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LinkedInNote: This is a guest post by Paul Swartz. Again, I appreciate Brad giving me the opportunity to fill in while he is on vacation.
A recent congressional hearing focused on where the money from the first part of the TARP went. Some representatives chose to communicate the challenges that their constituents faced in were having getting credit and inquire whether the banks were extending credit. As shown on the Center for Geoeconomics Studies homepage, banks were contracting home mortgage credit in the third quarter. Given that the first TARP funds were distributed in late October (well into the fourth quarter) the latest Flow of Funds data leaves us to wonder whether the banks are extending credit after the first step of recapitalization or not.
The Federal Reserve’s G19 Consumer Credit Report provides a credit picture on a timelier (monthly) basis. On a year over year basis consumer credit is growing. Banks are carrying this segment, making up for the securitization sector’s credit contraction (note: government lending plays a trivial role in this sector). It is interesting to note that, up until now, securitization has been more consistent (i.e. it has not been the cause of total growth volatility) than the banks (look at 81 and 90).
As a percentage of GDP, the consumer credit is much smaller than the mortgage market. The home mortgage credit market grew (excluding the boom) by around 4% of GDP per year while consumer credit market growth oscillated around 1% of GDP.
Are consumer and home mortgage credit extension connected enough for one to be a window into the other? If one looks only at the banking sector (banks, credit unions, and saving institutions), the year over year growth rates (as a % of GDP) for the two sectors are 35% correlated. This is illustrated in the chart below (I’ve smoothed the two series to 12 month moving averages as to make it easier to see). Fairly Rough.
But, if you are willing to take the consumer credit as a forward-looking indicator for the home mortgage credit, it looks somewhat positive. Maybe TARP I did do something but then again it has only been two months.
What exactly does the negative number in Home Mortgage Credit?
In my mind, counter-cyclical moves should be made by the Federal government, not credit.
Credit should increase during a boom (first chart)(82-84 and 93-96) and decrease during a recession (80-82 and 90-91). Up to 98 followed my prescription. After 98, did not follow my prescription. The year 2001 is a startling anolomy. Credit increasing during a downturn. Should not happen. Alan Greenspan. He lowered the interet rate in 2001 at a precipitous rate and kept it low too long.
Excess use of credit was encouraged by the combination of low interest rate and securitization.
Low interest rate has its uses, but the interest rate should not go low enough to prevent a decline in creadit during a recession. In this, the central banker in Germany was smarter than Greenspan.
I am not at all sure that we need more credit extended at the present time. Better to let people get accustomed to buying without credit.
The Federal Reserve reported that revolving credit and consumer credit contracted in Dec., right?
In fact for the whole 4Q 08:
http://www.federalreserve.gov/releases/g19/Current/
So how do we reconcile these reports?
@Paul/Hal:
Paul, thanks for a very illustrative analysis of recent consumer credit levels.
In the g19 release, it’s clear that absolute total consumer credit o/s. contracted from $2585.3 billion in October 2008 to $ 2582.6 billion in November 2008. Then, in December 2008, it increased to $ 2596.0 billion. So I think Paul’s interpretation that consumer credit grew after the TARP I funds sank in, albeit slowly, is correct.
The summary at the top of the Fed’s g19 release probably deals with decreases at ‘annual rate’; which might be some statistical measure other than the absolute o/s numbers in Q4 ’08.
Paul, it would be very helpful if you could share the absolute numbers for mortgage credit, or point to a link as well. The total mortgage debt market was estimated at $11 trillion before the bust. My understanding is that $11 trillion was only the direct ‘home loan outstanding’ part; and that it didn’t include mortgage securitization, either by the Agencies or by private label firms. Your chart yesterday shows percentage changes and composition in mortgage credit and not the absolute numbers, I think.
Less than 1% of total US Personal Consumption Expenditure between 2005 and 2008 came from increases in total consumer credit outstanding :
Personal Consumption Expenditure levels in the United States between 2004 and 2008, according to the National Income and Product Tables from BEA:
2005 $8,893.70
2006 $9,357.00
2007 $9,892.70
2008 $9,930.20
The total PCE 2005-2008 was $38,073.60 billion.
From the Fed’s g19 release linked above, total consumer credit outstanding grew from $2191.60 billion at the end of 2004 to $2562.30 at the end of 2008, an increase of $ 370.70 billion. Increases in consumer credit funded only 0.97% of total US PCE between 2005 and 2008.
