US Consumer Confidence Lowest Since Nov 2009, France 8 Month Low, South Korea 23 Month Low, UK Record Low; Icing on Three Little PIIGS' Cake

In the wake of falling US consumer confidence, let's take a look at global consumer confidence headlines starting with the US.

US Consumer Confidence Lowest Since November 2009

Bloomberg reports U.S. Consumer Sentiment Fell More Than Forecast in March

The Thomson Reuters/University of Michigan final index of consumer sentiment decreased to 67.5, the lowest level since November 2009, from 77.5 in February, the group said today. The median forecast of 67 economists surveyed by Bloomberg News projected a reading of 68.

Gasoline prices hovering near the highest levels since October 2008 are straining the finances of American households, whose spending makes up about 70 percent of the world’s largest economy. While unemployment has fallen for three months, Japan’s earthquake crisis led to a plunge in stock values, at one point wiping out all of 2011’s gains.

The decline in sentiment was foreshadowed by other gauges. The Bloomberg Consumer Comfort Index dropped last week to the lowest level since August as consumers’ assessment of the economy dimmed. The confidence gauge, which tends to inversely track fuel prices, slid to minus 48.9 in the week to March 20 from the prior week’s minus 48.5.

The current conditions gauge, which reflects Americans’ perceptions of their financial situation and whether they consider it a good time to buy big-ticket items like cars, decreased to 82.5 from 86.9 the prior month.

Future Expectations Gauge Plunges

ZeroHedge has a nice chart of Consumer Confidence "Expectations"

The Expectations component had its fifth largest drop in history, plunging from 72 to 58. This is a lower reading than that recorded when the "recession", according to the NBER at least, was still raging. As a reminder the recession ended with "expectations" at 70.

Consumer Expectations Index at 57.9



South Korean Consumer Confidence Drops to 23-Month Low

Please consider South Korean Consumer Confidence Drops to 23-Month Low After Japan Quake

South Korean consumer confidence fell to the lowest level in almost two years, damped by Japan’s strongest earthquake and political unrest in the Middle East. Retailers’ stocks dropped in Seoul trading.

The sentiment index declined to 98 in March from 105 in February, the fourth monthly drop, the Bank of Korea said in an e-mailed statement in Seoul today. A number below 100 indicates pessimists outnumber optimists.

“Consumer confidence worsened so sharply, boding ill for private consumption and also economic growth,” said Park Sang Hyun, chief economist at HI Investment & Securities Co. in Seoul. “If oil prices stay above $100 a barrel for another month, sentiment will deteriorate further, prompting the central bank to pause interest-rate increases next month.”

The Bank of Korea raised rates for the second time this year on March 10 after inflation exceeded its target ceiling for two consecutive months. The benchmark seven-day repurchase rate now stands at 3 percent. Consumer prices climbed 4.5 percent last month.

U.K. Consumer Confidence at Record Low

Are things so bad in the UK they cannot get worse? Somehow I doubt that. Meanwhile please ponder U.K. Consumer Confidence at Record Low on Economic Worries

U.K. consumer confidence fell to a record low in February as Britons grew more pessimistic about the sustainability of the economic recovery and the outlook for jobs, Nationwide Building Society said.

An index of sentiment dropped 10 points to 38, the lowest since records began in 2004, the customer-owned lender said in an e-mailed report today. A measure of whether now is a good time to spend dropped 18 points to 52, also the lowest since the survey began.

The U.K. economy shrank in the fourth quarter, while inflation has soared to twice the Bank of England’s 2 percent target. Bank of England policy makers have split four ways as they debate whether to focus on boosting the recovery or curbing price pressures, and voted on March 10 to keep the benchmark interest rate at a record low of 0.5 percent.

“The labor market remains fragile” and “inflation is showing few signs of easing,” Gardner said. Oil prices have risen 37 percent in the last six months and U.K. unemployment rose by 27,000 in the three months through January to 2.53 million, the highest since 1994.

A gauge of consumers’ future expectations fell 14 points to 50 and an index of their view of the present situation slipped 3 points to 20, the lowest in 18 months, the report showed.

“High inflation has led many to expect interest rate rises by the summer, which may in turn have fanned concerns about mounting pressure on household budgets,” Gardner said. He sees rates on hold “until the back end of 2011.”

