Economic Update: Why the Credit Crunch Spells Recession

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Economic Update Why the Credit Crunch Spells
Recession
Lindsey M. Piegza Market Economist
October 2008
FTN Financial
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The Credit Crisis Threatens the Economy

If money isn't loosened up, this sucker could go
down. -President George W. Bush, September 25,
2008
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The Credit Crisis Threatens the Economy

None of the Candidates questioned the bank
rescue.
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Financial Turmoil
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Financial Failures
Date Name Assets 9/29 Wachovia 7
83B 9/25 Washington Mutual 307B 
9/19 Ameribank, Inc. 115M  9/18 American
International Group Inc. 137B 9/15 Lehman
Brothers Holdings Inc. 639B 9/8 Fannie
Mae/Freddie Mac 882B/794B 9/5 Silver State
Bank 2B 8/29 Integrity Bank 1.1B
8/22 Columbian Bank and Trust Co. 752M 
8/2 First Priority Bank 259M 7/25 First
Heritage Bank 254M 7/25 First National Bank
of Nevada 3.4B  7/11 IndyMac Bank
32B 5/30 First Integrity Bank 54.7M 
5/9 ANB Financial 2.1B  3/16 Bear Stearns
385B 3/7 Hume Bank 18.7M 
1/25 Douglass National Bank 58.5M Total
3.9T
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Dow Jones Industrial Average
September, 2003
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Dow Jones, 6 Day Chart
BankRescuePasses
Down 1,200 points in 8 hours.
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SP 500 Financials
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3-mo LIBOR
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3-Month Treasury Bill
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Tightening Credit Conditions
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Consumers Debt/Asset Ratio
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Mortgage Delinquency Rates
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Banks Increasing Loan Spreads
September 2008
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FTN Financial
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Consumer Debt Key to GDP Growth
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Asset deflation is credit deflation
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Employment
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Job losses mounting
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Unemployment Rate Rising
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Unemployment Rates by State
7-8.5
HAWAII
6.5-7
6-6.5
4-4.5
ALASKA
5.5-6
3.5-4
5-5.5
3-3.5
4.5-5
2.5-3
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Tax Rebates Only Short-Term Fix
Tax Rebates
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Housing
FTN Financial
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New Home Sales
-53
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Existing Home Sales
-31
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Existing Home Sales
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Case-Shiller Home Price Index
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New Home Inventories
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New Home Sales and Inventories
12 months
12 months
22 months
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Commodity Prices and Inflation
FTN Financial
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The Outlook Inflation

• The most valuable lesson a central banker can
  teach is price stability. I do believe if you
  want to establish yourself in a globalized world
  you do exactly what Trichet is doing.
• - Richard Fisher June 10, 2008

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The Outlook Inflation

• European Union countries made a renewed effort
  to coordinate their response to the escalating
  banking crisis Monday, after a series of
  unilateral moves by European nations failed to
  restore confidence in financial markets.
• -The Wall Street Journal October 6, 2008

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The Consumer Price index
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The Consumer Price index
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Crude Oil Price per Barrel
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Natural Gas /mm BTU
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Crops Grains Index
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University of Michigan Long-Term Inflation
Expectations
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The Outlook Fed Policy and Forecast

• The recent intensification of the financial
  crisis has augmented the downside risks to growth
  and thus has diminished further the upside risks
  to price stability. Some easing of global
  monetary conditions is therefore warranted.
• -Ben BernankeOctober 8, 2008

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Two different management styles
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Discount Window Lending as a of Bank Assets
Credit Crisis
Continental Illinois
9/11
SL Crisis
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Retail sales falling behind inflation
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Confidence Income Up in 6 Mos
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The Recession Has Been Delayed
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Last Chance for Stimulus
This years stimulus is in next years budget.
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Deficit with TARP
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The Outlook

• TARP, the Federal Reserves liquidity programs
  are good, but cannot cure all.
• Leverage created growth and inflation.
  Deleveraging now means recession and deflation.
• Proactive Fed and Treasury mean no Great
  Depression II.
• Recovery comes with a stable banking system,
  return of capital to the financial markets and a
  return to credit growth.

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FTN Financial
Lindsey M. Piegza Market Economist
October 2008
FTN Financial