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Here are the latest bank closings for this week as announced by the FDIC. This puts bank closings at 118 this year. I wish to remind readers that I intend these announcements to be a positive thing for the economy. By trying to prevent bank closings, needed liquidity is thwarted from reaching the economy. [...] UPDATED Part 2 of 2 There are three factors that will hurt bank earnings: weak loan demand, spreads on interest income will narrow because of competition among banks, and it appears that many banks are concealing the true state of their balance sheets because of “extend and pretend” policies. “Extend and pretend” and “mark-to-make-believe” have been a major factor in dragging out this recession and is a major threat to the economy. This article describes the problem well:
But here is one positive note. … Continue reading Why Small Banks Are The Key To Recovery-Part 2 The critical factor in our economy right now is a declining money supply which has been the result of the “credit crunch” or what Keynesians call a “liquidity trap.” We have discussed this frequently on this blog. I believe deleveraging is the key to an economic recovery and measures of business. The result of deleveraging is deflation, but instead of seeing deflation as a negative, it is a necessary step for growth. I look at these issues quite differently from Keynesian and Neo-classical economists. As we have seen the Fed has been unable to stimulate money growth through zero interest rate policy (ZIRP) or through quantitative easing (QE). This is something that their theories not been able to adequately explain, and the outcomes of their policies have led to continued high unemployment, declining growth, declining money supply, and deflation. The policy makers at the Fed and Treasury have run into the same problems that mired Japan’s economy for almost 20 years: sluggish growth amidst deflation. The reason we are seeing money supply decline is twofold. Banks have (1) tightened lending standards which makes credit less easy to obtain, and (2) banks are finding it difficult to find credit worthy borrowers. While the Money Base has increased dramatically, these funds sit in the Fed as “excess reserves” where banks earn interest on it from the Fed. I will explore this issue in a moment. But first … … Continue reading Why Small Banks Are The Key To Recovery-Part 1 Here are the latest bank closings for this week as announced by the FDIC. This puts bank closings at 108 this year. I wish to remind readers that I intend these announcements to be a positive thing for the economy. By trying to prevent bank closings, needed liquidity is thwarted from reaching the economy. [...] Here are the latest bank closings for this week as announced by the FDIC. This puts bank closings at 103 this year. I wish to remind readers that I intend these announcements to be a positive thing for the economy. By trying to prevent bank closings, needed liquidity is thwarted from reaching the economy. [...] Here are the latest bank closings for this week as announced by the FDIC. I wish to remind readers that I intend these announcements to be a positive thing for the economy. By trying to prevent bank closings, needed liquidity is thwarted from reaching the economy. This is one of the major factors hindering [...] UPDATEDRegular readers of The Daily Capitalist know I think we are headed for a decline in economic growth in 2010 and that the data is starting to show this. Why isn’t our economy recovering? I ask that question often and have written about it many times. Perhaps a better question is: what needs to happen in order to make our economy grow? I offer some solutions. There are many problems seen as hindering recovery. Here are the common ones I wish to examine:
There are a host of other issues that are also important but let me focus on these points and show what can be done to fuel a recovery. Numbers 1 and 2 (debt/demand) are related. Our economy is consumer driven and we are reminded over and over again that consumer consumption is 70% of our economy. To put this in perspective, for Germany it is about 57% of GDP. Our economy is built on consumption which is fine as long as it is supported by real savings, productivity growth, and wage growth. The data reveal that most of the consumption binge of the boom phase of this current cycle was financed directly or indirectly by debt related to rising home values. Personal savings declined to almost zero. Now savings are back up to 4%. Here is why this is seen as a problem for recovery: PCE will decline as consumers pay down debt and increase savings. Spending drives the economy and the economy will decline. Is this really a problem? Saving is a process necessary for a recovery. Consumers are acting rationally to uncertainty and they will give us the signal when they are ready to spend again. About $10 trillion in household net worth was wiped out during the bust. Until consumers see unemployment decrease, wages go up, and their debt go down, they aren’t going to spend anyway. But savings is never bad for an economy. Economists often fail to look at the other side of savings which is an increase in capital necessary to fuel future growth. In a normal cycle, increased savings reduces interest rates, which sends a signal to producers of capital goods that consumers don’t want to buy consumer goods right now, and that there is opportunity for them to increase production of durable goods such as machines, homes, and basic equipment. They use the loan funds to pay workers who will spend which, as this capital works its way through the economy, will create new and real economic activity. While manufacturers have been increasing production in response to normal business cycle activity (inventory recovery; weak dollar advantages), they are just utilizing current capacity. If they wanted to expand, unless they are a large company with access to money center capital, they now report they are having trouble getting a bank loan. What does this mean? It means they can’t expand and hire new workers whose spending will take up the slack from consumers who save. The government and the Fed have confused our ability to make economic decisions because they are artificially lowering interest rates. What can we do to fix this? Savings is the fix. There is nothing that should be done to prevent this from occurring. In the longer term it will prepare the economy for new growth. See No. 4 for why flogging a dead horse is harmful to recovery. The question is: why can’t we get loans? … Continue reading How To Start An Economic Recovery
