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New, Hard Evidence of Continuing Debt Collapse!

by Martin D. Weiss, Ph.D.   06-15-09

While most pundits are still grasping at anecdotal “green shoots” to celebrate the beginning of a “recovery,” the hard data just released by the Federal Reserve reveals a continuing collapse of unprecedented dimensions.

It’s all in the Fed’s Flow of Funds Report for the first quarter of 2009, which I’ve posted on our website with the key numbers in a red box for all those who would like to see the evidence.

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Here are the highlights:

Credit disaster (page 11). First and foremost, the Fed’s numbers demonstrate, beyond a shadow of a doubt, that the credit market meltdown, which struck with full force after the Lehman Brothers failure last September, actually got a lot worse in the first quarter of this year.

Karl Note: If you did not click on that "page 11" link above you missed a startling admission by the Federal Reserve System, in their official report, that showed the following:

(F.4 Credit Market Borrowing, All Sectors, by Instrument
Billions of dollars; quarterly figures are seasonally adjusted annual rates)

This directly contradicts Washington’s thesis that the government’s TARP program and the Fed’s massive rescue efforts began to have an impact early in the year.

In reality, the credit market shutdown actually gained tremendous momentum in the first quarter. And although it’s natural to expect some temporary stabilization from the government’s massive interventions, the first quarter was SO bad, it’s impossible for me to imagine any scenario in which the crisis could be declared “over.”

Karl Note: Within a couple days of first publishing this page the Wall Street Journal carried a front page article about how banks were all tied up in Obama Red Tape, and were not able to make badly needed loans to bail out threatened home owners with bad mortgages:

Source: WSJ June 17, 2009: IRVINE, Calif. -- Kellina Lawrie used to be a mortgage broker, pitching loans to borrowers who in the end couldn't afford them. Her current job is working through the wreckage.

Ms. Lawrie is one of thousands of J.P. Morgan Chase & Co. employees trying to modify mortgages for Americans who are in danger of losing their homes. "I feel badly for them, but I also have a responsibility to the bank," says the 30-year-old Ms. Lawrie, who was forced to sell her own home and trade in her Mercedes for a Toyota when the housing market went bust.

Photo: Michal Czerwonka for The Wall Street Journal

Ex-mortgage broker Kellina Lawrie now helps borrowers keep their homes.

Clobbered by the recession, millions of homeowners are asking for help from mortgage lenders like J.P. Morgan's Chase unit, the nation's third-largest servicer of mortgages behind Bank of America Corp. and Wells Fargo & Co. Large and small banks have responded with programs that reduce interest rates, stretch out payments and provide other assistance. These efforts are getting a boost from the Obama administration's housing-rescue plan, which gives lenders financial incentives to modify as many as nine million mortgages.

But the competing interests, red tape and raw emotions that collide in Ms. Lawrie's cubicle and in the loan-counseling center where she works show how hard it will be to overhaul those troubled loans.

More than 9% of 45 million U.S. mortgages, or about four million loans, were delinquent in the first quarter of 2009, according to the Mortgage Bankers Association. That is the highest level since the group started tracking such data in 1972. As of the end of April, though, just 518,155 home loans had been modified, says Hope Now, a coalition of mortgage companies, investors and housing counselors.

Getting a mortgage modified can take months, slowed by thin staffing and mountains of paperwork. With so many loans bundled and sold to investors, it's sometimes hard to figure out who even owns them. The new federal program requires borrowers to meet slightly different requirements than bank programs do, meaning banks need to navigate two procedures.

Chase's mortgage business collects monthly payments and handles other chores on $1.5 trillion of mortgages. It owns about a fifth of those loans, having sold the rest to investors. Since October, the bank says it has prevented about 180,000 foreclosures, mostly through mortgage modifications. An additional 15,000 loans modified by the bank follow the guidelines set by the White House plan.

Roughly 3,500 Chase employees are trying to restructure troubled mortgages, and 1,000 counselors have been added this year to cope with demand. Chase has opened 24 walk-in offices around the U.S. where borrowers can seek face-to-face assistance.

Karl Note: The above WSJ Article puts the human face on the dry statistics of the most prestigious source you could have (The Federal Reserve Bank) for the collapse of credit in America.

