One-month Treasury bill rates ended the week at 16 bps, and three-month bills were at 26 bps. Two-year government yields were unchanged at 0.92%. Supply worries had five-year T-note yields ending the week up 12 bps to 1.92%. Ten-year yields surged 23 bps to 3.02%. Long-bond yields rose 15 bps to a 3-month high 3.77%. The implied yield on 3-month December ’09 Eurodollars increased 7 bps to 1.53%. Benchmark Fannie MBS yields jumped 20 bps to 4.45% (high since 12/09). The spread between benchmark MBS and 10-year T-notes narrowed 3 to 143 bps. Agency 10-yr debt spreads narrowed 2 to 61 bps. The 2-year dollar swap spread increased 3.25 to 69 bps; the 10-year dollar swap spread increased 6.25 to 31.5bps, and the 30-year swap spread increased 6.25 to negative 24.5 bps. Corporate bond spreads were wider. An index of investment grade bond spreads widened 9 to 244 bps, and an index of junk spreads widened 26 to 1,233 bps.
It was another week of strong corporate debt issuance. Investment grade issuance included Chevron $5.0bn, JPMorganChase $4.8bn, Hewlett Packard $2.75bn, PepsiCo $1.0bn, Noble Energy $1.0bn, Waste Management $800 million, Danaher $750 million, Nevada Power $500 million, Western Union $500 million, Baxter $350 million, and Vanderbilt University $250 million.
Junk issuers included Williams Companies $600 million and Oneok Partners $500 million.
International debt issues this week included Royal Bank of Scotland $1.0bn and Videotron $260 million.
U.K. 10-year gilt yields jumped 21 bps to 3.62%, and German bund yields rose 10 bps to 3.11%. The German DAX equities index sank another 4.3% (down 20.1%). Japanese 10-year "JGB" yields were little changed at 1.24%. The Nikkei 225 rallied 2.1% (down 14.6%). Emerging markets were under further pressure. Brazil’s benchmark dollar bond yields rose 6 bps to 6.875%. Brazil’s Bovespa equities index dropped 3.6% (up 1.9% y-t-d). The Mexican Bolsa fell 3.5% (down 21% y-t-d). Mexico’s 10-year $ yields dropped 11 to 6.48%. Russia’s RTS equities index dipped 0.8% (down 13.8%). India’s Sensex equities index declined 1.7% (down 7.8%). China’s Shanghai Exchange dropped 7.9% (up 14.4%).
Freddie Mac 30-year fixed mortgage rates gained 3 bps to 5.07% (down 117bps y-o-y). Fifteen-year fixed rates were unchanged at 4.68% (down 104bps y-o-y). One-year ARMs added one basis point to 4.81% (down 20bps y-o-y). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed jumbo rates down 25 bps this week to 6.83% (up 7bps y-o-y).
Federal Reserve Credit declined $7.1bn last week to $1.900 TN. Fed Credit expanded $1.034 TN over the past 52 weeks (119%). Elsewhere, Fed Foreign Holdings of Treasury, Agency Debt last week (ended 2/25) increased $4.6bn to a record $2.581 TN. "Custody holdings" were up $439bn over the past year, or 20.5%.
Bank Credit dropped $41.4bn to $9.776 TN (week of 2/18). Bank Credit expanded $444bn year-over-year, or 4.8%. Bank Credit increased $384bn over the past 24 weeks. For the week, Securities Credit increased $14.8bn. Loans & Leases sank $56.2bn to $7.109 TN (52-wk gain of $223bn, or 3.2%). C&I loans fell $4.8bn, with 52-wk growth of 7.8%. Real Estate loans dropped $11.2bn (up 5.3% y-o-y). Consumer loans added $2.2bn, while Securities loans fell $48.4bn. Other loans increased $6.0bn.
M2 (narrow) "money" supply jumped $16bn to a record $8.280 TN (week of 2/16). Narrow "money" has now inflated at an 17.7% rate over the past 22 weeks and has jumped $753bn over the past year, or 10.0%. For the week, Currency increased $1.8bn, while Demand & Checkable Deposits fell $13bn. Savings Deposits jumped $33.8bn, while Small Denominated Deposits slipped $0.5bn. Retail Money Funds dropped $5.7bn.
