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Bank Lending growth is not evidence that there is no crises

By Spencer

I just posted this in the comments at Marginal Revolution to explain why the view that expanding bank lending demonstrates that their is no crises is incorrect.

By looking at bank lending you are looking at the wrong side of the bank’s balance sheet. The point that bank lending is expanding is not a sign that their is no credit crunch. Rather it is an indicator that the Fed actions over the last year to provide large scale financing to the banking system is working.

The crises is not on the asset side of the banks balance sheet. Rather it is in the liability side of the balance sheet where they raise the funds to finance their loans and/or investment. To keep it simple this consist of three items.One is deposits. Two is borrowing in the money markets. Three is borrowing from the Fed.

The crises has been the contraction in the banks ability to borrow in the money markets as evidence by the drop in financial commercial paper and other short term instruments. Everything the Fed has done over the last year to provide special financing to the banks has been to offset or counterbalance the banks inability to funds their operations in the money markets. The fact that bank lending is still rising demonstrates the success of the Fed undertaking its lender of last resort. So again, the growth in bank lending does not demonstrate that their has been no crises. Rather it demonstrates the Fed success in dealing with the crises.

Why are firms borrowing? One of course, is to draw on lines of credit to offset their inability to raise funds in the money market. The second goes to the point that bank credit is a lagging indicator. In the early stages of a business downturn business credit demands typically surges. This stems from the point that their normal source of a positive cash flow, sales are drying up as demand contracts. But because sales are contracting they have to finance an unusual surge in unwanted inventories and their normal day to day expenses such as payroll. Until firms can dispose of their unwanted inventories and cut expenses they have to expand their use of credit. This is why credit demand normally expand sharply in the early stages of a business downturn and why bank lending is typically a lagging indicator. This typical early business cycle behavior is exactly what we are now seeing. This did not happen in the last cycle because it was not a typical cycle. It was caused by a collapse in capital spending, not by a contraction of consumer spending as we are now seeing.

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Draining the 401k pool of money


A quick search on 401ks in response to reader Noni Mausa: Via Money Central:

Financially stretched workers are increasingly breaking into their retirement accounts to get cash.
Over the past couple of decades, the 401(k) account and its brethren have become the main retirement savings vehicles for millions of Americans. But as the credit crunch and declining home values limit many types of consumer loans, a growing number of workers are tapping into these accounts as if they were piggy banks.
Eighteen percent of workers had loans outstanding from their retirement plans in 2007, up from 11% in 2006, according to a survey by the Transamerica Center for Retirement Studies, a nonprofit corporation funded by Transamerica Life Insurance.
Major retirement plan providers are reporting a similar trend. The number of participants taking loans from their 401(k) plans rose by 7% at the end of last year from six months earlier, according to a JPMorgan Chase analysis of 350 plans nationwide that cover 1.3 million people. Those results followed a period from January 2005 through June 2007 when loans from these 401(k) plans fell by 15%.
Similarly, in 2007, 401(k) plans administered by Fidelity Investments and T. Rowe Price Group posted increases in loans and so-called hardship withdrawals for people who demonstrated immediate financial needs, such as medical expenses, over the prior year.
In all, there was roughly $49 billion of 401(k) loans outstanding at the end of 2006, according to an estimate by the Employee Benefit Research Institute, a nonprofit research group in Washington, D.C.
Trend is ‘alarming’

For workers, a retirement plan loan may seem like a quick and easy solution to a cash crunch. Borrowers don’t need good credit ratings, interest rates are generally relatively low, and interest is paid to the borrowers’ accounts, not to banks.
But the rise in retirement plan loans is “an alarming trend,” says Catherine Collinson, the president of the Transamerica Center for Retirement Studies. “The real secret of building a retirement nest egg is saving over the long term on a consistent basis,” she says. Hitting up your retirement account for cash throws a wrench into this process.
There are other reasons why borrowing from your 401(k) can wreak havoc on your finances. A worker who leaves a job before a loan is paid off will have to pay the remaining balance in full or else face taxes and potential penalties. What’s more, given the stock market’s recent declines, participants now borrowing from plans may be selling assets at depressed values to fund the withdrawals.
Link to foreclosures seen
Why the surge in 401(k) loans? Until recently, soaring home prices made it easy for consumers to tap their home equity for funds. But now that home prices are dropping rapidly in many markets, more workers, loaded with debt and struggling to make mortgage payments, are turning to their retirement plans.
Talk back: What is your retirement target number?
In the Transamerica study, which surveyed more than 2,000 full-time employees at for-profit companies, 49% of those who borrowed from their retirement savings said they had taken the loans to pay off debts, up from 27% in 2006.
In some instances, workers in fear of home foreclosure may be tapping retirement funds as a last-ditch measure, says Anne Lester, a senior portfolio manager at JPMorgan Asset Management.

