Sunday, November 16, 2008

US economic risks and the G-20

The G-20 met but little action came from this group -partly because the attending US president is a lame duck. Europeans are eager to affix blame to the US and use that as leverage to get the sort of regulatory oversight that they would prefer.

The financial situation continues to be unsettled and banks are pulling back from lending after getting stung so badly on mortgages and in the face of a downturn of increasing severity. Government injections of capital into banks have helped to ease the sense of worry on the part of banks but it has not emboldened them to lend. An unusual joint statement from the Fed, the FDIC, the OTS and the OCC (see below) represents some of the strongest moral suasion the central bank and other regulators can bring to bear to get banks lending again.

That statement warns banks to discharge their responsibility to lend to creditworthy borrowers. It warns them against a payout out of excessive dividends as well as warning on compensation. The statement also urges lenders to work with mortgage borrowers.

The Fed is trying to do all it can. It has even been allowing the funds rate to trade below its 1% target making any call for a further rate cut really a moot point.


The BIG NEWS this past week also has featured discussions about the automakers. Detroit’s ‘big three’ are hurting and are running out of cash. An unusual series of events helped to put them in this situation. First of all they have been reeling from problems stemming from a slowing economy and a mix of cars tilted to SUV’s and vehicles that get poor mileage. An ongoing rise in gasoline prices pressured them severely impacting their sales followed by a slowing in overall demand as the economy weakened. Then the financial crisis led banks to clam up on their lending at the same time the commercial paper market shut the door the auto companies’ finance arms. Now a more severe recession threatens. Certainly, the auto companies are not poster boys for US competitiveness. But the unusual set of events reinforced by lending issues for banks and car buyers with low credit scores has exacerbated an already difficult situation, taking a bad situation and making it worse – making it life threatening.

While Congress has been eager to approve money for banks it appears much more reluctant to address the special problems in commerce even for a high-value product like an autos even when banking and financial sector problems seem to be an import reason for the problem in the auto sector. Car and truck sales have been averaging between 16mu to 16.5 mu of sales (saar) until this year when they have suddenly fallen off to 10.5mu. That’s a drop of 36% in the structural pace of sales not in some flakey m/m calculation. Autos need financing the financing arm is broken so why blame the automakers?

This a big issue because one and ten jobs is estimated to be auto-related. These jobs are concentrated in Detroit which will be decimated if the automakers fail. Moreover, with the democrats now taking over, the big problem in Detroit becomes more controversial: that is the relatively rich pay for auto workers. Auto wages are high and the automakers’ promise to retirees to pay benefits for them has been a real drag on GM’s earnings. The unions point out that some sort of public paid health care reform could take that drag off the automakers’ books, but that is not going to happen soon if at all – Obama’s idea is to have health care costs manageable not publicly paid.

The G-20:

The G-20 communiqué is a mixture of objectives. In an attempt to convince us they are on top of things, I get the impression that they are spinning their wheels. The ‘mandates’ at the country level are obvious for the most part.

There are no ground-breaking statements of intent in this document. There is nothing ambitious. No country by country tasks are assigned or promises are made. We are impressed that the leaders are full of intent to make things right. We are less impressed that there is anything of real structural significance in the works. We are not surprised at the lack of actual achievement since with the office of the US presidency in transition that much seemed obvious from the outset. But there is no sense of vision or purpose in this communiqué; little promise for the future other than to fix the errors of the past. It is chock-a-block with technical details that are, on close inspection, mostly obvious or things that we would take for granted or are already being done. Despite its extensiveness, I consider it a disappointment.