Manshu – The negative number means that the outstanding credit level is lower than it was in the prior period. For instances this could happen at aggregate level via paid down debt and default, but at the sector level by selling off those loans.
Hal Horvath – The consumer credit decrease seasonally adjusted but no the aggregate level of credit (look lower on the G19 release).
II- look at the level tables on this page. http://www.federalreserve.gov/releases/z1/Current/ On page 37 of doc (L218) or page 94 on the page. Total in 3Q08 was 11.16 Trillion. Also consider that it not the level of consumer credit that is contributing to PCE that is compelling but the degree of total volatility – which is much higher – that is explained.
This is how the financial system really works–something which seems to be completely beyond the grasp of congress. A shadow banking system has grown up around the process of securitization, which packages pools of debt (mortgages, commercial real estate, student loans, car loans and credit card debt) and sells them as securities to foreign banks, hedge funds, insurance companies etc. Wall Street has muscled into an area of finance that used to be the domain of the commercial banks. According to Treasury Secretary Timothy Geithner, “40 percent of consumer lending” depends on this shadow system for credit. That’s why he is determined to resurrect securitization whatever the cost. The Fed has already expanded its balance sheet to $2.2 trillion while providing loan guarantees for over $9.3 trillion dollars. The entire financial system is now backstopped by loans from the Fed without which the global financial system would collapse. The present Fed funding of financial markets forces us to rethink our outdated ideas of the “free market” which now exists only in theory.
A 40 percent decline in consumer credit is more than sufficient to push the world into another Great Depression. The sharp decrease in foreign exports, shipping, auto sales, and other vital areas of commerce–all in the 30 to 40 percent range–suggest that the global economy depends on Wall Street’s credit-generating mechanism more than anyone imagined. The breakdown in securitization has sent tremors across the planet triggering a decline in asset prices and an accelerating fall in personal consumption. Before the Fed and Treasury try to restore securitization to its former glory, politicians and pundits should decide whether it is a viable system for long-term growth. There’s reason to believe that transforming of debt into securities creates incentives for fraudulent loans and mortgages since they can be dumped on Wall Street and sold to gullible investors. The reason the mortgage lenders and banks bundled off crappy loans to the the big brokerage houses, is because they thought there was no risk involved. (for themselves!) They were wrong and now the entire market for structured debt is in a deep freeze. Geithner and Bernanke should suspend all funding for securitized loans until they can show that the kinks have been worked out and we won’t fall into the same trap again. One financial meltdown is more than enough.
The TARP funds should not be used to exhume the corpse of a dysfunctional financial system. The money should be used to create more jobs, extend unemployment benefits, provide food stamps, public works projects or cram downs for struggling homeowners trying to avoid foreclosure. People don’t need more credit; they need debt relief. That means higher wages and better jobs. Obama should realize this, even if Geithner and Co. don’t. The Geithner-Paulson policy of limitless credit expansion is the path to ruin. That’s why Geithner is the wrong man for the job. His fundamental worldview leads to economic calamity.
http://www.globalresearch.ca/index.php?context=va&aid=12340
Thanks a lot for the data reference Paul.
Just say NO to securitization.
Been looking at some “loan participation” funds lately. These are the opaque bundles of credit card, auto loan, student loan, etc…debt that gets purchased from lenders and obfuscated by all the BankerRobins on Wall Street(who may actually live in New Jersey, which apparently qualifies them for this Federal Jobs Program). These funds are down 50%-70%.
Call me selfish, but I really don’t want to sit here carefully not spending income I don’t have so I can pay everyone else’s consumer debt.
Bernanke took notice and decided he is going to fill the gap and spend $1 trillion in taxpayer money to buy the garbage. That’s $1 TRILLION out of the $2.6 TRILLION in outstanding consumer debt (ex-mortgage).
What are we supposed to do now. Not pay taxes and get thrown in jail for not paying for the deadbeats?
There has got to be something in the US Constitution about that. Didn’t Jefferson know about credit cards?
Quote of the Day:
Jim Rodgers on Bernanke: (Paraphrasing) “He does not take calls from farmers and school teachers, he only takes calls from Wall Street”
Paul, thanks. One thought: since it seems likely the Dec. increase in revolving (credit card) credit over Nov. was both gift buying and perhaps some drawing on credit due to job loss, we will have to wait until Jan. or even Feb. data comes out to see what’s happening to consumer credit. That is, past the point that it is flowing, which is significant.
The seasonal adjusted result suggests consumers may be cutting back considerably, so that the Jan. and Feb. results may tell us more about consumers than credit availability.