EU Consumer Confidence drops to -10.6

FXStreet reports EU Consumer Confidence drops to -10.6 in March

The EU consumer confidence index worsened slightly to -10.6 in March, compared to the revised -10.0 it recorded the month prior and the -11.0 which was expected.

French Consumer Confidence at 8-Month Low

Bloomberg reports French Consumer Confidence Declines on Higher Energy Prices

French consumer confidence fell to an eight-month low in March as surging energy costs sapped spending power and President Nicolas Sarkozy readied a new wealth tax.

An index of sentiment fell to 83 from 85 in February, national statistics office Insee said today in an e-mailed statement. That was the lowest reading since July.

With oil prices up more than 40 percent in a year, French motorists are paying more for gasoline while the government is planning electricity-price increases for later this year. That’s slashing spending power at a time when joblessness remains stuck near a seven-year high.

Sarkozy’s government is preparing an overhaul of a tax on the nation’s wealthiest households and the anti-immigration National Front is surging in opinion polls.

Look on the Bright Side

Being the ever-optimist, I like to look on the bright side. Please consider German consumer confidence rises on wage hopes.

German consumer confidence is rising as workers expect wages to increase in 2011, according to a survey by market research group GfK.

GfK said its forward-looking index for March had risen to 6.0 from a revised 5.8 in February.

The group also said that falling unemployment was giving consumers a greater feeling of security.

Such is the nature of the ECB's "One Size Fits Germany" Interest Rate Policy.

Icing on the Three Little PIIGS' Cake

We all know there's nothing quite like a mix of income tax tax hikes, high gasoline prices, rising food prices, and 7-year high jobless rates to boost consumer confidence.

Interest rates hike by the ECB will be icing on the three little PIIGS' cake.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

S&P Nightmare Scenario: Spanish Housing Prices Drop by 45%, GDP Drops by 20%, Interest Rates Hit 17%; Portugal May Need $99B; Missteps by Merkel

In the wake of the collapse of the Portuguese government comes the not unexpected news Portugal May Need $99 Billion Rescue

A bailout for Portugal may total as much as 70 billion euros ($99 billion), two European officials with direct knowledge of the matter said, as credit-rating cuts threatened to deepen Portugal’s debt woes.

Preliminary calculations put the cost of a lifeline from 50 billion to 70 billion euros, said the officials, who declined to be named because the issue is confidential. Portugal continued to rule out a rescue after the parliament’s rejection of budget cuts led Prime Minister Jose Socrates to offer to quit.

“It’s pretty inevitable” that Portugal will need a rescue, said Jacques Cailloux, a London-based economist at Royal Bank of Scotland Group Plc. “The market will deteriorate in the absence of other measures going through. There is obviously the risk of further downgrades, which will become anticipated by the markets and be a self-fulfilling prophecy.”

Some Weigh Restructuring Portugal’s Debt

Does Portugal need $99 billion as stated by Bloomberg or $113 Billion as estimated by the New York Times? The real question is when does restructuring the debt of Ireland, Greece, and Portugal start?

Please consider Some Weigh Restructuring Portugal’s Debt

As Europe struggles to come to grips with its debt crisis, which has deepened with the collapse of Portugal’s government after it pushed for yet another round of budget cuts, three numbers stand out: 12.4, 9.8 and 7.8.

Those are the interest rates currently paid on 10-year government bonds for Greece, Ireland and Portugal. That they remain so high — compared with just 3.24 percent on German bonds — shows that investors remain unconvinced that Europe’s haphazard strategy for bailing out troubled, highly indebted countries has succeeded a year after it began.

As heads of state huddled in Brussels on Thursday, with a possible rescue of Portugal on their minds after similar bailouts of Greece and Ireland, the question remained: would Europe accept a resolution it has long resisted — forcing investors to take a loss on their bond holdings to keep the crisis from spreading?

A bailout of Portugal — perhaps to the tune of 80 billion euros ($113 billion) — remains the most likely if not the safest possibility, because it could prove to be another stop-gap measure that might not keep the crisis from spreading.

As the number crunchers from the European Central Bank, tax experts from the International Monetary Fund and other members of the bailout bureaucracy prepare to descend upon Portugal, preaching more budgetary pain and sacrifice, some economists argue that the smarter approach would be to restructure Portugal’s existing debt instead of piling more of it on.

