FedUpUSA

Archive for September, 2010

As the Federal Reserve gears up for quantitative easing part two, a slow hidden bailout is occurring in the commercial real estate market.  Commercial real estate is a giant industry making up over $3 trillion in outstanding loans in the U.S.  Yet not much is being said about this in the press.  Why?  Because in a way, commercial real estate (CRE) is being funneled through various channels to bailout horrible banking loans but the process is convoluted on purpose.  We already have examples of the Federal Reserve owning a shopping mall out in Oklahoma for example.  The Fed has purchased incredible amounts of debt including CRE debt.  Much of the focus has been on the Fed monetizing residential real estate debt and this is true.  After all, they did buy over $1.25 trillion in residential mortgage backed securities.

The Fed balance sheet which used to be made up of safe U.S. Treasuries is now composed of mortgage waste:

Source:  Zero Hedge

Since the public has no ability to do a full audit on the Fed, we really have no idea what is sitting on the balance sheet.  If that doesn’t make you feel uncomfortable, just wait until QE2 hits and more debt is monetized into the system.  The bailout is happening and taxpayers are on the hook for this mess.  Keep in mind that this current path is destroying the U.S. dollar and it obvious to see.  If the Fed which is the bank of all banks is basically eating up the junk, what do you think happens when they dish out those green Federal Reserve notes?  The value goes down and down:

It is apparent what will be happening moving forward.  The attempt is to monetize as much of the toxic debt and inflate out of this current crisis.  But can you monetize your way out of $3 trillion in CRE debt plus another $10 trillion in residential mortgages?  Now of course, not all of this debt is bad.  Most are paying their mortgage on time (at least with residential RE).  Yet the big problem is the way banks leverage their assets.  With so many little to nothing down mortgages out there, $1 trillion in bad assets was enough to sink the system.  We have that much in the CRE markets:

Commercial loans from big banks (only one subset) have fallen by $500 billion from their peak.  This is enough to sink most of the current banks out there.  Yet what has happened is the Fed has allowed this shadow monetization of the debt and banks let borrowers roll over CRE debt without even making payments in many cases!  Think of an empty shopping mall.  There is no buyer for this in the current market.  So why would a bank want to foreclose on the borrower?  Instead, they pretend the asset is worth $10 million while the borrower makes no payment and the Fed keeps funneling money into the banking system.  In the end, the value of the dollar gets crushed and you end up bailing out the banking system.

It is disconcerting that no serious talk about inflation or deflation has occurred in the mainstream media.  They focus on the smaller stimulus bailout but this is nothing compared to what is happening through the Federal Reserve.  Even the CRE market problems will cost more than the entire stimulus that is constantly talked about.  At one point all U.S. CRE was valued at $6.5 trillion secured by $3.5 trillion in loans.  Today it is closer to $3 trillion in value with the equal amount of loans:

Source:  MIT

Commercial real estate has collapsed even harder than residential real estate.  This market is enormous in terms of actual debt.  There is no official bailout on the books but it is occurring through a slow and deliberate process.  Banks know that they are essentially insolvent and they are dumping this junk onto the taxpayer.  While people are distracted with the financial pangs of the recession they are destroying the U.S. dollar and trying with all their might to inflate out of this mess.

The CRE bailout has been going on for well over a year through various Fed vehicles.  Just don’t be surprised when QE2 comes out and you start seeing the value of your dollar declining slowly because of supporting the current banking system.

My Budget360

In response to $30 Billion Offer No One Wants – Small Businesses Hit by Deflation I received this email from a director of a small bank.

Hello Mish,

I sit on the board of a small community bank and I can attest to the fact that our loan portfolio is in excellent shape even when taking into consideration today’s dismal economy. That is not to say a loan is good when made can go bad but if that happens, our bank has sufficient collateral pledged against the loan to cover such short falls. We also review our loan loss reserve and increase as needed based on criteria established under current banking regulations.

