Tuesday, February 10, 2009

Quick thoughts on Geithner's plan

The market is a bit disappointed that Geithner's plan wasn't more concrete. No magical bullets! Darn. Well, it might be of some comfort to know that all the dire things he and Obama are warning about aren't necessarily all that dire in the first place. As this chart shows, Total Bank Credit is only modestly off its recent highs, and remains on a normal, long-term growth path. The M2 measure of the money supply is at an all-time high, and is growing so fast that Milton Friedman would be shouting "inflation!" if he were still alive. Nonfinancial commercial paper is still expanding. Commercial and Industrial loans are still expanding. Credit spreads are gradually declining. The financial world is far from being in miserable shape. Indeed, all key indicators of the financial sector's health have improved significantly since last November.

Would it be so disappointing to learn that maybe we don't need another government rescue package? It seems to me that the best news imaginable would be that a rescue wasn't needed. Same thing with the stimulus bill. It's not going to stimulate anything, it's only going to smother the economy with expanded government programs and greater tax burdens. So it's not surprising that all the market could do to celebrate the passage of the bill was a yawn.

What this economy needs is a tincture of time. It doesn't need a big government embrace, it just needs time to sort out its problems and to reprice assets so that they are once again attractive to hold.


Donny Baseball said...

I think you're right but markets were looking for something actually constructive to shorten the process or lessen the pain. Too much to hope for I guess. Incidentally, there is a report that China booked a capesize bulker to carry iron ore from Brazil for $59,000 per day. This is huge boost from where we were a few days ago, when you noted the optimistic trends in the Baltic Dry.
Again, we all appreciate the great blog.

Scott Grannis said...

The Baltic indices continue to rise. It's quite impressive. To think that the global economy could recover without the help of Congress!

Mark A. Sadowski said...

What plan? So far it looks like a plan to blow billions (or trillions?) in taxpayer money. Other than that there are few details. The only consolation was that I came across this IMF paper recently called "What Happens During Recessions, Crunches and Busts?"


The bottom line is that, in credit crunches, the economy recovers 6 months on average before the financial sector. Hopefully the economy (with the stimulus' help) will recover before Geithner has a chance to flush all our money down the toilet.

Tal Daley said...


Great chart on bank credit. I have always loved you charts--great context and perspective. Required reading for my staff as we try to be heard in the retail financial advisor space. You simply cannot violate the laws of economics without consequences. From Bush to Obama we are learning that once again. Thanks for the heads up on the Taylor op-ed in the WSJ.

Mercado Libre!


ronrasch said...

Makes my day whenever I read you blog Scott. Thank you for sharing your clear thinking and great work


Scott Grannis said...

Hi Tal! Good to hear from you.

Gant3000 said...

Love your blog, I look to it for positive news. I run a private CRE group with $60MM in assets, but I see no resolution whatsoever to correcting the various Asset Backed markets that my industry needs to continue and I think the bank chart you posted doesn't take into account the fact that lenders have had to step in due to the frozen securitization markets. Any insight would be great.

Thank you

Scott Grannis said...

I don't have a good answer, but it seems to me that the lack of recovery in the asset backed markets is intertwined with the fact that money velocity has dropped signficiantly. Total lending is up, but the degree to which that credit circulates and percolates through the economy is down. Banks are the only ones who can create new money. That money can then be lend round and round through different vehicles (and with some players using leverage) such as asset backed securities. What we see now is that these secondary markets for credit circulation have shut down. That doesn't mean credit is no longer available, it means that it is just harder for some people to get their hands on it, while being easier for others.

This is all very conceptual, but my instincts tell me there is some truth to it. Contributions and suggestions welcome!