Total Money Market Fund assets (from Invest Co Inst) increased $9.4bn to $3.888 TN, with a 52-wk expansion of $460bn, or 13.4% annualized.
Asset-Backed Securities (ABS) issuance remains about dead. Year-to-date total US ABS issuance of $2.9bn (tallied by JPMorgan's Christopher Flanagan) is a fraction of the $31.5bn for comparable 2008. There has been no home equity ABS issuance in months. Year-to-date CDO issuance remains less than $1.0bn.
Total Commercial Paper outstanding added $3.3bn this past week to $1.524 TN. CP has declined $157bn y-t-d and $316bn over the past year (17.2%). Asset-backed CP increased $1.7bn to $724bn, with a 52-wk decline of $90bn (11%).
International reserve assets (excluding gold) - as accumulated by Bloomberg’s Alex Tanzi – were up $364bn y-o-y, or 5.7%, to $6.716 TN. Reserves have declined $231bn over the past 19 weeks.
Global Credit Market Dislocation Watch:
February 24 – Wall Street Journal (Gerald F. Seib): “When President Barack Obama delivers his initial speech to Congress Tuesday night, a giant and unresolved question will hang over the proceedings: What’s the proper role for the government in today’s troubled economy? In fact, this is the megaquestion of our time. Yet it is increasingly clear that neither the lawmakers the president will be addressing, nor the nation beyond them, have come close to consensus on an answer. Look up and down Pennsylvania Avenue this week and you can see how the issue is dividing not just the two political parties, but factions within them.”
February 23 – Bloomberg (Walid el-Gabry): “Billionaire investor George Soros said the current economic upheaval has its roots in the financial deregulation of the 1980s and signals the end of a free-market model that has since dominated capitalist countries… The global recession, triggered by the collapse of the U.S. housing market, has ‘damaged the financial system itself,’ he said. Regulators are in part to blame because they ‘abrogated’ their responsibilities, Soros.. said. ‘We’re in a crisis I think that’s really the most serious since the 1930s and is different from all the other crises we have experienced in our lifetime,’ Soros said.”
February 26 – New York Times (Eric Lipton): “The federal government’s bank insurance fund dropped by the end of last year to the lowest point in more than 25 years, and the number of banks at risk of failure nearly doubled… ‘There is no question this is one of the most difficult periods we have encountered during the F.D.I.C.’s 75 years of operation,’ Sheila Bair, the [FDIC’s] chairwoman, said… Overall, the nation’s banks lost $26.2 billion in the fourth quarter, the biggest quarterly lost since the F.D.I.C. began collecting data on quarterly earnings. Almost one in three banks lost money… Ms. Bair said that the agency had placed 252 institutions on its watch list — meaning they were at risk of failure—compared to 76 banks at the end of 2007. With all of the bank failures, the F.D.I.C.’s insurance fund has dropped to $19 billion… The insurance fund had $52 billion at the end of 2007.”
February 27 – USA Today (Sue Kirchhoff): “U.S. banks reported a net loss of $26.2 billion in the final quarter of 2008 — the worst performance since 1990 — as the number of troubled institutions climbed. Fully 252 commercial banks and savings institutions, with total assets of $159 billion, were termed problem banks at the end of last year, ‘overwhelmed’ by staggering real estate losses and the faltering economy, the Federal Deposit Insurance Corp. said…”
February 26 – Bloomberg (Margaret Chadbourn and Alison Vekshin): “U.S. savings and loans reported a record $13.4 billion loss last year as they set aside more funds for loan losses amid the recession and worsening financial crisis…”
February 23 – Bloomberg (Gonzalo Vina): “Chancellor of the Exchequer Alistair Darling ordered Northern Rock Plc to expand lending by 14 billion pounds ($20 billion), the first in a series of measures due this week to revive the U.K. banking industry. ‘This is against a background where a lot of the foreign- based banks have withdrawn’ from Britain, Darling told BBC Radio 4… ‘What I want to do here is use Northern Rock to help fill that gap.’”
February 26 – Bloomberg (Jeff Green and Alex Ortolani): “General Motors Corp., surviving on $13.4 billion in U.S. aid, reported a $9.6 billion fourth-quarter loss... GM posted an annual loss of $30.9 billion, the second largest in its 100-year history.”
February 26 – Bloomberg (Jon Menon): “Royal Bank of Scotland Group Plc will put 325 billion pounds ($462 billion) of investments into a state insurance program and shift toxic assets to a new unit after posting the biggest loss in British history.”
