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September 18, 2009
Long-term interest rates slid a little this week, but confined in a tight, 30-day range: the 10-year T-note between 3.50% and 3.28%, and mortgages close to 5.25%.
The media are now giving every possible positive spin to new data, which are in reality still ambiguous: ever-so-slight improvements look more like floors than durable up-trends. Retail sales did pick up 1.1% in August, ex-clunkers, and industrial production rose .8% -- but all clunkers and still 10.7% below last year. New claims for unemployment insurance are down 100,000 weekly from the worst of spring, but sticky near 550,000, and long-term claims are still rising.
In the land of un-spun, no-foolin’, straight-shootin’, original-source raw data, nothing beats the Fed’s quarterly Z-1 Flow of Funds report. It accounts for changes in all the money and credit moving in the US, and has only two flaws: it lags the quarter-end by 75 days, and the 483KB file at www.federalreserve.gov has too many numbers.
We are in a period of deleveraging, and any head-of-household will tell you that paying down debt will crimp your style. Done slowly, over a long period of time, and you can breathe while gradually feeling better. Too fast, or denied credit when you need it... not a pretty way to go.
Are we un-borrowing at a reasonable rate, or too fast, turning blue?
The Fed’s site has Z-1s back to 1946. In this newest for the 2nd quarter, Commercial Banking Total Financial Assets (L.109, p71) shrank for the first time since 1946. Now, there are $14 trillion in assets out there, and the shrinkage was only $264 billion, and it was only one quarter, but the contraction has almost certainly continued and deepened in the 3rd quarter (viz: the Fed’s loan-officer survey and consumer credit).
Total Net Borrowing And Lending (F.1, p10) cooked along at a $2 trillion annual growth pace in normal, healthy times 1998-2003 before the $3.5-$4.5 trillion sillies, 2005-2007. Even in painful 2008, credit managed to grow by $2.6 trillion. Going all the way back to 1946, Z-1 shows brief moments of reduced growth in credit growth during recessions, roughly 10%-20% from prior years. However, in the first six months of 2009 credit declined outright by $465 billion -- the first outright decline since 1946.
The compensating life-support ventilator has been the immense Treasury deficit (half of every dollar spent this year was borrowed), and the Fed’s direct purchases of IOUs with invented money. Which leads to the Z-1 mortgage story (L.218, p96).
Total home mortgage debt outstanding now, $11 trillion, is the same dollar volume as early 2007. However, there have been huge changes in the account. Many loans were extinguished by refis, and new ones created dollar-for-dollar, but held by new and different lenders. Many other loans were extinguished by foreclosure or write-off.
By the end of the 2nd quarter, the Fed had bought almost $700 billion of the total. By the end of this year, the Fed’s nest egg will grow to $1.2 trillion of a total more likely to decline than grow. (Note for hard-money freaks: as the Fed has bought mortgages this year, it has sold other stuff it bought last fall to keep the world from imploding; the Fed’s balance sheet is actually contracting now, perhaps unwisely.) Despite the Fed’s purchases, there has been no increase in credit for housing.
In bad-news-good-news, the toxic-mortgage inventory (ABS securities) has declined (by foreclosure, mainly) from $2.17 trillion in 2007 to $1.68 trillion. Exposing commercial bankers as the skinflints they are, mortgages held by “savings institutions” have collapsed from $884 billion in Q1’08 to $559 billion, principally by the absorption of World, WaMu, and Countrywide into commercial banks. However, bank holdings of mortgages are the same as 2007: in a reverse of the miracle of loaves and fishes, the bankers made a third of a trillion dollars-worth of mortgages evaporate. Pffffft.
The credit markets are better than they were last fall and winter. However, the supply of private credit is hopelessly inadequate, preventing consumer and housing recovery. How we will get off Treasury and Fed life support is still a mystery. |
