I have just been looking at the 4th quarter data on commercial banks’ loan delinquencies and chargeoffs released on February 24 by the Federal Reserve Board of Governors. It confirms what I have been worrying about. Not the problems with residential mortgages, that’s old news. Rather it is the sharp increase in delinquency rates for all types of loans. Additionally, while chargeoffs have risen they have lagged the increase in delinquencies and will be playing catchup. This means there will be significantly more capital impairment ahead for the banking system.
Commercial real estate, credit cards, and business loans showed particularly sharp increases in delinquencies. OK, you might say, “Didn’t you expect this?” Yes, I did, although the both the magnitude and speed of the change is a bit shocking. My primary point is that this was occurring when the downturn was in a relatively early stage. Remember that the 3rd quarter of 2008 saw only a modest 0.5% decline in GDP, and that the 4th quarter was the first of what, in my judgment, will be at least three additional quarters of uncomfortable rates of decline. That means, inevitably, that the deterioration of bank asset quality is almost certainly worsening, not abating, and that the erosion of bank capital is continuing.
I continue to believe that neither the recession nor the bear market will see any trustworthy improvement until bank assets show signs of quality stabilization.
What Can We expect the Stimulus Package to Do?
One of my favorite economists, Larry Chimerine, has made the rough estimate that 18-24 months from now, the stimulus will cause GDP to be 5-6% higher than it would be otherwise. He hastens to add, however, that we cannot yet confidently estimate the base level from which that will take place.
Well, let’s make a try at estimating that base. If GDP declines at an annual rate, say, of 6.5% this quarter,3% in the 2nd quarter, and 2% in the third quarter, we will have a GDP level going into the last quarter of the year that is 5% below the 2nd quarter of 2008. If that proves to be the base on which the stimulus builds, then, by the first quarter of 2011 the economy’s output would be roughly be back where it was in the 2nd quarter of 2008. Of course, any reader knows that all these estimates are wrong, and the errors might compound to make the end result far better or far worse than this!