February 27 – Bloomberg (Balazs Penz and Agnes Lovasz): “Hungarian Prime Minister Ferenc Gyurcsany wants the European Union to arrange a package of as much as 180 billion euros ($230 billion) to help east European economies, banks and companies weather the financial crisis.”
February 25 – Bloomberg (Patrick Henry): “Delinquent loans account for about 10% of all loans issued by Russian banks, Interfax reported, citing Finance Minister Alexei Kudrin.”
February 25 – Bloomberg (Daryna Krasnolutska): “Ukraine’s credit rating was cut two levels by Standard & Poor’s, a day after Latvia was downgraded to junk, because political turmoil poses growing risks to the country’s International Monetary Fund loan.”
Currency Watch:
The dollar index ended the week up 1.8% to 88.01 (up 8.2% y-t-d). For the week on the upside, the South African rand increased 0.4%. On the downside, the Japanese yen declined 4.3%, the Norwegian krone 3.2%, the Swedish krona 3.1%, the Mexican peso 3.1%, the New Zealand dollar 2.1%, the South Korean won 1.8%, the Canadian dollar 1.6%, the Danish krone 1.3%, the Euro 1.3%, and the Swiss franc 1.3%.
Commodities Watch:
Gold dropped 4.9% this week to $945 (up 7% y-t-d), and silver sank 9.7% to $13.125 (up 16% y-t-d). April Crude rallied $4.34 to $44.37 (down 0.5% y-t-d). April Gasoline rose 14.6% (up 28% y-t-d), and April Natural Gas gained 4.0% (down 25% y-t-d). March Copper jumped 7.2% (up 9% y-t-d). March Wheat declined 3.0% (down 15% y-t-d), and Corn fell 3.6% (down 14% y-t-d). The CRB index gained 4.5% (down 7.8% y-t-d). The Goldman Sachs Commodities Index (GSCI) rallied 6.7% (down 3.7% y-t-d).
China Reflation Watch:
February 24 – Bloomberg (Belinda Cao): “China’s insurance regulator plans to allow insurers to buy unsecured corporate notes for the first time to spur economic growth and development of the debt market…”
February 25 – Bloomberg (Zhang Dingmin and Luo Jun): “China aims to prevent a ‘massive rebound’ in non-performing loans, even as the world’s financial crisis deepens, the nation’s top banking regulator said. The non-performing loan ratio at Chinese banks fell to 2.45% at the end of December, from 6.17% a year earlier…”
February 27 – Bloomberg (Li Yanping): “China plans to hand out 20 billion yuan ($2.9 billion) of subsidies this year for farmers’ home- appliance purchases as the government tries to drive up consumption to revive the world’s third-biggest economy.”
February 23 – Bloomberg (Nariman Gizitdinov): “China agreed to give a $5 billion yuan denominated credit line to Kazakhstan’s National Wellbeing Fund Samruk-Kazyna, Kazakhstan Today reported.”
February 26 – Bloomberg (Nipa Piboontanasawat): “Hong Kong’s exports plunged by the most in 50 years… Shipments fell 21.8% in January from a year earlier…”
Japan Watch:
February 27 – Bloomberg (Jason Clenfield and Toru Fujioka): “Japan headed for its worst postwar recession in January as manufacturers cut production by an unprecedented 10% and consumers slashed spending.”
February 25 – Bloomberg (Jason Clenfield): “Japan’s exports plunged 45.7% in January from a year earlier, resulting in a record trade deficit… The shortfall widened to 952.6 billion yen ($9.9 billion), the biggest since 1980… The drop in shipments abroad eclipsed a record 35% decline set the previous month.”
India Watch:
February 27 – Bloomberg (Cherian Thomas): “India’s economy grew at the slowest pace since 2003 last quarter… Asia’s third-largest economy expanded 5.3% in the three months to Dec. 31…”
February 24 – Bloomberg (Kartik Goyal and Cherian Thomas): “India reduced excise and service tax to revive economic growth, less than an hour after Standard & Poor’s said the nation’s credit rating may be cut to junk as government debt is reaching a level that’s “not sustainable.’”