Jim Rogers doesn’t stand a chance making quotes compared to me!
In fact…I may start a serial comic book. Bankerman and BankerRobin…the Deflation Fighting Dynamic Duo of Gotham City!
Epsisode I
Bankerman and BankerRobin are hanging out at the Bank Cave Club in the Upper East Side, enjoying Cola drinks, a Cuban cigar, munching on baby seal pate and crackers, and reading The Wall Street Journal.
Bankerman slaps himself on the knee and proclaims loudly to BankerRobin so all can hear, “We deserve a big pat on the capes, BankerRobin. Wholesale inflation just posted an increase that beat expectations by 400% !”
BankerRobin replies, “Golly Geez, Bankerman, makes me feel great we are winning the fight against Deflation!”
Bankerman puts his hand on BankerRobin’s thigh, “Don’t count you’re eggs before they are hatched BankerRobin, that’s a misdemeanor. The good news is we got gasoline and heating oil up, but there is still work to be done about food prices. Look what happened to beef prices!”
BankerRobin looks at Bankerman in awe, “Holy Cow, Bankerman, good thing you caught that. Jeez, I guess the Deflation Battle never ends , does it?”
Bankerman continues, “No BankerRobin and that’s why Gotham City needs us.”
BankerRobin starts waving his fists in the air, making SOCK, POW and POOF noises, and says “I’m ready to take on food prices Bankerman, but how?”
Bankerman says, “Don’t worry BankerRobin, I’m calling Bernanke on the BankPhone right now and ordering some more money. Then we’ll make a mass pre-approved credit card mailing to everyone over the age of 15. That should put the food deflation genie back in the bottle!”
BankerRobin puts is head on Bankerman’s shoulder and sighs, “Bankerman, I love you.”
DJC: There’s reason to believe that transforming of debt into securities creates incentives for fraudulent loans and mortgages since they can be dumped on Wall Street and sold to gullible investors.
As opposed to banks and savings and loans, whose investors generally have no idea or notion where their money is ending up. If you buy a package of securitized auto loans, you know that you are buying auto loans. If you deposit money in a bank, what fraction of that money goes into auto loans.
DJC: People don’t need more credit; they need debt relief. That means higher wages and better jobs.
The “money fairy” strikes again.
Better jobs and higher wages come from new businesses and education, and as we all know there is no relationship between new businesses and education and credit. They just magically get created by the “money fairy.”
Cedric: Call me selfish, but I really don’t want to sit here carefully not spending income I don’t have so I can pay everyone else’s consumer debt.
Too late, I’m afraid. When someone used a credit card, they already took your money, now the hard part is getting that money back. If you don’t pay their debts, then they aren’t going to be in trouble because they’ve already spent the money. The people are going to be in trouble are the savers.
Cedric: What are we supposed to do now. Not pay taxes and get thrown in jail for not paying for the deadbeats?
You can structure the taxes so that the rich get hit by them and you don’t, and you miss the point.
The “deadbeats” took the money years and years ago and spent it. The money is already gone, and for the most part, they don’t really care if get them out of debt or not. The problem now is how to pay back the people that they took money from, who are the savers.
Indian: My understanding is that $11 trillion was only the direct ‘home loan outstanding’ part; and that it didn’t include mortgage securitization, either by the Agencies or by private label firms.
No. The $11 trillion market includes all of it.
So maybe you think it is a bad idea to have banks at all, and maybe you think that it would be a better idea to have people be able to create portfolios in which they decide where their money goes. So if you want to loan money for credit card debt, you can do that, and if you don’t, you don’t. You can also structure things so that if the loans go bust then you get soaked by the losses.
What a nice idea….
One thing about the clean up, is that the federal government is going to clean up the banks because they have no real choice. Because banks have insured deposits, the government is going to have to pay for the mess one way or the other.
However if you are a hedge fund that bought a package of securitized credit card debt a year ago, you are not going to get bailed out. You lost your money and no one cares. Curiously, you aren’t going to be that interested in buying any new credit card debt.
One way out is to completely abolish FDIC insurance and force people to do their own portfolio allocations, and assume the risks of a wipe out. It might work, but I suspect that most people just don’t want to live in that sort of society in which there are no safe investments.
“What a nice idea…. ”
actually it is a nice idea:
http://us.zopa.com/
“A 40 percent decline in consumer credit is more than sufficient to push the world into another Great Depression”
Maybe so. But eliminating the shadow banking system which provides 40% of consumer loans does not automatically lead to a 40% decline in consumer credit. Other sources of consumer credit exist – sources that people should learn to use – sources that are in the regulated banking system.
