A new plan needed as the cycle grows vicious

[girl gone mad]

Now, this is pessimism:

A new plan needed as the cycle grows vicious
By Wolfgang Münchau, http://www.ft.com/cms/s/0/d5d1b1bc-1c93-11de-977c-00144feabdc0.html">Financial Times

So you think you can see the green shoots of recovery? You draw comfort from the recent stabilisation of forward-looking indicators such as new home sales in the US? Or you think the stock market rally marks the end of the crisis? Of course, economic growth rates are bound to improve soon for technical reasons. Otherwise, not much would be left of the global economy by the end of the year.

Even if a recovery were to start early in 2010, as some optimistic forecasters believe, most of the pain of the recession is still ahead of us: unemployment and default rates will rise sharply everywhere. Most of the pain in the financial sector is also still ahead of us. This will feel like a depression long after it has ceased to be one.

I am more worried now than I was a month ago. The main problem is that the feedback loops between the real economy and the banking sector are truly scary. Remember that all the public and private sector forecasters are still busy adjusting their 2009 economic projections downwards. The latest downward revision for Germany came from Commerzbank last week, which now projects 2009 growth at a negative 6-7 per cent for this year.

At this rate of contraction, the number of private and corporate defaults is likely to increase massively beyond some of the stress-test assumptions made by the banks themselves. After the crisis caused by toxic securitised assets, the financial industry is now hit by another crisis of potentially similar magnitude. This looks to be one of the worst credit cycles in living memory.

Economists and policymakers who wonder how much it will take to recapitalise the banking sector are discovering that rescuing the banks is a much more dynamic exercise than they thought. Whatever you think it costs – and there have been widely different estimates – it is likely to end up costing you a lot more for that precise reason. The economy is trapped in a vicious circle where credit crunch and recession mutually reinforce each other.

http://www.ft.com/cms/s/0/d5d1b1bc-1c93-11de-977c-00144feabdc0.html">More...

[pa28]

1. The "dynamic exercise" he's referring to is the whole problem.

After repeatedly being burned you'd think decision makers would catch on to the fact we live in a grossly overleveraged financial world. One that does not stop it's continuing death spiral for static "solutions".

IMO we simply cannot pour money into the hole and fill it fast as the leveraged losses can accelerate. Maybe it's possible but does anybody really want to find out how far this can go?

After watching Obama handle GM today I'm hoping the President is close to the end of his patience and will choose a strong demonstration of authority with banks next rather than the more passive strategy of pumping dollars.

[wuvuj]

2. Hussman's opinion....

http://www.hussmanfunds.com/wmc/wmc090330.htm

To begin this discussion, it is important to consider the balance sheet of a typical leveraged financial institution. The example below is similar to the one I presented last year in You Can't Rescue the Financial System if You Can't Read a Balance Sheet, but makes allowance for the fact that assets continue to be impaired due to policy failures, and that deposit banks such as Citigroup use more bond financing than investment banks. At the beginning of the recent crisis, the condition of U.S. financial institutions was much like the following:

Good Assets: $90
Questionable Assets: $10
TOTAL ASSETS: $100

Liabilities to Customers: $65
Debt to Bondholders: $30
Shareholder Equity: $5
TOTAL LIABILITIES AND SHAREHOLDER EQUITY: $100

Now suppose there are losses in those questionable assets - not all the way to zero, but to $4:

Good Assets: $90
Questionable Assets: $4
TOTAL ASSETS: $94

Liabilities to Customers: $65
Debt to Bondholders: $30
Shareholder Equity: $-1
TOTAL LIABILITIES AND SHAREHOLDER EQUITY: $94

The above institution is insolvent. There are several ways to address this situation.

....


What is coming our way...among other nasties.....?






** So some might wonder why they want to stress test the banks for what's to come?

[roamer65]

3. Roubini's right...it will be a "near depression".