Can Merkel Make Up Her Mind?

German Chancellor Angela Merkel has wasted a lot of political capital by proposing much needed sovereign debt haircuts then changing her mind under pressure from ECB president Jean-Claude Trichet. Moreover, many Germans are upset by her wishy-washy constantly changing bailout proposals that are in violation of the Maastricht Treaty.

In the wake of the nuclear crisis in Japan, she is accused of playing politics regarding her switch on nuclear energy. Now she is balking about an EU proposal she accepted just 4 days ago.

Please consider EU Cuts Future Aid Fund’s Start-Up Capital After Germany Balks.

European Union leaders cut the startup capital for the future euro emergency aid mechanism after German demands to make smaller upfront payments stoked fresh concerns about Europe’s effort to quell the debt crisis.

As speculation swirled that Portugal will be the next victim of the crisis, the leaders bowed to German Chancellor Angela Merkel’s call to pare the fund’s paid-in capital as of 2013 to 16 billion euros ($23 billion), less than the 40 billion euros foreseen in a March 21 accord.

“It was a difficult debate with Germany,” Luxembourg Prime Minister Jean-Claude Juncker told reporters after the first session of an EU summit in Brussels early today. “Germany found that in the compromise agreed last Monday it would have to pay in too much. So we had to tackle that issue.”

With Merkel’s party trailing an opposition bloc in the polls before a March 27 regional election, the sparring over the future emergency support system reflected domestic political pressure on leaders in Europe’s wealthier north to limit aid to struggling southern economies.

Merkel’s renegotiation of the three-day-old financing accord punctured the EU’s proclamation of a “comprehensive” anti-crisis strategy, including tougher sanctions on excessive budget deficits and national pledges to increase competitiveness.

German political jitters over propping up debt-swamped states dominated the crisis response last year, with Merkel delaying aid for Greece and calling for bondholder losses that hastened Ireland’s plunge into the fiscal abyss.

Spotlight on Spain

The Wall Street Journal reports Spain Takes Turn in Debt Spotlight

Portugal's admission that it will probably need a financial bailout raises a question that will shape the outcome of the euro zone's debt crisis: Is Spain next?

The cost of saving Spain, a €1.1 trillion ($1.56 trillion) economy, would dwarf previous bailouts and could test the financial strength of Europe as a whole.

But if Spain can continue to repair investors' trust, as in recent weeks, then Europe stands a chance of containing the debt crisis to three countries, Greece, Ireland and Portugal, whose combined economies are half the size of Spain's.

Spanish bonds and stocks, including those of banks, rose Thursday despite the downgrades and concerns that Spanish lenders could be hit by the deepening crisis in neighboring Portugal.

Spain's borrowing costs have stabilized and come down slightly in recent months, whereas investors have continued to dump bonds of the three smaller crisis-hit countries.
Spain's budget deficit, at 9.2% of GDP last year, remains too high for comfort, but was down from more than 11% in 2009. Spain improved its credibility with investors by meeting its deficit-reduction target, despite overspending by some regional authorities. This year's deficit target of 6% is achievable, said economists, but might require extra fiscal measures if economic growth disappoints.

The economy grew at an annualized rate of 0.9% in last year's fourth quarter, marking another contrast with Greece, Ireland and Portugal, which stayed mired in recession. Spanish consumer spending is falling thanks to mass unemployment and households' efforts to reduce their debts, but Spanish exports are doing better than expected, growing at an annualized 16.6% last quarter.

Spain's Capital Shortfall "Substantially" Higher than Bank of Spain Admits

Spanish lenders face a capital shortfall that’s “substantially” higher than an estimate by the Bank of Spain because they haven’t accounted for all of their real-estate losses says Jesus Ecinar, founder of the largest property website in Spain.

Please consider Bank of Spain Underestimates Funding Gap Faced by Lenders

Spanish lenders face a capital shortfall that’s “substantially” higher than an estimate by the Bank of Spain because they haven’t accounted for all of their real-estate losses, according to Jesus Encinar, founder and chief executive officer of Idealista.com.

As much as 15.2 billion euros ($21 billion) is needed by Spanish banks to meet new capital requirements, the central bank said on March 10. Encinar, 40, said the eventual shortfall may be between 80 billion euros and 100 billion euros. A spokesman for the Bank of Spain declined to comment on his estimate.