Sure there are numerous troubled banks identified by the FDIC but I feel many of these banks will survive.

All banks should be making reasonable earnings with today’s low interest rate environment. For community banks, loans are vital and banks are interested in making loans to individuals or businesses that meet our underwriting standards but loan demand is down. A big majority of our loans are just loans leaving another financial institution. Why would someone leave one bank for another?

Of course loan interest rates play a part in the decision but I think a big part is the relationship a customer develops with the loan officer. Dealing directly with a local loan officer who understands your business and is genuinely interested in your business is vital.

Today many larger banks only use local loan officers to bring in the loan request but the decision to make the loan and the terms rest in some committee located in a town far away. Most small business persons will leave such a bank for a local bank with more personalized service.

It’s ridiculous that Congress passed and our president signed a bill to provide funds to smaller banks for more loans. As a bank director, there is no way this plan can work. If a bank needs more deposits for loans, assuming the bank has sufficient capital, a banker can easily get more deposits from the public at a much lower cost than the bill passed by congress.

Our government is totally out of touch with the real world and passed this legislation strictly as a political move to make the public think they are trying to help small businesses.

This bull, I mean bill, should be labeled TARP II or some similar acronym.

Bazooka Lending Theory and Practice

Unlike October 2008, when Paulson forced the CEOs of the 9 largest banks to accept funds (See Compelling Banks To Lend At Bazooka Point) no one is forcing small community banks to do anything.

This is what I wrote in 2008 …

For now, you can force banks to take money, but you can’t force them to lend it.

Bazooka Theory

There seems to be a fine line between …

1) Illegally forcing supposedly well capitalized banks at bazooka point to take money on questionable terms

2) And illegally forcing those same banks at bazooka point to lend it

Self Preservation

Thus the best thing banks can do with that money is sit on it. Yet the penalty for sitting on it is the difference between what the Fed will pay on bank reserves and the 5% interest banks have to pay at bazooka point for borrowing money they did not want in the first place. If banks do start lending like Paulson wants, defaults are guaranteed to increase dramatically.

Someone needs to tell Paulson to go to hell but no one at the table had enough courage to do it.

Here We Go Again

Banks paid back those “forced loans” as soon as they could. Small business lending did not go up, nor should it have. Credit worthy customers were (and still are) few and far between.

Nonetheless, here we go again, except this time it’s voluntary.

Hells bells, if a program that forced banks to take money at bazooka did not compel banks to lend, how is a small voluntary program supposed to do it?

Supposedly, this plan will create another 4 million jobs according to president Obama. Hmm. It seems we spent a trillion dollars yet created no jobs, so offering $30 billion (little if any will be taken) to create 4 million jobs would be a feat indeed.

Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com

The United States is rapidly becoming the very first “post-industrial” nation on the globe.  All great economic empires eventually become fat and lazy and squander the great wealth that their forefathers have left them, but the pace at which America is accomplishing this is absolutely amazing.  It was America that was at the forefront of the industrial revolution.  It was America that showed the world how to mass produce everything from automobiles to televisions to airplanes.  It was the great American manufacturing base that crushed Germany and Japan in World War II.  But now we are witnessing the deindustrialization of America.  Tens of thousands of factories have left the United States in the past decade alone.  Millions upon millions of manufacturing jobs have been lost in the same time period.  The United States has become a nation that consumes everything in sight and yet produces increasingly little.  Do you know what our biggest export is today?  Waste paper.  Yes, trash is the number one thing that we ship out to the rest of the world as we voraciously blow our money on whatever the rest of the world wants to sell to us.  The United States has become bloated and spoiled and our economy is now  just a shadow of what it once was.  Once upon a time America could literally outproduce the rest of the world combined.  Today that is no longer true, but Americans sure do consume more than anyone else in the world.  If the deindustrialization of America continues at this current pace, what possible kind of a future are we going to be leaving to our children?

