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jeudi 30 avril
Green shoots : grounds for cautious pessimism
...
Bank profitability
Back to Willem Buiter’s Maverecon homepageGagging on Google Green shoots : grounds for cautious pessimism April 28, 2009 11:35pm I am not going to use this opportunity to deepen the gloom by exploring at length the possible consequences of a worldwide pandemic of a virulent form of swine flu. Just a few depressing words will have to suffice. From an economic perspective, a flu pandemic amounts to at least a temporary reduction in the effective supply of labour. If flu-related mortality is high, there will be a permanent reduction in labour supply. The dependency ratio rises (temporarily or permanently, depending on whether mortality increases). Trade and travel are interrupted. A flu pandemic therefore represents an adverse supply shock. Notional consumption demand need not decline materially, but effective consumption demand may well be depressed if many would-be shoppers cannot reach the sellers of goods and services or arrange for delivery. Investment is bound to suffer.
A flu pandemic therefore also represents an adverse shock to aggregate demand. It is bad news on both the demand and supply side. It will however, impact favourably on global warming. Now you know. In what follows I will analyse global economic prospects on the assumption that there will not be a global swine flu pandemic.
The real economy downturn in the US is about 1½ years old ; the UK recession has been with us for at least three quarters ; the rest of Europe, Japan and most emerging markets and developing countries have juvenile recessions, barely a couple of quarters old.
As regards the overdeveloped world, or at least the North Atlantic part of it, the odds are that this contraction of real economic activity will be deeper and last longer than other post-war recessions. The reason is that other post-war recessions were either the results of central banks murdering a boom that threatened price stability or of an exogenous oil price increase (Opec I and II). Following both types of downturns, the financial system (markets, banks and other systemically important institutions) were, on balance, in good shape (cyclically adjusted !). Banks suffered as a result of the decline in demand for external financing by households and non-financial enterprises caused by the recession, and from the increase in arrears, defaults and other delinquencies that come with an economy-wide slowdown. But the capacity of the system for providing intermediation services and external financing for households and non-financial enterprises was typically in reasonable shape.
Not so today. The crossborder North-Atlantic financial system had collapsed before the downturn in the real economy got going in earnest. Indeed, the financial collapse was the primary cause of the recession in the USA, the UK, Iceland and most of the rest of Western Europe. We know from the studies of Reinhart and Rogoff and of Laeven and Valencia that real economy contractions that follow a financial crisis tend to be both longer and deeper than those that don’t. Specifically, following deep financial crises, the unemployment rate rises an average of 7 percentage points over the down phase of cycle, which lasts on average over four years. Output falls (from peak to trough) an average of over 9 percent, and the duration of the GDP downturn averages around 2 years.[1]
US real GDP growth was -0.2 percent in 2007, Q4 (on the previous quarter), but became positive again the next two quarters (0.9 percent growth in 2008Q1 and 2.8 percent in 2008 Q2). Since then, growth has been negative, with -0.5 percent in 2008Q3 and -6.3% in 2008Q4. The Reinhart-Rogoff downturns are measured from previous peak GDP, which was 2008Q2. If the US conforms to the average of the post-World War II serious financial crisis countries studied by Reinhart and Rogoff, negative GDP growth would persist until 2010Q2. Growth after that would be slow and hesitant. The 2008Q2 level of GDP would be regained at the earliest around the middle of 2012. Unemployment would still be far above the 2008Q2 level at that time.
There is little reason to assume the US will do better than the average achieved post-world war II. Its room for discretionary fiscal stimuli has been more than exhausted. Almost two years have been wasted since the beginning of the financial crisis as regards getting past toxic assets off the balance sheets of the banks. The US regulators and Treasury have put the interests of the unsecured creditors of the banking system ahead of those of current and future tax payers and beneficiaries of public spending. Worse than that, by failing to come up with the required amount of up-front fiscal resources to clean the balance sheets of the zombie banks, recapitalise the banks and, where necessary, guarantee new lending and borrowing, the US authorities have relegated most of the banking system to a state of limbo in which far too little new lending to the real economy is undertaken. The sloth-like speed of the stress tests and the six months grace period granted banks deemed short of capital to come up with new capital on their own, contribute further to my sense that the authorities in the US are doing everything they can to make sure that the US gets as close as possible to emulating Japan’s lost decade.
Bank profitability
What limited bank lending takes place is often at high interest rates, and is funded at government-subsidised rates (about $340bn worth of borrowing by banks has so far been guaranteed by the state). These tax-payer-engineered high spreads on limited new lending, plus the welcome transfusion of taxpayers’ money through AIG paying off its counterparties at 100 cents on the dollar gave a useful boost to many banks’ Q1 profits. ...
Disguising the new damage done to the banks’ loan book by the contraction of the real economy will become harder as time passes. By the end of the year, I expect that the combination of the stress tests and the reluctant revelation of new bad loans may bring us to the point that even the authorities can no longer shrink from restructuring the insolvent components of the banking system by forcing the unsecured creditors to swap their debt and other claims for equity.
....
Asset price stabilisation
House prices continue to fall. While house price changes don’t have an aggregate wealth effect, they do affect the capacity of households to borrow, because property, unlike human capital, makes rather good collateral. Until house prices stabilise, it is hard to see consumption reviving. Even with the recent (in my view premature) recovery in the US equity markets, stock market wealth in the US has come down spectacularly from its previous peak, and is now, in real terms, at about its 1996/1997 level. Talk of a lost decade...
