.8%, year-over-year this March. This is the lowest level of output since December of 1998; an entire decade of output has already been lost in the 2007 Depression, only a year and a half in.
Add to that the Federal Reserve's report that industrial capacity utilisation fell to 69.3%, the lowest level on record since recording began in 1967, and the economy is looking pretty grim indeed.

As it is industry, not retail or High Finance, which makes an economy functional, this drop is very troubling. It represents both serious unemployment, and - perhaps worse still - the destruction of productive capacity via lack of maintenance. We say worse, because although new workers can be trained by old workers, the knowledge is useless if the machines are unusable. It is exactly this in the oil industry: the longer prices stay down, the more capacity to meet future demands will be annihilated.

Whatever the case, though, the picture can be shaded even darker, as the Census Bureau suggests that, year-over-year in February, the drop was more like 14.8% (source, Table 2).

Considering all this information, we feel it is possible to give a hypothetical time-frame for the duration of this Depression. Assuming a 15% year-over-year drop in output, and also assuming that the economy will find an initial bottom after a 50% drop, we posit that the bottom will possibly be in about three years from now (as one additional year has already past). After that, we think a 75% drop-from-peak is probably the longer-term outlook, but that time-frame is not predictable at present.

Conceptually Grasping an Inflection Point

Now that everyone knows there is a Recession on, of course the next step will be for the masses to gradually acknowledge that there is actually a Depression going on. It will probably take only a few more false dawns and startling crashes to get to that point. A greater conceptual challenge will come when people struggle to realise the economic landscape has changed permanently - that the era of ever-increasing prosperity is over for good.

The economic boom of the last fifty years is an abberation in human history - though everyone now living sees it as normal. How long will it take to acknowledge that growth isn't coming back? And that any economic climate that doesn't involve serious decline is the new prosperity?

Truth is always the first casuality, and it should be expected that governments and financial institutions (or is that redundant now?) will lie with statistics. The mass media who are always so eager to sell things will be happy to go along with the lie. The people will just have to rely on their own power of perception to see what is really happening.

We suspect that society will divide roughly into two camps: those who 'get it' and adopt dramatically more frugal lifestyles; and those who persist in an increasingly delusionary attitude of affluence. Given that the latter attitude will become an ever shorter and quicker road to ruin, it won't be too long before the first group becomes ascendant.

Growth in Household Debt: Paused or Ended?

In the United States, the last 60 years have been marked by the continuous expansion of household debt: mortgages, car loans, student loans, credit cards, and so forth. In the fourth quarter of last year, this party came to an end. In spite of Federal Government and Federal Reserve efforts to expand lending, more loans were paid off than taken on.

We believe this is not the result of the masses coming to their senses, but a constriction imposed by wounded banks and finance companies. If the current economic troubles were merely a 'recession', when banks were inclined to lend again, as they must sooner or later if they wished to stay in business, the populace would borrow willingly. We wish it were otherwise, but the consumer culture is very deeply embedded in the American psyche.

If this Depression turns out to be as truly nasty as we expect it might, substantial banking capital will be lost - and in spite of all the bailouts, it will be many, many years before banks and finance companies are in any position to expand lending. In this environment, as it was in the Great Depression, a culture of thrift and debt-aversion will arise out of survivor bias.

We recently asked an elderly friend how her parents coped with the Great Depression, and what they brought out of it. The answer was simple: they were very frugal; and they paid for everything with cash. These habits remained with them for the rest of their lives.

So, to answer the title's question: If the economy is in a recession, paused; if in a depression, ended.

Read the Handwriting on the Wall

One of the things we find amazing, at least in the area of economic depression, is how easily things can be explained away. The pieces are all there, but the dog ate the box and no one wants to put the pieces together. We can sympathise -- it looks pretty scary -- but we can't help but feel that seems like sticking one's head in the sand and hoping the volcano isn't, in fact, erupting.

For instance, in the Autumn of 2007 we were driving through a good chunk of the United States. At one point, we remarked to our partner that the number of cars in the road had fallen off a cliff. A few weeks later, the owner of a coffee shop we frequented said to us, that business was doing okay... even though the country was in a recession. We nodded sagely in agreement; we had seen evidence of the truth of his words. But guess what we didn't do, dear Reader? Even though we thought we saw the writing on the wall, we didn't start planning for recession.

Now, however, we're paying a bit more attention, especially to articles like this one from Reuters U.K., which paints a grim picture of a 55% drop in commercial loan issuance. Although good data seems to be impossible to find, we feel confident in saying that bank lending strongly supports the U.S. economy. How much, we can't say, but with a 55% drop-off in commercial loan issuance by banks... even the Wizard of Oz couldn't prevent the United States economy from contracting significantly this year.