February 24 – Bloomberg (Cherian Thomas): “India’s credit rating may be cut to junk by Standard & Poor’s, which said government spending plans to help shield the economy from the global recession and win voter support in elections were ‘not sustainable.’”
Asia Reflation Watch:
February 27 – Bloomberg (Kim Kyoungwha): “South Korea’s won tumbled to the lowest level in 11 years on concern sliding exports will curb the supply of dollars and hinder the ability of local banks and companies to repay overseas debt.”
February 24 – Bloomberg (Yu-huay Sun and Janet Ong): “Taiwan’s export orders dropped by a record in January… Orders fell 41.67% from a year earlier after December’s 33% plunge…”
February 26 – Bloomberg (Shamim Adam): “Singapore’s economy shrank the most in at least 33 years last quarter… Gross domestic product declined an annualized 16.4% last quarter from the previous three months…”
Latin America Watch:
February 23 – Bloomberg (Jens Erik Gould): “Mexican retail sales declined in December at the sharpest pace in more than six … Retail sales dropped 3.3% from the same month a year earlier…”
Central Banker Watch:
February 26 – Bloomberg (Reed Landberg): “Bank of England Governor Mervyn King said he’s ready to act to increase the supply of money to bolster the U.K. economy. ‘The amount of money in the economy is growing too slowly,’ King told lawmakers… He said he expected the government to give him the authority to boost money supply over ‘the next few months.’”
Fiscal Watch:
February 26 – Associated Press (Martin Crutsinger): “Pledging ‘a new era of responsibility,’ President Barack Obama unveiled a multi-trillion-dollar spending plan Thursday that would boost taxes on the wealthy, curtail Medicare, lay the groundwork for universal health care and leave a string of deficits dwarfing any in the nation’s history. In addition to sending Congress his $3.55 trillion budget plan for 2010, Obama proposed more immediate changes that would push spending to $3.94 trillion in the current year. That would result in a record deficit Obama projects will hit $1.75 trillion, reflecting the massive spending being undertaken to battle a severe recession and the worst financial crisis in seven decades.”
February 27 – Bloomberg (Gabrielle Coppola and Jody Shenn): “The Federal Deposit Insurance Corp. plans to back new debt sold by banks that would later convert into common shares in an expansion of its Temporary Liquidity Guarantee Program.”
Unbalanced Global Economy Watch:
February 23 – Bloomberg (Alexandre Deslongchamps): “Canadian retail sales fell twice as fast as expected in December, and posted the biggest drop since January 1991… Retail sales tumbled 5.4% from December…”
February 27 – Bloomberg (Theophilos Argitis): “Canada recorded its first current account deficit in almost a decade in the fourth quarter as exports and profits that companies earned abroad fell.”
February 25 – Bloomberg (Jana Randow): “German exports slumped in the fourth quarter, causing Europe’s largest economy to contract the most in 22 years. Exports dropped 7.3% from the previous quarter…”
February 24 – Bloomberg (Gabi Thesing): “German business confidence dropped to a 26-year low in February as the worst recession since World War II prompted companies to curb production and lay off workers.”
February 24 – Bloomberg (Ben Sills): “Spain’s budget deficit totaled 3.82% of gross domestic product last year…”
February 25 – Financial Times (Charles Clover): “Russia’s economy contracted at an annual rate of 8.8% in January, according to the economy minister.”
February 23 – Bloomberg (Aaron Eglitis): “Latvia, Estonia and Lithuania, facing a prolonged recession, say they will protect their currency pegs whatever the cost. That strategy may be as crippling as the alternative, economists say. The three-nation Baltic region is in its deepest crisis since breaking from the Soviet Union in 1991…”
Bursting Bubble Economy Watch:
February 27 – Bloomberg (Timothy R. Homan): “The U.S. economy shrank in the fourth quarter at a faster pace than previously estimated as consumer spending plunged, companies cut inventories and exports sank. Gross domestic product contracted at a 6.2% annual pace from October through December…”
February 24 – Bloomberg (Aliza Marcus): “Health-care spending in the U.S. this year will grow 5.5%, the least since 1997… The projected increase, to $2.5 trillion, compares with annual gains of 6.1% in 2008 and 2007… The calculations include stepped-up government spending to cover more elderly and poor through programs such as Medicare and Medicaid…”
February 24 – Wall Street Journal (Richard Gibson): “The recession is bruising businesses across the franchising industry. From ice-cream parlors to tanning salons, franchisees’ defaults on loans guaranteed by the U.S. Small Business Administration are piling up in amounts unseen in years. A list of loans at 500 franchises shows the number of defaults by franchisees increased 52% in the fiscal year ended Sept. 30, 2008, from fiscal 2007.”