I am all for eliminating or cutting back as much as possible on the shadow banking system.
DJC – I don’t know who you are and I have not always agreed with your posts, but your long contribution to this discussion above is very, very good.
“The entire financial system is now backstopped by loans from the Fed without which the global financial system would collapse”.
One thing I am certain of – there will be a global financial system next year and in all the years following.
I have no fear that the global financial system will collapse. I do have a fear that the net debts of the U.S. government will place the U .S. in a subordinate position in the global financial system that emerges.
I want to cut back on U.S. committments to maintain the existing system. That should be an objective – to be achieved gradually, with as little pain as possible. But we should work toward that objective – not the objective of keeping foreign investors active in the U.S. financial markets. We need to make sure the U.S. financial markets shrink, in keeping with their failures.
From Twofish “Because banks have insured deposits, the government is going to have to pay for the mess one way or the other”.
Yes, it is going to have to pay for insured deposits – most of which are taken over by some other bank at little cost to the FDIC.
What proportion of all the “assets” listed on the bank balance sheets are insured deposits? Very high for small regional banks. May be a small proportion for the big international banks.
I strongly resist the notion that it is impossible to change U.S. law in a way that will force the losses from this mess to fall largely on the private sector.
Indian Investor : the relationship between consumer credit and PCE may not be correctly measured by looking only at the change. The amoount of consumer credit at the end of 2004 probably reflects expenditures in 2004. If that is the case, your numbers show that 25% of PCE attributed to consumer credit (if i got your numbers right) in 2004.
ReformerRay: Yes, it is going to have to pay for insured deposits – most of which are taken over by some other bank at little cost to the FDIC.
We’ve reached the limit of that approach. If you have a bad bank and some healthy banks, then the healthy banks can take over the bad banks. The trouble with that is that once you do that, the healthy banks become much less healthy. Eventually you reach the point where the good banks can’t take over bad banks without putting themselves in extreme danger, and we’ve already reached that point.
ReformerRay: I strongly resist the notion that it is impossible to change U.S. law in a way that will force the losses from this mess to fall largely on the private sector.
I think it is quite simple. You have the government come in clean up the mess, and after the mess gets cleaned up, you then have this long discussion about who in the “private sector” pays for the cleanup, and then you just have Congress take the money from them via this thing called taxes.
The thing about “no tax” solutions is that we’ve reached the end of the line. JPMorgan took over Bear and WaMu. Bank of America got Countrywide and Merrill. Wells Fargo got Wachovia, and Citigroup is not in a position to take over anyone. All the banks that were healthy have taken a bullet for for the public good, and have become less healthy because of that.
ReformerRay: I do have a fear that the net debts of the U.S. government will place the
U.S. in a subordinate position in the global financial system that emerges.
Those decisions were made years and years ago. Bush was able to wage a major war and finance tax cuts without an obvious cost to anyone, but the costs cames from non-obvious places. But the good news is that the US is just “too big to fail.” If the US was your average country, it would have had a total economic collapse years ago, but the US is big and powerful enough so that no one wants to see it crash.
ReformerRay: I want to cut back on U.S. committments to maintain the existing system.
The existing system is changing week by week.
ReformerRay: But we should work toward that objective – not the objective of keeping foreign investors active in the U.S. financial markets. We need to make sure the U.S. financial markets shrink, in keeping with their failures.
As far as financial markets go, there is no such thing as a “US market” any more than there is a “US internet.” Everything is so connected that it creates one giant global machine.
@Twofish: I think $11 trillion plus is only just the direct mortgage loans.i.e. if you total the outstanding home loan principal on ALL US homes, you get $ 11 trillion. If you want to know the o/s principal on securitized bonds, etc you have to look elsewhere. Table L218 (link from Paul above) shows the break up of outstanding mortgage credit across different lenders. It shows, for instance, the share of commercial banks, Agency and GSE backed mortgage pools, and ABS issuers holding the corresponding mortgage assets whereas the entire $11 trillion + is a liability mostly of the household sector. Remember, the outstanding CDS principal alone was estimated to be more than $43 trillion by DTCC.
It would be useful to get this confirmed.
