Per Cale

August 19, 2008

Is Your Power Out?

The News-Press of Fort Myers has ongoing coverage of Tropical Storm Fay, including this helpful link -

http://www.news-press.com/apps/pbcs.dll/frontpage

Depending on your setup, it may be tough to click the link if you have no electricity.

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August 16, 2008

Economists Don't Predict Recessions

Economists have a poor track record at predicting recessions - in the area of a 3% success rate:

A recent study looked at “consensus forecasts” (the predictions of large groups of economists) that were made in advance of 60 different national recessions that hit around the world in the ’90s: in 97 percent of the cases, the study found, the economists failed to predict the coming contraction a year in advance. On those rare occasions when economists did successfully predict recessions, they significantly underestimated the severity of the downturns. Worse, many of the economists failed to anticipate recessions that occurred as soon as two months later.

The dismal science, it seems, is an optimistic profession. Many economists, Roubini among them, argue that some of the optimism is built into the very machinery, the mathematics, of modern economic theory. Econometric models typically rely on the assumption that the near future is likely to be similar to the recent past, and thus it is rare that the models anticipate breaks in the economy. And if the models can’t foresee a relatively minor break like a recession, they have even more trouble modeling and predicting a major rupture like a full-blown financial crisis. Only a handful of 20th-century economists have even bothered to study financial panics. (The most notable example is probably the late economist Hyman Minksy, of whom Roubini is an avid reader.) “These are things most economists barely understand,” Roubini told me. “We’re in uncharted territory where standard economic theory isn’t helpful.”¹

Source:

1. Stephen Mihm. Dr. Doom.
New York Times. August 15, 2008
http://www.nytimes.com/2008/08/17/magazine/17pessimist-t.html?pagewanted=2&_r=1

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August 15, 2008

No bank failures this week.

So far, the FDIC is expected to pay out between $5 billion and $9 billion in deposit insurance due to the eight banks that have failed so far this year. In comparison, the fund paid out $6.9 billion in 1988 due to the savings and loan crisis.¹

There are 90 banks with $23.6 billion in total assets currently classified as "problem" banks. There is media speculation on which banks could potentially make that list :

via ABC News
Eastern Savings Bank - Hunt Valley, MD
Integrity Bank - Alpharetta, GA
First National Bank - Brookeville, IL
Downey Savings and Loan - Newport Beach, CA

via Naples News
Marco Community Bank - Naples, FL
Partners Bank - Naples FL
Florida Community Bank - Immokalee, FL
9 other unnamed Florida banks

The FDIC had at total fund of $52.8 billion at the end of Q1 to deal with bank failures.

They have already made the request to Congress to raise the premiums that they charge banks.

Sources:

1. Alison Vekshin. Failures straining FDIC fund.
Bloomberg News. August 12, 2008.
http://www.delawareonline.com/apps/pbcs.dll/article?AID=/20080812/BUSINESS/808120316/1003

2. Brian Ross, Rhonda Schwartz, Justin Rood. Who's Next? List of Troubled Banks Worries Wall Street, DC
ABC News. July 15, 2008.
http://abcnews.go.com/Blotter/Story?id=5374205&page=1

3. Kelly Farrell. Marco Community Bank makes list of Florida’s most troubled banks.
NaplesNews.com. May 20, 2008.
http://www.naplesnews.com/news/2008/may/20/marco-community-bank-makes-list-floridas-most-trou/

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August 13, 2008

Foreclosure City

The latest real estate report from Zillow.com says that U.S. home values are down almost 10% from a year ago. That's the largest year-over-year decline in the last 12 years.

Of homeowners that purchased their home since 2003, 29% owe more money than their house is worth.¹

California is one of the worst regions. The valley towns of Stockton, Modesto, and Merced have been particularly hardest hit, battling for the dubious distinction of the Foreclosure City. Merced has 9.3% of first mortgages in deliquency, Stockton is at 8.6%, Modesto at 8.3%.²

Sources:

1. Zillow.com U.S. Home Values Drop Nearly 10% in Q2 Leaving Almost One-Third of Homeowners Who Bought in the Past Five Years Underwater on Their Mortgages.
Press Release. August 12, 2008.
http://zillow.mediaroom.com/index.php?s=159&item=65

2. Ben Arnoldy. In California, foreclosure's next wave?.
Christian Science Monitor. August 11, 2008.
http://www.csmonitor.com/2008/0812/p01s01-usec.html

3. Bob Ivry. One Third of New Owners Owe More Than House Is Worth
Bloomberg.com. August 12, 2008.
http://www.bloomberg.com/apps/news?pid=20601087&sid=a3rsglZgqmTs&refer=home

