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Where’s the economy really at?

December 11, 2009

It’s hard to keep track of the economic news these days with various divergent perspectives and points of view, but it pays to listen to the experts and in this case, Tim Geithner , who heads up the US Treasury.

Here’s a quote from a testimony he gave to congress yesterday.

“However, the financial and economic recovery still faces significant headwinds.  Unemployment remains high, along with foreclosure and delinquency rates.  Although
RealtyTrac’s October report shows a third straight month of decreasing
foreclosure activity, foreclosures are still up nearly 19 percent since
October 2008.  And delinquencies of subprime residential
mortgages reached over 26 percent and conforming mortgages nearly seven
percent in the third quarter.  Further, according to First
American CoreLogic, roughly one in four homeowners owed more on their
mortgages than the properties were worth in the third quarter of 2009.  These conditions place enormous pressure on American families and homeowners.

Bank lending continues to contract overall, although the pace
of contraction has moderated and some categories of lending are growing
again.  For example, commercial and industrial loans
contracted at an annual rate of 27 percent in the third quarter, but 16
percent since then.  Such loans are particularly important
for small businesses, which generally cannot raise money by issuing
debt in securities markets.  Meanwhile, residential mortgage loans from banks have increased at an annual rate of two percent since the third quarter. 

The contraction in many categories of bank lending reflects a
combination of persistent weak demand for credit and tight lending
standards at the banks, amidst mounting bank failures and commercial
mortgage losses.  There have been 130 bank failures this year, compared with 41 over the decade that preceded the current recession.  And
the number of banks that the FDIC classifies as “problem institutions”
has reached over 550 this year, compared with 76 in 2007 and 252 in
2008.  Further, FDIC-insured commercial banks reported
that net charge-offs–that is, losses that have occurred–increased to
2.9 percent as a share of loans and leases in the third quarter, up
from 0.6 percent before the recession.  And delinquencies of commercial real estate loans were nine percent in the third quarter and increasing.

Banks’ willingness to lend also has a significant impact on consumer spending and, consequently, economic growth.  Macroeconomic
Advisors, a consulting firm, found that a 10-point increase in bank’s
willingness to make consumer installment loans yields a 0.3 percentage
point increase in personal consumption expenditures.”

So, what’s he saying…

– Foreclosures are still around and bigger than they were in 2008, but activity is decreasing.

– A quarter of all homeowners owe more on their property than their property is worth.

– Mortgage loans are growing, but banks are not lending to business.

– Banks are still in trouble- 130 bank failures this year and 550 classified as “problem institutions”.

While many are talking about recovery, these factors which don’t even examine unemployment, suggest this is going to take time.

Posted by Ed Cotton

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