@Reformer: I’ve taken o/s consumer credit at the end of 2004, and at the end of 2008. The difference shows how much consumer cr increased, net of any repayments that people made. This is less than 1% of PCE for 2005-2008. Some of the repayments, for instance repayment of revolving credit such as credit card loans, might have come from HEW. Earlier total share of PCE from HEW was estimated @ 3% till 2005. Overall, around 4% of PCE was funded through Home Equity Withdrawals and increased consumer credit.
Indian Investor : What is wrong with my logic? I understand consumer credit outstanding to be to total amount of credit people have access to at a point in time. Presumabley, they get that credit in order to spend it. Our question is how much is spent in the year 2004 when total Personal Consumption Expenditures are 8,8894 billion? This is revolving credit – the get some credit, spend some and spend some more. If the amount at the end of the year is 2,191 billion is it reasonable to assume they spent 2,191 billion of that credit in 2004? AAt the beginning of the year 2004 they had a little less credit outstanding. However, I am willing to assume that the spending in one years is closely approximated by the amount outstanding at the end of the year. If that is the case, then consumer credit accounted for 2,191 divided by 8,884 or 24% of PCE for the year 2004.
The change in the two amounts does not indicate what % of PCE in one year was paid for by consumer credit.
“What is wrong with my logic?”
if there is anything ‘wrong’ with your logic, dear sir, it might be because it’s too ‘logical’?
may i suggest an absinthe?
(it’s legal here now you know)
guilt-free temporary schizophrenia works wonders on solutions to insoluble problems.
and we got right here the mother of insoluble problems.
the pinnacle of paradoxes you might say –
a land where logic fears to tread.
@Reformer:
http://www.federalreserve.gov/releases/g19/Current/
Revolving credit could be credit card o/s and non revolving credit could be things like unsecured personal loans.
In 2004 revolving credit o/s was $799.8 b and it increased to $ 963.5 b by end 2008. If a consumer makes a credit card bill of say $2000 in a month and then pays it off at the end of that month, their consumption isn’t financed by credit card debt. In this case the consumer is financing their consumption from their other sources of income.
On the other hand if they keep the bill unpaid for a long time, only then can you say that their consumption is financed by credit card debt.
Your logic seems to assume that swiping a credit card amounts to credit financed consumption. You have to look at the duration for which that bill remains outstanding to know what is financing the consumption.
I’ve looked at the o/s consumer debt at the end of the year basis, from the link above which I got from Paul.
I suspect that you will get similar results by looking at end of the month total outstanding consumer debt levels if you’re looking at those 3 years’ data.
The US economy wasn’t driven by houses alone. Around a half million new homes were constructed every year, providing an output of very approximately $100 billion(if you assume an average home price of $200 K). That’s not significant compared to the output of the entire US economy which was something like $14 trillion in 2008.
Decreasing housing starts, increased unemployment in construction, followed by re allocation to commercial real estate construction, followed by a marked downturn on the commercial side; has no doubt created a decreased level of output and aggregate demand. But in absolute terms, as a percentage of GDP, the direct output effect of decreased home building is negligible.
I suggest getting a realistic picture of the US economy by going through the NIPA tables, and from general knowledge. Look at seasonally adjusted data from Q4 2008. (other data shows approximately the same overall picture)
According to Paul Swartz’ analysis above, the absolute level of o/s consumer credit increased in December 2008. If you look at increases in o/s credit, annualize them, and compare the Q4 CY 2008 with the previous year, you might get a contracting level of credit availability. Still, the credit implosion and deleveraging process seems to be coming to a conclusion. Apart from the effects of TARP I over 2 months, soon the effects of further stimulus, and TARP II from the Obama administration are yet to be seen.
1) The US economy is more of a services economy than a products economy.
In 2008, services totaled $ 6139.8 b out of the GDP of $14264.4 b, which is 43.04% of GDP.
Durable goods were $ 944.40 b and non durable goods were $ 2846 b, giving a total of only 26.57% of GDP for goods altogether.
2) Services exports from the US are more than services imports, and the US has a trade surplus in the services category.
Services exports were $551 b and imports were 407 b, giving a surplus of $144 b or so, which tho isn;t a major percentage of GDP.
3) Trade deficit is a small percentage of GDP for the US: The overall trade deficit including goods and services was $ 529 b in 2008 (according to above NIPA tables). (I noticed another table in which the non seasonally adjusted balance for 2008 overall is -$677 b). Overall, the US trade deficit is only 3.71% of GDP.
4) The goods deficit is insignficant in comarison to the total size of the US economy. For 2008, the goods deficit is around $ 821 b, which is around 5.76% of the US economy.
