Monday, December 14, 2009

Lend Your Way Out of Debt

I remember when I was in school (elementary and high school) and the time span between Thanksgiving and Christmas used to seem like a year. As an adult it seems the very same time span lasts about 15 minutes. I am a little behind this year due to a busy work schedule, and Christmas is right around the corner!

Lend Your Way Out of Debt
During the whole inflation/deflation debate the same chart is always discussed: Bank Reserves. Banks have stashed cash either in their vaults or at the FED in record amounts. Deflation siders say this cash has not entered into the money supply and thus does not "exist" in a monetary sense and they are 100% correct on that. Now.

Inflation siders point to that cookie jar and cast their minds to a time where the banks may well feel emboldened to put that cash to work on a grand scale. This has not happened and thus far there are few signs it will in the near term.

I am always on the lookout for the switch to happen as I think smug banks fresh off getting their butts saved are none too shy about chasing returns like in the old days. All they need is a wink and a smile. Maybe this is starting.

Today's big story was the White House hosting a meeting with top bankers (the ones that could make it that is!) in an effort to guilt them into taking risk. From Yahoo Finance:
Obama implores top bankers to increase lending
WASHINGTON (AP) -- President Barack Obama implored top bankers Monday to help keep the fragile recovery from faltering by boosting lending to small businesses and getting behind an overhaul of financial regulation. "We rise and fall together," Obama declared.
We rise and fall together? I think that was line which is going to come back later! Who fell exactly? The 10 plus percent unemployed or banker bonus amounts? Just checking. Moving on:
Obama called his message a simple one: "America's banks received extraordinary assistance from American taxpayers to rebuild their industry, and now that they're back on their feet, we expect an extraordinary commitment from them to help rebuild our economy."

He urged bankers to "explore every responsible way" to boost lending and to "take a third and fourth look" at every loan application.
The bankers said they got the message.
What could go wrong? So what about the banks, what kind of incentive do they need here:
But they (banks) also insisted they are getting conflicting messages from Washington when they do try to make more loans. While the White house presses for more lending, regulators are cracking down on banks to lend more prudently and forcing them to keep larger cushions of capital to protect against future losses. That means there's less money available to lend.
Step one: remove any check on capital reserves. Check. What else?:
"He didn't call us any names" during Monday's session lasting just over an hour, said U.S. Bancorp CEO Richard Davis.

Davis called the meeting "very productive" and acknowledged banks haven't done as good a job as they could in resuming lending. He said he and fellow bankers understood the public outcry over compensation and said they agreed to "make sure we are doing the job of banking, which is lending."

"And we should get paid for that when we do it," added Davis, who is incoming chairman of the Financial Services Roundtable.
The set of brass ones on this guy is amazing. First off banking is many things and not just lending out money hand over fist. Second, see the move here to remove pay limits on any banks going forward. Smooth operators. Wrapping it up:
Using a sports analogy, Obama told the bankers Americans might be more sympathetic to outsize pay if those who got it were in the equivalent of a financial World Series, according to a senior administration official who lacked authorization to speak publicly and spoke on the condition of anonymity.

The bankers told Obama they are shifting from cash bonuses to longer-term payouts such as stock, but Obama said that was not good enough because the public was likely to still see it as excessive, this official said.

The bankers have said the amount of lending is limited by factors beyond their control: The sluggish economy and tighter oversight by regulators. The slow economy has businesses reluctant to expand -- and makes banks more grim about their prospects. Loan applications are down.
I have no idea what was meant by "World Series" in finance! Again the tighter oversight is pointed out by the banks.

So where does this leave things? The engineered recovery has not been good enough to allow a return to old habits thus far. The banks now have on their resume an explicit guarantee on their actions and this is big. I think is just pure dumb luck that there are no areas to plow money into right now or the banks would be doing it.

On a related note I was surprised at a comment that Barry Ritholtz made today on a post about bank lending. Here is the relevant section:
Low, Low Rates
...That is the problem with an abdication of lending standards — as we saw from 2002 – to 2007. After the collapse, the over-reaction sends the pendulum swinging too far the other way. Lending standards become too tight.

