Aug. 27 (Bloomberg) -- The U.S. added 111 lenders to its list of “problem banks,” a jump that suggests rising bank failures may force the Federal Deposit Insurance Corp. to deplete a reserve fund that shrank 40 percent this year.
A total of 416 banks with combined assets of $299.8 billion failed the FDIC’s grading system for asset quality, liquidity and earnings in the second quarter, the most since June 1994, the Washington-based FDIC said in a report today. Regulators didn’t identify companies deemed “problem” banks.
The U.S. has taken over 81 banks this year, including Guaranty Financial Group Inc. in Texas and Colonial BancGroup Inc. in Alabama, amid the worst financial crisis since the Great Depression. The surge forced regulators to charge banks an emergency fee to raise $5.6 billion for its insurance fund, which fell to $10.4 billion as of June 30 from $13 billion in the previous quarter, the agency said. The total was the lowest since the savings-and-loan crisis in 1993.
“We’re right in the middle of the cycle and it’s a very tough place to be,” said James Chessen, chief economist at the American Bankers Association, a Washington-based industry group. “We’ll have another couple of more quarters where banks will be working through these loan-loss problems.”
An $11.6 billion increase in loss provisions for bank failures caused the decline in the reserve fund, the FDIC said. If the fund is drained, the FDIC has the option of tapping a line of credit at the Treasury Department that Congress extended in May to $100 billion, with temporary borrowing authority of $500 billion through 2010.
Line of Credit
The agency doesn’t expect to use the Treasury line of credit, FDIC Chairman Sheila Bair said in a news conference releasing the data. Bair said the number of problem banks and failures will remain elevated as banks and thrifts continue to clean up their balance sheets.
“For now, the difficult and necessary process of recognizing loan losses and cleaning up balance sheets continues to be reflected in the industry’s bottom line,” she said.
FDIC-insured banks reported a net loss of $3.7 billion in the second quarter, compared with a $5.5 billion gain in the first quarter. The quarterly loss, the second the industry has reported in 18 years, was driven by increased expenses for bad loans, the FDIC said.
Funds set aside by banks to cover loan losses rose to $66.9 billion in the second quarter from $60.9 billion in the first quarter.
Nonperforming Loans
More than 150 publicly traded U.S. lenders own nonperforming loans that equal 5 percent or more of their holdings, a level that former regulators say can wipe out a bank’s equity and threaten its survival, according to data compiled by Bloomberg.
The biggest banks with nonperforming loans of at least 5 percent include Wisconsin’s Marshall & Ilsley Corp. and Georgia’s Synovus Financial Corp., according to Bloomberg data. Among those exceeding 10 percent, the biggest in the 50 U.S. states was Michigan’s Flagstar Bancorp. All said in second- quarter filings they’re “well-capitalized” by regulatory standards, which means they’re considered financially sound.
The FDIC insures deposits at 8,195 institutions with $13.3 trillion in assets. The agency is a state-bank regulator that insures bank customer deposits, helps find buyers for failing banks and liquidates lenders that have collapsed.
The agency this week approved new guidelines for private- equity firms that invest in failed banks to increase the pool of buyers beyond traditional lenders and reduce costs to the banking industry and taxpayers.
Max Kaiser speaks about the predicted bank run and currency destruction of the US economy. He also speaks about how China will be on top of the depression because they are spending their stimulus on domestic growth. Peter Schiff makes a guest appearance, as well as Gerald Celente.
Whirlpool Corp. announced Friday that it will close its manufacturing plant in Evansville, Ind., eliminating about 1,100 full-time jobs by mid-2010.
Next year's closing is among several changes in the company’s North American manufacturing operations.
Whirlpool (NYSE: WHR), based in Benton Harbor, Mich., said in a news release that production of top freezer refrigerators made at Evansville will be transferred to one of the company's existing plants in Mexico.
Production of icemakers produced in Evansville will be relocated to a site yet to be determined.
Friday’s announcement follows a comprehensive review of alternatives for product consolidation within the refrigeration product category.
The company also said that it is currently evaluating options for the best location for the Refrigeration Product Development Center, which is also in Evansville and has about 300 employees.
“This was a difficult but necessary decision,” Al Holaday, vice president, North American Manufacturing Operations for Whirlpool, said in the release. “To reduce excess capacity and improve costs, the decision was made to consolidate production within our existing North American manufacturing facilities. This will allow us to streamline our operations, improve our capacity utilization, reduce product overlap between plants, and meet future production requirements.
