Doom and gloom update

[Theothertyler]

Every post war recession was supply driven, this one has been credit driven in that our entire economy (due to low interest rates, easy terms, and vast securitization) was growing based on an ever exapnding supply of credit. Well it stopped expanding, and it wont be expanding like it was for a long time if ever. Loans were being made, bundled into securities, given AAA ratings, then sold for a nice sum+fees thus offloading risk and with it-the incentive for sound underwriting. Everybody was buying these securities: banks, central banks, city and state govt, pensions, hedge funds, insurance companies. They contained everything from sub prime mortgages, to credit card debt, student loans, auto loans, signature loans... It wont return, ever. The credit driven consumer based economy is dead.

Paging Dr. Little. Paging Dr. Chicken Little.

I think you made a fine argument for the decline of securitization, but to say that what's happened is the end of credit as we know it is a big jump to me.

Consumers are still getting mortgages, still getting student loans, still getting car loans, still getting personal loans, and still using credit cards. I get at least one or two credit card offers each week in the mail, encouraging me to join. As long as perceived necessities are priced at a point where the average person cannot afford to write a check, credit will be available in the market. Most people can't write a check for a house or pay cash for their tuition at 18. As long as that's the case, there will be companies that charge an appropriate amount of interest given the risk associated with lending.

 

[strike3]

2 cents,

The real problem here imo is government involvement in the economy. The economy is not real at the moment. The government is the economy right now. The free market was not allowed to work as it should have. Had we had a collapse I believe the large banks would have failed, over leveraged, poorly run businesses would have failed (GM as the poster child) and better managed less leveraged banks and businesses would have taken their place. Housing would have reached a bottom very quickly. Instead we have housing being propped up by the government, banks being propped up by the government. I could go on. The government at the moment is "ALL IN!" If this fails there will be trouble.

So the question is, what now? The stock market is being used as an inflation hedge at the moment. The dollar is getting crushed today. There is no possible way that I can see at this time that the Fed will ever be able to raise interest rates in the next 2 to 3 years. If they do the banks will not be able to make money as they are now borrowing a 0.5%, the banks are still having huge credit losses, but the investment banking and relaxed accounting rules is making up for it. Housing will plunge. No matter what you see on TV, credit is still very tight. For small business it is almost non existent, and for home buyers it is getting tighter.

None of us has a crystal ball, we will never know what would have happened had we allowed the free market to run its natural cycle. So......Hope for the best, prepare for the worst.

 

[GMZ]

Paging Dr. Little. Paging Dr. Chicken Little.

I think you made a fine argument for the decline of securitization, but to say that what's happened is the end of credit as we know it is a big jump to me.

Consumers are still getting mortgages, still getting student loans, still getting car loans, still getting personal loans, and still using credit cards. I get at least one or two credit card offers each week in the mail, encouraging me to join. As long as perceived necessities are priced at a point where the average person cannot afford to write a check, credit will be available in the market. Most people can't write a check for a house or pay cash for their tuition at 18. As long as that's the case, there will be companies that charge an appropriate amount of interest given the risk associated with lending.

Its not the end of credit as we know it, and I didnt say that. What I said was the "credit driven consumer economy" was dead. Were kind of getting away from the economy as a whole and into the credit (debt) side of things, which I find more fascinating but even more scary! Mainly because we are now talking about huge sums of money and mathematics which as we know wont lie to get re-elected!

The post war credit boom had to end sometime by the very math of it all. Debt has been rising more than GDP at an increasing spread over those years. At the rate were going (projected deficits for 10 yrs) even if GDP were to grow at 5%/yr (we can dream) our debt will still double inside of that time. At which point -even at current near 0% interest rates- it will be impossible to service.

As to the current situation regarding credit, are you aware of the fed's QE program? They just wrapped up purchasing several hundred billion in US debt, and will continue to buy 1.5 trillion in agency debt until the end of Q1 2010 as part of the program. I am really interested to see what will happen when that is stopped. I would wager that credit is being extended largely due to the QE program. Also, an interesting data point the fed tried to do a reverse repo (where they drain money from the system, unlike a repo when they inject) and it failed, the banks said they would participate in a reverse repo in the future only if Tier 1 capital ratio requirements were dropped! What does that tell you? It tell me that they dont have the money to give back due to a cratering debt/balance sheet situation.

Im at work so I cant really get too many references but if you google the stuff itll come up. The more I see the more worried I get. The best case scenario is we end up like Japan with a lost decade or two. Worst case is a very deep deflationary-then inflationary depression. I dont think people realize that as a nation, we are insolvent.

Something else to ponder, in the 20's total US debt was about 250% of GDP, now its well over 350% IIRC.