February 26 – Dow Jones: “The National Football League has cut its administrative staff by 15%, or 169 positions, and frozen all salaries, including that of commissioner Roger Goodell…”
MBS/ABS/CDO/CP/Money Funds and Derivatives Watch:
February 24 – Bloomberg (Timothy R. Homan and Courtney Schlisserman): “Home prices in 20 U.S. cities declined 18.5% in December from a year earlier, the fastest drop on record…”
February 26 – Bloomberg (David M. Levitt): “Office building sales in the U.S. fell in January to the lowest since at least 2000… About $744.6 million in office property sold last month, an 86% drop from a year earlier.”
GSE Watch:
February 26 – Bloomberg (Dawn Kopecki): “Fannie Mae, the mortgage-finance company seized by regulators in September, asked the U.S. Treasury for $15.2 billion in capital and raised the possibility of requesting more aid after a sixth consecutive quarterly loss drove its net worth below zero. A wider fourth-quarter net loss of $25.2 billion… pushed the company to make its first draw from a $200 billion federal lifeline… Credit quality deteriorated and debt costs soared, forcing the company to record higher expenses and write down the value of its assets. ‘We expect the market conditions that contributed to our net loss for each quarter of 2008 to continue and possibly worsen in 2009, which is likely to cause further reductions in our net worth,’ Fannie said…”
Real Estate Bust Watch:
February 26 – Bloomberg (David M. Levitt): “New York’s biggest banks and securities firms may relinquish 8 million square feet of office space this year, deepening the worst commercial property slump in more than a decade… JPMorgan Chase & Co., Citigroup Inc., bankrupt Lehman Brothers Holdings Inc. and industry rivals have vacated 4.6 million feet, a figure that may climb by another 4 million as businesses leave or sublet space they no longer need, according CB Richard Ellis…”
February 22 – Crains NY (Amanda Fung): “Residents of a 54-unit Upper East Side co-op got the bad news last month—despite the board’s intense efforts to trim expenses, maintenance fees are rising 15%, nearly double last year’s hike. ‘People are furious,’ says Steven Sladkus, president of the co-op board… It’s an increasingly common problem. Even as the city’s economy sinks, maintenance fees and common charges for co-ops and condos, respectively, are rising at the highest rates in years. Co-op managers blame soaring expenses, primarily property taxes.”
Muni Watch:
February 26 – Bloomberg (Jeremy R. Cooke): “CPS Energy, San Antonio’s power and gas utility, leads U.S. tax-exempt borrowers today as this year’s sales of fixed-rate municipal bonds pass the $40 billion mark a week sooner than in 2008.”
California Watch:
February 27 – Associated Press (Don Thompson): “California’s unemployment rate jumped to 10.1% in January, the state’s first double-digit jobless reading in a quarter-century. The jobless rate… represents an increase from… 8.7% in December.”
February 26 – Bloomberg (Daniel Taub): “California home sales doubled in January from a year earlier as buyers took advantage of a 41% decline in the median price of an existing home, the California Association of Realtors said… The median price dropped to $254,350 from $427,200.”
New York Watch:
February 25 – Bloomberg (Henry Goldman): “New York state’s economy deteriorated so rapidly that anticipated tax revenue declined by $1 billion since December… The third-largest U.S. state faces a $14 billion gap in its $122.7 billion budget for the fiscal year beginning April 1.”
Crude Liquidity Watch:
February 24 – Bloomberg (Henry Meyer): “A $10 billion bailout from neighbor Abu Dhabi threatens to cost Dubai its autonomy and the free- wheeling economic system that helped establish it as the Middle East’s main business hub.”
February 26 – Bloomberg (Zainab Fattah): “Dubai rents reached ‘unrealistic’ levels and are expected to fall as much as 40% in high-end areas this year after the global financial crisis slowed a property boom in the Gulf business hub, the head of Dubai’s Real Estate Regulatory Authority said.”