“We are announcing this decision nearly one year in advance as part of our commitment to make the transition as smooth as possible.”
Home-appliance maker Whirlpool had sales of about $19 billion in 2008. It has 70,000 employees and 67 manufacturing and technology research centers around the world, and its brands include Whirlpool, Maytag, KitchenAid and Jenn-Air.
Last week Ron Paul sat down with his old friend Lew Rockwell to discuss Obamacare, liberty, the swine flu, and the dangers of big government.
Transcript
Lew Rockwell: Around these days it seems like the hot issue is Obama’s socialized medical bill or do we call it a fascist medical bill or interventionist medical bill? I don’t know, but it involves vastly increasing. There are already horrible amount of government intervention in the medical system. But it looks like there is so much opposition. Is he going to get it through?
Ron Paul: One thing we can agree on it’s not a free market approach to medical care. I don’t think he’ll get the whole thing through. You know, looking back at what has happened with my bit of an experience in Washington is that they never get everything, but they always get a bunch and I imagine he’s going to keep moving this.
But they’ve been doing this for maybe 50 years. Incrementalism, the American people accept incrementalism. But you know, if in the 1940s or 1950s, they would have said, “We want social healthcare,” The American people would have rebelled, and even today they resent being in socialized medicine and they’re rebelling, but they’re going to take a little bit more and they’ll keep moving. So I think they’re going to move in that direction and you know, Republicans are doing a pretty good job in opposing it, but the Democrats have more votes.
But the real tragedy is whether you have the Republicans in charge or the Democrats in charge, you know what happens, it still marches on. I mean, look at what happened under Bush. We had that prescription drug program and it sailed right through and here we go, we’re even looking for a much greater influence from government, so unfortunately, I don’t think this is going to be much benefit to our patients.
Lew Rockwell: And of course, you’re right about both parties having increased government intervention in medicine. As you’ve pointed out that with Hill Burton and starting with the Eisenhower administration in the 1950s, whereas Truman, even at the height of his popularity could not get a socialized medicine bill through.
Ron Paul: Right.
Lew Rockwell: Yet, Eisenhower did it. Of course, LBJ with Medicare and Medicaid. Nixon with the HMOs and Healthcare Financing Administration and Reagan increased intervention in medical care and Clinton and so I guess Obama is going to just continue on that same path.
Ron Paul: So you can understand and empathize with those people who are getting angry, especially that they’ve been introduced to free markets and believe in liberty and believe in the Constitution, let them be angry and I think it’s very justified that people are upset and angry, and hopefully this is a healthy sign that people are starting to realize that the federal government can’t deliver and ultimately, I think that’s what our country is facing; a government that can’t deliver, but that should be a very positive thing for us if we come of it without violence, I think this could be very helpful to us.
Lew Rockwell: I think it’s thrilling. Of course, the government uses only violence, right? I mean, that’s how they get their medical bill through. If you don’t obey, if you don’t pay their taxes, they use violence against you. But the opposition, they’re just arguing against these things.
Ron Paul: Yeah, they have a lot of guns that they use. You know, I argued that we should have gun control on all the federal bureaucrats. I think we have 100,000 federal bureaucrats who carry guns now. When you think of all of the agencies of government, they’re permitted to carry guns and of course, sometimes that one individual American have guns, the left goes nuts, you know, “What, somebody has a gun?”
Lew Rockwell: Because these guys will bring them on planes. They can carry them anywhere. State law doesn’t apply to them. They sail above it.
Ron Paul: That’s right and that’s what should really scare us. What scares me is the use of the gun to take away our liberties. You know, even though they’re not shooting at us, the gun is always behind everything that they do and just the idea of paying for this medical program, where are they going to get the money? It’s all the use of force and guns. They go to the IRS and then, of course, they borrow money and they pay interest on this money, then they use force, a sinister tack like inflation, the Fed prints the money, and then they haven’t talked that much about paying for this bill.
Obama talks about all these good things that are going to come from it, but I don’t even think the conservatives have done a real good job in talking about the real cost of this thing. You know, where does this come from? And what amazes me is we have… we’re living in a period of time now where the national debt has gone up to $2 trillion this year and it doesn’t hardly even faze him to talk about another program they claim is going to be a trillion, but you know that have you ever seen a government program proposed to cost a billion or 2 billion or 10 billion and not being 2 or 3 times more.
