Bottom’s Up!

Banks won't really lend until they think we've hit “bottom.” They're hoarding cash to cover their bottoms. What is “bottom” and why does it matter? Are we looking at the Dow? Interest rates? Jobs? What? Well, let’s start with a basic proposition: banks don't often lend (or lend much) against assets that are depreciating in value, where money is scarce or where the borrower is unlikely to be able to pay the debt on time and on schedule.

Grassroots lenders don't have the money right now anyway (liquidity – money is still stuck way up in the system, per my earlier blogs), most people are watching their net worth fall (stocks and real estate), incomes are falling (so unless you have a big cushion, well – banks like cushions a lot), people are losing their jobs (unemployment), businesses are losing customer/clients or dropping sales and factory orders are down (gross domestic product – GDP), unsold inventory is up, houses are falling in value, etc. Even stuff we assume will hold value – like gold and oil – is dropping because there are fewer buyers and the buyers that exist cannot afford to pay what they did before (because they aren't doing as well). Negative growth and high unemployment are hallmarks of a recession.

The dollar is holding against most other currencies because, for example, folks are even more worried about the emerging markets – and the Euro has less stability than you might think because the Euro-based economies of European countries like Iceland, Hungary, Ukraine and Belarus have been hit much worse than the U.S. – they're looking for bailouts from the International Monetary Fund.

We are, politely, “de-leveraging,” a word that means getting rid of excess debt. We can get there by filing for bankruptcy (the Lehman Bros. debacle), renegotiating existing loans (by force – if the government will act, or by choice – if you know what you are doing), paying off debt (sometimes by selling assets – what some tycoons had to do to pay off their “margin calls” – loans they took to fatten up on juicy stocks that eventually gave them indigestion), getting “bailed out” by someone, merging with a solvent player and most certainly by not borrowing (often because we can't anyway). Credit card debt is a hidden issue waiting in the wings, by the way.

So bottom is kind of “everything.” House prices have to stabilize, unemployment has to level off, the stock market has to stop falling through the floor (and get back to the “couple of points” up or down every day), and people need to borrow based on real values at market interest rates but there has to be money in the lending system. We're not at bottom now; experts see that as possibly as much as several months away. I sure hope not, and there is so much that the government can do (see prior blogs) to right the ship.

So in simple English, the financial institutions who might lend you some money probably won't start until the bottom is reached (or when they are sure what it will be), because you can only go up from there. Right now, a whole lot of folks are trying to figure out what the bottom is and when we will arrive there. Hope it’s soon!

I’m Peter Dekom, and I approve this message.