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August 12, 2008

Hundreds Of Bank Failures

In a Barron's interview with Professor Nouriel Roubini, we get an estimate on the future of our Bank Death Watch (emphasis added):

The FDIC (Federal Deposit Insurance Corporation) has only $53 billion of funds, and has already committed almost 15% of it to bail out depositors of IndyMac. The FDIC's deposit-insurance premiums weren't high enough, and now it is asking Congress to raise them. Plus, the agency claims only nine institutions are on its watch list. IndyMac wasn't on the watch list until June, the month before it collapsed. Studies done by experts in banking suggest that at least 8% of U.S. banks are in big trouble. Eight percent of the roughly 8,500 that the FDIC essentially is insuring equals about 700 banks. Another 8% to 16% also are shaky, so some 700 potentially are going bust and another 700 eventually could join them. Yet the FDIC is watching only nine institutions. It's a joke.

Roubini estimates that the total cost of the credit crisis is going to be about $2 trillion. We're not even half way there, yet.

Source:

1. Robin G. Blumenthal. Yes, That's $2 Trillion of Debt-Related Losses.
Barrons. August 4, 2008.
http://online.barrons.com/article/SB121763156934206007.html?mod=ba_mp_view&page=2

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August 10, 2008

FDIC: No More Large Bank Failures

You should be worried to know that FDIC Chairman Sheila Bair has declared that she does not expect any bank failures among institutions the size of IndyMac or larger.

Based on what I'm seeing now, I really don't see we will have institutions of that significant size having serious problems¹

You should take absolutely no solace from this statement.

After all, this is the same FDIC that identified the subprime crisis back in 2005, studied the issue, probably appointed a committee or two, and then proposed new guidelines for the banking institutions that they regulate.

In 2006 Senate testimony, the FDIC stated -

The FDIC will continue to monitor FDIC-insured institutions with significant exposures to nontraditional mortgage products and to ensure that institutions follow the final guidelines when they are issued. The FDIC expects institutions to both maintain qualification standards that include credible analysis of a borrower's capacity to repay the full amount of credit that may be extended, as well as to provide borrowers with clear, understandable information when they are making mortgage product and payments decisions. ²

I think it's safe to say the FDIC, not to mention many of its member institutions, have failed on all counts.

So since their foresight and expectations were so horribly wrong in 2006, why should we expect them to be accurate now?

Answer: We shouldn't. Expect more bank failures.

Sources:

1. John Poirier.FDIC doesn't see another IndyMac-size failure
Reuters. July 23, 2008.
http://www.reuters.com/article/politicsNews/idUSN2233203920080723

2. Statement of Sandra L. Thompson before the Subcommittee on Economic Policy and Subcommittee on Housing and Transportation.
U.S. Senate Committee on Banking, Housing and Urban Affairs. September 20, 2006.
http://www.fdic.gov/news/news/speeches/archives/2006/chairman/spsep2006.html

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August 9, 2008

Good News, Bad News

The good news - the oil price bubble has burst (along with the commodities bubble).

The bad news - it's beginning to look like a global recession, not just a U.S. one.

The average duration of a recession in the U.S. since 1945 has been 10 months. Since 1913, when the central bank was created, the average is about 12 months, excluding the Great Depression; 13.5 months if it's included. The peak-to-trough duration of the Great Depression was 43 months.¹

If the U.S. recession started in Q4 of last year, we may bottom out by the end of the year. If we enter a global recession, the duration of this recession will be larger than average.

Hold onto your hat, it's going to be a bumpy ride.

The great oil bubble has burst

US dollar rallies as extent of worldwide recession becomes clearer

P.S. - Don't believe what you hear in the press about a recession being defined as two consecutive quarters of negative GDP growth. This has been parroted so much it is being taken as fact. It is a common misconception. The NBER defines a recession as "a significant decline in economic activity spread across the economy, lasting more than a few months".

For more, see http://www.nber.org/cycles/recessions.html

Sources:

1. National Bureau of Economic Research. Business Cycle Expansions and Contractions.
July 17, 2003.
http://www.nber.org/cycles/cyclesmain.html

2. Martin Vander Weyer. The great oil bubble has burst
The Telegraph. August 8, 2008.
http://www.telegraph.co.uk/opinion/main.jhtml?xml=/opinion/2008/08/08/do0801.xml

3. Ambrose Evans-Pritchard. US dollar rallies as extent of worldwide recession becomes clearer.
The Telegraph. August 8, 2008.
http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/08/09/cndollar109.xml

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