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You Can Lead a Horse’s Arse to Water, but…

You can’t make him think—or own to loan. Krugman notes:

[L]ast week Joe Nocera of The Times pointed out a key weakness in the U.S. Treasury’s bank rescue plan: it contains no safeguards against the possibility that banks will simply sit on the money. “Unlike the British government, which is mandating lending requirements in return for capital injections, our government seems afraid to do anything except plead.” And sure enough, the banks seem to be hoarding the cash….

Events have forced Mr. Paulson into a partial nationalization of the financial system — but he refuses to use the power that comes with ownership. [link added]

So that $700 billion was the kleptocratic c.f. Main Street suspected it was, and which Wall Street has known at least since Ms. Smith Listened in on Washington.

And that just means it will be longer, and worse. But Jamie Dimon will be richer at the end, so all is well in Paulsonland.

UPDATE: Peter Dorman at Econospeak was all over the Nocera piece the day before I saw it. And his reading, naturally, is classier than mine:

You can lead a bank to liquidity but you can’t make it loan.

but the description is pretty much the same:

It makes it crystal clear that Paulson has a plan for his friends in the financial world, but there is no plan for the economy.

The United States can’t wait for noon on January 20, 2009.

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Layoffs begin to replace cutting hours worked

by rdan
The NYT provides charts and article as well. (hat tip reader kuros)

Layoffs have arrived in force, like a wrenching second act in the unfolding crisis. In just the last two weeks, the list of companies announcing their intention to cut workers has read like a Who’s Who of corporate America: Merck, Yahoo, General Electric, Xerox, Pratt & Whitney, Goldman Sachs, Whirlpool, Bank of America, Alcoa, Coca-Cola, the Detroit automakers and nearly all the airlines.

When October’s job losses are announced on Nov. 7, three days after the presidential election, many economists expect the number to exceed 200,000. The current unemployment rate of 6.1 percent is likely to rise, perhaps significantly.

“My view is that it will be near 8 or 8.5 percent by the end of next year,” said Nigel Gault, chief domestic economist at Global Insight, offering a forecast others share. That would be the highest unemployment rate since the deep recession of the early 1980s.

Companies are laying off workers to cut production as consumers, struggling with their own finances, scale back spending. Employers had tried for months to cut expenses through hiring freezes and by cutting back hours. That has turned out not to
be enough, and with earnings down sharply in the third quarter, corporate America has turned to layoffs.

I have noticed that people in various circles I travel still avoid actually talking about economics, as if it is a “math and my checkbook” emotional response or something they find too esoteric. As if what they do is not arcane enough to the rest of the world, or they are insulated so far from the fall out and will wait to see.

They are smart and knowledgeable yet willfully oblivious to possible repercussions except for a sense of worry that is kept vague, or rigidly kept in a political framework of party, “economic school” in the broadest sense of market or not, or personal finance. All political persuasions. I want to emphasize that if I can learn, so can any reader pay enough attention to follow the arguments and the feedback. Politicized talking points in comments get us nowhere … take the next step in comments and follow through to reasoned argument. We will need it.


think voters would like to be serious, but don’t know how. And the media doesn’t provide them with a way to be serious–serving as trusted intermediaries to tell Americans about candidates’ likely policies and their likely effects is the last thing from reporters’ minds. Recall New York Times editor Jill Abramson’s sorry excuse that the Times hadn’t run stories about issues because the reporters competent to cover policy substance were all dragged off to write about the financial crisis.

(Quote from Brad Delong’s post that Ken Houghton links)

Update 2: Then again,Dick Cheney’s sunglass reflection get more hits by a wide margin.

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Underemploment numbers

OMB Watch carries:

Notes from the Economy: Underemployment
While the monthly number is an important component in summarizing the state of economy, but it’s an incomplete indicator. For example, at the state level in August, 20 states had unemployment rates greater than the national average of 6.1 percent, while 31 states had unemployment rates below the national average. Yet, the trend is unmistakable: compared a a year ago, 48 states have seen their unemployment rate increase with 34 percent increasing more than one percentage point.

The Economic Policy Institute reminds us that there are more dimensions to employment than the unemployment rate. In a slowing economy, millions of workers are forced to take lower-paying or part-time jobs, squeezing family budgets. This aspect of the jobs market rarely makes headlines, but it results in real hardships for millions of families.

