bank run blog

As politicians and financial gurus spin happy talk about the chimera of a recovery, and America’s ‘private banks’ cue up on the receiving end of the so-called public/private partnership offered by the Treasury Department, regular working Americans see something else on the horizon and prepare for a coming cataclysim, the Associated Press writes;

“From teachers to real estate agents, these budding emergency gurus say the dismal economy has made them prepare for financial collapse as if it were an oncoming Category 5 hurricane. They worry about rampant inflation, runs on banks, bare grocery shelves and widespread power failures that could make taps run dry.”

At least working America’s interest in end-times preparedness has created a bit of survivalist-bubble, the AP reports;

“The surge in interest in emergency stockpiling has been a bonanza for camping supply companies and military surplus vendors, some of whom report sales spikes of up to 50 percent. These companies usually cater to people preparing for earthquakes or hurricanes, but informal customer surveys now indicate the bump is from first-time shoppers who cite financial, not natural, disaster as their primary concern, they say.”

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Associated Press : Crisis spurs spike in ’suburban survivalists’

Speaking to members of Congress today, Federal Reserve Board Chairman Ben S. Bernanke delivered a message of cautious optimism about the US economy, saying that modest growth may be possible later this year. The Associated Press reports :

“Federal Reserve Chairman Ben Bernanke told Congress Tuesday the economy should start growing again later this year, his most optimistic assessment of the country’s financial health since the recession struck with force last year.”

Bernanke sees reasons for renewed hope that the economy may be on the rebound :

“’We continue to expect economic activity to bottom out, then to turn up later this year,’ he told lawmakers. ‘We expect that the recovery will only gradually gain momentum.’

Recent data suggest the recession may be loosening its grip on the country, Bernanke said.

‘The pace of contraction may be slowing,’ he said. It was similar to an observation the Fed made last week in deciding not to take any additional steps to shore up the economy.”

If the tenor of Bernanke’s economic prognosis sounds familiar, it’s only because you’re paying attention. Here’s what the Fed chairman told an audience of distinguished academics and policymakers at the International Monetary Conference in Barcelona in June, 2008 :

“We may see somewhat better economic conditions during the second half of 2008, reflecting the effects of monetary and fiscal stimulus, reduced drag from residential construction, further progress in the repair of financial and credit markets, and still solid demand from abroad. This baseline forecast is consistent with our recently released projections, which also see growth picking up further in 2009.”

Today’s guardedly upbeat remarks were made in Congressional testimony before the Joint Economic Committee. Bernanke told the same committee in March, 2007 :

“Growth in consumer spending should continue to support the economic expansion in coming quarters. In addition, fiscal policy at both the federal and the state and local levels should impart a small stimulus to economic activity this year.”

Bernanke’s forecast for 2007 concluded :

“Overall, the economy appears likely to continue to expand at a moderate pace over coming quarters. As the inventory of unsold new homes is worked off, the drag from residential investment should wane. Consumer spending appears solid, and business investment seems likely to post moderate gains.”

Keenly sensing a “cooling” of the US housing market in 2006, USA Today reported that Bernanke was expecting a “soft landing” :

“The housing market, after flying high for five years, has lost altitude but appears headed for a safe landing, Federal Reserve Chairman Ben Bernanke said Thursday.

‘It seems pretty clear now that the U.S. housing market is cooling,’ Bernanke said in a question-and-answer session following a speech he delivered on banking in Chicago.

He noted that home sales and construction are slowing.

‘Our assessment at this point … is that this looks to be a very orderly and moderate kind of cooling,’ Bernanke said.”

A former professor of economics at Princeton, with degrees from Harvard and MIT, it is certain that Bernanke is one of the best and brightest of his generation. The question is, at what?

Associated Press : Bernanke: Economy should grow again later in 2009

Federal Reserve Board : Remarks by Chairman Ben S. Bernanke at the International Monetary Conference, Barcelona, Spain (via satellite), June 3, 2008

Federal Reserve Board : Prepared Testimony of Chairman Ben S. Bernanke Before the Joint Economic Committee, U.S. Congress, March 28, 2007

USA Today : Bernanke: Housing market is headed for a soft landing (May 18, 2006)

Data from the Federal Reserve shows that, as can be expected in a deflationary depression, bank lending has continued to contract. This, in the long term, would actually be good for the underlying fundamentals of the economy, but it is disastrous for those who hope to paper over the cracks and rebuild in the same sandbox. The Associated Press reports :

“A larger share of banks has made it more difficult for people to obtain home mortgages over the last three months even as demand has grown, the Federal Reserve reported Monday.

The Fed’s new quarterly survey found that about 50 percent of U.S. banks tightened their lending standards on prime mortgages, up from about 45 percent in the survey issued in early February.

