I’ve been reading the IMF’s Global Prospects and Policies Chapter !:
One of the items that stands out is the amount of repair (in currency) that is estimated to be necessary to produce a functioning credit system:
The policy responses in both advanced and
emerging economies have helped alleviate the
extreme financial market disruptions observed
in October–November 2008, and there have
been encouraging signs of improving sentiment
since the G20 meeting in early April, but financial
market conditions have generally remained
highly stressed. Thus, financial risks have risen
further along most dimensions, as discussed in
detail in the April 2009 Global Financial Stability
Report (GFSR). Most market risk and volatility
indicators are still well above ranges observed
before September 2008, let alone before August
2007.Although access for high-grade borrowers in securities markets
has improved, bank credit growth is falling rapidly
across the board, bank wholesale funding
in mature markets remains highly dependent
on government guarantees, and securitization
markets remain deeply impaired. The situation
is further complicated by continuing uncertainty—
both about economic prospects and the
valuation of bad assets—particularly since little
progress has been made in either reestablishing
liquid markets in these assets or reducing bank
exposure to fluctuations in their value.The continued pressures reflect to an important
degree the damaging feedback loop with
the real economy—as economic prospects have
darkened, estimates of financial losses have continued
to rise, so that markets have continued
to question bank solvency despite substantial
infusions of public resources. The GFSR estimates
that expected write-downs on U.S.–based
assets suffered by all financial institutions over
2007–10 will amount to $2.7 trillion (up from
the estimate of $2.2 trillion in January 2009).
Total expected write-downs on global exposures
are estimated at $4 trillion, of which about two thirds
will fall on banks, with the remainder distributed
among insurance companies, pension
funds, hedge funds, and other intermediaries,
although this figure is subject to a substantial
margin of error.So far, banks have recognized
less than one-third of estimated losses, and
substantial amounts of new capital are needed.
Subject to a number of assumptions, the GFSR
estimates that additional capital would be
required (measured as tangible common equity)
amounting to $275 billion–$500 billion in the
United States, $475 billion–$950 billion for
European banks (excluding those in the United
Kingdom), and $125 billion–$250 billion for
U.K. banks.1 Moreover, insurance company and
pension fund balance sheets have been badly
damaged as their assets have declined in value,
and lower government bond yields used to
discount liabilities have simultaneously widened
asset-liability mismatches.
The first remark that catches my attention is this:
The situation is further complicated by continuing uncertainty— both about economic prospects and the valuation of bad assets—particularly since little progress has been made in either reestablishing liquid markets in these assets or reducing bank exposure to fluctuations in their value.
I am not surprised that liquid markets for bad assets cannot be established; they are BAD assets. These assets are loans that will never be repaid, why should anyone want to buy them? Consider that these loans should never have been made in the first place, lending to those who have nothing to pledge as collateral other than that which is lent to them previously. Lending so that these borrowers might spend it. This is folly, what value is that?
Zero! I know that and I am not even an economist!
The IMF is distressed that there are none to be found who will speculate on the relative worthlessness of bad loans.
Another interesting observation is the amount of bad loans that are already estimated to be on the books of the banks significant enough to deserve examination. The number $4trillion has been commented on by others, but additional amounts squirreled away in corners beyond the peeping eyes of the IMF is certainly just as large. There are Chinese banks, Indian banks, Russian banks; commercial real estate and construction lending is within the ambit of local and private lenders and while the loans are being serviced now, the collapse in retail and office work means that the good loans will certainly go bad.
Another number is the estimated $875b – $1.7t needed in bank capital to keep the system solvent. Where will this money come from? Borrowed, certainly … so that the illusion of solvency today can be conjured out of certain ruin in the future since the lenders of the future cannot deny the loan, they can only refuse to repay it! The solution to the assembling of expedients over the past thirty years is more expedients … hopefully nobody will notice!
Here is a question; why are all the countries in the world being affected by this financial meltdown? Is it banks? Is it credit and money flows? Is it real estate?
IMF Chart
The blue line – the oil line – is the important one. Notice that the current position is 100+ IMF basis points higher than it was generally from 1993 to 2000 ; The period 1990 -2000 was notable because energy prices were so low – 1998 the annual price was $14.42 (WTI from EIA data). A simple equilibrium observation gives this as the point where production worldwide measured in the markets against consumption set a remarkably low market clearing price. That would arguably be the point of ‘Peak Oil’ as production rates could never drive the price that low again.
From 1998 onward, excess of production over consumption as determined by oil price in the market has been shrinking. Think about it. What better way of determining the relationship between the rates of production and consumption than price? Wouldn’t the flow of petroleum be greatest – and the price lowest – at the peak of production relative to consumption? Consumption is considered to be quite inelastic; it would be reasonable to conclude the rise then fall against inelastic demand would be reflected more sensitively in price.
Excess production is contracting right this minute and the IMF calculates that equilibrium prices will be almost 100% higher than current in 2015 indicating an even greater shrinkage.
HEY! We are already in the Hubbert Down slope!
All the stimulus and liquidity will not put the economy back together again. Oil, not lending, is weighing on the economies. It”s not hard to connect the dots. Much of the bad lending is housing, infrastructure and transport related. How many home loans are bad? How many auto loans? Ironically, oil is not expensive enough to finance more production. It is expensive enough to cause contraction in the parts of the economy that are dependent upon it. There is certainly more forthcoming, but this is one of the scariest charts I have seen.