The illusion of economic stability

Flickr image by Dominic's pics.

The Fed has succeeded in holding down Treasury and mortgage rates, but that is the only clear accomplishment by government so far this year.

A grand debate began last week between those who see Federal Reserve Chairman Ben Bernanke's "green shoots" and those who don't. The Fed's Beige Book summary described a "moderation in the pace of decline ... some sectors stabilizing at a low level." The "shooters" pointed to better-than-expected bank earnings, slightly improved consumer confidence, a possible turn in unemployment claims, and flattening Institute for Supply Management surveys.

The no-bottom counter-data: The small-business National Federation of Independent Business survey sunk to the second-worst level in its 35-year history (not by coincidence -- the Q2 '80 worst was the only credit crunch comparable to this in modern times). Industrial production fell 1.5 percent in March, and capacity in use dropped to 69.3 percent, the lowest measured in the 60-year series.

I think the "shooters" are spinning. They have no case ... not yet.

The mechanics of bottom are slippery. A claimed "reduction in the rate of decline" is often sophistry. Example: The annual pace of home sales has fallen from 7 million to 4.5 million. We will not fall another 2.5 million, hence a lesser rate of decline, but a silly observation in the face of foreclosures rising toward 1 million. Another: Auto sales have fallen from 16 million to 9 million, and will not fall another 7 million, but soon ahead lies the bankruptcy of the majority of U.S.-owned production and associated layoffs.

"Stabilizing at a low level" (I read the whole Beige Book, and the details do not support the summary) happens at some point in every recession. However, at this moment stability is illusion: More and more businesses are running at revenue below sustainability, unable to cover fixed costs, downsizing dominoes just beginning.

The key to all of this, of course, known to every Main Street businessperson and consumer, is CREDIT. Availability continues to contract sharply. The smaller the bank, the more demented the threats by examiners against making loans; the larger the bank, the faster its CEO is running from government capital and pressure to make loans.

The entire commercial banking system is quickly curling into fetal position around remaining capital. If we make no loans, we won't have new bad ones, and won't need capital. We'll raise our rates, sit with immense net-interest margins, and grow our own capital slowly -- anything but take government capital and surrender control. ...CONTINUED

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