Wednesday, December 9, 2009

It Ain't Over Until It's Over

Spain has just had its debt outlook lowered by Standard and Poor’s. In January, Spain’s debt rating was lowered from AAA to AA+. Now, Spain’s debt outlook has been reduced from “stable” to “negative”. The outlook: Spain is now expected to experience a “more pronounced and persistent deterioration” in its budget and a “more prolonged period of economic weakness,” than it expected at the start of the year. Enough said.

Spain now joins Dubai and Greece in the headlines that include the label “sovereign debt.” And, the guess is that this list is going to grow in the upcoming weeks and months.

It’s not over yet!

There are still too many entities that have not fully voiced their precarious financial situation or have not yet fully accounted for their losses.

As I have said many times before that although the bad news is that there are still a lot of write-offs and write-downs that have not been taken yet, the good news is that we are not “surprised” by them and seem to be handling the bad debt problems within the “course of business.”

Many of the people I most respect believe that there will be more nations joining Spain, Dubai, and Greece as problem areas. There will be states within the United States that will be downgraded credit-wise. More corporations and businesses will find their credit rating lowered. Bankruptcies, business and personal, will continue to rise. Foreclosures on homes and commercial properties will keep going up. There will be a lot more bank failures. Remember there are 552 banks on the problem bank list of the F. D. I. C. The credit problems of the world are not going to go away for a while.

And, this is the reason why there is next to no lending going on in the economy and in the world.

Yes, some of the bigger organizations are getting funds. But, the world is bifurcating. As mentioned Monday, many of the bigger banks seem to be thriving, profit-wise, while the smaller ones are on the edge. (See Also, the larger banks are increasing their lending while the small- and medium-sized banks are still contracting their lending.

It seems that at this time there is very little confidence in balance sheets and in people. One just doesn’t know who to trust anymore. And, this lack of confidence extends from the private sector to the public sector and back again.

It is this underlying lack of confidence, this lack of faith that will tend to hinder the recovery and the return to a more “normal” economy, whatever “normal” is going to mean in the future.

The real problem is that I don’t see anything on the horizon that is working to change this lack of confidence. To me, the world has changed, it changed in September 2008. Yet, to a great extent, our policymakers are trying to force the world back into the form it was before these changes took place.

Just in terms of financial regulation, Congress, and many of people that advise Congress, are fighting the previous war.

Haven’t they noticed that the bigger financial institutions have already changed? JP Morgan Chase and Goldman Sachs have moved on. So have many other healthy, large organizations in the United States as well as in the world. Congress will not be able to put them back into their former mold.

In this respect, the only thing one can hope for on the regulatory side is that the Congress will not “muck-it-up” too badly in terms of banking regulation for the rest of the industry.

Remember that there are about $12 trillion assets in the banking system in the United States. Of this amount, the largest 25 domestically chartered banks possess $6.8 trillion and the “small” domestically chartered banks hold about $3.8 trillion. The rest of the assets are in the branches of foreign banks. The largest will find ways around new rules and regulations: the smaller institutions will have to deal with them directly.

The things that the current administration and Congress are doing to try and get the economy moving again lack traction in the area of building confidence where that confidence is needed. This lack of confidence is even coming from within government, itself, as Elizabeth Warren, the head of the Congressional Oversight Panel on bank bailouts, has called the Treasury’s program to restructure mortgages that are underwater so as to prevent foreclosures “ineffective” and something that the Treasury should scrap.
Confidence in the system and trust are going to be slow in coming back. Until these things return, a full recovery will not be forthcoming. It ain’t over until it’s over!

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