Meltdown 10, Thaw 0

If you’re running a small business – especially if you have been using a credit card instead of a credit line – you may have noticed that issuers are dropping credit lines in droves, and many are canceling the cards altogether, even as Congress provides new protections for consumers. The accelerating and massive failures in the commercial real estate market still grab financial headlines as office and store defaults trigger bigger losses to the mall/office building owners. Since the lenders in so many of these commercial real estate foreclosures and mortgage defaults are as often the local banks that approved these loans, and since the feds aren’t “stress-testing” and then recapitalizing the smaller banks that way they did the biggest 19 “too big to let fail” lenders, there is nothing close to a “thaw” in the credit markets.

With Americans deferring purchases wherever they can, savings rates on the rise (at a time when the government is trying to stimulate spending to restore job-creating consumer demand), and the jobless rate, however much the rate of decline may have slowed, is still dropping, there is “one clear reality” for our future: whether we hit bottom in the next few months or not, there is very little on the horizon to suggest anything but a whimper of a “recovery” beginning anytime in the next year or two (or even beyond).

The June 29^th 247WallSt.com: “A prolonged period of unemployment higher than 10% may break that mold. A large enough number of people without work could hamper consumer spending enough that some parts of the economy could move back into a recession next year. The ranks of the unemployed are rarely good credit risks. This poses important problems for banks which hope to see the quality of their loan portfolios begin to rebound. There is a point at which unemployment becomes both a lagging and leading economic indicator. It shows the end of one recession and foretells the beginning of another if double-digit joblessness persists for any period beyond next year. The modern economy has not experienced this but once in the last several decades. That was in the early 1980s. The banking system was not as riddled with problems among its largest firms then and the auto industry was not in need of nearly complete nationalization… Unemployment at or above 10% will also financially cripple many states, some of them to the level where they may not be able to provide basic services or pay their own workers. Those problems begin to cascade as states lack the ability to provide social benefits to the unemployed and state worker layoffs increase those numbers.”

Sadly, we are dependent on government demand – in the form of the federal stimulus package – to break the economic stalemate, but it may too little, too late to make the difference. It appears that the private sector is still sitting on the sidelines; even in the government-supported residential housing market – a market segment that seems to continue to experience value declines – it’s hardly a healthy environment. Demand is much weaker than expected, and for properties above the $500K range, loans are still virtually non-existent.

Despite the government’s efforts to deal with toxic assets (“legacy assets” is now the polite word), banks are loathe to sell these bundles of under-performing loans to willing investors, because they will then have to accept that these assets, carried at unrealistically higher values on their books as part of their required capital base, are indeed worth much less than touted. Bankers are terrified, terrified bankers do not lend money, and when they do, the borrowers have to be super-qualified (and in a managed depression, who exactly is that?).

The June 29^th DailyFinance.com: “While big banks have raised $65 billion in new investor capital, smaller banks can't tap into that source of funds to prop up their balance sheets. Hundreds of smaller banks are sitting on commercial loans that have gone bad or soon will. But even the smaller banks don't want to sell the assets at bargain basement prices because it will hurt their balance sheets and dent their capital cushions.” So what is the rescue plan for these smaller banks? How do we reignite local lending? Or are these banks “too small to matter”? Unfortunately for the American credit markets, the FDIC is probably going to be forced to let the more of these smaller banks fail. The credit thaw is nowhere on the horizon.

So as the Dow rallies every now and again, I have to wonder what the analysts advising “buy” decisions for major market positions are thinking. It seems that the days of buying a stock and sitting on it (the old “buy and hold” strategy) are over if not at least suspended. Traders in the market seem to be buying in any number of troughs the market has provided since September 15, 2008 (the fall of Lehman Bros.) and selling in any number of steep rises (that inevitably collapse as some new negative statistic hits the news). Not exactly long-term growth trading, is it?

And people are struggling with the reality of paying for higher education – the best investment that our country could make in true long-term growth – as financial aid collapses, and lending (once you hit the federal Stafford student loan limits, both subsidized and unsubsidized) can exceed 20% per year. Many of our sons and daughters are forgoing the kind of education so desperately needed for our future. Young adults are losing their dreams, and as the Federal Reserve provides close to zero percent loans to the banking industry, you have to wonder why we seem to be willing to sacrifice our children to a world of mediocrity, our small businesses (and the jobs that go with them) to unsustainable stagnation without credit, just as we continue to support a financial sector that wants to pay back TARP solely to get the government out of their “executive pay” decisions.

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