Monday, September 14, 2009

IS THE CREDIT CRUNCH OVER?

The FDIC quietly shuttered three more banks on Friday, including Chicago-based Corus Bank, which was riddled with commercial real estate exposure and brings to 92 the total number of banks that have been forced to close so far in 2009, and the year still has more than three months to go. So far this year, there have been more bank failures than in the last 15 years combined. So for economists to be increasingly calling for a V-shaped recovery, or any sort of recovery over and beyond the long arm of Uncle Sam, ignores the fact that there is a gaping hole in the credit system that is going to impede any sort of organic rebound in economic growth.
The number of banks that have failed this year climbs to 92
It is so evident, with fiscal stimulus accounting for 100% of global economic activity this year and an estimated 80% government contribution to world GDP growth in 2010, that this entire recovery is as illusory and artificial as it was in the treacherous 1930s. Even after the bottom at that time, a bottom that was aided and abetted by a 40% dollar devaluation, and after seven years of rampant New Deal stimulus, the CPI was still deflating at a 2% annual rate by the end of the decade, the unemployment rate was still north of 15%, and the level of GDP was still below its 1929 peak. The equity market had merely traded in a wide band for seven years after the initial bout of enthusiasm off the mid-1932 trough, policy rates were still at zero, the long bond yield had moved below the 2% threshold, and the best performing asset class proved to be corporate bonds, notwithstanding the acute default experience at the time.
Meanwhile, bank credit continues to contract at an alarming rate. During the September 2nd week, U.S. commercial banks cut back on their commercial & industrial (C&I) loans by $10.3 billion; their real estate credit by a huge $15.3 billion; and their lines to consumers by $6.4 billion. In sum, $32 billion of banking sector lending evaporated during the week, bringing the total contraction to over $200 billion since the end of July. Not only is that unprecedented, but it is also a record decline in percent terms — down at over a 12% annual rate on a 13-week basis. Indeed, we have massive government stimulus that is still just patching a leaky boat, and the consensus economics community is trying to “sell” this idea to investors that credit typically lags the cycle. That may well be true, but not by this much — these declines in lending activity are triple the most severe downdrafts we have seen in the modern era — there is no comparison.
Bank credit continues to contract at an alarming rate
What we do know is that without Uncle Sam’s generosity, U.S. real GDP would have contracted at a 6% annual rate in the second quarter and outside of this continuous government support, as well as what can only be described as a temporary realignment of auto production, the economy is actually still contracting. It is totally unclear to us that the recession is actually completely behind us. Indeed, the National Bureau of Economic Research (the NBER) seems to be in no hurry to make such an early declaration (as it did, a tad prematurely, in 2002).By David A. Rosenberg
Breakfast with Dave  14th sept. ‘09


"It is so evident, with fiscal stimulus accounting for 100% of global economic activity this year and an estimated 80% government contribution to world GDP growth in 2010, that this entire recovery is as illusory and artificial as it was in the treacherous 1930s........

"Meanwhile, bank credit continues to contract at an alarming rate. During the September 2nd week, U.S. commercial banks cut back on their commercial & industrial (C&I) loans by $10.3 billion; their real estate credit by a huge $15.3 billion; and their lines to consumers by $6.4 billion. In sum, $32 billion of banking sector lending evaporated during the week, bringing the total contraction to over $200 billion since the end of July. Not only is that unprecedented, but it is also a record decline in percent terms — down at over a 12% annual rate on a 13-week basis. Indeed, we have massive government stimulus that is still just patching a leaky boat, and the consensus economics community is trying to “sell” this idea to investors that credit typically lags the cycle. That may well be true, but not by this much — these declines in lending activity are triple the most severe downdrafts we have seen in the modern era — there is no comparison.
Bank credit continues to contract at an alarming rate

What we do know is that without Uncle Sam’s generosity, U.S. real GDP would have contracted at a 6% annual rate in the second quarter and outside of this continuous government support, as well as what can only be described as a temporary realignment of auto production, the economy is actually still contracting. It is totally unclear to us that the recession is actually completely behind us. Indeed, the National Bureau of Economic Research (the NBER) seems to be in no hurry to make such an early declaration (as it did, a tad prematurely, in 2002).”
Source: www.gluskinsheff.com

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