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Monday, April 6, 2009

Great Recession Roundup — April 6, 2009

Items of Interest:

Will banks will take bigger hit than Great Depression?

The Original Seven Deadly SinsFT.com:
Move over Meredith -- …there’s another bank slayer in town, and his name is Mike Mayo.

The former Deutsche Bank analyst has re-launched his coverage of the sector at his new employer, CLSA, with a note titled the ‘Seven deadly sins of banking’ ...

The impact of excessive risk, while already seen, still has more to go in our opinion, especially given a rolling recession by asset class. While mortgage losses may be half way to the peak, card and consumer losses may only be about one-third of the way and industrial and commercial real estate problems (except construction) seem in the early stages. Loan losses, as a percentage of loans, will likely pass the level of the Great Depression...
  1. Greedy loan growth - once in a generation excess.
  2. Gluttony of real estate - historic asset concentration.
  3. Lust for high yields - loan losses exceed Depression (est.)
  4. Sloth-like risk management - highest ever consumer debt.
  5. Pride of low capital - lowest level in 25 years.
  6. Envy of exotic fees - exotic turns toxic w/$400 billion of charges.
  7. Anger of regulators - consequences of past lobbying.
DealBook / NY Times:
Bank Analyst Sees Depression-Size Loan Losses -- Mike Mayo is back, and the prominent banking analyst sounds more bearish than ever.

Mr. Mayo, who recently left his job covering bank stocks for Deutsche Bank to join a unit of Calyon, initiated coverage of 11 large banks in the United States on Monday, and his first report at his new firm assigns all of them “underperform” or “sell” ratings.

The report was full of gloomy predictions, not least of which was this one: Mr. Mayo projects that loan losses in the current financial crisis will eventually exceed the levels experienced during the Great Depression...

Heidi Moore / WSJ Deal Journal:
The History of Mike Mayo Bank Downgrades

Calculated Risk:
Meredith Whitney: House Prices to Fall Another 30% -- House prices ... "peak to trough off 50%" ...

US Recovery Is Far Off, Banks Are ‘Basically Insolvent’: Soros
— The U.S. economy is in for a “lasting slowdown” and could face a Japan-style period of relatively low growth coupled with high inflation, billionaire investor George Soros said on Monday. — Soros, speaking to Reuters ...
World Industrial Output, Now vs Then (1929):

World Industrial Output, Now vs Then (1929)Voxeu.org:
A Tale of Two Depressions -- Often cited comparisons – which look only at the US – find that today’s crisis is milder than the Great Depression. In this column, two leading economic historians show that the world economy is now plummeting as it did in the Great Depression; indeed, world industrial production, trade and stock markets are diving faster now than during 1929-30. Fortunately, the policy response to date is much better...
Annie Lowrey / FP Passport: Worse than the Depression...

Paul Krugman: It's 1930 time — Barry Eichengreen and Kevin O'Rourke …
-- What Eichengreen-O’Rourke show, it seems to me, is that knowledge is the only thing standing between us and Great Depression 2.0.
Roger Altman / FT.com:
Why this will not be a normal cyclical recovery -- The rare nature of this recession precludes a cyclically normal US recovery. Instead, we are consigned to a slow, painful climb-out, as are nations such as Japan and Mexico that depend on US demand. The implications for US policy include a likely second round of stimulus, much more federal capital for the banking system and stunning budget deficits that will slow key initiatives for President Barack Obama, such as healthcare and energy reform.

What is unusual is that this is a balance-sheet driven recession, centred on the damaged financial condition of both households and banks. These weaknesses mandate sub-normal levels of consumer spending and overall lending for about three years...
Smith & Gjerstad / WSJ.com:
From Bubble to Depression? -- Bubbles have been frequent in economic history, and they occur in the laboratories of experimental economics under conditions which -- when first studied in the 1980s -- were considered so transparent that bubbles would not be observed.

We economists were wrong: Even when traders in an asset market know the value of the asset, bubbles form dependably. Bubbles can arise when some agents buy not on fundamental value, but on price trend or momentum. If momentum traders have more liquidity, they can sustain a bubble longer...

Fed rates vs. housing prices - boom and bust cycle
John Tamny, Forbes: Alan Greenspan Did Not Cause the Housing Boom
Diana Olick / CNBC - Realty Check:
Signs Of A Housing Bottom? -- Well in the past few weeks, I’ve been getting dribs and drabs of comment and fact that, culled together, suggest housing may be bumping along the bottom...
Ambrose Evans-Pritchard / Telegraph [UK]:
Swiss slide into deflation signals the next chapter of this global crisis -- Watch Switzerland closely. It is tipping into deflation, the first Western country to succumb to Japan's disease.

Swiss consumer prices fell 0.4pc in March (year-on-year). Swiss CPI will be minus 1pc at least by July, nearing the level where spending psychology changes. By the time you have a self-feeding spiral, it is too late...
Mess That Greenspan Made: The Swiss slide into deflation