Last weekend I attended Freedom Fest, a libertarian-ish convention in Las Vegas. You know, from Steve Forbes to Peter Schiff. I was there for a one day session with the Mises Institute but also wandered in and out of other lectures, perused the vendor section, and cruised the floors of Bally’s and Bellagio. Here are a couple economics vignettes of things that interested me about Las Vegas. Tale No. 1 Las Vegas Because I wasn’t staying at Freedom Fest’s venue, Bally’s, but rather at a friend’s place, I managed to take about 8 cab trips back and forth (you can’t walk around when it’s 110°) and struck up conversations with my cabbies. All, except for two, were immigrants from Haiti, Ethiopia, Iran, West Indies, Central America, and one who refused to identify his country of origin. Without exception they all said business was slow, tips were down, and they were making far less money than during the boom. But here’s the saddest tale, and I am told, far from infrequent. My cabbie Tony, 50 years old and born in the USA, was no longer a home owner. He had a home, bought during the boom, maxed out his loan at 90% of value, and watched it go down from the $305,000 he paid to “I don’t know what it’s worth today. I gave it back to the bank.” As gambling in Vegas was seen as a frivolous pastime, his cab business declined at well–he and his partner had 5 cabs and his employees drove the other cabs in double shifts. He lost those as well when he couldn’t make the bank payments. Oh, and he and his wife got divorced, and then she lost her job as well. “I got nothing, but I love my family,” Tony said. It gets worse. His father also got into the “game” and bought 3 homes. The last one was at a developer’s “lottery” for about $800,000. When he mentioned that dad was the lucky buyer at a lottery, I knew right where the conversation was going. Dad lost all three homes and is now broke. Without his Social Security check, he’d be living with Tony. … Continue reading Tales of Vegas Part I Here are the latest bank closings for this week as announced by the FDIC. I wish to remind readers that I intend these announcements to be a positive thing for the economy. By trying to prevent bank closings, needed liquidity is thwarted from reaching the economy. This is one of the major factors hindering [...] Can you believe there were no bank closings this week. The FDIC must be saving them up. But, I do have something for you: credit union closings. There have been 10 federally insured credit unions liquidated so far in 2010; 16 federally insured credit unions liquidated in 2009; [...] There are three banks closed by the FDIC today. That brings the total t0 86. High Desert State Bank, Albuquerque, NM First National Bank – GA, Savannah, GA Peninsula Bank, Englewood, FL The FDIC closed only one bank this week, bringing the total for this year to 83. Nevada Security Bank, Reno, Nevada. So far today, only one bank was closed by the FDIC: Washington First International Bank, Seattle, WA This brings the total up to 82. Q: Why do I report this? A: It is actually a sign of recovery as bad banks are cleared out of the economy. The sooner this happens, the quicker our [...] So far today the FDIC has listed two bank closings which brings us to 80 81 banks for 2010. TierOne Bank, Lincoln, NE Arcola Homestead Savings Bank, Arcola, IL First National Bank, Rosedale, MS I’ll update this list if more banks are listed. These five new closed banks add up to 78 banks closed by the FDIC this year. Sun West Bank, Las Vegas, NV Granite Community Bank, NA, Granite Bay, CA Bank of Florida – Tampa Bay, Tampa, FL Bank of Florida – Southwest, Naples, FL Bank of Florida – Southeast, Fort Lauderdale, [...] A Plan For Recovery While bank closures and high foreclosure and mortgage default rates are universally seen as negative impacts on the economy, it is closures and foreclosures that we need for a recovery. The bearers of such news are usually ignored as doom-sayers, bears, or Cassandras: no one wants to hear bad news. A fear of “bad news” is what has been driving the government’s recovery policies and that is why this recession is not over. In fact those same policies may be leading us to a renewed period of decline. It is of course unfortunate and sad to see banks close and people lose their homes. But when put in the context of the boom years when personal, corporate, bank, and government debt went off the charts, deleveraging has the effect of creating the conditions needed for a recovery. We have not recovered. We see people still saddled by high personal debt. We see most banks weighed down by bad loans from commercial real estate, residential development, and consumer loans. We see deflation continue to drive residential real estate and commercial real estate down, further magnifying the the impact. As a consequence, credit is still largely frozen for most individual and business borrowers, money supply continues to shrink, the economy appears to be headed to stagnation, and unemployment remains disturbingly high. … Continue reading Why Deleveraging Is Necessary For Economic Recovery The FDIC closed only one bank this week: Pinehurst Bank, St. Paul, MN This brings this year’s total up to 73. There are more to come. See “Ten Percent of US Banks Are In Trouble.” The FDIC reported today that the number of troubled banks rose to 775, and total assets of “problem” institutions increased from $403 billion to $431 billion:
Much of the gains seen in banking were confined to the largest banks, although 51% of banks saw growth in net income in Q1 :
The detail on loan problems is interesting, and the FDIC sees this trend leveling off: … Continue reading Ten Percent of US Banks In Trouble It’s Friday already and that means our weekly bank closings report from the FDIC. Here’s the latest. Since these tend to trickle out, I’ll update if necessary. This makes it 72 bank closings so far this year. Midwest Bank & Trust Company, Elmwood Park, IL Southwest Community Bank, Springfield, MO New Liberty Bank, Plymouth, [...] This is just in from the FDIC. These banks were closed which brings the total to 68 this year. 1st Pacific Bank of California, San Diego, CA Towne Bank of Arizona, Mesa, AZ Access Bank, Champlin, MN The Bank of Bonifay, Bonifay, FL |
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