“Property portfolios are still mostly valued at prices dating from the boom, rather than current values,” Encinar said during an interview at his office in Madrid. Home prices in some parts of Spain have dropped about 40 percent since the market’s peak in 2007, according to his 10-year-old company, the country’s largest property website.

Savings banks alone have taken on land worth 23 billion euros after borrowers defaulted on their loans, according to data from the Bank of Spain. Land prices have fallen as much as 80 percent in the past four years and the valuations used by lenders are “pure fantasy,” Encinar said.

On March 15, Spanish Finance Minister Elena Salgado said that estimates of lenders’ capital needs by rating companies aren’t comparable with those of the Bank of Spain and the firms should explain their methodology.

While the Bank of Spain does a “simple subtraction” to see how much capital is needed to meet the new rules, the rating companies make “presumptions on the amounts our lenders would need to cope with certain eventualities.”

Inflated Prices

Banks and other financial-services companies advertise homes at prices that are as much as 12 percent higher than privately owned properties, according to Idealista. In return, they offer better mortgage terms, Encinar said. In some cases, banks only grant mortgages for homes that they own.

“We tried to inform the banks about the market value of their properties, but they won’t reduce prices because it would affect the data that the banks are giving to the Bank of Spain,” he said.

Spain's Nightmare Scenario

Nearly every day of the week I receive emails from my friend Bran who lives in Spain.

Many of the links Bran sends are in Spanish. Sometimes he translates the highlights. Today he writes ...

An S&P "nightmare" scenario quoted by El Pais, not only assumes a fall in housing prices by 45%, it also assumes GDP to fall by 20% between 2011 and 2015, a destruction of a quarter of today's jobs and interest rates to reach 17%. In this worst case scenario Spanish banks and savings banks would need an injection of public capital of €64bn, equivalent to 6% of GDP.

Spanish speaking readers may wish to consider "La agencia parte de una caída del PIB del 20% y una destrucción del 25% del empleo"

English Speaking readers can follow this Google translation: S&P believes that in an extreme case the bank would need 64,000 million

Right now, the two things propping up the Euro are Trichet's expected rate hikes and speculation that Spain will not need a bailout. Both are questionable ideas to say the least.

I happen to think the "nightmare" scenario is the realistic one. If so, those who think Spain will not need a bailout need to think again.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Appraisal Madness in Illinois, Maryland, Missouri and Nevada

Inquiring minds are investigating sheer lunacy regarding the appraisal process in Illinois, Maryland, Missouri and Nevada.

Please consider Four States Consider Legislation Barring Distressed Sales as Comparables

Four states – Illinois, Maryland, Missouri and Nevada – are considering legislation that would prohibit or restrict the use of “distressed sales,” such as foreclosures and short sales, as comparable sales as a part of a residential real estate appraisal.

The Missouri legislation, known as House Bill 292, would prohibit appraisers from using a property that has been sold at a foreclosure sale as a comparable. Similar to the Missouri proposal, the Illinois legislation would prohibit appraisers for the next five years from using as a comparable sale “a residential property that was sold at a judicial sale at any time within 12 months.”

The Nevada legislation would prohibit the use of foreclosures and short sales. The prohibitions contained in the Maryland legislation are somewhat broader and include any property that was sold under “duress or unusual circumstances, such as a foreclosure or short sale.”

There is, however, conflicting language in the Maryland legislation that appears to allow for the use of distressed properties as comparables if the appraiser takes into account factors such as the motivation of the seller, the condition of the property and the property’s history or disposition before the sale. Appraisers in Maryland will oppose this legislation during a hearing March 29.

If these bills were enacted into law, appraisers would be put in the difficult position of having to choose which law to violate. Appraisers are required to adhere to comply with the Uniform Standards of Professional Appraisal Practice in federally related transactions. The standard mandates that appraisers “must analyze such comparables sales as are available.” Further, the standard cannot be voided by a state or local government.

Not following USPAP could subject the appraiser to having action taken against their license. Therefore, appraisers would have to make the decision to commit a USPAP violation – which in the case of federally related transactions would be a violation of state law – or to violate the law prohibiting the consideration of distressed sales as comparables.

