Recent activity
The headlines recently have largely ignored the economic data and bank closings and focused instead on the stimulus bill. The economic data continue to grind out disappointing numbers, although GDP was less negative than the survey expected, and there are a few encouraging signs amid the carnage. The stimulus bill is rightly taking center stage at the moment. There is a tremendous amount of taxpayer money being requested which on its own will force taxes to rise in the future and will serve as a drag on future growth. As this process moves further into the political arena it necessarily moves further away from the economic arena. I will attempt to keep all of my comments and analysis in the economic arena as:
A – I know how that world works, and;
B – my language will be better
One of the biggest concerns about the package is that there will be a lot of wasted expenditures. Depending on one’s view of the severity of our current economic problems you might view all of these expenditures as wasteful but that’s an argument for another day. Wasted expenditures are those that don’t address the problems at hand and will unnecessarily burden the taxpayer and the economy for years to come. At this point, those of us that actually pay taxes (and I’m confident that everyone on this distribution list falls into that category) are more concerned about the long term tax effects of the stimulus bill than those that are writing it…this makes perfect sense as it’s getting tough to find anyone in Washington that actually PAYS their taxes.
They took my job but left my bills
I’ve attached a graph below showing the long term trend in Personal Savings as a percentage of Disposable Income. In laymans terms this simply shows how much Americans save. The trend is pretty clear, since the late 1970’s Americans have been willing to operate with less of a cushion in terms of savings. As access to new and widespread forms of liquidity became available, from credit cards to home equity lines people spent more and saved less. This trend continued until very recently. This index actually went negative in August of 2005, an event we hadn’t seen since the Great Depression. The difference though is that during the Great Depression Americans depleted savings to survive the tough economic times…in August of 2005 Americans did it to buy stuff…generally stuff that depreciates in value.
So where are we now? Now we see this savings rates rising in a hurry. People are scared, and cash is king when people get scared. I think it’s a safe bet to say that at this point everyone in America knows of someone that has lost their job (or taken a pay cut to keep a job). You can’t go anywhere and not hear about someone getting laid off or fired. This conversation doesn’t go un-noticed by those that still have a job. They begin saving in case they lose their own job. It’s an unfortunate fact that when you lose your job you don’t lose your bills with it. You keep those you just have no way to pay them (especially if your savings rate has been close to zero). So people save. They build a cash cushion on which they can survive if the unthinkable happens. This is exactly how things should work…finally we are acting in a rational manner…it just took a trip close to a depression to make it happen.
The short term pain from this improvement in American savings is that consumers won’t be spending. Consumer spending accounts for roughly 2/3’s of GDP and if Americans are saving rather than spending then GDP can’t improve. The government at this point will increase it’s own spending to make up for the lack of consumer spending. This will clearly increase spending but the ironic part of this is that it will ultimately increase taxes which will depress consumer expenditures at some point in the future. This proves the old adage that there is no free lunch…but you CAN finance the lunch and pay for it a little at a time...with the minimum monthly payment.
In addition to traditional government spending programs the government is also pulling a lot of strings and re-writing a lot of rules to entice the consumer back into the game. They are making a Hurculean effort to reverse the savings trend. Despite the fact that saving is good, the government wants Americans to quit saving and start spending to get the economy out of the ditch. This is why you see such a hard push to get the refinance activity going. If every good borrower in the country get’s to refi to a 30 year 4.00% mortgage it will provide a lot of extra cash in the consumers pocket. This is cash the government expects will be spent, but at the moment it appears that the average American may be more inclined to save it.
Closing time, you don’t have to go home but you can’t stay here.
After a short break from closing banks, the FDIC got back to business this weekend by closing 3 institutions around the country.
Failed Banks:
Three financial institutions were closed over the weekend. Ocala National Bank in Ocala Florida ($235 million), MagnetBank in Salt Lake City ($300 million), and Suburban Federal Savings Bank in Crofton Maryland ($354 million). The reported asset sizes are as of 3Q 2008.
The most recent quote I’ve seen puts the FDIC’s troubled bank list around 170 banks. My contacts throughout the banking/regulatory/investment world seem to think the 170 number is far too low, and if I use history as a guide I tend to agree with them. To provide a bit of perspective consider the following quotes from the FDIC’s Sheila Bair:
- In 1989 at the peak of the S&L crisis the regulators had closed roughly 534 institutions
- In 1990 there were 1,500 banks on the FDIC’s Troubled Bank List
Given the complexity and scope of the problems we face today I would not be surprised to see the FDIC Troubled Bank list grow substantially from its current level of 170.
Will Mortgage refinance activity pick up?
There have been a LOT of different ideas considered in order to find a way to start the refi machine. I’ve written about many of them as they come up in the news. One of the most recent ideas is likely to hit the Senate floor during the debate over the stimulus bill this week:
Government insured and subsidized 30 year 4.00% mortgages. This plan would push banks to make these loans to qualified borrowers. Preliminary talk is that there would be some period of years on the front end of the mortgage during which performance is guaranteed by the government. Since mortgage rates are currently much higher than 4.00% the government will pay the difference…I say again…the government will pay the difference between the market rate and the 4.00% level. That is one option being considered. This is a great example of what we mean when we say don’t bet against the government…if they want it badly enough they will get it. Currently they want a refi wave and they have taken no options off the table. It is quite a plan to use taxpayer money to get homeowners an artificially low rate on their home…if they view this plan as workable I can’t rule anything out.
I’ve provided a link to the story where this was reported.
http://money.cnn.com/2009/02/01/news/economy/Senate_stimulus_housing/index.htm
If you have any questions on this material or if there is anything I can be doing for you just let me know.
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