Saturday, January 31, 2009

How Bad Is It?

The Wall Street Journal reports that we just experienced the Worst January on Record for Stocks .

Calculated Risk has posted a series of graphs that depict just how bad various aspects of the economy are. See January Economic Summary in Graphs. Things are bad indeed -- many indicators are the worst on record.

But some of my friends in the banking industry tell me that they see a dim light at the end of the tunnel. Big bankers are looking favorably at the Obama administration's rescue plan insofar as it would decouple the fortunes of the housing market from the assets of the banks.

The plan to take the bad assets off the books of the banks supposedly would diminish the banks' exposure to the unknown risks of many mortgages, mortgage backed securities, and their derivatives, removing some of the uncertainty about the viability of the banks. Conceivably, the same would apply to credit cards, student loans and the rest of the toxic fallout from the credit bubble. What, then, will be left of the banks' portfolios of business (which, when all is said and done, is lending)? And how will the banks rebuild that business? Unemployment above 8% would be bad news for the banks and the rest of us. See Bankers' Fear of Unemployment.

The government's solutions are designed to restart lending. But what they really want is to restart borrowing. But with 40% of the world's wealth having vanished and unemployment rising, the attempts to get people to releverage will not work. Few want to crawl back up that slippery slope.

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