Any great nation throughout history has been great at making things.  So if the United States continues to allow its manufacturing base to erode at a staggering pace how in the world can the U.S. continue to consider itself to be a great nation?  We have created the biggest debt bubble in the history of the world in an effort to maintain a very high standard of living, but the current state of affairs is not anywhere close to sustainable.  Every single month America does into more debt and every single month America gets poorer.

So what happens when the debt bubble pops?

The deindustrialization of the United States should be a top concern for every man, woman and child in the country.  But sadly, most Americans do not have any idea what is going on around them.

For people like that, take this article and print it out and hand it to them.  Perhaps what they will read below will shock them badly enough to awaken them from their slumber.    

The following are 19 facts about the deindustrialization of America that will blow your mind….

#1 The United States has lost approximately 42,400 factories since 2001.  About 75 percent of those factories employed over 500 people when they were still in operation.

#2 Dell Inc., one of America’s largest manufacturers of computers, has announced plans to dramatically expand its operations in China with an investment of over $100 billion over the next decade.

#3 Dell has announced that it will be closing its last large U.S. manufacturing facility in Winston-Salem, North Carolina in November.  Approximately 900 jobs will be lost.

#4 In 2008, 1.2 billion cellphones were sold worldwide.  So how many of them were manufactured inside the United States?  Zero.

#5 According to a new study conducted by the Economic Policy Institute, if the U.S. trade deficit with China continues to increase at its current rate, the U.S. economy will lose over half a million jobs this year alone.

#6 As of the end of July, the U.S. trade deficit with China had risen 18 percent compared to the same time period a year ago.

#7 The United States has lost a total of about 5.5 million manufacturing jobs since October 2000.

#8 According to Tax Notes, between 1999 and 2008 employment at the foreign affiliates of U.S. parent companies increased an astounding 30 percent to 10.1 million. During that exact same time period, U.S. employment at American multinational corporations declined 8 percent to 21.1 million.

#9 In 1959, manufacturing represented 28 percent of U.S. economic output.  In 2008, it represented 11.5 percent.

#10 Ford Motor Company recently announced the closure of a factory that produces the Ford Ranger in St. Paul, Minnesota. Approximately 750 good paying middle class jobs are going to be lost because making Ford Rangers in Minnesota does not fit in with Ford’s new “global” manufacturing strategy.

#11 As of the end of 2009, less than 12 million Americans worked in manufacturing.  The last time less than 12 million Americans were employed in manufacturing was in 1941.

#12 In the United States today, consumption accounts for 70 percent of GDP. Of this 70 percent, over half is spent on services.

#13 The United States has lost a whopping 32 percent of its manufacturing jobs since the year 2000.

#14 In 2001, the United States ranked fourth in the world in per capita broadband Internet use.  Today it ranks 15th.

#15 Manufacturing employment in the U.S. computer industry is actually lower in 2010 than it was in 1975.

#16 Printed circuit boards are used in tens of thousands of different products.  Asia now produces 84 percent of them worldwide.

#17 The United States spends approximately $3.90 on Chinese goods for every $1 that the Chinese spend on goods from the United States.

#18 One prominent economist is projecting that the Chinese economy will be three times larger than the U.S. economy by the year 2040.

#19 The U.S. Census Bureau says that 43.6 million Americans are now living in poverty and according to them that is the highest number of poor Americans in the 51 years that records have been kept.

So how many tens of thousands more factories do we need to lose before we do something about it?

How many millions more Americans are going to become unemployed before we all admit that we have a very, very serious problem on our hands?

How many more trillions of dollars are going to leave the country before we realize that we are losing wealth at a pace that is killing our economy?

How many once great manufacturing cities are going to become rotting war zones like Detroit before we understand that we are committing national economic suicide?

The deindustrialization of America is a national crisis.  It needs to be treated like one.

If you disagree with this article, I have a direct challenge for you.  If anyone can explain how a deindustrialized America has any kind of viable economic future, please do so below in the comments section.

America is in deep, deep trouble folks.  It is time to wake up.

The Economic Collapse