5) In 2008, Government consumption expenditures and gross investment (including Federal, State, local, defense, etc) totaled $ 2914.9 b. The US Government is therefore ~20.43% of the US economy.
6) According to Brad Setser’s estimates, PBoC held around $600 b of Agencies at peak, and this has now decreased to around $450 b. The total direct mortgage debt o/s was $11 trillion+ in 2008. PBoC financing contributed negligibly to the US housing boom.
7) According to the Greenspan/Kennedy paper referenced yesterday, 3% of US PCE was funded by Home Equity Withdrawals, including repayment of non mortgage debt. Annual o/s Consumer credit increases funded another 1% of US PCE in 2008.
Twofish: Better jobs and higher wages come from new businesses and education, and as we all know there is no relationship between new businesses and education and credit. They just magically get created by the “money fairy.”
DJC: Better jobs and higher wages come from investments in productivity improving industrial technology which the US no longer invests in anymore. Economic prosperity doesn’t come from the inflation of Ponzi bubbles in subprime mortgage finance or junk bonds. As a nation, the United States doesn’t need anymore McMansions and Shopping malls from coast to coast. That is why the Federal Reserve’s efforts to re-inflate the Ponzi real estate bubble are doomed to failure. The Fed is merely delaying the inevitable economic cleansing of the maladjusted economy from the past decade of massive capital misallocation.
DJC: Better jobs and higher wages come from investments in productivity improving industrial technology which the US no longer invests in anymore.
And all this productivity improving investment involves money fairies moving money back and forth. We just have the head money fairy say “increase productivity” and it happens like magic, right?
DJC: That is why the Federal Reserve’s efforts to re-inflate the Ponzi real estate bubble are doomed to failure.
The Fed isn’t trying to reinflate the real estate bubble, it’s trying to clean up the mess that has resulted now that the asset bubble has blown up. In the bubble blowup, you’ve had a lot of damage to the financial system, and that damage has to be dealt with before you can do anything else.
DJC: The Fed is merely delaying the inevitable economic cleansing of the maladjusted economy from the past decade of massive capital misallocation.
No they aren’t. Fixing a broken financial system requires a large amount of money. Getting things to the point in which people that shouldn’t lose their deposits don’t lose their deposits requires a large amount of money.
OK, we have lots of out of work real estate brokers. What should they be doing? Whatever it is, it’s going to require massive amounts of credit in order to get those new businesses running.
Investor: Remember, the outstanding CDS principal alone was estimated to be more than $43 trillion by DTCC.
That’s a rather bogus number. I promise to give you a $1 trillion if you give me $1 trillion + $1. If you add up all are debt, it’s $2 trillion + $1, even though it’s clearly a bogus number. CDS notionals are calcuated like that.
(And in case you are wondering what happens if someone doesn’t pay, the contracts are written so that defaults are netting, meaning that if you don’t pay me a $1 trillion, I can subtract that number from the $1 trillion + $1 I owe you.)
The notational values of CDS has decreased by $20 trillion over the last year, even though only a few billion in cash has actually changed hands.
Now the $11 trillion in mortgages. That’s real money.
As long as H-Ben here is allowed to go on destroying the money “market” with his crunch creating “policies” registered falsely as Friedmanite (backed by the false Keynesians), the Treasury secretary can always find enough senators to approve different bailout proposals due to “the biggest run on money market” that will result in US financial meltdown within hours and global within 24 further ones – for sure – and then justify that kind of “reasoning” on TV as to their vote cast. While H-Ben latter on – when kicked in the butt to now “PR his ways” in order not to loose the (“private”) vote on next abc class members of some local federal board of directors in 2009-2011 – goes on air saying to “the people” that firstly and lately he too saw his former house put through foreclosure. Then explaining in detail how he and the rest of FOMC have created the crunch (the run on the money market) just before the election (hence provided the votes and the votes on counterparties behalf in exchange for a non-voting wipe out) while they then proceeded inventing non conventional credit easing tools to repair that damage to that part of the credit “market” and will in the near future TALF more on the other part of the credit “market” on the Treasury s “credit risk” account, hence for you, “the people”, all in an Oscar deserving performance way that generated applause of the mind boggled audience.
