bank run blog

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)

It was only 100 short days ago that an affable, well-intentioned young lawyer from the big city moved into the rambling old house with his elegant wife, who immediately set about planting a garden.

They’ve received lots of advice from some of the more experienced locals, who assure them that pretty soon they can expect to see green shoots all over the place.



To curb the excesses of the past, they have enlisted the aid of altruistic career civil servants.



In a related story, Chief White House Economic Advisor Lawrence Summers today pointed to a bustling, colorful tent city in rural Appalachia as an example of the kind of “green shoots” of economic activity that will characterize the nation’s recovery.

Summers and his entourage got lost on their way to a photo opportunity in Hooterville, and were mistakenly directed to one of many local Hoovervilles by their OnStar GPS navigation systems.



Summers praised the resourcefulness of the settlers in what he called the “flexible housing development” before moving on to speak at a luncheon for a banker’s association in Mount Pilot.

New York Times : World Finance Leaders Meet, and Cautiously Glimpse ‘Green Shoots’ of Recovery

Economic Times : More ‘green shoots’ keep Wall Street upbeat

New York Times : Cities Deal With a Surge in Shantytowns

Last week saw stories flooding in through every porthole of the mainstream and business media about all the tiny, hopeful signs that the worst might be over for the US economy. Meaning that the large banks had avoided publicly declaring their insolvency for yet another quarter, aided by trillions in free Fed funds, billions in Treasury TARP dollars, and new, relaxed accounting standards under which the big four actually will have the audacity to post “profits”.

But the tide of happy talk has receded for the moment, as analysts suddenly remembered the tsunami of credit defaults still to come. According to Bloomberg News :

“U.S. stocks declined following six straight weeks of gains as concern grew that credit losses are worsening and lower commodity prices dragged down energy and material producers.

Bank of America Corp., the lender that lost three-quarters of its market value in the past year, tumbled 16 percent as rising charge-offs for uncollectible loans overshadowed better- than-estimated earnings. Citigroup Inc. dropped 15 percent after Goldman Sachs Group Inc. said the bank’s credit losses are growing at a ‘rapid rate.’ U.S. Steel Corp. and Exxon Mobil Corp. declined as oil and industrial metal prices decreased.

‘The market seems to follow the direction of financial stocks one way or another,’ said Keith Wirtz, who helps oversee $20 billion as chief investment officer at Fifth Third Asset Management in Cincinnati. ‘There are definitely more writedowns ahead and more challenges for the loan portfolios, particularly in the consumer side of the equation.’”

After sending a couple of ward heelers out in the rain to the Sunday shows to deny that the banks will be nationalized, the Obama administration leaked to the New York Times that another round of stealth nationalization is already underway :

“President Obama’s top economic advisers have determined that they can shore up the nation’s banking system without having to ask Congress for more money any time soon, according to administration officials.

In a significant shift, White House and Treasury Department officials now say they can stretch what is left of the $700 billion financial bailout fund further than they had expected a few months ago, simply by converting the government’s existing loans to the nation’s 19 biggest banks into common stock.

Converting those loans to common shares would turn the federal aid into available capital for a bank — and give the government a large ownership stake in return.

While the option appears to be a quick and easy way to avoid a confrontation with Congressional leaders wary of putting more money into the banks, some critics would consider it a back door to nationalization, since the government could become the largest shareholder in several banks.”

Unfortunately for Lawrence Summers and his umbrella-holder Timothy Geithner, focusing on the banks is a great strategy for 2006. The damage from the financial sector’s overflowing bathtub has now caused mold downstairs in the broader economy.

Even if the banks are eventually stabilized through zombification, the lobbyists and their politicians haven’t yet even considered lifting a finger to fix all the leaky dikes. The Associated Press reports :

“The Conference Board said Monday that its monthly forecast of economic activity fell 0.3 percent in March and has not risen in nine months. Economists surveyed by Thomson Reuters expected a 0.2 percent decline.

And without the government’s intervention in the economy, boosting the money supply and tamping down interest rates, analysts said the forecast likely would have been worse.

The index is designed to forecast economic activity in the next three to six months based on 10 components, such as stock prices, the money supply, jobless claims, new orders by manufacturers and building permits.

The index for February was better than previously reported, falling 0.2 percent instead of 0.4 percent. But it was revised lower in January to a 0.2 percent decline, instead of a 0.1 percent increase.”

Bloomberg : U.S. Stocks Tumble as Financials, Commodity Shares Retreat

New York Times : U.S. May Convert Banks’ Bailouts to Equity Share

Associated Press : Leading economic indicators dip more than expected

In the accompanying video from Yahoo Finance, Aaron Task talks to analyst Nariman Behravesh about the newest US residential construction activity numbers and the prospects for a bottom :

“Hopes for a bottom in the housing market took a serious knock Thursday as the government reported housing starts fell 10.8% in March while building permits fell 9% to a record low.

The starts number is volatile because it’s weather dependent – February, for example, saw a surprising spike – but ‘the permits are a little more reliable,’ says Nariman Behravesh, chief economist at IHS Global Insights. ‘The fact they’re down is a little worrisome.’

As rates and home prices have fallen, mortgage applications have risen sharply and affordability has improved dramatically, says Behravesh. But ‘we’re not out of the woods yet,’ he says, forecasting another 5% to 10% decline in average home prices nationwide.”

Yahoo Finance Tech Ticker : Housing Dilemma: Govt. Needs Banks to Play Ball as Public Outrage Grows

Los Angeles Times : Housing starts plunge in March

After facing a storm of criticism and bad publicity over their cartoonish secrecy and eventual gag order to the banks on the results of the stress tests, the Obama administration is in full damage control mode as they plant leaks about their latest new strategy in the New York Times :

“The Obama administration is drawing up plans to disclose the conditions of the 19 biggest banks in the country, according to senior administration officials, as it tries to restore confidence in the financial system without unnerving investors. The administration has decided to reveal some sensitive details of the stress tests now being completed after concluding that keeping many of the findings secret could send investors fleeing from financial institutions rumored to be weakest.

While all of the banks are expected to pass the tests, some are expected to be graded more highly than others. Officials have deliberately left murky just how much they intend to reveal — or to encourage the banks to reveal — about how well they would weather difficult economic conditions over the next two years.

As a result, indicating which banks are most vulnerable still runs some risk of doing what officials hope to avoid.”

In the accompanying video, Aaron Task and Henry Blodget of Yahoo Finance interview analyst Scott Bleier, who stresses that at this point even the experts still have no idea how to value the big four banks, which he says are already effectively nationalized. Blodget posts on the Business Insider :

“The U.S. government has finally been forced to do the right thing, which is share some of the results of the bank “stress tests” after they are completed.

As we’ve complained, the “stress tests” aren’t stressful enough, and are therefore basically propaganda designed to create the appearance of a healthy banking system, but more information is better than less.

There is some concern that releasing the stress test results will immediately trigger a run on the lousy banks. If the results seemed lousy enough to cause a run, we doubt the government would release the information (remember–the government thinks we can’t handle the truth.) But if there’s a run on a couple of big banks, then so be it. Better to deal with the problem sooner rather than later.”

New York Times : U.S. Planning to Reveal Data on Health of Top Banks

Yahoo Finance Tech Ticker : U.S. May Rat Out Crap Banks After Stress Test