Best of the Week
Most Popular
1. US Housing Market Real Estate Crash The Next Shoe To Drop – Part II - Chris_Vermeulen
2.The Coronavirus Greatest Economic Depression in History? - Nadeem_Walayat
3.US Real Estate Housing Market Crash Is The Next Shoe To Drop - Chris_Vermeulen
4.Coronavirus Stock Market Trend Implications and AI Mega-trend Stocks Buying Levels - Nadeem_Walayat
5. Are Coronavirus Death Statistics Exaggerated? Worse than Seasonal Flu or Not?- Nadeem_Walayat
6.Coronavirus Stock Market Trend Implications, Global Recession and AI Stocks Buying Levels - Nadeem_Walayat
7.US Fourth Turning Accelerating Towards Debt Climax - James_Quinn
8.Dow Stock Market Trend Analysis and Forecast - Nadeem_Walayat
9.Britain's FAKE Coronavirus Death Statistics Exposed - Nadeem_Walayat
10.Commodity Markets Crash Catastrophe Charts - Rambus_Chartology
Last 7 days
Silver Bull Market Update - 7th Aug 20
This Inflation-Adjusted Silver Chart Tells An Interesting Story - 7th Aug 20
The Great American Housing Boom Has Begun - 7th Aug 20
NATURAL GAS BEGINS UPSIDE BREAKOUT MOVE - 7th Aug 20
Know About Lotteries With The Best Odds Of Winning - 7th Aug 20
Could Gold Price Reach $7,000 by 2030? - 6th Aug 20
Bananas for All! Keep Dancing… FOMC - 6th Aug 20
How to Do Bets During This Time - 6th Aug 20
How to develop your stock trading strategy - 6th Aug 20
Stock Investors What to do if Trump Bans TikTok - 5th Aug 20
Gold Trifecta of Key Signals for Gold Mining Stocks - 5th Aug 20
ARE YOU LOVING YOUR SERVITUDE? - 5th Aug 20
Stock Market Uptrend Continues? - 4th Aug 20
The Dimensions of Covid-19: The Hong Kong Flu Redux - 4th Aug 20
High Yield Junk Bonds Are Hot Again -- Despite Warning Signs - 4th Aug 20
Gold Stocks Autumn Rally - 4th Aug 20
“Government Sachs” Is Worried About the Federal Reserve Note - 4th Aug 20
Gold Miners Still Pushing That Cart of Rocks Up Hill - 4th Aug 20
UK Government to Cancel Christmas - Crazy Covid Eid 2020! - 4th Aug 20
Covid-19 Exposes NHS Institutional Racism Against Black and Asian Staff and Patients - 4th Aug 20
How Sony Is Fueling the Computer Vision Boom - 3rd Aug 20
Computer Gaming System Rig Top Tips For 6 Years Future Proofing Build Spec - 3rd Aug 20
Cornwwall Bude Caravan Park Holidays 2020 - Look Inside Holiday Resort Caravan - 3rd Aug 20
UK Caravan Park Holidays 2020 Review - Hoseasons Cayton Bay North East England - 3rd Aug 20
Best Travel Bags for 2020 Summer Holidays , Back Sling packs, water proof, money belt and tactical - 3rd Aug 20
Precious Metals Warn Of Increased Volatility Ahead - 2nd Aug 20
The Key USDX Sign for Gold and Silver - 2nd Aug 20
Corona Crisis Will Have Lasting Impact on Gold Market - 2nd Aug 20
Gold & Silver: Two Pictures - 1st Aug 20
The Bullish Case for Stocks Isn't Over Yet - 1st Aug 20
Is Gold Price Action Warning Of Imminent Monetary Collapse - Part 2? - 1st Aug 20
Will America Accept the World's Worst Pandemic Response Government - 1st Aug 20
Stock Market Technical Patterns, Future Expectations and More – Part II - 1st Aug 20
Trump White House Accelerating Toward a US Dollar Crisis - 31st Jul 20
Why US Commercial Real Estate is Set to Get Slammed - 31st Jul 20
Gold Price Blows Through Upside Resistance - The Chase Is On - 31st Jul 20
Is Crude Oil Price Setting Up for a Waterfall Decline? - 31st Jul 20
Stock Market Technical Patterns, Future Expectations and More - 30th Jul 20
Why Big Money Is Already Pouring Into Edge Computing Tech Stocks - 30th Jul 20
Economic and Geopolitical Worries Fuel Gold’s Rally - 30th Jul 20
How to Finance an Investment Property - 30th Jul 20
I Hate Banks - Including Goldman Sachs - 29th Jul 20
NASDAQ Stock Market Double Top & Price Channels Suggest Pending Price Correction - 29th Jul 20
Silver Price Surge Leaves Naysayers in the Dust - 29th Jul 20
UK Supermarket Covid-19 Shop - Few Masks, Lack of Social Distancing (Tesco) - 29th Jul 20
Budgie Clipped Wings, How Long Before it Can Fly Again? - 29th Jul 20
How To Take Advantage Of Tesla's 400% Stock Surge - 29th Jul 20
Gold Makes Record High and Targets $6,000 in New Bull Cycle - 28th Jul 20
Gold Strong Signal For A Secular Bull Market - 28th Jul 20
Anatomy of a Gold and Silver Precious Metals Bull Market - 28th Jul 20
Shopify Is Seizing an $80 Billion Pot of Gold - 28th Jul 20
Stock Market Minor Correction Underway - 28th Jul 20
Why College Is Never Coming Back - 27th Jul 20
Stocks Disconnect from Economy, Gold Responds - 27th Jul 20
Silver Begins Big Upside Rally Attempt - 27th Jul 20
The Gold and Silver Markets Have Changed… What About You? - 27th Jul 20
Google, Apple And Amazon Are Leading A $30 Trillion Assault On Wall Street - 27th Jul 20
This Stock Market Indicator Reaches "Lowest Level in Nearly 20 Years" - 26th Jul 20
New Wave of Economic Stimulus Lifts Gold Price - 26th Jul 20
Stock Market Slow Grind Higher Above the Early June Stock Highs - 26th Jul 20
How High Will Silver Go? - 25th Jul 20
If You Own Gold, Look Out Below - 25th Jul 20
Crude Oil and Energy Sets Up Near Major Resistance – Breakdown Pending - 25th Jul 20
FREE Access to Premium Market Forecasts by Elliott Wave International - 25th Jul 20
The Promise of Silver as August Approaches: Accumulation and Conversation - 25th Jul 20
The Silver Bull Gateway is at Hand - 24th Jul 20
The Prospects of S&P 500 Above the Early June Highs - 24th Jul 20
How Silver Could Surpass Its All-Time High - 24th Jul 20