Admittedly appraisers blew it in 2004-2006 with absurd valuations. However, the market rectified that situation quite nicely.

Let the appraisers do their jobs. They are the ones who ought to know what to include in comparables or not. If perchance some don't, the one thing we know with absolute certainty is that virtually 100% of legislators don't know either. If they did, they would have acted to prevent appraisal fraud six years ago.

Such laws would be bad enough as is, but conflicting standards makes the legislation considered by Illinois, Maryland, Missouri and Nevada complete lunacy.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Good News: Only 83% Say Now is a Bad Time to Find a Quality Job

A recent Gallup survey shows Gallup's Job Creation Index Sees Its Best Week Since Sept. 2008

Gallup's Job Creation Index reached +14 during the week ending March 20 -- its highest weekly level since the week ending Sept. 28, 2008. Thirty-two percent of employees nationwide say their companies are hiring and 18% say their companies are letting workers go. This is a slight improvement over the prior week, when 31% of companies were hiring and 18% letting go, and a similar reading for the month of February.



Pessimism About Finding a Quality Job Is Lowest Since October 2008

Thinking about the job situation today, would you say that now is a good time or a bad time to find a quality job?



While 83% of Americans in a separate question think March 2011 is a "bad time" to find a quality job, this is the lowest percentage since October 2008. Still, for more than two years, at least 8 in 10 Americans have been pessimistic about the job market.

Americans' perceptions of the market for quality jobs have shown similar improvement in recent months. Nevertheless, more than 8 out of 10 Americans believe quality jobs remain hard to find.

Regardless, to the degree that the jobs situation is improving, it continues to be insufficient to significantly lower overall underemployment and unemployment.

Inquiring minds may also be interested in Gallup Poll Pegs Unemployment Rate at 10.2%, Underemployment at 19.9%, Same as Last Year

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Collective Bargaining neither a Privilege nor a Right

The battle cry from Wisconsin is a union complaint that their "right" to collective bargaining has been taken away. Nothing could be further from the truth. You cannot take away something that does not exist and never did.

Please consider this simple sentence straight from the Declaration of Independence.

"We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness."

Public unions take away those "unalienable rights" via collective bargaining arrangements.

Five Ways Collective Bargaining Tramples Various Unalienable Rights

1. Collective bargaining agreements take away the right of individuals to pursue a career of their dreams void of union affiliation
   
2. Collective bargaining agreements force individuals into organizations against the free will of those members
3. Collective bargaining agreements force union dues out of members who do not even want to belong
4. Collective bargaining agreements dictate what members can and cannot do with their free time.
5. Collective bargaining agreements even dictate what non-members can and cannot do with their free time!
   

Example of Point Number Four

Union firefighters are frequently prohibited from being volunteer fire department workers for their city.

Example of Point Number Five

Union rules prohibit volunteers from helping schools paint, trim shrubbery, answer phones, clean blackboards, etc. The absurdity of such pro-union, anti-taxpayer arrangements should be self-evident.

Right to Pursue Happiness

Unions have no right to deprive others of their "unalienable right" to pursue happiness.

If it makes people happy to volunteer time, that "unalienable right" must not be stripped away by unions or politicians and their self-serving goals.

The alleged collective bargaining "rights" of unions were attained over the years via tactics of coercion, bribery, fear-mongering, and vote-buying. Regardless of how attained, even in good-faith, politicians have no right to take away "unalienable Rights".

Unions insist they won the rights to collective bargaining through negotiation. That is as impossible as whites negotiating rights to own blacks or to tell blacks where they can sit on a bus.

There is no right or even privilege that can make people slaves. There is no right or privilege to tell people what they can or cannot do with their free time. There is no right or privilege to collect dues from members forced into an organization against their will. There is no right or privilege that can force someone into a union, otherwise stripping them of the ability to pursue the career of their dreams.

The Issue is Unalienable Rights

Rights of unions must not and cannot be allowed to interfere on the rights of others to NOT belong to a union and to NOT pay union dues if they do not want to.

For more on the slavery aspect of public unions and collective bargaining advocates, please see Paul Krugman, Stephen Colbert, Bill Maher, others, Ignore Extortion, Bribery, Coercion, and Slavery; No One Should Own You!

