Borrowed Time

America’s growth, its entire business and housing market, most job-creating corporate functionality, has been based on the ready availability of credit. In 1975, according to the August 17^th Washington Post, the ratio of consumer debt to our nation’s entire economic output was 45%. In the first quarter of 2009, it was 97%. The lending capacity of local banks to local consumers was hit hard enough in the subprime collapse last year and early this year; what’s left of that lending capacity will shrivel up, taking large local banks to their own collapse (like the sixth largest fall of a bank in U.S. history last week, Alabama’s Colonial Bank), as the failures of the commercial real estate market shrink the lending capital base even more.

Americans are saving more now – “deleveraging” as some say – from 1.2% of disposable income in early 2008 to 5.2% today, but with the consumer credit pipeline all but closed (except where the government intervenes), that basic fuel to most of America’s modern recoveries from economic disaster – credit – is severely limited and much more expensive than the current “near-zero” Federal Reserve rate would suggest. Once corporate America disposes of its current inventories – sales below cost to generate operating capital in many cases – what’s next?

The Post: “‘Credit fuels housing. It fuels consumer durable goods. It fuels business investment. It's in every part of the economy,’ said [Carmen M.] Reinhart, an economist at the University of Maryland. ‘Credit makes recessions after a financial crisis longer, and all the signs are that [it] is happening this time as well.’” Credit Recession?

The robust recovery that followed most modern downturns doesn’t look as if it is going to happen this time. “Huge swaths of the financial system have been damaged, which could lock consumers and businesses out of loans for years to come. American families are saving more and relying less on borrowed money. In this global recession, no part of the world appears poised to lead a buoyant recovery. And the U.S. government's aggressive stimulus efforts -- including special Federal Reserve lending programs and full-throttle government spending -- may need to wind down before the economy returns to solid footing.” The Post. Strange thing is that our government, while spreading the word that the current recession shows signs of ending, doesn’t disagree with the foregoing assessment.

Maybe a better way of understanding what is going on is to think of the economic malaise as a series of related recessions, each one leading to the next. The subprime loan collapse, which devastated our biggest financial institutions, led to a collapse of both the residential real estate market and a contraction in general access to credit. Severe job loss followed, and contraction of the economy made credit even harder to get. The government stepped in to shore up the financial big boys, but even as this task was beginning, the realities of residential real estate fall began to be applied to the commercial real estate market (we’re there right now), hitting local and mid-level banks even harder.

The DailyDeal.com (August 17^th): “Impaired may be putting an optimistic spin on circumstances as commercial real estate property values have fallen 35% since October 2007 and $165 billion in commercial mortgages need to be refinanced this year… Over the next three years, about $1.5 trillion in commercial real estate loans are coming due, Walter J. Mix, a managing director at LECG LLC, recently wrote in The Deal magazine… Realpoint Research reported that June delinquencies in commercial mortgage-backed securities rose an ‘astounding’ 585% to a 12-month high of nearly $29 billion, while Real Estate Econometrics LLC predicted that the default rate on commercial real estate is likely to reach 4.1% by year's end. That projection would imply defaults on about $44.3 billion of commercial mortgages, based on the $1.08 trillion of such loans held by U.S. banks in the first quarter, according to data in the report.”

The stock market does not seem to have reflected this second phase of economic collapse, focusing instead on the corporate efficiencies generated by cutting costs (even if it required laying off masses of people). Reacting to “news” and short term trends, the market has yet to reflect the uncertainty of a severely prolonged credit crisis. It would be different if our companies, unable to sell products and services to local American consumers because of this credit crunch, could turn to buyers overseas, but the global economy is in disarray as well. Consumers everywhere are holding back, and as a result, U.S. exports have decline, during this debacle, by 16%.

All of this suggests that much of the government’s going-forward focus has to be on repairing the grassroots, local consumer and small business credit markets, a direction that so far, Treasury Secretary Tim Geithner and President Obama have refused to follow. With too much on the federal government’s plate, with tax resources strained and deficits soaring, the government seems to be content to get this elongated credit impairment drift for years, taking down more and more American families in the process.

Their response to the commercial real estate failure rate is to extend the TARF (the program where the government subsidizes buyers of “troubled assets” off the banks’ books), but financial institutions have been loath to use this program, because it forces them to reduce their asset value accordingly (making it difficult to access Federal Reserve funds). In short, the program just doesn’t work. The current administration may not have caused this economic crisis, but they are in charge of prioritizing the solutions.

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