Market Oracle FREE Newsletter

How to Get Rich Investing in Stocks by Riding the Electron Wave

The Bernanke Monetary Policy Conundrum Heading for a Crash

Economics / Economic Depression May 07, 2008 - 05:40 PM GMT

By: Mick_Phoenix

Economics

The Bernanke Monetary Policy Conundrum Heading for a Crash

Best Financial Markets Analysis ArticleWith the US Federal Reserve cutting its Fed Fund Rate to 2%, presumably to aid the cost of borrowing and allow an expansion of lending that will lift the US economy from the doldrums you would expect to see an expansion of bank business. Not so according to the latest Fed's Senior Loan Officer Opinion Survey which shows that banks are now actively avoiding the expansion of credit and it can be shown are deliberately causing a credit contraction.

This has profound meaning for the US and the wider global economy.


Let's look at the evidence. The following 3 charts show the Bernanke Conundrum as it applies to business. Yes, business - its not just consumers getting squeezed:

This is for all business sizes in the April survey, conditions have been tightened, rates have been further increased above the cost that banks incur to borrow and here is the crunch, demand is increasing from business.

How important is this?

Very, I mean crash imminent (Q2/3) very important. It is clear to see that borrowing conditions for business have not improved even with the Fed liquidity/solvency actions and the cutting of rates. Around 60% of domestic banks are making it difficult or impossible (likely the latter for all but the highest quality of business) to borrow. In fact conditions for business requiring credit have deteriorated substantially even in the face of a higher demand since the last survey.

Why am I worried about a crash?

Simply this, notice the increase in demand for loans (third chart above) is a good leading indicator of the direction of the economy and the markets. This is probably a function of using credit to expand business / productivity in anticipation of an acceleration of growth overall.

Having said that and looking at the chart above you are probably wondering why I am not saying the good times are just around the next quarter or 2. It would seem foolish to say its different this time.

Yes, you guessed it:

This is the same information up to Q1 2003, just before the last Bull market took off. Notice the striking difference? Rising demand for loans occurred in a benign environment of looser lending standards and cheap credit as priced by the banks over their borrowing costs (Low risk). Q2 '03 is even more benign.