So this is not going to cost a trillion dollars because they can’t know. Because costs are always going to go up. You know, so what they’re projecting… I mean, their programs, their computers are telling, “Well, everything is going to cost this much.” Oh, yes, but we’re going to get rid of the waste and fraud and that’s how they’re going to pay for it.
Lew Rockwell: I also like the fact that they claim that they’re going to cut costs. I mean, government loves spending money, they sort of exist to spend money. So when in human history has any government ever cut the cost of anything?
Ron Paul: When you think about how much the bureaucracy costs in lost time and inefficiency with the little cost of paying these people and who thinks for a minute they’ll be less federal bureaucrats involved in this program. You know, the one thing that bothers me is it’s going to involve some bureaucrats and that is this electronic surveillance of all the medical records. You know, the procedures are already in place. They’ve gotten the authority to set up the medical documentation of electronic records.
In this bill, if it pass, has $50 billion in there. So if anybody cares about medical privacy, it’s essentially gone. This HIPAA thing that came up a few years ago, it was designed… it has made everything accessible to the government and to the big insurance companies.
Ron Paul: Yeah, in the name of privacy and now, they’re talking about making it… but what they want to do is monitor every single transaction; everything the patient does, everything the nurse does, everything the doctor does, and how many pills have been prescribed and monitor this and review everything to find out if everybody is doing the right thing and they think they’re going to bring down the costs. It bewilders me to think that anybody could believe this stuff.
Lew Rockwell: And who can doubt that your medical records would be part of your dossier to be accessible to the Department of Homeland Security, maybe every cop on the beat. They’re going to have all that information on you; your financial information, legal information, medical information.
Ron Paul: Yeah, and you know, that under the HIPAA law, they explicitly say that you’re protected, unless the government needs these records for health matters and think about all the hype on this flu… this swine flu and they’re getting ready for that and are we going to have mandatory inoculations and all this and then you’re going to be in a computer, “Oh, Joe Blow, he didn’t get his shot, you know, round him up.” So it’s scary stuff. You know, it looks like it’ll make 1984 look attractive one of these days.
Lew Rockwell: It sure was interesting how disappointed, openly disappointed they were when the swine flu business didn’t bloom into the full-fledged epidemic they were hoping for.
Ron Paul: No, and they’re still sort of hoping for it. You know, they’re trying to do this and all that… and I guess, you do remember a little bit about 1976, when we were worried about [...]. You remember Larry McDonald and I voting against that thing.
Lew Rockwell: Yes.
Ron Paul: And more people died from the inoculation than did from the flu. But you know, this isn’t… I never want to belittle the principle of inoculations. I think people get way, way to many and we break down our immune system, but the whole idea, if it’s a shot that’s good or bad, why is it that it has to be massive and why is it that it have to be with everybody? Why is it that it has to be the government? Why can’t the parents make these decisions? Why can’t the doctors make these decisions on whether somebody has to get a flu shot? And you can argue the pros and cons of that, but this idea that there’s going to be a government decision, you know, the Federal government is going to make the decision and of course, drug companies tend to be involved as well. Oh, boy, I guess that is going to be a big customer if I can do a flu shot for everybody in the country.
Lew Rockwell: And of course, this always leaks into foreign policy, it seems too, given the empire. So I remember when the Ford administration used the swine flu virus to attempt to infect all the farm animals in Cuba in an active germ warfare, right? We call it an act of terrorism today if somebody else were doing it into the US.
Ron Paul: No, no, that’s verging on conspiracy.
Lew Rockwell: Yeah.
Ron Paul: Now, you’re telling the truth, telling the truth about what our CIA has done over the years. You know, you might find out that not too… in recent years or decades, when they did this survey and find out that we’ve attempted over 50 assassination of government leaders. So whether it’s the health matters or oil or whatever, I think we’re way too much involved, so…
Lew Rockwell: That’s for sure. Ron, thank you so much.
Ron Paul: Okay, good. It’s good to talk to you, Lew.
What's the exit strategy from the monetary and fiscal easing?
In the last few months the world economy has been saved from a near-depression. That feat has been achieved by a range of extraordinary government stimulus measures: In the U.S. and in China, and to a lesser extent in Europe, Japan and other countries, governments have pumped liquidity, slashed policy rates, cut taxes, primed demand and ring-fenced and back-stopped the financial system. All of this has worked, but at a cost. Governments have been spending and borrowing like never before. The question now is: how do they stop?