At 11%, the underemployment rate in September was at its highest in more than 14 years. The underemployed currently includes about 9.5 million unemployed workers, 6.1 million involuntarily part-time workers, and 1.6 million workers only marginally attached to the workforce.1 The fact that one out of every nine U.S. workers is now either unemployed or underemployed is clear evidence of the need for a second stimulus package targeted at job creation.

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Win the Nobel Prize,* they publish you on Sunday instead of Monday

Krugman believes people want someone who is “serious”:

In a way, you can’t blame Mr. McCain for campaigning on trivia—after all, it’s worked in the past. Most notably, President Bush got within hanging-chads-and-butterfly-ballot range of the White House only because much of the news media, rather than focusing on the candidates’ policy proposals, focused on their personas: Mr. Bush was an amiable guy you’d like to have a beer with, Al Gore was a stiff know-it-all, and never mind all that hard stuff about taxes and Social Security. And let’s face it: six weeks ago Mr. McCain’s focus on trivia seemed to be paying off handsomely.

But that was before the prospect of a second Great Depression concentrated the public’s mind….

[T]he Barack Obama voters see now is cool, calm, intellectual and knowledgeable, able to talk coherently about the financial crisis in a way Mr. McCain can’t. And when the world seems to be falling apart, you don’t turn to a guy you’d like to have a beer with, you turn to someone who might actually know how to fix the situation.

UPDATE: Brad DeLong has more on this, with graphics (but without Annoying Videos).

Somewhere, McCain’s uber-handlers are trying to figure out why they didn’t go with Kay Bailey Hutchinson, who would not have been subject to this:

Meanwhile, the video of the night on November 4th should be this one (NSFSanePeople):

*Or its Economics equivalent

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So Why Did we Give SunTrust "bailout buying" money?

Via Dr. Black, Alpha Bank and Trust of Alpharetta is now FDIC-owned.

In related news, PNC is paying about $5.6 billion for midwest-based National City, which was a major player in subprime until everyone realized they weren’t any good at it.

As noted previously, the claim was that monies given to “regional leaders” such as Atlanta-based SunTrust would be used to purchase Endangered Banking Species.

You don’t get much closer to Atlanta than Alpharetta. On the other hand, judging by contemporaneous financial analysis, SunTrust may have been more in need of bailing out than able to bail out.

So Another One Bites the Dust. And Main Street can wonder, once more, exactly what that $700 Billion is supposed to do, other than line the pockets of Hank Paulson’s friends.

*See “my” novel Atlanta Nights for details. Or, as a better idea, just check a map.

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The Palin Curse Manifests itself

In the “correlation may not be causation, but the trend is your friend” category.

Republican Vice Presidential candidate Sarah Palin—at the request of McCain-supporting Flyer owner Ed Snider—dropped the puck in celebration of “hockey moms” at the Flyers home (and season) opener. That was October 11th.

They lost. Followed by five more losses (three in Overtime).

Last night, Palin dropped the puck in St. Louis. Coincidentally(?), the Flyers won their first game of the season (against a much better team, on the road).

Meanwhile, in St. Louis, not only did the Blues lose a shutout, but their goalie was injured, in a manner directly related to Palin’s presence.

The Palin Curse appears to have been transferred.

UPDATE: Dr. Black also calls it a curse.

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Infant Mortality – The Excuse is Addressed

by cactus

Infant Mortality – The Excuse is Addressed

From a report put out by the CDC:

Infant mortality rates were generally lowest (below 3.5 per 1,000) in selected Scandinavian (Sweden, Norway, and Finland) and East Asian (Japan, Hong Kong, and Singapore) countries. In 2004, 22 countries had infant mortality rates below 5.0.

The United States’ international ranking fell from 12th in 1960 to 23d in 1990, and to 29th in 2004.
International comparisons of infant mortality can be affected by differences in reporting of fetal and infant deaths. However, it appears unlikely that differences in reporting are the primary explanation for the United States’ relatively low international ranking.

I guess even the CDC got tired of the usual right wing talking point which goes something like this:

Just the other day, my cousin’s brother’s friend’s pet walrus mentioned that a person isn’t even considered alive in France until they reach their 47th birthday – 48th if they’re a Libra. And in Germany, they won’t even admit a child died unless a foreigner happens upon the dead body when it gets chucked onto the trash heap. So that proves our glorious free market healthcare system outperforms the socialist and semi-socialist medical systems in Scandinavia, Japan, Western Europe, Canada, and Singapore, regardless of what the statstics say. Woo-hooooooo! USA! USA! We’re number one!

by cactus

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