Right-to-Work is an Unalienable Right

The "right-to-work" is an unalienable right. Unfortunately, Paul Krugman, Stephen Colbert, Bill Maher, Michael Moore and countless others ignore the slavery aspect of this debate because it happens to suit their political goals.

I commend Wisconsin Governor Scott Walker for his brave stand to end slavery in Wisconsin. I also commend Senator Rand Paul's effort in pursuing a national "right-to-work" law.

It is time to abolish slavery once and for all. A properly written national "right-to-work" law would help do just that.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Central Bank Authorized Fraud; Fractional Reserve Lending Problems Go Far Beyond "Duration Mismatch"

Keith Weiner at the Daily Capitalist purports to explain the Fractional Reserve Banking: The Real Story

Weiner makes a case that the problem with fractional reserve lending is one of "duration mismatch". If you don't understand the term "duration mismatch", please don't stop reading. I provide an easy to understand example below.

While "duration mismatch" is a huge problem, it is by no means the only problem. Thus Weiner misses the overall picture.

Fractional Reserve Banking Defined

Before we can state the problems and concerns with fractional reserve lending we need to define the term. Here is the meaning I use for my analysis:

Fractional reserve lending is the act of lending out more money than banks have ownership of. "Ownership" can be temporary.

Clearly, I cannot lend you $1,000 if I only have $1.98.

However, and this may surprise many people, banks can. Moreover, the fact that banks can lend more money than exists is at the very root of the financial crisis we are in today.

It is illegitimate to lend out more money than you have "ownership of".

Legitimate Right-To-Lend

The key question is what constitutes a "legitimate right-to-lend"? The answer involves banks' "right-to-use" deposited money.

CDs provide an easy to understand example of right-to-use. Consider a 5-year CD. A person buying a 5-year CD gives up the right to use his money for 5-years in return for an agreed upon interest rate. The bank then lends the money out for a higher amount of interest.

Keith Weiner complains (and rightfully so), about banks securing funds for 5 years, then lending them out for 30-year mortgages. That "duration mismatch" is certainly a problem, but it is not the only problem as discussed below.

First let's consider a 100% gold-backed dollar.

A 100% Gold-Back Dollar Would Not Stop Lending

Note that a 100% gold backed dollar would not stop lending. One can easily relinquish ownership of gold for as long as one wants (say 5 or 10 years), and at the end of that period the bank would have to return the gold to its owner, plus interest.

Thus a 100% gold-backed dollar would not stop lending as many misguided souls think.

Also note that the commonly attributed meaning of fractional reserve lending is complete silliness in that it fails to address the crucial issue of "ownership"

I suspect this is what led Keith Weiner astray in this admittedly very complicated issue, even though I agree on his central thesis that "duration mismatch" is a huge problem.

Duration Mismatch Schemes Guaranteed to Blow Up

Weiner states ....

Borrowing short to lend long, aka duration mismatch, inevitably implodes. This is not a matter of odds or probability. Like a geological fault line, one can try to assess probability of a destructive event in any given year, but sooner or later catastrophe is certain. When a business knowingly engages in an activity that is guaranteed to cause it to dishonor its obligations, that is acting in bad faith. Such a business has no intention of honoring its obligations over the long term, only in the short term when it is expedient.

Finally, fractional reserve banking is one of those issues where there is a deep misunderstanding in Austrian circles. This is compounded by the dearth of information about duration mismatch (I am only aware of Professor Antal Fekete writing about it, and of course some of his students such as myself) and the proliferation of misinformation about it.

Duration Mismatch Articles

For starters, I have written about Duration Mismatch 17 times since 2007 as the link in this sentence shows. Two of the articles are from 2011.

Here are some of the key posts.

February 16, 2011: The Next Borrow-Short Lend-Long Guaranteed to Blow Up Bank Lending Scheme; Citigroup, Chase, Bank of America CD Ripoff

Borrow-short lend-long strategies have caused more pain and grief than nearly any play in the book. They are virtually guaranteed to blow up given enough time if the duration mismatch and leverage is too great.

For those who do not know what I am describing, a couple of examples below will help explain. The first example is a look at "cost of funds" and guaranteed profits that banks can make. It is not a borrow-short lend-long strategy but will morph into such a scheme as I vary the parameters. ....