This is not a simple problem. Restore normality too soon and the risk is that a weak recovery will double dip into a second and deeper recession. Restore it too late and inflation will already be ingrained.
Consider how much has been committed and how much has been spent. In the U.S. alone, when you add up the government's liquidity support measures, its re-capitalizations of banks, its guarantees of bad assets, its extension of deposit insurance and guarantees of unsecured bank debt, at least $12 trillion has been committed, and a quarter of that has already been spent. Along with the rise in spending there has also been a very large fiscal stimulus, pushing the federal budget deficit to 13% of gross domestic product this year. (Next year, on current plans, the deficit will fall back but still amount to 10% of GDP.)
Not all the measures adopted appear on the budgetary bottom line. As well as monetary easing and fiscal stimulus, the U.S. and other governments have resorted to unconventional measures to ease monetary conditions. In the U.S., Japan and the U.K., real interest rates have been pushed down to zero, and governments have resorted to buying long-dated securities, the goal of which--only partially achieved--was to hold down long-term interest rates.
The Fed, for example, has committed to spending $1.8 trillion on longer-dated Treasury bonds and other securities, but most of this spending is money the government has printed itself, simply by creating central bank monetary base. It doesn't add to the budget deficit, although it does add to the long-term risk profile of the government doing the spending as monetization of fiscal deficit can eventually be inflationary.
This massive escalation of central government spending and borrowing was necessary. For most of last year, governments lagged well behind the curve of the unfolding crisis. For too long policymakers continued to believe that the house-price bubble was an isolated aberration that would self-correct without impacting the wider economy, and that the unprecedented growth in household indebtedness was not a matter of concern. By the final quarter of last year, however, the global economy was in freefall, with industrial production, private demand, employment and broad GDP all contracting at a rate indicating something close to depression at hand. Policymakers suddenly went into corrective overdrive in late 2008--not a moment too soon.
The second-quarter GDP estimates for the U.S. show just how significant this aggressive front-loaded policy stimulus has been. While total GDP growth was sharply negative in the first quarter--around -5.6%--the rate of decline in the second quarter had moderated to around -1.5%. Credit this relative improvement to governmental monetary, fiscal and financial stimulus. The private components of GDP, private demand and capital expenditure, were actually still very weak. But government spending rose by 5.6%, breaking what otherwise would have been another quarter of headlong GDP contraction.
Necessary as the stimulus has been, it cannot go on indefinitely. Governments cannot run deficits of 10% or more of GDP, and they cannot go on doubling the monetary base, without eventually stoking inflation expectations, pushing up long-term interest rates and eventually eroding their very viability as sovereign borrowers. Not even the U.S. can do that.
The fiscal implications of the current policy package are particularly serious. For the time being, fiscal policy has been put at the service of survival, but the current price of survival is that net public debt is going to double as a share of GDP between 2008 and 2014. Even using the very optimistic forecasts of the Congressional Budget Office, which anticipate growth of around 4% over the next few years, the net debt burden will rise from 40% of GDP to 80%--that's an increase in the debt stock of about $9 trillion. The interest charge alone on that increased debt will be in the region of $300 billion to $400 billion a year, which in turn may mean more borrowing to pay the interest if primary deficits are not reduced. When governments reach the point where they are borrowing to pay the interest on their borrowing they are coming dangerously close to running a sovereign Ponzi scheme.
Ponzi schemes have a way of ending unhappily. To get out of the Ponzi trap, governments will have to raise taxes, or cut spending, or monetize the debt--or most likely do some combination of all three.
Monetization is already happening. This is where a government effectively prints money by allowing the central bank to create base money that is used to buy government debt, thereby increasing liquidity and holding down long-term interest rates (because the additional demand for these securities pushes up bond prices, thereby lowering the real interest rate the securities pay, as well as putting money into the pockets of the investors who have sold the securities).
Over time, monetization is inflationary, but the inflationary effect is insidious because it is not immediately visible. In the short run deflation will outplay inflation. In most developed countries today there is so much slack in economies, with weak demand and high unemployment, that prices cannot rise. The velocity of money is also weak, as financial institutions are receiving liquidity from central banks and hoarding it to rebuild their balance sheets, instead of lending it out. But as the economy recovers, these effects will abate, and the growth of the monetary base caused by monetization will eventually drive expected and actual inflation. And once markets start to anticipate that scenario, it may already be too late to avert an inflationary surge.