 

[strike3]

Our Government is terrified of deflation. That is the entire reason they are "All In!" as i stated. Inflation and deflation are both natural cycles in a free market economy. Facts on lending from today:

JP Morgan Chase end of third quarter 2009: $653.1 billion vs. $761.4 billion a year earlier.

B of A 2009: $878.4 billion vs. $922.3 billion a year earlier.

Last year was the peak of the credit crisis. Why are banks lending less? What happens at the end of Q1 2010 when the Fed ends its $1.5 trillion debt purchases? The majority of which are mortgage bonds being bought from Fannie and Freddie to make room on the GSE's balance sheet so they can buy mortgages on the secondary market. Why? Because if Fannie and Freddy aren't buying then the banks aren't lending. There is no secondary market player now except the Feds. This also helps keep the 10 treasury yield below 4% keeping interest rates artificially low. Personally, I don't see the program ending. How can it with 10.2% unemployment and climbing.

 

[GMZ]

Our Government is terrified of deflation. That is the entire reason they are "All In!" as i stated. Inflation and deflation are both natural cycles in a free market economy. Facts on lending from today:

JP Morgan Chase end of third quarter 2009: $653.1 billion vs. $761.4 billion a year earlier.

B of A 2009: $878.4 billion vs. $922.3 billion a year earlier.

Last year was the peak of the credit crisis. Why are banks lending less? What happens at the end of Q1 2010 when the Fed ends its $1.5 trillion debt purchases? The majority of which are mortgage bonds being bought from Fannie and Freddie to make room on the GSE's balance sheet so they can buy mortgages on the secondary market. Why? Because if Fannie and Freddy aren't buying then the banks aren't lending. There is no secondary market player now except the Feds. This also helps keep the 10 treasury yield below 4% keeping interest rates artificially low. Personally, I don't see the program ending. How can it with 10.2% unemployment and climbing.

We live in interesting times. Ive been keeping a log/journal of sorts for about a year now, just stats and prices, maybe a few headlines. Should be interesting to read it in 10 years time.

Here is a good read about the reverse repo fiasco on MT. When you combine that with the recent jacking of rates by Citi to 29.99% it makes you wonder wtf is going on.

Edit: I dont know why, real deflation is a good thing for the masses. The cause is debatable but we have seen some, albeit slight, deflation. Id like to see more.

Edit 2: fed graph via Mish's blog of bank credit, notice it hasnt gone below 0 before?

Edit 3: This post from Mish's blog shows how the decline in consumer spending is affecting the states.

Inquiring minds might be asking "Why Aren't Banks Lending?"

1) There are no credit-worthy businesses that want to borrow.

2) Consumers are tapped out and do not want to borrow.

3) Banks are scared to death of pending commercial real estate losses, credit card losses, residential real estate losses, home equity lines of credit losses, and losses in general.

4) Asset prices are simply too high (and banks know it) and the securitization market has dried up

Number three above is the most critical one. Banks need those reserves to cover future writeoffs.

Also from Mish's blog fed chart of bank assets that have an allowance for loan and lease losses that exceeds non performing loans. This graph coupled with the above commentary by Mish gives one possible reason why banks are not lending, while at the same time jacking rates to default levels.

Interesting commentary on Citi here

Ok last edit for the night, been surfing some sites I havent read in a good while. Im also making a short list of people/places/sites/blogs I frequent.

Things that "cant" happen
Spending collapses in all generational groups
Commercial Real Estate commentary
The new normal economy
Debt explosion

 

[trev0006]

very interesting, thanks for posting.

We live in interesting times. Ive been keeping a log/journal of sorts for about a year now, just stats and prices, maybe a few headlines. Should be interesting to read it in 10 years time.

Here is a good read about the reverse repo fiasco on MT. When you combine that with the recent jacking of rates by Citi to 29.99% it makes you wonder wtf is going on.

Edit: I dont know why, real deflation is a good thing for the masses. The cause is debatable but we have seen some, albeit slight, deflation. Id like to see more.

Edit 2: fed graph via Mish's blog of bank credit, notice it hasnt gone below 0 before?

Edit 3: This post from Mish's blog shows how the decline in consumer spending is affecting the states.



Also from Mish's blog fed chart of bank assets that have an allowance for loan and lease losses that exceeds non performing loans. This graph coupled with the above commentary by Mish gives one possible reason why banks are not lending, while at the same time jacking rates to default levels.

Interesting commentary on Citi here

Ok last edit for the night, been surfing some sites I havent read in a good while. Im also making a short list of people/places/sites/blogs I frequent.

Things that "cant" happentire
Spending collapses in all generational groupscars
Commercial Real Estate commentary
The new normal economy
Debt explosion