February 02, 2007: Central Bankers Cry Wolf

Key GSE Points

• Size and leverage of Fannie Mae and Freddie Mac is enormous.
• The Fed does not want to be responsible for a blowup at either company.
• Both pursue policies that inherently expose the firms to an extreme asset/liability duration mismatch.
• Both hold long-term mortgages and mortgage-backed securities financed by short-term liabilities forcing them to synthetically create a duration match via massive amounts of derivatives.
• The stocks act as if there is implicit government guarantees. There are no such guarantees.
• The lack of market discipline is striking.
• The Fed can provide liquidity not capital.
• A crisis is not unthinkable. Those that think so need a course in economic history.

November 03, 2009: What is Money and How Does One Measure It?

Given there are no reserves on savings accounts, as much as $4.5 trillion people think is in their savings accounts is not there either. Moreover, the duration mismatch on savings accounts, sweeps, and likely even CDs is massive.

If even 20% of the people tried to get their money out the system would freeze up.

The banking system is clearly insolvent. Such is the folly of fractional reserve lending.

September 10, 2007: Duration Mismatch Causing Severe Stress Everywhere

Duration Mismatch and Leverage

Leverage is a wonderful thing when spreads are moving in your direction. It's now payback time for those who borrowed short and lent long. Short term borrowing costs are rising while the value of long term assets, especially mortgage debt is sinking.

See Duration Mismatch to Bankruptcy (in one week flat) for the saga that caused Sentinel to go bankrupt in short order once their mismatch mattered.

The issue is not whether it's absurd for Lehman or Bear Stearns debt to be trading at a discount to Columbia, the issue is how much leverage Lehman (LEH), Bear Stearns (BSC), Merrill Lynch (MER), Goldman Sachs (GS), Citigroup (C), Morgan Stanley (MS) are using as well as the timing and size of needed debt rollovers.

It was a huge mistake for corporations to assume they could perpetually roll over short term debt at good prices. If you stop and think about it, many homeowners over leveraged in homes have a similar mismatch problem. Incomes have not risen as expected but short term financing costs have gone through the roof with no way to roll over the debt.

Duration Mismatch Not the Only Problem

Fractional reserve lending go far beyond duration mismatch. Here are few key points.

1. Fraudulent lending (banks lending more than they have ownership of) pushes up assets prices and favors those with first access to cash (banks and the wealthy). The housing bubble was a result of such fraud.


2. The existing fractional reserve system allows lending of money that is supposed to be available on demand. Lending of money banks have no ownership of is outright fraudulent.


3. Excessive credit backed only by artificially inflated asset prices is simply another form of fraud. Moreover, such lending also sends false signals to the market about the true state of the economy.
   


4. In the ensuing and inevitable busts, the central bank inevitably punishes savers by artificially holding rates too low.
   

Central Bank Authorized Fraud

Point number two above involves sweeping of checking deposit accounts into saving deposit accounts by banks, unbeknown to customers, then lending the money out.

Greenspan authorized sweeps in 1994 as a way of allowing banks to put "idle cash" to use. There are no reserve requirements on savings accounts.

Thus, money that is supposed to be available on demand isn't. People think that money in their checking accounts is sitting in banks. It most assuredly isn't. It has been "swept" away nightly into savings accounts that banks can lend out. Bookkeeping says the money is there. Physically it isn't.

Lending of money in "available on demand" checking accounts is purposeful fraud. Greenspan authorized the practice, but that that simply makes it central-bank authorized fraud.

Savings Accounts Fraudulent as Well

With savings accounts, customers do relinquish control of deposits, at least in theory. For example, customers deposit money in a savings account and receive an agreed upon interest rates. Everyone understands their banks will lend that money out.

Nonetheless, should someone walk into the bank the next day and request to pull money out of "their savings", it will be given to them. Unfortunately, control of "their savings" was relinquished to the bank who then lent the money out.

It is illogical (and fraudulent) for money that is already lent out to be available on demand. Thus savings accounts are nothing but another form of "have your cake and eat it too" fraud.

Whether the loans are backed by assets or not is irrelevant.

Problems Measuring "True Money Supply"

It is this very savings account debate that has caused two Austrian economic camps to split into two camps as to how to measure "True Money Supply".

