Capital Markets

Zombie Banks Well Enough to Go Off Life Support While Living Fight Over Canned Goods


Order another round of recession-is-over stories. 

Federal Reserve data show that U.S. households got slightly richer in the fourth quarter of 2009—marking nine straight months of increasing household net worth.

The household net worth figure of $54.2 trillion from the Fed's quarterly flow of funds report, which is out today [pdf], suggests Americans are worth about $2.8 trillion more than we were early in 2009. That still puts us more than $10 trillion off where we were at the peak in Q4 2007, but these numbers are subject to substantial revision as more data come in. The current Flow of Funds report, for example, estimates household net worth (the difference between the value of assets and liabilities) at the peak as about $65 trillion. When the Q4 2007 report first came out, however, that figure was just shy of $58 trillion, indicating that $7 trillion subsequently turned up in couch cushions throughout the land.

Much of fourth quarter growth has come through stock market gains, which are still the only real area of growth in the economy. So if you think there is thick ice under the Dow, this could be a real return to value. Does it mean the recession's over?

Early this week, Federal Reserve Bank of New York executive vice president Brian P. Sack gave an interesting speech detailing the success of the Fed's emergency liquidity facilities, and as soon as I read it I thought, as I'm sure you did: In the more than a year that these lending windows were open, why didn't Morgan Spurlock or some prankster like that make a documentary about going to the Fed and trying to get a loan from the emergency lending facilities? They could have posted the responses on YouTube. Too late now! Sack clucks:

As is well known, the Federal Reserve launched a number of liquidity facilities to provide short-term funding to the financial markets during the crisis, in order to meet the extraordinary demand for liquidity at that time… Just today, we conducted the last operation associated with those facilities, meaning that all of the short-term liquidity facilities that were introduced during the crisis have now effectively been retired…

With the wind-down of these short-term liquidity facilities, it is a good time to look back and assess their performance. The bottom line here is simple: These programs were an unquestionable success. We have witnessed a remarkable improvement in the functioning of short-term credit markets and an impressive recovery in the stability of large financial firms. While a whole range of government actions contributed to this recovery, giving financial institutions greater confidence about their access to funding, and that of their counterparties, was most likely a crucial step toward achieving stability.

Moreover, the exit from these facilities has been quite smooth. At their peak, these facilities provided more than $1.5 trillion of credit to the economy. Today, the remaining balance across them is around $20 billion. It is impressive that the Fed was able to remove itself from such a large amount of credit extension without creating any significant problems for financial markets or institutions. That success largely reflects the effective design of those programs, as most were structured to provide credit under terms that would be less and less appealing as markets renormalized. This design worked incredibly well, as activity in most of the facilities gradually declined to near zero, allowing the Fed to simply turn them off with no market disruption.

Calculated Risk has some praise for the short-term liquidity program as it winds down. But while the Fed may have managed to keep banks twitching and blinking, aren't we just going to face the same trouble again as more debts go bad, not just in real estate but in automotive, education, and unsecured credit?

Dr. Doom, booty hound.

In his email newsletter, super party animal Nouriel Roubini rolls the dice on more recession, in the form of an extended trough, u-shaped, double-dip, dipsy-doodle or other unhappy trendline:

A slew of poor economic data over the past two weeks suggests that the U.S. economy is headed for a U-shaped recovery—at best—in 2010. The macro news, including data on consumer confidence, home sales, construction and employment, actually suggests a significant downside risk even to the anemic levels of growth which RGE forecast for H1. The U.S. faces continued challenges in H2—particularly as historic levels of fiscal stimulus fade—and appears far too close to the tipping point of a double-dip recession.

This is not the conventional wisdom. Heated debate continues to rage in the United States on whether the economic recovery will be V-shaped (with a rapid return to robust growth above potential), U-shaped (slow anemic, sub-par, below trend growth for at least the next two years) or W-shaped (a double-dip recession)…

Consumer confidence, based on the Michigan survey, has tanked. On the real estate front, new home sales are collapsing again, existing home sales are also falling sharply, and construction activity (both residential and commercial) is sharply down. Durable goods orders are down, initial claims for unemployment benefits remain stubbornly high (way above the 400K mark). Real disposable income for Q4 has been revised downward while real disposable income (before transfers) for January was negative again. The manufacturing ISM index—while still expanding being above 50—has now fallen a couple of notches and its production and new orders index levels are falling, too; and global PMIs suggest a loss of momentum in the global economic recovery. Real inventories look unchanged in Q1 relative to Q4; auto sales were at best mediocre; core CPI was falling and core PCE was close to 0%, suggesting anemic demand and economic weakness. Q4 GDP growth was revised upward to 5.9% but most of it (3.9%) was due to inventories; final sales grew at a 1.9% rate while consumption grew at a dismal 1.7% (down from 2.8% in Q3). Q3 growth has been revised from an initial 3.5% to 2.8% to 2.2%, with final sales growing only 1.7%. So, at the time of maximum policy stimulus (H2 of 2009), final sales were growing only at a pathetic 1.8% average rate.

So don't quit your job just yet! And get out there and invest in a zombie bank, because of course, "What makes the zombie posthuman is the elimination of human limitations intrinsic in the state."