How much, we don't know. Singapore has slid 12.5% year-over-year, but we have a suspicion it will be worse in the United States, and other economically weak nations. How are we responding to the signs now? We're preparing.

Is The Media Crying Wolf?

Since the present epoch is 'The Information Era,' and the economy is the big story of the moment, there is now abundant commentary on the "Deepening Recession." The question of whether the world may be in for a depression has now hit the mainstream.

Given the mainstream media's poor track record of appropriate attention to what is truly relevant, legitimate questions arise: "Is this recession thing just media drum-beating - a 'media event'?" Is the economy even that bad? Or are things actually much worse? Could it just be that it was a bad downturn, but now that it is getting so much press, one can figure the worst is actually over?

Our opinion is that things are actually much worse, and that the bad news will be 'spoon fed,' and not so much as a result of some sinister conspiracy as from the cycle of denial, confusion and slow recognition of conditions as they are.

The essence of the 2007 Depression, like depressions before it, is falling income - whether through pay cuts, unemployment, or lower returns on investments. Falling income sets off a vicious cycle of economic contraction as households spend and save less, tax receipts fall, and organisations invest less - further reducing what will become others' income.

An economist whom we admire, a Mr. Williams, presents a strong case that the USA has been in recession since 2000, and that government statistics to the contrary are unreliable. You may read more about this at his website. If the USA has indeed been contracting economically for the past seven years, then the apparent prosperity was most definitely a bubble. Its crashing down now is only the reality that a shrinking economy cannot support exaggerated consumption.

There is a great deal of productive capacity in the human race and its artifacts. Income is flowing from this capacity, but one must learn to live within and not beyond one's means. When this story is the top of the news, then you will know the worst is over.

Did We Say 2008? Hahahahaha...

It's now official, folks: according to the National Bureau of Economic Research, the United States is in a recession... which started in December 2007. Actually, the recession is really a depression, but that's a detail; the illusion that things are just 'slow' has been eradicated, a year into the problem. Whatever the case, we wish the Depression a happy first birthday!

It is customary to name a depression after the year in which it started, so officially the United States is in the 2007 Depression. We resist the temptation to retcon our previous posts to fit the present circumstances, but we will use 2007 Depression from now on. It is the way this depression will be remembered in the history books, and who are we to argue with history?

Now that the economic situation is 'official,' let's look at what this may mean. One thing we feel is certain: fear is going to be much stronger than before. As an example, news has broken that credit card companies are thinking of cutting $2 trillion in consumer credit. Although we aren't convinced the banks will actually do this, it's a sign of increased tension and fear.

Fear will also help drive President-elect Barack Obama's sweeping social programmes with neck-snapping speed. In the manner of President Franklin Roosevelt before him, we believe Mr. Obama will be coming out swinging... and one doesn't want to be in his way. We fear his new policies, like Roosevelt's inept and destructive New Deal, will only serve to worsen and prolong the 2007 Depression.

Denial

It is human nature to avoid stress, if possible. One healthily perceives ordinary happenings not as potentially dangerous and cause for alarm. To be locked into a vigilant viewpoint is incapacitating. When the time is right, however, it is critical to recognise signs of actual danger and respond appropriately.

Stock markets are crashing, there are mass foreclosures, bank failures, and mass layoffs. A whole nation – Iceland – goes from affluence to a basket-case in a matter of weeks. This is not a drill, ladies and gentlemen. And how are the professional firefighters – the Treasury Departments, the Central Banks – managing the crisis? They are, frankly, running around like chickens with their heads cut off. If a multi-building fire was raging in your city and its fire department was acting like Mr. Paulson, would you have much confidence in its ability to contain the fire?

The mainstream media aren't helping the situation. They couch discussion of the economy in terms such as “being at the brink of a recession,” or “there is risk of a deep recession.” It is time to stop pretending that the current situation is merely a problem of lack of confidence.

Chances are you have suffered some financial setbacks already, or know people who have. You wonder if things in general are going to get worse before they get better, and if so, how bad will things get. The answer is that things are going to get a lot, lot worse. The problem is, in a nutshell, that the world's economy has been built on an unsound basis. If you build a house on a weak foundation, it will come tumbling down. The unsoundness of the economic system is complex and reflective of unsound parts of culture. It will not be a simple matter to begin again, aright. There will be false starts and future depressions.

Here are a few components of the unsound basis: the illusion that wealth comes from money, or in today's credit-addled world, from access to money; the illusion that human beings may increase their numbers endlessly, and claim ever larger shares of the earth's resources; the illusion that the earth's resources are in any way, shape, or form unlimited; the illusion that shielding persons or organisations from negative consequences of their actions is a good. Future posts will discuss each of these points and others.

If you disagree with these points, we would like you to make your case. Please post comments and future posts will address them.