The TMS2 camp says that money in savings accounts is available on demand and thus needs to be factored into money supply figures. Meanwhile the TMS1 camp that I am in says that the right-to-use the money was transferred (whether it is fraudulently available on demand or not) and thus should not be counted in money supply figures.

For further discussion, please see Money Supply Divergence - TMS1 vs. TMS2 vs. M2 - What does it Mean?

The above link also contains a discussion of sweeps and how they distort money in checking accounts.

Regardless of the "correct" measure of money supply, both the TMS1 and TMS2 camps generally believe the practice of lending of savings accounts while simultaneously making the money available on demand is fraudulent.

Reflections on "Legitimate" Right-To-Use

Some argue that as long as customers agree to these various banking schemes it is OK. That line of thinking says as long as it's in the agreement for banks to sweep money from checking accounts to savings accounts and lend it out, then it's OK for banks to do so.

However, it's not OK because such lending is nothing more than a gigantic kiting scheme. Moreover, it affects others by cheapening the value of money, pushing up asset prices for the benefit of those with first access to money, the banks and the wealthy.

Logically, two people cannot have the right to use the same money at the same time, whether they agree to such a scheme or not!

Money Multiplier Theory

Compounding the issue, money that is lent out then redeposited in another bank, can be lent again and again and again. In theory, the same money can be lent an infinite number of times (10 times if you prefer, with each bank keeping 10% in reserves). This is the "money multiplier" theory of fractional reserve banking.

However, such analysis is further complicated by the fact that in a fiat-credit based banking system, lending comes first and reserves come second.

Thus, money multiplier theory as commonly understood is simply wrong.

For a discussion of the "money multiplier" issue please see Fictional Reserve Lending And The Myth Of Excess Reserves

Complicated Issue

Clearly, money is a complicated subject involving numerous competing definitions of money. Fractional reserve banking and invalid money multiplier theories greatly compound understanding.

Unfortunately, Weiner adds to the confusion with analysis that suggests that duration mismatch is the only issue in regards to fractional reserve lending.

Fractional Reserve Lending is Fraudulent and Must Stop Entirely

Lending what you do not have "ownership of" is the issue. Duration mismatch is a form of that problem, but it is not the only form of that problem. Numerous complications arise when multiple people have immediate access to the same money at the same time.

Housing and credit lending bubbles constitute unmistakable proof that fractional reserve lending in any form is fraudulent and must stop entirely.

The solution is to abolish the Fed, institute a 100% gold-backed dollar, and disallow banks to ability to lend money they have no legitimate right-to-lend.

Addendum:

At the Suggestion of James Turk I made a quick change to my definition above

From Fractional reserve lending is the act of lending out more money than banks have a legitimate right-to-lend

To Fractional reserve lending is the act of lending out more money than banks have ownership of.

That was the way I originally wrote it, but changed it at the last moment. "Ownership" of course can be temporary. I made a few other changes of "right-to-lend" to "ownership" as well to make it more clear.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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World's Biggest Property Bubble: China's Ghost Cities Revisited; 64 Million Vacant Properties

I have done many stories on China's ghost cities. So have others. However, yet another ghost city story has come up recently that's worth a good look.

Please consider the Dateline SBS report on China's Ghost Cities by Adrian Brown

Vast new cities of apartments and shops are being built across China at a rate of ten a year, but they remain almost completely uninhabited ghost towns.

It’s all part of the government’s efforts to keep the economy booming, and there are many people who would love to move in, but it’s simply too expensive for most.

Video journalist Adrian Brown wanders through malls of vacant shops, and roads lined with empty apartment buildings… 64 million apartments are said to be empty across the country and one of the few shop owners says he once didn’t sell anything for four or five days.

Here is a Transcript of by Adrian Brown's report.

Here is a Slideshow of Ghost Cities.

However, the must see portion of his report is the Video of Ghost Cities.

Modern Equivalent of Building Pyramids

All this talk about how undervalued the Yuan is, how China will rule the world, and why the Yuan will be the next global reserve currency is pure silliness.

China's growth is nothing more than a credit bubble on steroids. Cities are vacant, yet China keeps building, and building and building.

The true state of affairs is China's banks are insolvent. China is building units for which there is little demand and few can afford. China will have to print money to pay for all of this malinvestment. The idea the Yuan is undervalued fails to take into consideration any of this.

Play the video and decide for yourself.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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