Green shoots : grounds for cautious pessimism
...
Bank profitability
Back to Willem Buiter’s Maverecon homepageGagging on Google Green shoots : grounds for cautious pessimism April 28, 2009 11:35pm I am not going to use this opportunity to deepen the gloom by exploring at length the possible consequences of a worldwide pandemic of a virulent form of swine flu. Just a few depressing words will have to suffice. From an economic perspective, a flu pandemic amounts to at least a temporary reduction in the effective supply of labour. If flu-related mortality is high, there will be a permanent reduction in labour supply. The dependency ratio rises (temporarily or permanently, depending on whether mortality increases). Trade and travel are interrupted. A flu pandemic therefore represents an adverse supply shock. Notional consumption demand need not decline materially, but effective consumption demand may well be depressed if many would-be shoppers cannot reach the sellers of goods and services or arrange for delivery. Investment is bound to suffer.
A flu pandemic therefore also represents an adverse shock to aggregate demand. It is bad news on both the demand and supply side. It will however, impact favourably on global warming. Now you know. In what follows I will analyse global economic prospects on the assumption that there will not be a global swine flu pandemic.
The real economy downturn in the US is about 1½ years old ; the UK recession has been with us for at least three quarters ; the rest of Europe, Japan and most emerging markets and developing countries have juvenile recessions, barely a couple of quarters old.
As regards the overdeveloped world, or at least the North Atlantic part of it, the odds are that this contraction of real economic activity will be deeper and last longer than other post-war recessions. The reason is that other post-war recessions were either the results of central banks murdering a boom that threatened price stability or of an exogenous oil price increase (Opec I and II). Following both types of downturns, the financial system (markets, banks and other systemically important institutions) were, on balance, in good shape (cyclically adjusted !). Banks suffered as a result of the decline in demand for external financing by households and non-financial enterprises caused by the recession, and from the increase in arrears, defaults and other delinquencies that come with an economy-wide slowdown. But the capacity of the system for providing intermediation services and external financing for households and non-financial enterprises was typically in reasonable shape.
Not so today. The crossborder North-Atlantic financial system had collapsed before the downturn in the real economy got going in earnest. Indeed, the financial collapse was the primary cause of the recession in the USA, the UK, Iceland and most of the rest of Western Europe. We know from the studies of Reinhart and Rogoff and of Laeven and Valencia that real economy contractions that follow a financial crisis tend to be both longer and deeper than those that don’t. Specifically, following deep financial crises, the unemployment rate rises an average of 7 percentage points over the down phase of cycle, which lasts on average over four years. Output falls (from peak to trough) an average of over 9 percent, and the duration of the GDP downturn averages around 2 years.[1]
US real GDP growth was -0.2 percent in 2007, Q4 (on the previous quarter), but became positive again the next two quarters (0.9 percent growth in 2008Q1 and 2.8 percent in 2008 Q2). Since then, growth has been negative, with -0.5 percent in 2008Q3 and -6.3% in 2008Q4. The Reinhart-Rogoff downturns are measured from previous peak GDP, which was 2008Q2. If the US conforms to the average of the post-World War II serious financial crisis countries studied by Reinhart and Rogoff, negative GDP growth would persist until 2010Q2. Growth after that would be slow and hesitant. The 2008Q2 level of GDP would be regained at the earliest around the middle of 2012. Unemployment would still be far above the 2008Q2 level at that time.
There is little reason to assume the US will do better than the average achieved post-world war II. Its room for discretionary fiscal stimuli has been more than exhausted. Almost two years have been wasted since the beginning of the financial crisis as regards getting past toxic assets off the balance sheets of the banks. The US regulators and Treasury have put the interests of the unsecured creditors of the banking system ahead of those of current and future tax payers and beneficiaries of public spending. Worse than that, by failing to come up with the required amount of up-front fiscal resources to clean the balance sheets of the zombie banks, recapitalise the banks and, where necessary, guarantee new lending and borrowing, the US authorities have relegated most of the banking system to a state of limbo in which far too little new lending to the real economy is undertaken. The sloth-like speed of the stress tests and the six months grace period granted banks deemed short of capital to come up with new capital on their own, contribute further to my sense that the authorities in the US are doing everything they can to make sure that the US gets as close as possible to emulating Japan’s lost decade.
Bank profitability
What limited bank lending takes place is often at high interest rates, and is funded at government-subsidised rates (about $340bn worth of borrowing by banks has so far been guaranteed by the state). These tax-payer-engineered high spreads on limited new lending, plus the welcome transfusion of taxpayers’ money through AIG paying off its counterparties at 100 cents on the dollar gave a useful boost to many banks’ Q1 profits. ...
Disguising the new damage done to the banks’ loan book by the contraction of the real economy will become harder as time passes. By the end of the year, I expect that the combination of the stress tests and the reluctant revelation of new bad loans may bring us to the point that even the authorities can no longer shrink from restructuring the insolvent components of the banking system by forcing the unsecured creditors to swap their debt and other claims for equity.
....
Asset price stabilisation
House prices continue to fall. While house price changes don’t have an aggregate wealth effect, they do affect the capacity of households to borrow, because property, unlike human capital, makes rather good collateral. Until house prices stabilise, it is hard to see consumption reviving. Even with the recent (in my view premature) recovery in the US equity markets, stock market wealth in the US has come down spectacularly from its previous peak, and is now, in real terms, at about its 1996/1997 level. Talk of a lost decade...
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