What Is All the Market Excitement About?

The International Monetary Fund updated its Global Financial Stability Report Wednesday. I received a barrage of emails from analyst cohorts telling me about the green lights provided by the report. I dove in, and came away with less an impression of green lights than a slight flickering of the red from being lit up so brightly for so long. I'll go through some highlights with you, and let you make up your own mind.

The GFSR thinks overall financial sector losses are less than it expected six months ago, but still staggering. "For both banks and other financial institutions, the GFSR calculates that actual and potential writedowns from bad assets such as loans and securities have fallen by some $600 billion over the past six months -- from about $4 trillion to $3.4 trillion, as a lessening in financial stress has narrowed spreads." When was the last time writedowns of $3.4 trillion were considered a pop-the-champagne moment in your experience? It expects US banks to lead the debtors list by incurring about $1 trillion of that sum.

It estimates that commercial banks have already written off $1.3 trillion so far in 2009, but still have another $1.5 trillion to go. In other words, we're not even halfway through this collapsing card house yet!

From the report: "Even though bank earnings are recovering, they are not expected to be big enough to offset fully the anticipated writedowns over the next 18 months. The insufficient earnings, combined with continuing deleveraging pressure, means banks will have to raise more capital." You think? Anybody running a spreadsheet through this crisis has been aware of that for about eighteen months, and wondering what all the stock market excitement has been about.

Despite being only halfway done, "Many private sector financial risks were transferred to the public sector during government rescue operations, leaving the governments vulnerable to future shocks. Countries with high debt-to-GDP ratios and large contingent liabilities (such as bank asset or liability guarantees) are particularly vulnerable." In other words, the United States. This means that if we do see a double-dip, there isn't a whole lot more left in the government tank to stimulate the economy into another false bubble. On the next leg down, we shouldn't expect another liquidity rescue like we got last time.

Those saying that the crisis is over and the economy on the mend will enjoy this next part: "Although banks' balance sheets have been stabilized, some of it because governments have injected capital, banks are not yet in a strong position to lend support to the economic recovery." No kidding, and maybe that's why we haven't seen lending tick up yet. Trillions into the black holes of banking, nothing out, sounds like just the recipe that created a two-decade recession in Japan -- so far.

If that's what passes for good news these days, brace yourself for the bad.

Comments

[User 353732:]

1.What this documents, briefly, is the greatest, sustained, unpunished, act of financial predation in Western history.....and Wall St analysts applaud?

2. The transfer of risk to Main St from Wall St via the police powers of Big Govt, while ensuring all rewards go politicians and bankers and those enjoying their patronage, is a financial Jihad by ruling elites against their own people........and Wall St analysts applaud?

3. The accelerating accumulation of National liabilities without the consent of the governed , accompanied by a structural compression in the capacity of ordinary Americans to create wealth, is a deep betrayal of the American experiment and a premeditated act of great malice against the American future....and Wall St analysts applaud?

Oct 01 09:39 AM

[Leftfield:]

This is the good news! Reminds me of Orwell, "1984," first page, there is a billboard that says, "Slavery is Freedom!" Now, we keep in place the leaders, accelerate policies that got us into this hole, and applaud the achievement of fewer "Trillions into the black holes of banking, nothing out" than analysts expected.
The longer the transfer of bank liabilities to public balance sheet goes on, the more the public is raped and pillaged for the privileged and connected. Is this the road to recovery?

Oct 01 10:12 AM

[Joseph L. S...:]

What to do besides complain or invoke conspiracy theories? One way to rein in the excesses and return the pendulum to the middle might be:

1. Term limits on both Congress AND political appointees in the executive branch. We would still have screw-ups but at least they'd be different screw-ups -- and lobbyists would have to work ten times as hard to get the new kids to play ball. This was the original intent of the Founding Fathers, with Jefferson noting that the only check on a legislator's folly was knowing he had to return and face those in the communities that elected him.

2. No revolving door between Wall Street and the executive branch. Once you go into "service to the people" it must be real service rather than a sabbatical where the good ole boys promise you a $10 million bonus the year you return to the fold for all that time you spent "working for peanuts" (like the $191,300 the Treasury Secretary makes) to ensure "nobody does anything stupid in DC" -- like tax hedge funds, curtail risk, prevent banks from using depositors money to trade derivatives, etc. I'd say a 5-year "no compete" variation ought to do it: if you oversaw a particular industry, you don't get to work in or "consult" to that industry for 5 years.

For those coming from an industry with a "5 seconds is long-term" time horizon, that might put some brakes on those coming in for their mandatory 2-year stint to protect their cronies, and instead attract real overseers, real reformers and executives really interested in the daily fate of the American people.

Oct 01 11:31 AM

[MikeX:]

Joseph, term limits do not help. Government has been pushing the crash further and further to let the next administration deal with it:

www.tradingstocks.net/...

The long term solution is to have a monetary system where
1. Banks are not allowed to create money.
2. Interest is forbidden.


On Oct 01 11:31 AM Joseph L. Shaefer wrote:

> What to do besides complain or invoke conspiracy theories? One way
> to rein in the excesses and return the pendulum to the middle might
> be:
>
> 1. Term limits on both Congress AND political appointees in the executive
> branch. We would still have screw-ups but at least they'd be different
> screw-ups -- and lobbyists would have to work ten times as hard to
> get the new kids to play ball. This was the original intent of the
> Founding Fathers, with Jefferson noting that the only check on a
> legislator's folly was knowing he had to return and face those in
> the communities that elected him.
>
> 2. No revolving door between Wall Street and the executive branch.
> Once you go into "service to the people" it must be real service
> rather than a sabbatical where the good ole boys promise you a $10
> million bonus the year you return to the fold for all that time you
> spent "working for peanuts" (like the $191,300 the Treasury Secretary
> makes) to ensure "nobody does anything stupid in DC" -- like tax
> hedge funds, curtail risk, prevent banks from using depositors money
> to trade derivatives, etc. I'd say a 5-year "no compete" variation
> ought to do it: if you oversaw a particular industry, you don't get
> to work in or "consult" to that industry for 5 years.
>
> For those coming from an industry with a "5 seconds is long-term"
> time horizon, that might put some brakes on those coming in for their
> mandatory 2-year stint to protect their cronies, and instead attract
> real overseers, real reformers and executives really interested in
> the daily fate of the American people.

Oct 01 02:33 PM

[untrusting ...:]

Good summary and observations. Thanks for posting it.

Oct 01 11:24 PM