According to FDIC the big mainly »troubled« banks hold the ratio somewhere at 55% of insured deposits to their assets while 99.9% of all derivatives ($ ? 177 trillion of them) whereas all other non troubled banks ratios range from 70% (middle sized) to 80+% (small banks) while holding no derivatives. If they nationalize – whose bail out is this? It surely is not at all that of insured deposits nor is it that of the other smaller (mainly by domestic insured deposits financed assets) banks. On the other hand the other unusual suspects: derivative (and other) “exchange” delivery system, derivatives counterparties, spot market makers, subordinated and unsecured claims` within troubled banks liabilities and the FOMC permanent member chair all qualify nicely. Note that the equity holders are left out due to their non-existence. Then there are also two ridiculous ratios of equity vs. derivatives and all liabilities (insured and non- insured) vs. the same that will slip quietly under the next US budget accounting rules (that will need a restructure) should nationalization occur. All this can result in rising pressure of reparations settling in gold, not failed to deliver that time around, the above mentioned chair (previously kicked in its butt by counterparties into the AIG for” liquidity” purpose courtesy also of international swaps for default swaps for the dollar index) holding the keys to the vault.
Now this on the fly-produced divine high-flying comedy soap-show you call the ”revival of credit” is supposed to be “brilliant” and “confidence inspiring”? Go award yourself a Prize.
I went to FRB website where I learn that Consumer Credit Outstanding is the dollar value of short and intermediate term loans to indivudals not based on real estate (does include auto loans, trailers, vacations).
Outstanding to me means loans still on the books of fiance companies – loans not yet paid off.
Auto loans that are 5 years in duration (from auto finance companies)remain on the books until paid. The actual purchase may have been made in 2004 but the loan is still outstanding in 2006 or later.
The loans outstanding grew each year between 2004 and the first 3 quarters of 2008. I assume the purchases grew along with the loans – that is, that more purchases based on Consumer Credit were executed in 2005 than in 2004. Thus, it seems a safe bet to take the outstanding balance at the end of 2005 as a rough indicator of the total of purchases made in 2005. That probably is not precisely accurate, but it is the best I can do.
If that is correct, more than 20% of PCE each year is funded by consumer credit.
The AWard nominee makes an important point I would like to know more about.
He says FDIC can separate the banks – troubled and non-troubled. The troubled have 99% of the derivatives, low ratio of insured deposits to assets. Where do I find this information on the FDIC website?
Award Nominee: The person that answered the phone on the FDIC line tells me that FDIC has no information on derivatives. Is he wrong?
@Reformer: Consider somebody who has a job that gives an income of $100,000 per year. This person has o/s personal loans of $20,000 at the end of 2004. In 2005, some part of the $20,000 was paid back and some new loans were taken out. At the end of 2005, there’s $22,000 of personal loans outstanding. Actual spending might have been $22,000, plus whatever was repaid in 2005. But that spending wasn’t financed by consumer credit. It was financed by the $100,000 income; or the part of that income which was used to pay EMIs on the loan.
Suppose you borrow a cup of sugar from your neighbour today and you buy a beer for your neighbour tomorrow; your sugar consumption isn’t financed by the neighbour. As long as the part of debt that falls due is financed, the spending is financed from income, if income is the source of the debt servicing.
@Twofish: You’re right in saying the $11 trillion is real money whereas the $44 trillion CDS is notional. I was just making sure for myself the $11 trillion is the total of o/s home loan principals.
Bankerman and BankerRobin
Episode II
Even though it’s well past lunchtime, we find our Dynamic Duo still hanging out at the Bank Cave in Gotham City.
A waiter dressed in magenta spandex comes by the table and presents a tray of baby seal canapes to Bankerman and BankerRobin and lisps, “On the house, thirs. Thanks for thaving the thervice economy Bankerman and BankerRobin.”
BankerRobin blushes and replies,”Awe shucks, waiter boy. It was nothing. The last thing we want to see is you people on the streets!”
BankerRobin pulls a new $100 bill from his spandex Deflation Fighting money belt to tip waiter boy, but Bankerman grabs his arm and says, “BankerRobin, always tip with credit cards! Money multiplier, remember.”
BankerRobin says,”Righto, BM. I almost forgot. Thanks a zillion for reminding me.”. He pulls out a new Chase platinum card embossed with “To whom it may concern.” and hands it to waiter boy.
Waiter boy bubbles over with joy, and says, ” Thankyou, thankyou, caped crusaders. Now bus boy and me can get that Lexus we always wanted!”
Bankerman nods his head wisely and replies, “That’s how the economy works waiter boy, and we are happy to make you a part of it.”
BankerRobin gets a questioning look on his face and asked Bankerman, “Does tipping with credit cards create small business too, Bankerman?”