A Week of Big Numbers:
February 24 – Bloomberg (Mark Pittman and Bob Ivry): “…the U.S. government has pledged more than $11.6 trillion on behalf of American taxpayers over the past 19 months, according to data compiled by Bloomberg. Changes from the previous table, published Feb. 9, include a $787 billion economic stimulus package. The Federal Reserve has new lending commitments totaling $1.8 trillion. It expanded the Term Asset-Backed Lending Facility, or TALF, by $800 billion to $1 trillion and announced a $1 trillion Public-Private Investment Fund to buy troubled assets from banks. The U.S. Treasury also added $200 billion to its support commitment for Fannie Mae and Freddie Mac…”
The Administration’s new budget projects an astounding $1.75 TN fiscal 2009 federal deficit - or about 12% of GDP. Federal outlays are expected to surge 32% this year to $3.94 TN. In nominal terms, the deficit is set to quadruple the previous all-time record. In percentage terms one has to return back to the war economy of the 1940s to find anything comparable.
Yesterday, Fannie Mae reported a fourth quarter loss of $25.2bn, bringing the company’s second-half 2008 shortfall to more than $50bn. Non-performing assets surged a stunning 87% during the quarter to $119.2bn, a three-fold increase in just 12 months. Having more than depleted its razor-thin capital base, Fannie requested $15.2bn of additional Treasury support (from the $200bn promised).
The FDIC announced yesterday a $26.2bn Q4 2008 loss for the banking system. The Office of Thrift Supervision reported that our nation’s Savings & Loans lost $3.0bn during the final quarter of the year, increasing 2008 losses to a record $13.4bn. General Motors announced a $9.6bn Q4 loss, increasing its annual loss to a staggering $30.9bn. Analysts are expecting even greater losses to be reported at AIG and Citigroup.
The dimensions of the reported deficits and losses are not easily digested; the scope of the today’s systemic problems not so easily comprehended. I’ll push ahead with efforts to use the Credit Bubble Framework as an analytical tool for making some sense of the historic nature of the unfolding bust.
Let’s try to place the various huge – and increasingly numbing – deficit/loss numbers (attendant with this bust) into coherent context. For such an endeavor it is imperative to first examine the preceding boom. This week, in particular, seems an appropriate time to summarize, in Credit terms, the incredible dimensions of the fateful inflationary Bubble.
From the Federal Reserve’s “flow of funds” report, we can see that Total System Credit (non-financial and financial) ended 1995 at $18.475 TN. By the end of 2007, this number had inflated to $49.882 TN, for growth of 170% in only 12 years. During this period, Household Debt swelled 184% to $8.959 TN; Non-farm Corporate Debt 130% to $3.832 TN; and State & Local Government borrowings 109% to $2.192 TN. Federal debt expanded “only” 41% to $5.122 TN. Rest of World holdings of U.S. assets inflated 365% to $16.048 TN. While significantly trailing Credit growth, GDP nonetheless bulged 87% during this period.
Over the past decade, the “optimists” often cited the federal government’s positive fiscal position as evidence of the health of the overall economy and soundness of our prosperity. It should be clear these days that the protracted boom's massive inflation of private-sector Credit had grossly inflated government receipts (among other things). Indeed, over the 12-year period Federal Receipts inflated 88% (to $2.651 TN) and State & Local receipts increased 92% (to $1.903bn). This crucial facet of the inflationary boom spurred federal and state & local spending growth of 80% and 93%, respectively.
State & Local governments will now attempt to maintain these inflated levels of expenditures, while the federal government will move aggressively to grossly inflate already inflated spending. The budget now calls for federal expenditures this year to approach $4.0 TN. This compares to spending of about $1.6 TN back in 1995. The federal deficit is projected to expand by a combined $3.0 TN during fiscal years ’09 and ’10. This would amount to a 60% increase in federal debt in only two years.
Today’s unparalleled expansion of federal debt and obligations is being dressed up as textbook “Keynesian.” It’s rather obvious that we are in dire need of some new books, curriculum and economic doctrine. But from a political perspective, the title is appropriate enough. From an analytical framework perspective such policymaking is more accurately labeled “inflationism” – a desperate attempt to prop inflated asset prices, incomes, business revenues, government receipts, and economic “output”. There have been many comparable sordid episodes throughout history, and I am not aware of any positive outcomes.
