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August 21, 2009
In a considerable achievement, Treasury and mortgage rates held last week’s improvement: the 10-year T-note near 3.50%, mortgages 5.375%.
To have held during one of the thinnest trading weeks of the year, in which a butterfly wing-beat can blow up any market; in the week before the Treasury’s next borrowing wave ($109 billion new cash next week); stock market anti-gravity; and interpretation of all incoming data as “recovery” -- quite an achievement.
That last upward force on rates -- anticipation of recovery -- is the most powerful of all at the end of any recession cycle. The decline in long-term rates from two tries at 4.00% 10-year T-notes since May, and trading now as though headed for lower -- that pattern says that real players in actual markets disbelieve the daily cheerleading, the Fed, White House, and Treasury indistinguishable from CNBC.
This week, housing got the optimistic pom-pom treatment. Yes, new construction starts improved again in July, but stabilizing, not really growing, builders shifting to low-end homes, the half-million annual aggregate less than half of health, one-quarter of 2005. Today the stock market took off again on NAR’s corner-turning report of a 7.2% gain in sales of existing homes, to 5.2 million annualized in July.
Everybody wants to see the turn, and nobody wants to read the contrary data. Today’s aggregate sales numbers are indistinguishable from last July’s, one-third off the 2005 peak. Median prices were distinguishable, 15% lower. Purchase loan applications did not increase enough in July to support the sales numbers. NAR said that 31% of the sales were distressed (as opposed to zero in 2005); however, a mortgage-industry survey of real estate brokers found that 64% of sales were distressed in one way or another. The July 1 underwriting guidance by MGIC, the mortgage insurer, measuring conditions in 76 metro areas found 29 “softening or weakening,” one improving: in Rochester, NY, soft conditions were “stabilizing.”
The heart of the data-interpretation struggle: are we in recovery, or are we stabilizing temporarily in unsustainable conditions?
I think the supply of credit is central, and the best overall evaluation is the Fed’s quarterly Senior Loan Officer Survey (www.federalreserve.gov, then “Economic Research” on the top toolbar, then “Surveys” on the left, then under Bank Assets and Liabilities the second Senior-Survey bullet – the first is a stale 1998 report).
In 2007 banks began the most rapid and extreme credit tightening on record. In early 2008 and continuing each quarter of the year, 80% of banks reported tightening credit -- a compounding phenomenon, a re-tightening by continuous ratcheting. Early in 2009, the fraction tightening began to fall, and in the newest survey for July, only 40% of banks were still at it.
Many observers in the recovery group say this new survey, released this week, confirms improved credit conditions. They are mistaken.
Of 54 banks surveyed for business loan standards, two said they had eased. Prime residential terms? Zero had eased. Had the spread narrowed between rate charged and cost of funds? Zero. Minimum payment reduced? Zero. Eased credit score? Zero.
Asked why their lending had declined this year, banks replied, “... Decreased loan demand and deteriorating credit quality.” In this Red Queen logic, we are ready to lend, but you don’t like our new terms or qualify for our new standards. Your fault.
Mr. Bernanke’s keynote address this morning at the central-bankers’ big conference in Jackson Hole spoke to financial “panic” last fall as the key cause of trouble and recession. There is some reason to hope that enough central-bank medicine will cause panic to fade and reverse. However, in the meantime, the Fed’s own evidence says that banks are trying not to make loans.
They can’t. Panic or no panic, without capital and still loaded with bad assets they can’t make loans. Until they do, sustainable recovery will be in doubt. |