If only we monkeys could learn anything from history . . .
Now understand that Barry is as sharp as they come so when I disagree it is both not normal and means I am wrong!

That said, I would be interested to know what kind of lending standards Ritholtz sees as too tight? Maybe business loans, but certainly not mortgage loans. Of course banks do not write home loans anymore, they allow the FHA/FNM/FRE the honor of doing that! The current loan standards for FHA are anything but tight.

If banks are looking for options for loans and are having problems maybe they are on to something. Headlines form today:
Mexico’s Credit Rating Downgraded One Level by S&P
Looks like Mexico is out.

Abu Dhabi Bails Out Dubai!
Dubai will be a sick joke punch line for years to come.

Greece Enters Twilight Zone As It Announces 90% Banker Bonus Tax Plans, Expectations For Sub 3% Deficit By 2013
How is that for business friendly? Looks like Greece is a no go.

China is taking care of their own lending by ramping stimulus to the moon, so they are out. The FED MBS program ends in Spring 2010 (yeah right!) and nobody is going to go to a bank for a mortgage when they can get the FHA low rate loan from fantasy land.

It is my contention that the reason all the money created over the past 2 years has not led to inflation (hyper or only kinda) is that there are no good options for loans and not many that are even just poor risks. We can all be thankful about that.

I have a poll up tonight about where the next best loan pool will be, so please vote.

Have a good night.


getyourselfconnected said...

Looks like it will be robots:

"Wild Grouses Mate with FemBot"

You have been warned.

getyourselfconnected said...

How is there going to be 6 votes on the poll already and no comments? This author runs on feedback!

watchtower said...

Robots, definitely robots.


Because who wouldn't want their own robot to cut the grass or take out the trash.
I'm not even going to go into the whole 'fembot' (they are not just for Grouses anymore) possibilties here.
Plus they have been promising us robots for eons and it's high time they delivered.
Can't afford to upgrade into that McMansion? Console yourself with your own personal robot, they'll be under 1K after the Chinese get thru working their magic.
What's not to like here?

getyourselfconnected said...

I agree 100% It is going to be robots. Skynet has already been born.

getyourselfconnected said...

Childrens letters to God; very interesting:

Anonymous said...

I couldn't less about bankster bonuses. They shouldn't of been bailed out. All this media concern is window dressing. Might as well be gossip about Tiger.

Glass-Stegall needs to be reinstated. Derivatives regulated.
Banks left to live or die on their own merits (and SHUT down when they don't meet conventional accounting standards).

More importantly, what happens when Treasury bond actions don't find buyers? That's the 64 Trillion dollar question.

The Fed might be able to hide it for a short period being the devious bastards they are, and then what?

As I see it, either:
1) the FED truly does go into hyperdrive and prints like a bat outta hell (Ben would love it)
2) rates rise and the US realizes the full impact of being a borrower.

Both are problematic. Ahhh...that's an understatement deluxe.

Stagflationary Mark said...

I tried to vote in your poll but you offered radio buttons. I needed check boxes. Sorry. ;)

As I see it, you have described the robot from my movie idea.

The Day the Credit Stood Still

1. Start with a "robot" made of "gold" that's too big to fail.
2. Teach it the ethics and arrogance of "congress" combined with the greed of an investment banker so that it can make money in the real world without having to work too hard.
3. Install financial weapons of mass destruction (derivatives) so that it can "recycle" anything and anyone that gets in its way.
4. Install bullet proof glass for eyes and install fembot "payday loan" specialists within them. Why? Why not!
5. And finally, ask it former NAR Chief Economist David Lereah's question. Are you missing the "real estate" boom? Use a cell phone to ask the question. Consider immediately leaving the planet and seeking out a new home world. This robot will be in no mood to be told it is missing anything.

Anonymous said...

Genial fill someone in on and this fill someone in on helped me alot in my college assignement. Thank you for your information.