The Administration’s budget earmarks an additional $750 billion as a contingency for added financial sector bailouts. Fed data nicely illuminate the dimensions of the financial sector's problem. Between 1996 and 2007, Total Mortgage Debt expanded 220% to $10.061 TN. Total GSE Agency Securities (debt and MBS) tripled to $7.397 TN. The ABS market inflated 580% to $4.50 TN. Over this 12-year period, Bank Assets swelled 150% to $11.194 TN. Securities Broker/Dealer assets ballooned 440% to $3.10 TN. In 12 years, Total Financial Sector borrowings expanded 300% to $16.90 TN – in the process creating a Credit and liquidity junky out of U.S. asset markets and the real economy. Today, the deeply impaired financial sector is incapable of assuaging the system's bloated Credit needs.
For perspective, a little compare and contrast is in order. Total Mortgage Debt increased $188bn in 1995, compared to $1.437 TN growth in 2005, $1.410 TN in 2006, and $1.098 TN in 2007. Agency MBS increased $98bn in 1995, compared to $609bn growth last year. The ABS market grew $127bn in 1995, in contrast to the $725bn growth in 2005 and 2006’s $808bn. Bank Credit expanded $273bn in 1995, compared to 2007’s $788bn and 2008's $1.294 TN. Broker/Dealer assets expanded $113bn in 1995, a small fraction of 2007’s fateful $615bn growth.
This unprecedented Credit explosion inflated asset prices as well as incomes. Between 1996 and 2007 National Incomes inflated 90% to $12.271 TN. Compensation of Employees surged 86% to $7.812 TN. Bubble Impacts were even more dramatic with respect to the Household (including non-profits) Balance Sheet. In twelve short years, Household Sector Asset holdings inflated $43.685 TN, or 133%, to $76.549 TN. Despite Household Liabilities surging 185% to $14.379 TN, Household Net Worth (assets minus liabilities) inflated $34.360 TN, or 124%, to $62.170 TN. Importantly, this Massive Inflation of Perceived Financial Wealth over years glossly distorted the quantity and pattern of spending throughout the real economy.
This historic Credit-induced inflation of Household Incomes and Net Worth was at the core of deep structural maladjustment to the U.S. “Bubble” economy. The implosion of “Wall Street finance” (in particular the collapse of Broker/Dealer financing, private-label MBS and other ABS, and various methods of leveraging mortgage, corporate and other securities) marked the demise of various Bubbles, including ones in private-sector debt securities, residential and commercial real estate, equities, and Household Net Worth more generally. In the final analysis, the bust has left multi-Trillion dollar holes in various sector balance sheets. Moreover, Patterns of Spending throughout the economy have been forever altered. Year-after-year of reckless lending has quickly come home to roost in a Big way.
Our federal government has commenced the process of attempting to fill holes through the massive inflation of government Credit and obligations (by the Trillions). Depending on the reader’s perspective, I risk appearing either the master of the obvious or a rabid sensationalist. Yet the stakes associated with the current course of fiscal and monetary policy are absolutely momentous. And I am compelled to write that “if you’re not confused you don’t understand the nature of the problem.”
What are the ramifications and consequences associated with U.S. deficits approaching 12% of GDP? Over the short and intermediate terms? Will unprecedented fiscal and monetary measures stem financial sector implosion? Will Washington’s efforts work to bolster a faltering Bubble Economy, or will they instead only tend to delay unavoidable structural adjustment? Will the Treasury market continue to so easily accommodate reflationary efforts? How long will the dollar remain relatively stable in the face of massive growth in U.S. Non-Productive Credit? Will multi-Trillions of government debt and obligation expansion help to resuscitate private-sector Credit creation - or will it instead simply destroy the Creditworthiness of the entire economy?
Not uncharacteristically, I pose more questions than I have answers. But I do fear that we now face Trillion dollar deficits as far as the eye can see. I don’t expect “Keynesian” policies to have much success in reinvigorating busted asset markets. I’ll be surprised if private-sector Credit creation bounces back anytime soon. I fear policymaking will do more harm than good when it comes to needed economic restructuring. And my worst fears of policymaking (fiscal and monetary, democrat and republican, national and local) bankrupting the country are being anything but allayed. Similar to my belief that mortgage Credit growth should have been limited to, say, no more than 4 or 5% annually during the boom, there is today a very serious need to incorporate some reasonable limits on the expansion of federal debt and obligations.