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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 If you look at the data on credit, it's clear there's a massive shift underway. Consumers have become fanatical about cutting back on debt. October credit fell by $3.5 billion (-1.7% year over year). September's decline was dramatic, $8.7 billion. October marked the ninth month of declines, a trend that has not been seen in 66 years. This is unlikely to change until consumers feel more confident about the economy and their own personal situation. It remains unclear if the recession is well and truly over, although indicators suggest unemployment has peaked, it's likely consumers remain unconvinced.




Posted by Ed Cotton Here's a great visual from The Deal that explains the packaging and re-marketing of credit. Sort of explains how the badness was turned into goodness and everyone slept soundly at night until the day they realized the badness was real bad. It's also the system that propped up the consumer economy. An economy driven by cheap and easy credit isn't sustainable. For years, the US economy has been running on cheap credit. What happens when it goes away remains to be seen, but companies are need to get amazingly creative if they want to continue to sell in these tough times.



From Paul Kedrosky


Posted by Ed Cotton Cantos has a really good discussion on its site where it explores the implications of the credit crunch on the corporate sector.

The participants include: Robin Bew from the Economist Intelligence Unit, Davide Sola from the (ESCP-EAP) European School of Management, and Paul Anning from Osborne Clarke. It's a long and worthwhile read and contains this interesting quote from Davide Sola.

"If we look at a few numbers, if we look at in the States at the overall level of indebtedness, there was an interesting article from Martin Wolf a few days ago. In the 80s it was about 130% of GDP of the US, now it's 350%. Where does it come that from? The financial sector, number one. Five times it moved from 20 to 130, and also from 50 to 100. Which means that the business sector, they always used that. And banks usually were predicating and saying: "You need to have a certain capital structure, you need to have certain capital requirements if you want me to give you some debt." But then if you look at the bank Lehman Brothers went bust on 31x the capital structure they had.

So, you are predicating to your client that they should have a good capital structure but you're doing exactly the opposite. So I think that this correction is going to allow the people to return and say: "I am an industrialist, I am a service company, I should concentrate on what I do in order to cut cost. And I am a bank, I need to start to be a banker again rather than a financial engineer."



Posted by Ed Cotton Bank of America is a bank that seems to have benefited from the crisis on Wall Street, picking up the brand asset of Merrill Lynch for the bargain price of $50 billion.

However, despite the purchase, B of A's CEO is very skittish about the implications of the current crisis.

Fortune has a good story on Ken Lewis, B of A's CEO, in its latest issue, which includes this quote...

" For Lewis the biggest problem is the plight of the consumer. He sees the credit pie shrinking as Americans, stretched by high mortgage payments and gas prices, their jobs frequently in jeopardy, recognize that they can't afford the debt they already have, let alone add more. "The consumer is deleveraging, just like many of the banks," says Lewis.

I am now expecting to see Planners going off now and start writing their "Deleveraged Consumer" presentations.

Trying to fathom out what this all means and how the consumer is going to be impacted is occupying the finest marketing minds at the moment.

Clearly, the consumer is in no mood to spend as witnessed by the recent spending numbers, but they still have to live and brands are going to still play a role.

There are two critical questions.

1. Who are the brands that are going to persuade the consumer that they matter and are essential to their lives?

2. How are they going to do that?


Posted by Ed Cotton

Posted by Ed Cotton