Another WSJ Article, same date, shows one of the smartest investment managers in America now betting billions of dollars in his management toward a massive inflation. Click here for that Article, but be aware that I, Karl Loren, have what I consider an even broader view of the future than this simplistic prediction of inflation (which will happen, but that is not the full story).

Continue with Dr. Weiss Full Article:

Here are the facts:

Bottom line: The first quarter brought the greatest credit collapse of all time.

Excluding public sector borrowing (by the Treasury, government agencies, states, and municipalities), private sector credit was reduced at a mind boggling pace of $1,851.2 billion per year!

And even if you include all the government borrowing, the overall debt pyramid in America shrunk at an annual rate of $255.3 billion (line 1)!

Asset-backed securities (ABS) got hit even harder (page 34). This is the sector where you can find most of the new-fangled “structured” securities — the ones Washington had already identified as a major culprit in the credit disaster.

Did they make any headway in stopping the ABS collapse? None whatsoever! The total outstanding in this sector (line 3) fell at an annual pace of $623.4 billion in the first quarter, the WORST ON RECORD!

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U.S. security brokers and dealers were smashed (page 36). Brokers were forced to reduce their total investments at the breakneck annual pace of $1,159.2 billion in the first quarter, after an even hastier retreat in the prior quarter (line 3)!

What’s even more revealing is that they were so pressed for cash, they had to dump their Treasury security holdings in massive amounts — at an annual pace of $424 billion (line 7)! Given the Treasury’s desperate need for financing from any source, that’s not a good sign!

Government agencies got killed (page 43). Households dumped their Ginnie Maes, Fannie Maes, Freddie Macs, and other government-agency or GSE securities like never before in history, unloading them at the go-to-hell annual clip of $1,395.7 billion (line 6).

And the rest of the world (mostly foreign investors), which had started unloading these securities in the third quarter of last year, continued to do so at a fevered pace (line 10).

Mortgages got chopped again (page 48). Home mortgages outstanding were slashed at an annual clip of $87.3 billion in the second quarter of last year, $324.2 billion in the third quarter, $271 billion in the fourth, and another $61 billion in the first quarter of this year (line 2).

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A slowdown in the collapse? For now, perhaps. But the first quarter also brought the very first reduction in commercial mortgages, an early sign of bigger commercial real estate troubles ahead (line 4).

Trade credit is dying (page 51, second table). If you’re in business and you don’t have cash on hand to buy inventories, supplies, or other materials, beware! Large and small corporations all over the country have been slashing trade credit at an accelerating pace (line 3).

In the first quarter of last year, this aspect of the credit crisis was still in its early stages; trade credit outstanding was shrinking at an annual pace of just $15 billion. But by the second quarter, this new disaster burst onto the scene at gale force, with trade credit getting docked at the rate of $151.2 billion per year. And most recently, in the first quarter of 2009, it was slashed at the shocking pace of $277.2 billion per year.

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And I repeat:

With ALL of these figures, we’re not talking about a decline in new credit being provided, which would be bad enough. We’re talking about a collapse that’s so deep and pervasive, it actually wipes out 100 percent of the new credit and brings about a net reduction in the credit outstanding — a veritable dismantling of America’s once-immutable debt pyramid!

For the long-term health of our country, less debt is not a bad thing. But for 2009 and the years ahead, it’s likely to be traumatic, delivering …

The Most Wealth Losses of All Time

Who is suffering the biggest and most pervasive losses? U.S. households and nonprofit organizations (page 105)!

The losses have been across the board — in real estate, stocks, mutual funds, family businesses, life insurance policies, and pension funds.

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In U.S. households alone, the losses have been massive: $1.39 trillion in the third and fourth quarters of 2007 (not shown on page 105) … a gigantic $10.89 trillion in 2008 … $1.33 trillion in the first quarter of 2009 … $13.87 trillion in all, by far the worst of all time.

And these losses have equally massive consequences for 2009 and 2010:

Rescues That Make the Crisis Worse

The U.S. government has taken radical, unprecedented steps to counter this credit collapse. And for the moment, it HAS been able to avert a financial meltdown.

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But no government, even one run amuck with spending and money printing, can replace $13.87 trillion in losses by households.

Consider just two of the government’s most egregious escapades:

Can Mr. Bernanke take even MORE radical steps? Can he trek where no other modern-day central banker has ever gone before?