Simply issuing debt in the form of Treasury bonds offers no escape. The more debt a government issues, the higher the risk it will eventually face refinancing problems and/or default on that debt. Accordingly, investors will demand a higher return for investing in that debt, and that in turn will push up rates. Independent rating agencies have already downgraded the sovereign risk rating of countries like Greece and Ireland, and it cannot be ruled out that core economies of the OECD, including the U.S., could eventually be downgraded.
As it happens, there is little sign today of investors demanding a significantly higher risk premium on U.S. government debt. That is partly because private savings are increasing: Those savings have to be invested somewhere and investors are cautious about alternative investments. Foreign demand for U.S. bonds also remains robust so far. But this demand is unlikely to survive another big round of government-financed stimulus and bailout spending. And unfortunately, such a spending round is rather likely.
Consider that by the end of 2010 most of the tax cuts legislated by the Bush administration in 2001 and 2003 are due to expire. This means that there will be a sharp tax hike, including income taxes, capital gains taxes and taxes on dividends and estates. This hike--equivalent to around 1.5% to 2% of GDP--is already factored in to future calculations of government indebtedness. So if by next year the recovery proves as anemic as I expect, and if unemployment is around 10.5%-11%, as I also expect, then the pressure for another stimulus round early in 2010 will be strong.
A rough calculation goes like this: Stimulus money to keep the lid on rising unemployment is likely to be around $200 billion. Add to that the likely temporary partial extension of the Bush tax cuts and funding of the current administration's plans for universal health care (an additional bill of around $1.5 trillion over 10 years) and you get deficits close to12% of GDP.
This amounts to a fiscal train wreck. For the U.S., it means deficits could remain over 10% of GDP for years. Bond issuance will remain enormous, and it will mean that the Fed will almost certainly have to monetize a proportion of the debt by buying even more government or government-backed securities.
A combination of higher official indebtedness and monetization has the potential to yield the worst of all worlds, pushing up long-term rates and generating increased inflation expectations before a convincing return to growth takes hold. An early return to higher long-term rates will crowd out private demand, as lending rates on mortgages and personal and corporate loans rise too. It is unlikely that actual inflation will emerge this year or even next, but inflation expectations as reflected in long-term interest rates could well be rising later in 2010. This would represent a serious threat to economic recovery, which is predicated on the idea that the actual borrowing rates that individuals and businesses pay will remain low for an extended period.
Yet the alternative--the early withdrawal of the stimulus drug that governments have been dispensing so freely--is even more serious. The present administration believes that deflation is a worse threat than inflation. They are right to think that. Trying to rebuild public finances at a deflationary moment--a time when unemployment is rising, and private demand is still contracting--could be catastrophic, turning recovery into renewed recession.
History offers more than one example of this error. It happened in Japan in the late 1990s when the Japanese government feared the effects of fiscal deficits and of an increase in inflation as the economy was beginning to recover after almost a decade of deflation. Consumption taxes were raised too soon and the "zero interest rate policy" was abandoned. Within a year the economy was back in recession.
It also happened in the U.S. in the 1930s. President Roosevelt instituted a massive stimulus package when he came to office in 1933, to push the U.S. economy out of the depression, but by 1937 the administration was worrying that inflation was returning and that deficits were too large; so it cut spending and raised rates and the Fed tightened monetary policy. By 1938 the economy was heading back into near-depression.
So policymakers are between a rock and a hard place. Stop spending now and risk renewed recession and deeper deflation (stag-deflation). Keep spending now and risk renewed recession amid rising inflation expectations (stagflation).
Yet there is a space between the rock and the hard place. It is not a big space, but it is there.
Governments will have to manage perceptions. Today investors remain willing to bankroll federal spending without any clear or firm indication of how the fiscal crisis--and it is a crisis of extraordinary proportions--is going to be dealt with. That won't last. Clear indications will soon be needed as to how and when public finances will be repaired. That doesn't have to be accomplished soon--but it does have to be communicated soon.
Monetary policy can most likely remain looser for longer (in the developed economies at least)--as long as there is a clear commitment to fiscal consolidation. But a credible fiscal commitment to medium-term fiscal sustainability is vital, because that is what will open up the very narrow window that is the exit route from our current and unsustainable spend-and-borrow economy.