Bankerman answers, “ It certainly does. Give one to the parking lot attendant when he fetches the Bankmobile, and he’ll incorporate and be an independent contractor in no time. Probably will name his company “Parking Technologies” or something like that, but we always leave the details up to entrepreneurs.”
BankerRobin says,”So he’ll need attorneys and tax lawyers too! Golly Wow, BM. I think I’m getting hang of this!”
Award: According to FDIC the big mainly »troubled« banks hold the ratio somewhere at 55% of insured deposits to their assets while 99.9% of all derivatives ($ ? 177 trillion of them) whereas all other non troubled banks ratios range from 70% (middle sized) to 80+% (small banks) while holding no derivatives.
This is a bit confused. There isn’t as far as I can see very much of a correlation between bank size and degree of trouble. There are big banks that are in good shape and small banks that are in a whole lot of trouble. Derivatives complicate the situation, but you can be in good shape if you have the right derivatives, whereas if you have no derivatives but a bunch of bad loans, then you are in trouble.
Also if you try to measure the amount of derivatives by adding up notional numbers, you get high but meaningless numbers.
ReformerRay: He says FDIC can separate the banks – troubled and non-troubled. The troubled have 99% of the derivatives, low ratio of insured deposits to assets. Where do I find this information on the FDIC website?
I’d be interested in finding this out since it seems to me to be totally false.
Also be careful with mixing what the FDIC says with what you are saying. The ratio of insured deposits to assets versus size of bank looks to me to be reasonable. Although the numbers may be off once FDIC removed the deposit limit. People that have $2 million in their checking account typically have them in big banks.
The notion that the major troubled banks are large ones and that smaller banks have no problems doesn’t look like it came from the FDIC.
The other thing that is confused is assets and liabilities. To a bank, a deposit is a liability not an asset. So I think the poster was trying to imply that if a bank has 99% FDIC backed deposits that it doesn’t have derivatives which is wrong. You could have a bank with 99% FDIC backed deposits (i.e. liabilities) backed completely by mortgage backed securities.
Indian Investor : I think people take out loans so the can spend money today that they don’t have today. Maybe the whole idea of estimating the percent of PCE that we can attribute to loans is a bad idea. You are right that loans have to be paid, mostly. However, a lot of people think that ease of getting loans supports auto sales. Could be that loans merely change the date of a sale.
All I object to is your conclusion that Consumer Credit is responsible for a negible % of PCE. I don’t think your calculations support that conclusion.
Private sector certainly failed in directing resources into an efficient use. The self-regulated social corporate responsibility model is not working. Active monitors including equity investors, creditors,rating agencies, pension fund portfolio managers etc.failed to monitor the economy and put money into productive use. Laws and regulations on capital market are inadequate and insufficient to protect the interest of general stakeholders.
CFR- please generate posts on how to reform the current system and make someone accountable for the action of their own behaviors.
The numbers do not add up, the post is not clear.
Consumer credit growth is 6% in 2008, but only 1% of GDP…
the ratio annual growth / GDP is not interesting. Much more is Annual level of consumer and housing debt / GDP.
All in all the graphs point a debt level on the rise for all of the period.
Twofish: Fixing a broken financial system requires a large amount of money. Getting things to the point in which people that shouldn’t lose their deposits don’t lose their deposits requires a large amount of money.
Ahem, it requires only as much money as it takes to guarantee those deposits. Let’s tally that up and see if it’s less than just one trillion dollars. Betcha it’s a lot less.
Twofish: OK, we have lots of out of work real estate brokers. What should they be doing? Whatever it is, it’s going to require massive amounts of credit in order to get those new businesses running.
We don’t all have to pay to retrain real estate brokers. They were good enough to capture 6% of our real estate transactions, they are good enough to find their way in the new economy.
It’s just being realistic. We all know that real estate brokers do not create value. Those who choose that career are entitled to the upside, and the downside.
In order to have an orderly unwind of excesses, you can’t simply allow a huge chunk of the credit system to evaporate. We need securitization to bridge the gap between where we are and where we need to be.
The originate to distribute model took out huge chunks of the traditional banking system.
However, it isn’t essential to buy OLD securitized loans, just buy new ones.
It is time for securitization 2.0. Since the Treasury will be the buyer, they can dictate the specs. More/total transparency, stricter guidelines, etc.
Once that source of credit is flowing, then we can work on where we want to go. I would suggest that the Treasury develop the type of securitization that would correct the problems that just blew us up.
Further, they don’t have to do it all. The banks can regain some of their market share. The total securitization market can shrink some.