Not without shooting himself in the foot! It still won’t be enough to avert a continuation of the debt crisis. Indeed, all it can accomplish is to kindle inflation fears, drive interest rates even higher, and actually sabotage any revival in the credit markets.

Look. The nearly $14 trillion in financial losses suffered by U.S. households has inevitable consequences. And massive, nonstop borrowings by the U.S. Treasury in the months ahead — driving interest rates still higher — can only make them worse.

My urgent warning: If you fall for Wall Street’s siren song that “the crisis is over,” you could be in for a fatal surprise.

Don’t believe them. Follow the numbers I have highlighted here. Then, reach your own, independent conclusions.

Good luck and God bless!

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Martin

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Click here to view all stories Credit Crisis Part Deux 06/22/2009

June 22, 2009 - Ben Bernanke has announced green shoots, and Tim Geithner has completed the bank stress tests. Unfortunately, all this good news amounts to little more than a public relations stunt pulled by the government, and it remains to be seen how long they can continue to fool the public. If one simply looks at the monthly call reports published by the government reporting the financial health of our nation’s banks, one will see a vastly different picture. The balance sheet of Colorado’s New Frontier Bank, a bank that was recently shut down by the FDIC due to financial insolvency, is virtually identical to those of thousands of other zombie banks across the country. The problem is that construction lending as a percentage of the banks’ loan portfolios is more than 20 percent in many cases, and developers are defaulting left and right at this point in time. Many may have applied for the loans back in 2004 and are just finishing the projects now with no buyers. There are thousands of acres of developed lots across the country in which no one is living in these properties and no one wants them. These loans are effectively worth zero because no one will take these properties even if the banks gave them away because of the taxes owed on them, but most of the banks have yet to mark them down on their books. If they did, all the equity in the banks would be wiped out. The banks have no negotiating power in most of these cases. The FDIC unfortunately can’t handle all these asset sales from the banks at the same time so they have artificially slowed down the pace of shutting down these banks to a very quiet orderly manner so as to stall the collapse of the banking system. So far, the fire hose of debt has been limited to a trickle by the Fed and the government since they know there is no market for all the debt outstanding. The Fed has absorbed much of it on its balance sheet, and they have yet to explain to the public how they plan to unwind them. But in addition to all the defaulting subprime loans, these commercial loans will have to be recognized as non-performing at some point in the near future which will cause a second avalanche of loan defaults around the corner. Will the government also bailout all the commercial developers? It will be extremely difficult given the dollar amount, nor should they from a moral and fairness perspective. The only way out of this problem is to create a huge demand for all the real estate inventory. Unfortunately, as the government keeps printing money to stop deflation, the rising interest rates will keep buyers from stepping into the real estate market. Other buyers like hedge funds cannot help the market because they have a trading mentality. They may buy something at ten cents on the dollar and try to flip it at forty cents on the dollar. In the meantime, these properties will deteriorate in value as they sit languishing without owners. What we need are buyers who will manage these properties with a long-term perspective until real demand returns. Managing these assets could take years, but in today’s short-term trading culture, such managers are hard to come by. Obama’s administration should focus on how to solve this problem rather than on extraneous, ill-conceived notions of how to regulate the hedge fund industry. America doesn’t need larger, more inefficient government wasting taxpayer dollars on useless regulation. The government couldn’t even regulate the banks, so spreading themselves out too thin to regulate hedge funds will be a colossal waste of money and time. Simply passing legislation that requires all hedge funds with at least $25 million in assets to register with the SEC will not reduce fraud in the system. Many hedge funds would either relocate to another jurisdiction or find loopholes. Rather, the government should figure out how to fix the banks, and the gargantuan bad debt that overhangs the American economy. For starters, the government should force banks to provide full electronic transparency to the public. The Fed should also require companies to report their true value at risk (VAR), their solutions to it, their top 25 counterparty exposure, the kind of products to which they have exposure, and transaction documentation for all material transactions. Only with up-to-the minute information can the government develop a rapid response system that could minimize damage if another systemic market failure should occur. As for the debt, the government should let the market figure out how to extinguish the debt. The thousands, perhaps millions of minds who follow the debt markets everyday, have a much better idea of what to do with the bad debt than a few bureaucrats and bank regulators sitting in Washington. We’ve already seen what a command and control government has done to the economies of Communist countries. We can’t afford to ignore history.

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