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.

Why a Higher Stock Market Will not Help the Consumer

It seems like Thursday has become the big breaking news day lately. There is plenty of ground to cover tonight, and perhaps more than most nights, some real food for thought.

Cognitive Reinforcement
In my last two posts titled "Silent Liquidity" and "The Solution to the Recession" I highlighted two major themes:
-Banks have plenty of cash to put into play, they need cover to make it happen (via a rising stock market, lending standards relaxation)
-Fannie Mae is a black hole that will never cease to astound to the downside and the hilarity of keeping it running

As if to show that I am not totally making things up as I go along (well, mostly) there are two stories I would point you towards as addendum's.

First up, the sad state of Fannie Mae:
Fannie Mae to Tap $10.7 Billion in Treasury Capital
Fresh off an almost 15 Billion dollar 2nd quarter loss, FNM has to tap further government credit lines to facilitate more losses. Naturally, the penny stock is up huge on the news. Here is 60% of the mortgage market folks, and you and I own it.

The second additive piece is this one via Clusterstock:
A Return To "Innovative" Lending
Payday loans and credit default swap linked credit lines are the latest fractal iteration of predatory lending by the banks using their new found money.

Both items are surreal.

Putting it All Together
Here at Economic Disconnect we have discussed why confidence is so important. We have covered in detail why debt fueled consumption is really not in a sane person's best interest. We have tried to explain that the music has to stop at some point, and many will not find a chair. Spread out across posts over time, the message may be diluted or lose it's coherence. Luckily, we have a writer that has put it all together.

Tim Iacono, author of the site The Mess That Greenspan Made, has been a regular read of mine for over 3 years. The content quality has always been top notch. Today Tim has a post that ties all the elements we have been discussing together in a way that made me step back and say "I wanted to say that, but could never put it together!".

I will not excerpt such a work, it needs to be read in its entirety. Make sure you set aside 30 minutes for the thought provoking article:
Confidence Games and Ponzi Schemes
A must read, and there may well be a quiz!

It is Only a Conspiracy Theory if there is no Proof
A late developing story has emerged that has major implications going forward.

Us Bond auctions used to be boring affairs that only staffers at bond desks noticed. As the US has to place debt issuance never seen before, these activities have become very important to a American universe unable to function without ample, cheap money. Perhaps the added attention is not welcomed at this juncture.

Last Thursday (yes another Thursday!) I had made an observation on the 7 year bond auction:

The 7 year sale went just fine, though one would have to wonder why 5 year notes were less than chased, but 7 year notes were a hot item. What's two years between friends? This kind of disconnect is hard to figure out.

I left the thought at that, as I had covered many times that it was my position (amongst many others) that the US Axis Powers (FED/Treasury) were in cahoots to buy debt issuance should bids not surface, or even to buy them should yields become unattractive. This kind of thinking was tolerated by some, and called part of the "tin foil hat brigade" by most market observers.

Tonight we may have final evidence of our own government's explicit play with the bond auctions.

Let may state up front, this is not the end all of the question. There may well be(and I would expect an attempt) to make some kind of innocent explanation of this information. It might even be true. At this point I think the data and facts stand on their own, so I will present a quick summary.

Chris Martenson has done all the legwork, and for that his original article should be your first stop.

Through published record sleuthing, and amazing cross record matching, Mr. Martenson shows:
-Primary Dealers were the bulk of the "indirect" bids at the auction
-The Axis powers coordinated a buyback of EVERYTHING they purchased a mere week later
-This is monetization of debt, if you are interested

This story is very big and has ginormous ramifications for many aspects of the markets going forward. For more information I would point you to Zero Hedge and Market Ticker, who both have summaries up which should help further study of this event.

Why a Higher Stock Market Will not Help the Consumer
It is funny. All day I had planned to write about the following topic, and then I was hit with items that fit with my recent posts, a work of real significance, and a breaking story that needed attention! Oh well, I will go on with a shorter option of my idea. That is the real time information world, and I love it!

It should be obvious by now that the stock market is THE vehicle by which the confidence game will be manipulated. Headlines of "DOW over 9000", "S&P up 40% in 3 months" and "Nasdaq on 30% tear" are eye catching. After the very recent real estate bust, a resurgence in property prices may well be impossible (but the stock market is not? I digress..), so a Wall Street led rally in stocks is seen as an avenue for growth in confidence.

I think there are a bunch of problems with that line of thought, but I will limit it to one item only:

401K's

In the late 90's boom, which led to the tech crash in 2000, there were indeed many regular people that were knee deep in stocks. I have covered why the stock bust then did not require a full on response from the government, it was the small retail investor that took the losses, the banks and Wall Street had off loaded all those stocks on the public, so no reason to help.

And this is a key point.

You may see a stat that states "70% of Americans own stocks" and I have no issue with that number at all.

But how do they own them?

Through a brokerage account they actively manage?
Through an online account they are in and out of daily? Weekly?
Through a managed account by a Wall Street firm?

While there will be some number that can answer "yes" the answer for the majority will be "No".

The major stock holdings of most Americans are held through company 401k's and pension plans.

I would like to focus on 401k's in this discussion.

It is my contention that a renewed stock market bubble will have little to no effect on consumer spending.

The reason for this is twofold. After getting burned for something like 30-40% over the past year, many will not see a rise in 401k value as beneficial. Just closing the gap as it is.

The second reason is that plenty of any 401k appreciation is already spoken for, and thus will never enter the economic cycle.

Here is what I mean.

The real estate bubble sucked in many. Money flowed into homes in a way never seen before. Faced with price competitions (seems silly now) and a feeling of "losing out" many looked to a source of capital they normally would not touch.

The 401k.

From Wikipedia:

Many plans also allow employees to take loans from their 401(k) to be repaid with after-tax funds at pre-defined interest rates. The interest proceeds then become part of the 401(k) balance. The loan itself is not taxable income nor subject to the 10% penalty as long as it is paid back in accordance with section 72(p) of the Internal Revenue Code. This section requires, among other things, that the loan be for a term no longer than 5 years (except for the purchase of a primary residence), that a "reasonable" rate of interest be charged, and that substantially equal payments (with payments made at least every calendar quarter) be made over the life of the loan. Employers, of course, have the option to make their plan's loan provisions more restrictive. When an employee does not make payments in accordance with the plan or IRS regulations, the outstanding loan balance will be declared in "default". A defaulted loan, and possibly accrued interest on the loan balance, becomes a taxable distribution to the employee in the year of default with all the same tax penalties and implications of a withdrawal.

So what happens when someone borrows from their 401k to buy home and;
- The home is now 30% cheaper on the market
- A big tax hit is coming, or a payback of the full amount?

Personally I know three couples that are in this boat. Anecdotal, I am aware of about 10 others.

I think the consumption the FED/Treasury/Keynesian's are looking for from a rising stock market was used up in the last debt expansion salvo.

With so much to digest, I leave it at that. Be sure to get your Friday Night requests in (anything goes) and I will comply to the best of my ability.

Have a good night.