Meanwhile, 65 percent of banks said they tightened standards on nontraditional mortgages, such as adjustable-rate loans with multiple payment options. That was up from 50 percent in the last survey.

‘Even if you had a stellar credit history, banks were reluctant to lend in this environment,’ said Richard Yamarone, economist at Argus Research. With unemployment rising, it raises the odds of more people defaulting on their mortgages, he said.”

According to the Financial Times, the tendency was also apparent in commercial loan activity :

“About 40 per cent of US banks said they had tightened standards on commercial and industrial loans to businesses over the previous three months, the survey reported. The Fed said this proportion was “still very elevated” but noted that it represented fewer than half the banks for the first time since January 2008.

About 80 per cent of US banks said they had increased spreads on loans to large and mid-sized businesses, down from 95 per cent in January.

‘Large majorities of both domestic and foreign banks reported a less favourable or a more uncertain outlook, a worsening of industry-specific problems and a reduced tolerance for risk’ as reasons for tightening standards and terms on business loans, the Fed said.”

Associated Press : Fed says more banks tighten home loan standards

Financial Times : Bank lending terms keep squeeze on consumers

Henry Blodget of the Business Insider had an interesting post Friday on the topic of bear market rallies in historical context, accompanied by some excellent charts :

“Now that stocks have rallied nearly 30% off their low, pundits agree: It’s a new bull market. So be very afraid.

Market punditry is a lagging indicator, not a leading one. Pundits are excellent at describing what has happened, not what is going to happen.”

Of course, many serious economists have been warning that the tumult in the financial sector is far from over, and that the markets will see large movements as a result. Nouriel Roubini made the rounds in Europe a couple of weeks ago, purveying that same message. The Independent reported on April 21 :

“In particular, the economist warned of further dangers ahead for the financial services industry in the US. ‘I see financial shocks in the months ahead. Some financial institutions are in so much trouble we may have to take them over,’ he said, before adding that losses in the industry could rise from $1 trillion to as high as $3.6 trillion.

Firms from across financial services will go out of business or be taken over, he said, particularly focusing on the bleak future for hedge funds.

Mr. Roubini also disagrees with more optimistic forecasts for the US economy. In an interview published on Forbes.com yesterday, he said that the prediction of a 2 per cent growth rate next year was far too bullish. He called it at somewhere around 1 per cent. ‘So while we are going to be technically out of a recession, it is going to feel like a recession,’ he added.

He blamed weak recovery, deflation which would dog the US for the next two years, and financial shocks for the lower-than-expected growth.”

Business Insider : Stop Thinking The 30% Stock Rally Means The Bear Market Is Over

Independent : Stock market bulls have got it wrong, warns Nouriel Roubini

On Friday afternoon, the Treasury announced that it was pushing back publication of the bank stress test results to next Thursday, apparently because some banks are trying to appeal their grades. According to CNN :

“Regulators have delayed releasing the results of stress tests conducted on the nation’s largest banks until May 7, government officials familiar with the matter said Friday.

The government expects to release its assessment next Thursday afternoon and will provide information both on individual companies as well as the overall group, according to sources.

For weeks, Wall Street has been anxiously awaiting the results of the tests, which regulators originally indicated would be announced on May 4.

Austan Goolsbee, a top economic adviser to President Obama, indicated Friday that the delay was driven, in part, over a disagreement by banks over the results of the tests. Regulators began notifying participating institutions of the results last Friday.”

The Financial Times reports that Treasury officials are concerned about the effect of the test results on share prices in the financial sector :

“The authorities’ decision to let the original timetable slip also reflects the widespread belief that, after months of speculation since the tests were first announced in February, their outcome has the potential to disturb the markets.

Government sources said regulators were likely to release both aggregate and individual data for each of the 19 banks, detailing their losses and capital needs under adverse economic -scenarios.

Some of the banks will then supplement those data with regulatory filings and analysts’ calls. Bankers said several lenders had pleaded with regulators for more time to lay out plans to plug any capital shortfall identified by the stress tests, by raising equity from either the government or from the stock market.

People familiar with the situation said that, despite their objections, Citi and BofA – and at least four more lenders – were almost certain to need more equity capital.”

It is left to the Times of India to mention the obvious next step for the feds, in an article headlined Markets expect more bailouts after bank stress tests :

“The relief after banks’ better-than-expected results during the first quarter has been short-lived.

Standard & Poor’s warned in a report that the credit cycle is tougher than expected.

’Markets are concerned about the rapid deterioration in bank loan portfolios in the US, as not only consumer loans, but commercial and commercial real estate delinquencies are on the rise,’ S&P said.”

CNN Money : Bank stress test results delayed

Financial Times :Cautious regulators delay release of financial stress report

Economic Times : Markets expect more bailouts after bank stress tests