The problem for Bernanke is made no easier by the same predicament facing consumers:

So as consumer demand picks up do the banks take the business?

No, they do not. Loans and credit cards have tightening standards and there is no willingness to allow consumer instalment loans. The bottom of the consumer barrel has been scraped and there is no wish to return for the crumbs.

When compared to the last downturn and recession ('00-'03) you can see how much more difficult it is for consumers to borrow now, compared to then. No consumer and no business borrowing. What's a Fed chairman to do eh?

Am I saying its different this time?

Oh yes, without a doubt. Look again at the charts above, focussing on the last quarter of '99. Look how lending standards and costs rise as we tipped over into the weakening economy and eventual recession to come, yet lending demand from business contracted. This is the "natural" state of affairs, even back in '90/91 when demand for loans and the price above the banks borrowing costs rose, standards were dropping rapidly, business could borrow, it just cost more.

This is clearly not happening now. We have an environment were business needs to borrow but banks are unwilling or unable to lend.

Bernanke's conundrum is simple to see, after all the easing of rates and invention of facilities to enable credit markets to continue and even with the de facto underwriting of the whole fiat monetary system, banks will not lend.

How big a problem is this?

Unless business can borrow (either to offset costs, rollover previous borrowing or get ready for expansion) then 1929-33 looms large.

This though is not the final state we have achieved. By now all market participants know that the Fed will go to extraordinary lengths to keep the current system operating. The conundrum for Bernanke is what can he do to make banks loosen standards and lower costs?

You see, For Ben Bernanke the current situation isn't "news"

Bernanke has already studied the conundrum. I quote from "Non-Monetary Effects of the Financial Crisis in the Propagation of the Great Depression" as used in "New Keynsian Economics"(Mankiw and Romer Ch 29):

"An interesting aspect of the general financial crises - most clearly, of the bank failures-was their coincidence in timing with adverse developments in the macroeconomy"

The present paper builds on the Friedman-Schwartz work by considering a third way in which the financial crises (in which we include debtor bankrupties as well as failures of banks and other lenders) may have affected output".".....because markets for financial claims are incomplete, intermediation between...borrowers and....lenders required nontrivial market making and information gathering".

Bernanke then goes on to state that as the real costs of intermediation rose some borrowers found credit to be expensive and difficult to obtain. He then states:

"The effect of this credit squeeze on aggregate demand helped convert the severe.....downturn of 1929-1930 into a protracted depression"

Bernanke goes on to identify various problems from the '20s that made the 29-30 downturn, which included the expansion of debt and in 1930 the move by banks out of the loan markets into more liquid instruments. Indeed the 1932 National Industrial Conference Board survey of credit conditions reported that the shrinkage of commercial loans in 1931 and the first half of 1932 represented pressure from the banks on customers for repayment and refusal by banks to grant new loans. The worry is that the Fed Chairman saw no cure better than the one used in the '30s New Deal and the large scale intervention of the federal Govt:

"home mortgage market...function....was largely due to the direct involvement of the ferderal government....establishing ...FSLIC...federally chartered savings and loans....government "readjusted" existing debts....and substituted for recalcitrant private institutions in the provision of direct credit. In 1934.....Home Owners' Loan Corporation made 71 percent of all mortgage loans extended"

It looks to me that Bernanke has already instituted the measures he believes will help avoid a repeat of '29-'33 by delivering the medicine now rather than later. As we have seen earlier in this article, the medicine does not seem to be affecting the patient. Credit availability continues to contract due to the policies of banks. Ben Bernanke now finds himself in a situation where he has delivered all he can to no avail. Does he sit back and wait for a change in credit conditions to become apparent or is there more that he can do?

Whatever he does, unless lending conditions change markedly and rapidly in this quarter , it will be ineffective. Bernanke will no longer have to refer to history to see a deflationary depression, he will be living it.

By Mick Phoenix
www.caletters.com

An Occasional Letter in association with Livecharts.co.uk

To contact Michael or discuss the letters topic E Mail mickp@livecharts.co.uk .

Copyright © 2008 by Mick Phoenix - All rights reserved.

Disclaimer: The above is a matter of opinion and is not intended as investment advice. Information and analysis above are derived from sources and utilizing methods believed reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Do your own due diligence.

Mick Phoenix  Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules