This morning the value of the Euro dropped below $1.30.  The United States should thank the European Union for the diversion it has created.  With all the turmoil taking place in Europe, little attention is being paid to the monetary and fiscal policies of the United States and the impact these policies are having on the value of the United States dollar against other major currencies. 


As can be seen in the following chart the value of the United States dollar against other major currencies in the world continues its secular decline.  In terms of monetary policy and fiscal policy, international financial markets continue to give a negative rating to the United States and continue to see further future declines in the value of the dollar.


I continue to believe that, given the current policy leanings of the United States government, that the value of the United States dollar will continue to decline in the future.  Since the early 1960s the United States government, both Republican and Democrat, has generally followed a policy of credit inflation that resulted in the United States going off the gold standard and then resulted in the secular decline in the value of the dollar since President Nixon floated the dollar’s price in August 1971.  The two exceptions to this secular decline occurred when Paul Volcker was the Chairman of the Board of Governors of the Federal Reserve System in the early 1980s and when Robert Rubin was the Secretary of the Treasury in the Clinton administration in the latter part of the 1990s.
To me, there the Obama administration has continued the policy of credit inflation carried on by his predecessors and perhaps even improved upon it. 
The only times that the value of the dollar has rebounded over the past several years has been when there has been a “flight to quality” in US Treasury securities.  Other than this the value of the dollar has continued to decline except relative to the Euro.
Again, it seems to me that the United States should thank the European officials for all their follies because they have taken attention away from the political mess in the United States and the continued weakness in the value of the United States dollar in the world.   

The United States economy is growing.  However, the United States economy is not growing very fast and the growth does not appear to be very deep.  
January figures for Industrial Production were released today and about all one can say about the numbers is that the rate of growth is positive but modest.  And, the rate of growth seems to be declining. 
Year-over-year, industrial production grew at a 3.4 percent annual rate in January 2012. 
However, this is down from a 3.9 per cent, year-over-year, rate of growth in the fourth quarter of 2011 and down from a 6.2 percent, year-over-year, rate of growth in the fourth quarter of 2010.  In the fourth quarter of 2009 the economy actually declined by 5.5 percent, year-over-year. 
The numbers for industrial production are not inconsistent with the pattern of growth, year-over-year, of real Gross Domestic Product.  In the fourth quarter of 2011, the year-over-year rate of increase in real GDP was 1.6 per cent.  In the fourth quarter of 2010, the similar measure stood at 3.1 percent.  For the fourth quarter of 2009, like the figure for industrial production, the economy actually declined by 0.5 per cent.
Looking at the numbers in this way does not give one the upbeat feeling one can often get from just looking at the month-to-month change in the numbers.
Furthermore, information on the capacity utilization of industry (also released today) and the under-employment of working age people still indicates that there is a massive problem in our use of physical capital and of human capital. 
Capacity utilization in manufacturing stands at 78.5 percent in January.  That is, more than 20.0 percent of our industrial capacity is standing idle!  The important thing to me here is that the capacity utilization in the United States has been on a downward path since the 1960s.  Please check the chart below. 
Reading the chart from the left to the right shows a dramatic downward trend with each subsequent peak in capacity utilization being lower than the one previous to it. 
The question that remains to be answered is whether or not the trend will be continued with the “peak” in capacity utilization we are going to reach this time around.
The United States has a growing mis-match in the industrial capacity it has built and the industrial capacity that is useful.  This mis-match must be worked off…there is not an over night solution to this problem.
The same situation exists in the labor markets.  The under-utilization of working age people has grown since the 1960s.  In the 1960s about one in eleven or twelve people in the United States were under-employed.  The measure of under-employment now stands somewhere between one in four or one in five people that are of working age. 
The United States has a major problem.  Jobs and industrial capacity are not matched with the present makeup of our human and physical capital.  These under-employed persons and this under-utilized plant and equipment are not going to be matched up any time soon.  Thus, under-employment of labor and under-utilization of industrial capital are going to be around for a long time.  And, the rates of economic growth we are experiencing will not do much to help the situation.

I am really tired of the German bashing!
The model for the Euro was unsustainable.  But, the lessons learned from the effort should not be taken lightly.
The major lesson from the experiment with the Euro is that a currency area cannot be set up without a central political body that is strong enough to enforce the rules of the currency area.  One can have separate states within the area, but, as in the United States, there must be a political union with enough authority to dominate the individual components of the area.
A second lesson from the experiment is that the economic model based upon “social engineering” is not sustainable.  The German economic model of low inflation, high labor productivity, and fewer government handouts has worked better than the model that includes substantial credit inflation, an inefficient private sector, and bloated government payrolls. 
And, as usual, the “losers” in the game cry foul against the successful. 
“The press review from around Europe does not make pleasant reading for the German foreign ministry these days.  ‘Look at this stuff, it’s just unacceptable,’ laments one diplomat—pointing to a front-page article from Il Giornale, an Italian newspaper owned by Silvio Berlusconi.  The piece links the euro crisis to Auschwitz, warns of German arrogance and says that Germany has turned the single currency into a weapon.  The Greek papers are not much better.  Any taboos about reference to the Nazi occupation of Greece have been dropped long ago.
Across southern Europe, the ‘ugly German’ is back—accused of driving other nations into penury, deposing governments and generally barking orders at all and sundry.
There is also a much more polite form of German-bashing going on at the official level.’ (http://www.ft.com/intl/cms/s/0/9d38ffee-5639-11e1-8dfa-00144feabdc0.html#axzz1mGnbTALH)
Economics, at one time, was defined as the study of the allocation of scarce resources.  That is, there are limits to what a country can attain given the amounts of human capital and physical capital that are available to it. 
Over the past fifty years, many countries came to believe that they had overcome these limitations and through credit inflation and social engineering they could achieve something beyond the boundaries set by the amounts of human capital and physical capital that existed.
Some of these programs included government created credit inflation that kept workers locked in jobs that were becoming legacy positions and that also promoted a home ownership scam that seemingly created middle-class piggy-banks; government hiring practices that resulted in excessive overstaffing of bureaucratic agencies (about one-third of the Greek workforce is in the public sector); and pension benefits that allowed for very comfortable early retirements. 
The economies of these countries just did not have the resources to sustain these programs. 
If everyone is following these policies then everyone is basically in the same boat.
However, a problem occurs if one or more other countries do not follow the same policies. 
The eurozone is having a problem because Germany, for one, has not taken the path most travelled.  And, over time, their more disciplined approach came out on top.
Germany now has the wealth, the resources, that others don’t.  Consequently, those that don’t have the wealth and are now struggling believe that Germany should compensate them for Germany’s success. 
The article quoted above states that the weaker countries in Europe are asking three things from the Germans: first, to commit more money to a European “bailout” fund that would be “so large that it would frighten the markets from speculating against southern European bonds”; second, to commit to Eurobonds to make the debts of individual countries the debts of the eurozone itself; and to stimulate the German economy so that Germans would buy more goods from southern Europe.
These requests, in my mind, are totally off-the-wall!
The Germans should not give in on these issues and they should maintain their position of strength.  And, the German-bashing should stop!
The eurozone is not going to get stronger by making every one of its members weaker!
This is because the eurozone is not the only game going on in the world.
Other areas in the world are maintaining their discipline and can only benefit, competitively, from a weaker eurozone.  Need I mention China?  And, Brazil?
And, these other areas of the world are growing in relative economic strength as Europe fights its own little family fights.  The pressures coming from this competition are not going to go away and Europe, as a whole, may have already postponed dealing with its problems for so long that it may still be years away from a resolution in which it becomes as competitive as it needs to be in the world of the 21st century.
I still fail to see anyone in Europe that I would call a leader.  Consequently, I find it hard to defend the continued existence of the Euro, as we now know it.  At this point in time, I see several countries leaving the Euro over the next couple of years.  I see a much-diminished role for the eurozone in the world, both economically and financially.  I also see economic social engineering receding as a government policy in the western world even though Paul Krugman and Joseph Stiglitz will still be around.  The era of economic social engineering is past its prime, even though this fact is not fully recognized yet.
The United States should be grateful to the eurozone for the way it has conducted itself, otherwise we would be talking more about the fifty-year weakness in the value of the US dollar.       

There seems to be growing optimism in the United States that the economic recovery is picking up steam.  This is all fine and good, but I still believe that the major potential bump in the road for the United States is the economic and financial situation in Europe. (See my post of January 4, http://seekingalpha.com/article/317268-issue-number-1-for-2012-recession-in-europe.)
Now we have the new austerity program passed by the Greek parliament and the unrest in the streets of Greece protesting the austerity program.
But, the new austerity program, at this point, does not end the concern over whether or not this new plan will be sufficient to end the Greek insolvency.
Greece is insolvent.
With the government’s new austerity program, however, Greece will get a new financial bailout.  The question now becomes: will this new bailout program buy Greece enough time to get its ship in shape so that it can work its way out of its insolvency?
Some think not.  For example, Wolfgang Münchau writes in the Financial Times, “My central expectation is that the program will happen.  A period of calm will set in, but after a few months it will become clear the cuts in Greek wages and pensions have worsened the depression…. Before long, another round of haircuts will be beckoning.” (This from the article “Why Greece and Portugal ought to go bankrupt,” http://www.ft.com/intl/cms/s/0/57485f60-540a-11e1-8d12-00144feabdc0.html#axzz1mGnbTALH.) 
There is another problem on the horizon, however, and that is the fact that a new Greek government will be be elected in April.  The expected winner at this time is Antonis Samaras.  The question is, what will this new government do after it assumes power?
Münchau argues: “I cannot see how this (the bailout) is going to work politically.  For a new prime minister who contemplates a full term of four years, the temptation to pull the plug and blame the mess on his predecessors must be big. He will then have four years to rebuild the country from the rubble of a eurozone exit.  It would be politically much riskier for him to stick to a program that he himself says does not work, and which will keep his country in a depression for the length of his mandate—possibly beyond.” 
And this is exactly the dilemma a “turnaround” leader faces…do I struggle along with the things that were left me…or, do I clean house and start with as clean a slate as possible.
I have successfully completed three corporate turnarounds and to me there is no choice.  The nice thing about being brought in to turnaround an organization is that you have a certain time period to blame everything on the previous management and clean house.  If you don’t do the house cleaning right up front, however, you lose most of your leverage to change things.  The decision is not difficult: you start with as clean a slate as possible.  In the case of Greece, then, declare bankruptcy
Greece is insolvent.  “To rebuild itself, Greece needs a functioning economic infrastructure, a modern labor market, and a less tribal political system.”  It also needs less corruption throughout its culture. 
This is not the only set of problems that Greece…and Europe…faces.  New data on the economies of Europe coming out this week are expected to be rather dismal.  The forecasts for the fourth quarter GDP of the eurozone run from a 0.4 percent to a 0.6 percent contraction.  These figures include the fact that even Germany seems to be in a decline.  Industrial production figures for December are also to be released this week and some analysts see a decline in this measure of more than one percent. (http://www.ft.com/intl/cms/s/0/f9558702-53e1-11e1-bacb-00144feabdc0.html#axzz1mGnbTALH) 
There is some feeling that the first quarter of 2012 may find growth in positive numbers, but not by much.  Germany and others may experience some kind of recovery then, but the southern peripheral countries are not expected to start growing again for some time.  And, with unemployment in excess of twenty percent in some of these countries and continued government austerity, 2012 prospects remain quite gloomy. 
The next question, though, is where the pressure will be applied next.  Münchau contends that Portugal is also bankrupt and should follow Greece in declaring bankruptcy.  Will the international investors now turn their attention to Portugal?  I wouldn’t be surprised. 
Countries…businesses…individuals…do not resolve their financial difficulties until they resolve them.  Continued bailouts only tend to postpone a final solution.  They very seldom correct the insolvency that is causing the problem. 

President Obama announced a mortgage plan aimed at giving relief to homeowners that are facing problems with their mortgages.  Yet, this is just putting a finger in a hole in the dike.
The problem is that after fifty years of governmental credit inflation many homeowners are facing the reality that their homes were grossly over-valued and that they assumed too much debt to finance their “American Dream.”
One out of every four or five houses has a mortgage on the property that is greater than the market value of the house.  Many of these homes are now valued at only 75 percent or less of their mortgage value. 
Regardless of a government “solution” to this situation, either through debt relief or a renewed bout of government-induced inflation, the attitudes and expectations of homeowners have changed.  These homeowners have been “burned” and are unlikely to expose themselves to this possibility again in their lifetimes. 
Even if the market stabilizes in the near term and housing prices bottom out, many potential home buyers will be much more financially conservative in the future given the experience that they have just been gone through. 
The reluctance to buy a home will also be affected by the situation in the labor market.   And, here again there is a longer-term problem that will not be resolved in a matter of months. 
One out of every four or five people of employment age are either unemployed, employed in a part time job but would like to be employed full time, or are not seeking employment.  The percentage of working age people in the labor market has recently dropped to a level not seen for several decades. 
With conditions in the labor market so tenuous, people will not have the same resources to purchase housing as they have had in the recent past. 
But, how is this under-employment situation in the labor market going to be resolved in the short-run?
The fundamentalist preacher Paul Krugman cries out for short-run government “solutions” to put people back into the jobs that were in existence at another time.  Krugman writes, “We have become a society in which less-educated men have great difficulty finding jobs with decent wages and good benefits.”  For example, “Adjusted for inflation, entry-level wages of male high school graduates have fallen 23 percent since 1973.” (http://www.nytimes.com/2012/02/10/opinion/krugman-money-and-morals.html?ref=opinion)
Maybe, part of this problem is that the government has emphasized putting high school graduates into what have historically been entry-level jobs, jobs that are shrinking as a proportion of the jobs available due to changes in technology and needed training.  And, what about those that do not graduate from high school…they are in an even less-favorable position. 
Elsewhere in the New York Times, we read that “Rich and Poor Further Apart in Education.” (http://www.nytimes.com/2012/02/10/education/education-gap-grows-between-rich-and-poor-studies-show.html?hp) “Education was historically considered a great equalizer in American society, capable of lifting less advantaged children and improving their chances for success as adults.  But a body of recently published scholarship suggests that the achievement gap between rich and poor children is widening, a development that threatens to dilute education’s leveling effects.”
This is a gap that cannot be overcome quickly.  And, it is a gap that cannot be overcome by national tests and government spending.    Since the end of World War II, politicians have generally believed that they could get elected and re-elected by keeping people employed and by helping more and more people become homeowners.  This underlying emphasis has resulted in the fifty years of credit inflation the United States has experienced since the early 1960s. 
People were kept employed by short-term government economic programs that put the unemployed back into the jobs that held previously before becoming unemployed.  And, why should someone going through high school be concerned about employment when they knew that the government would continue to stimulate jobs in heavy manufacturing and industry and keep them employed. 
The government continued to promote these kinds of stimulus programs even though under-employment increased steadily over the past fifty years and the capacity utilization in manufacturing was declining over the same time period. 
The federal homeowner programs and credit inflation created in the housing sector over the same time period created a “piggy bank” for many people not only helping them to own their own home, but also to allow them the ability to borrow more and more money to binge on consumer goods.     
So, we ended up with the “less wealthy” being under-educated and hence not readily employable in the labor markets of the 21st century and with many of these same people owning homes and over-their-heads in debt.     This is a situation that does not have an easy or ready solution. 
Under-employment can only be resolved over an extended period of time.  The same holds for people with too much debt.  Short-run stimulus is not the answer.  In fact, the emphasis on short-run stimulation has created and further exacerbated the situation. 
A safety net may be necessary for many of the under-employed and overly leveraged.  In fact, the efforts to keep people in “legacy” jobs and to put families in homes to make their life better may have resulted in a whole generation of individuals being excluded from the mainstream.  They are going to need some economic support.
But, the only real solution to the labor market situation is a long run one and it begins with education and the environment that surrounds the culture of education. 
The situation in the housing market will only get better as people lower their expectations and get their balance sheets back in order.  This, too, will take a substantial amount of time because it is related to a major change in expectations.  People, in the future, just cannot expect a “free ride.”      

There seem to be three major stories in commercial banking these days: first, the cash going to foreign-related institutions; second, the pickup in non-real estate business lending; and three, the continued weakness in consumer borrowing.

Excess reserves at depository institutions in the United States averaged $1,509 billion in the two weeks ending January 25, 2012.  Cash assets at commercial banks in the United States were $1,597 billion in the week ending January 25, 2012.
In December 2010, excess reserves were $1,007 billion and cash assets $1,082 billion. 
Both excess reserves and cash assets rose by about 50 percent during this time period.
In recent years excess reserves at depository institutions and cash assets held by commercial banks have moved closely together.  The reserves the Fed has injected into the financial system have gone primarily into cash assets. 
It is interesting to note that of the $590 billion increase in cash assets at commercial banks, $403 billion went onto the balance sheets of foreign-related institutions in the United States.
For the week ending January 25, 2012, roughly 47 percent of all the cash assets held in commercial banks in the United States were held on the books of foreign-related institutions.  This is up from about 32 percent in December 2010. 
Note: These foreign-related institutions hold only 14.5 percent of the total assets in the United States banking system (up from about 11 percent a year earlier) so they are now holding a disproportionate share of the cash assets in the banking system.     On the liability side of these foreign-related institutions there was a net increase in “net (deposits) due to foreign offices of $625 billion and a decrease in US held deposits (large time and other deposits) of $185 billion.  Thus, the right side of the balance sheets of these foreign related institutions rose by a net amount of $440 billion related to movements of funds “offshore”, i.e., primarily to Europe.
The Federal Reserve has not only supplied liquidity to the European continent through dollar swaps with foreign central bank, it has supplied funds to international financial markets through its open market operation.
It is not expected that many of the funds going to these foreign-related financial institutions will go into loans in the United States market as these institutions only hold about 8 to 9 percent of all commercial loans in the United States.
Therefore, when we look at what the Federal Reserve has done, we have to realize that only about fifty percent of the funds the Fed has injected into the banking system has gone to domestically chartered banks.  It is only this domestic portion of the Fed’s injection of funds that can have the greatest possibility of impact on business lending and hence economic growth.
Cash assets did increase at domestically chartered commercial banks during this time period: the increase was about $112 billion as total assets grew by $243 billion.  At the largest twenty-five banks in the country, the increase was $75 billion in cash assets and $130 billion in total assets.
The important thing is that business loans (Commercial and Industrial loans) at commercial banks have been increasing, primarily at the largest twenty-five domestically chartered banks in the United States.  From December 2010 to December 2011, C&I loans rose by $123 billion in the commercial banking system, with $94 billion of this increase coming at the largest twenty five banks, a 15 percent year-over-year rate of increase. 
Business loans did increase at the rest of the domestically chartered US banks, but they rose by only about $18 billion or about 5 percent year-over-year.
Over the past thirteen-week period, however, C&I loans at these smaller banks hardly increased at all and actually fell over the last four-week period.
At the largest banks, business loans continued to rise over the past four weeks ($15 billion) and over the past thirteen weeks ($35 billion).  My question about these increases has to do with the uses that the funds are being put to.  The national invome statistics showed that inventories increased in the latter part of last year and these loans could have gone to increase the inventory buildup.  Many economists seem to believe that given the weak consumer behavior (see below) that the inventories will decline in the first quarter of 2012 and this will result in some weakness in business loans.  Alternatively, some of the borrowing could be so that corporations could buildup cash positions for either acquisitions or for stock repurchases.  There does not seem to be any inclination to increase spending on business plant or equipment.
Commercial real estate loans continue to decline at the smaller banks in the country although there has been a pickup in these loans at the largest banks.  All-in-all, lending on commercial real estate continues to go down: and given all the loans that will mature over the next 12 to 18 months, with many of them being unable to re-finance, there is a continued likelihood that these loans will continue to decline in the near future.    
On the other hand, residential mortgage lending rose across the board at commercial banks.  Although residential mortgages fell on the books of the banks from December 2010 to December 2011 by $12 billion, over the past thirteen-week period, these mortgages grew by almost $19 billion, with $11 billion of this increase coming in the last four weeks.  And, the increases came in all sizes of banks.
This line item will be interesting to watch over the upcoming months since housing prices continue to decline and foreclosures and bankruptcies seem continue to occur at a rapid pace.
Just a further note on real estate lending: home equity loans have declined over the last thirteen weeks and held roughly constant over the past four.  
Counter to this increase in residential spending is the decline in the dollar amount of consumer loans on the books of the banks.  Over the past six months consumer lending has dropped by a little more than $6 billion with a major decline of roughly $15 billion coming over the last four weeks.   Most of this decline has come in credit card debt outstanding at the banks. 
This information on consumer lending seems to point to a continued weakness in consumer expenditures. 
In terms of the domestic economy it seems as if there is not much encouragement for a stronger economic recovery in the banking numbers.  There seems to be little demand for any kind of loans in the current environment, but, one also gets the feeling that the banks, especially the smaller ones, are not willing to lend even if there were an increasing demand for loans. 

I keep reading that some people want to have the Federal Reserve begin a new round of quantitative easing…QE3.
I see nothing in the financial figures that calls for more quantitative easing.
For one, there seems to be no pressure on interest rates.  Looking over the last 13-week period the yield on the 10-year US Treasury (constant maturity) has remained relatively constant.  The weekly average for the week of November 4, 2011 was 2.07 percent: for the week of January 27, 2012 the weekly average was 2.01.  And, the market yield on 10-year Treasuries has been below 2.00 percent all of this week.
The European sovereign debt situation has certainly contributed to this weakness in yields.  Hence, there does not seem to be any demand pressure on interest rates at this time.
Economic growth continues to be modest and consequently is not adding any demand pressure on rates.
The commercial banking system is quiet and even though bank closures average around 2 per week adjustments are being made smoothly and with little or no disruption to the industry. 
Excess reserves in the banking system have fluctuated around $1.5 trillion over the past three months indicating little or no pressure on the financial system on the loan demand front.  This, too, is consistent with the modest economic growth.
Overt Federal Reserve actions have been absent over the past 13-week period indicating that the Fed is allowing operating factors to work themselves out without undue disturbance to the monetary system. 
The big change on the Fed’s balance sheet has to do with the European debt crisis.  Central bank liquidity swaps have risen by a little more than $100 billion since November 2, 2011 as the Fed moved to assist central banks in Europe.  It appears as if part of this increase went to take pressure off the market for Reverse Repurchase agreements with foreign official and international accounts.  The account recording this activity fell by about $41.0 billion over the same time period.
This has resulted in a net increase of about $53 billion in Reserve Balances at Federal Reserve banks but this has had little or no immediate impact on the United States banking system.
Actually, Reserve Balances at Federal Reserve banks declined by $7.0 billion over the past four-week period.  The increase in central bank liquidity swaps was just about totally matched by the decline in reverse repos with foreign official and international accounts as other factors removed reserves.
In terms of Federal Reserve open market operations, the securities account at the Fed actually declined in both the latest 4-week and 13-week periods.  Securities bought outright dropped by a little more than $11.0 billion since November 2 and by a little more than $5.0 billion since January 4. 
Over the past 13 weeks, about $20.0 billion in federal agency issues and mortgage-backed securities ran off in the portfolio.  The Fed only replaced this runoff by a little more than $8.0 billion.  In the latest 4-week period, the runoff in securities was across the board.
The conclusion I draw from the latest Federal Reserve statistics is that the Fed has had a relatively peaceful 13 weeks.  Money continues to flow into the United States Treasury markets seeking a “safe haven” from what is going on in Europe.  This, along with the mediocre economic growth in the country, has taken pressure off the Fed to buy more securities in order to keep interest rates low.  The fact that the securities portfolio at the Fed has declined over the past 13 weeks indicates that the Federal Reserve is letting market forces keep interest rates low and, for a change, is staying out of the market. 
If these conditions continue, I see no justification for any talk about another round of quantitative easing.
The money stock numbers are continuing to maintain excessive growth rates.  The year-over-year rate of growth of the M1 measure of the money stock for the week ending January 24, 2012 is 18.7 percent; the M2 measure of the money stock is growing at 9.7 percent.
Over the past three years I have been arguing that the reason that these money stock growth rates are so high, given the fact that commercial banks did not seem to be lending and that the reserves being pumped into the system by the Fed were going into excess reserves, is that the dire economic conditions have caused individuals and businesses to move their funds from interest bearing assets to transaction assets like currency and demand deposits.  The very low interest rates on the interest bearing assets also contributed to this movement.
Now, however, it seems as this re-arrangement of liquid asset holdings has slowed down.  This is something I think we want to keep our eyes on, for it could be that households and businesses have done all they can do to “be liquid” in bad times.  Thus, we will either see a slow-down in money growth measures (the rates have dropped since the first of November from a 20.0 percent year-over-year rate of growth for M1 and a 10.0 percent rate for M2) or we will see spending starting to increase as these transactions accounts are being used to actually buy things.  It will be interesting to see what happens here.
If people and businesses do speed up their expenditures, this fact would be another reason why another round of quantitative easing would not be necessary.  The Fed would have done enough.   

The Congressional Budget Office (CBO) just released its forecast for economic growth and what it sees seems to differ substantially from what the Federal Reserve sees.
The CBO forecast places economic growth (real GDP growth) for the United States at 2.0 percent this year and at 1.1 percent in 2013. (http://www.nytimes.com/2012/02/01/us/politics/deficit-tops-1-trillion-but-is-falling.html?_r=1&ref=todayspaper)
The Federal Reserve just released its projections last week.  Taking the average of the ranges given, the Fed is forecasting that economic growth in 2012 will be 2.5 percent, and, for 2013 will be 3.0 percent.
Hey, these forecasts are going in opposite directions!
The one forecast, that of the CBO, emphasizes the future of the federal deficit: “The deficit will be $1.1 trillion in the current fiscal year, about $200 billion less than in 2011, and will fall sharply in the next three years as a result of tax increases and spending cuts required by existing law…”
The other forecast, that of the Federal Reserve, emphasizes the future of interest rates: short-term interest rates will remain close to zero until well into 2014.
In one sense, it seems as if the consequences of the two forecast are backward.  In order for the deficit to decline, the economy needs to be growing so that tax revenues will increase and welfare payments will decrease.  This will not happen if economic growth slows and unemployment increases…as it does in the CBO projection. (See a strong argument on this point, http://professional.wsj.com/article/SB10001424052970204740904577195352148844134.html?mod=WSJ_Opinion_LEADTop&mg=reno-secaucus-wsj.)
The Federal Reserve, on the other hand, has short-term interest rates staying extremely low despite the fact that they predict rising rates of economic growth, a condition that usually produces higher levels of interest rates.  This is because the demand for money generally increases with the rising level of incomes produced by the economic growth.
The major point is, however, that the CBO has produced a pretty dismal economic forecast. 
The CBO projection has unemployment rates rising to 8.9 percent in the last quarter of this year, up from 8.5 percent in December 2011.   Furthermore, the unemployment rate is expected to rise to 9.2 percent in the final quarter of 2013. 
This is not good!
And, what happens to the amount of under-employment if the CBO forecast takes place.  We certainly would see the under-employment rate stay in the 20 to 25 percent range.
On top of this is the real threat of recession in Europe.  The question is, how much does a European recession play into the forecasts of the Congressional Budget Office?
My big fear has been that a recession in Europe will have very negative connotations for growth in the United States.  (See my post, “Issue Number 1 for 2012: Recession in Europe,” http://seekingalpha.com/article/317268-issue-number-1-for-2012-recession-in-europe.)
Data released yesterday and presented by the Financial Times indicates that the unemployment rate for the eurozone was at 10.4 percent at the end of 2011 for the whole workforce, and was at 21.3 percent for the category “youth.”  Furthermore, the consensus real GDP growth for the eurozone is at negative 0.3 percent, not a level that is conducive to the reduction in the unemployment rate. 
The unemployment rate ranges from 22.9 percent in Spain and 19.2 percent in Greece to 5.5 percent in Germany and 4.1 percent in Austria showing the split that exists within the eurozone, itself. (See ”Eurozone Jobless Rate at Euro-era High,” http://www.ft.com/intl/cms/s/0/dca5fe48-4bf3-11e1-98dd-00144feabdc0.html#axzz1l92ForcZ, and, “Contraction Threat Clouds Euro Zone,” http://professional.wsj.com/article/SB10001424052970204740904577194442237686180.html?mod=ITP_pageone_3&mg=reno-secaucus-wsj.)
How much impact will this “European Recession” have on the economy of the United States and has it really been taken into account by the forecasters of the CBO and the Federal Reserve System?
And, given the over-extended position of consumers (http://seekingalpha.com/article/328252-where-is-the-u-s-consumer), corporations (http://seekingalpha.com/article/326412-corporate-confidence-continues-to-wane) , and banks (http://seekingalpha.com/article/320698-what-s-to-like-about-the-united-states-banking-system), where might a pickup in spending take place?
Given these facts, I tend to agree more with the economic projections of the Congressional Budget Office than I do with those of the Federal Reserve.  However, if we do achieve the growth rates of the Congressional Budget Office it would seem that the cumulative federal deficit for the next five years would be closer to the cumulative federal budget deficit of the past five years…in excess of $6 trillion, than what is now being forecast.
In essence…we are going nowhere…fast!

Two pieces of news today that go along with my earlier post about the pressures families are facing in the United States. (http://seekingalpha.com/article/328252-where-is-the-u-s-consumer).   
First, “Home Prices Tumble.” (http://professional.wsj.com/article/SB10001424052970204652904577194752102528744.html?mod=WSJ_hp_LEFTWhatsNewsCollection) “For November, the Case-Shiller index of 10 major metropolitan areas and the 20-city index both fell 1.3% from the previous month. David M. Blitzer, chairman of the index committee at S&P Indices, also noted that 19 of the 20 major U.S. metropolitan markets covered by the indices in November saw prices decline from October…
The 10-city and 20-city composites posted annual returns of negative 3.6% and negative 3.7%, respectively, compared with November 2010.”
Second, “Consumer Confidence Unexpectedly Declines.” (http://blogs.wsj.com/economics/2012/01/31/consumer-confidence-unexpectedly-declines/)  “U.S. consumer confidence in January gave back some of the huge gains posted in the previous two months, according to a report released Tuesday. Views on labor markets darkened.
The Conference Board, a private research group, said its index of consumer confidence retreated to 61.1 this month from a revised 64.8 in December, first reported as 64.5. The January index was far less than the 68.0 expected by economists surveyed by Dow Jones Newswires.
Perceptions about the job markets worsened this month. The survey showed 43.5% think jobs are “hard to get” up from 41.6% saying that in December, while only 6.1% think jobs are “plentiful” down from 6.6% in December.”
These data are consistent with the material presented in the earlier post.  The United State consumer has lots to worry about and, for a large portion of this consumer base, spending is not expected to be very robust in future months.  And, their situation cannot be turned around soon by either monetary or fiscal policies. 

“Rising Income is Saved, Not Spent,” reads the Wall Street Journal Tuesday morning. (http://professional.wsj.com/article/SB10001424052970204740904577192702993936344.html?mod=ITP_pageone_1&mg=reno-secaucus-wsj)
“Personal income increased 0.5% in December from November adjusted for seasonality, the largest monthly increase since March…but spending was flat over the month—actually fell when inflation is factored in.”
“The savings rate, around 5.0% for the first half of 2011, was near 4.0% for much of the second half of the year…. Economists warned that consumers would soon resume socking away cash at the expense of spending, and that appears to be playing out now.”
With unemployment still high and the housing market in the doldrums, consumers are reluctant—and in many cases unable—to increase their spending in a big way.”
The Federal Reserve’s recently released forecast projected unemployment rates remaining at high levels through 2014, declining only slightly throughout the next three years.  And, even worse, underemployment is also expected to remain high with the rate of underemployment staying near to one out of every five people of working age.  No help coming here.(
Furthermore, a large proportion of homeowners still find themselves “under water” with mortgages that exceed the market value of their houses.  This situation is not expected to improve in the near future.
Robert Shiller, the Yale economist, was just interviewed at Davos and responded to questions about home prices by saying that prices will probably continue to decline, although not at the rate they declined in recent years.  He added that even if housing prices did stop declining, there is no reason to expect that they would start to rise anytime soon.  In addition, he added, that even though housing prices were returning to something more like a “fair value” that historically, the tendency was for the market to “overshoot” the “fair value” until all the previous exuberance is wrung out of the market. (http://professional.wsj.com/article/SB10001424052970204740904577192702993936344.html?mod=ITP_pageone_1&mg=reno-secaucus-wsj)
A White House effort to lessen the impact of these homes that are “under water” seems to have failed in that the program developed by the administration has not reached enough borrowers to have much impact on the market. (http://www.ft.com/intl/cms/s/0/cf9fed00-4a89-11e1-8110-00144feabdc0.html#axzz1l2qSCMaM)
Even more chilling is the report released today by the Corporation for Enterprise Development (CFED) titled “The 2012 Assets & Opportunity Scorecard: How Financially Secure are Families?” (Go to http://cfed.org/.)   This study presents what it calls the households that are in “liquid asset poverty”.  A household is considered in liquid asset poverty if it owns a home, yet has no savings to speak of.  These people are just one significant emergency away from a real financial crisis. 
The emergency could take the form of a major car breakdown or a health problem.  Most of these people are earning a regular paycheck, CFED says, but they don’t really realize how close to the edge they are living.  Many have some other form of debt, but in an emergency would have to rely on very expensive sources of debt to try and carry them through the emergency. 
The study reports that 43 percent of the households in the United States are liquid asset poor.  This amounts to roughly 128 million households. 
Again, we seem to see the country bifurcating.  There are those households that are doing OK and are continuing to spend through these tough times.  Yet, there are a large number of people that have to watch out where every penny of their income is going.  This means that the economic recovery will not only remain week, but it will be fragile and susceptible to unexpected shocks.
Saving and deleveraging are still needed and being sought by many families, but this will just mean that the recovery will be missing any strong support from consumer spending in the near term.
And, it means that banks and other financial institutions cannot be sure of value of many of the assets on their balance sheets, both mortgages and consumer loans, but also face the fact that loan demand will also not be strong in the future.
We are still looking for where the surge in economic activity will come from.    

I closed my review of the 2012 prospects for mergers and acquisitions with this paragraph: “Let’s hope the boom in M&A business does take place. Let’s hope that the corporate cash and corporate borrowing do not go just to corporations buying back their own stock. Let’s hope that the unwinding and restructuring takes place because that is one prerequisite for business to get back to the capital investment activities that do drive economic growth.” (http://seekingalpha.com/article/321037-the-outlook-for-mergers-and-acquisitions-in-2012)
However, at the end of January we see the headlines: “M&A volumes at lowest for a decade.” (http://www.ft.com/intl/cms/s/0/f23718f6-4a76-11e1-8110-00144feabdc0.html#axzz1kx2Cicvs) “Dealmaking has had its slowest start to a year for nearly a decade, as companies’ appetite for mergers and acquisitions remains suppressed by the uncertain outlook for the global economy.”
The deal volumes announced so far this year…about half the level of 2011 at this time according to S&P Capital IQ.
Additionally, we read “Hordes of hoarders,” concerning corporate cash hordes…with corporate entities holding onto well over $1.7 trillion at last count. “ (http://www.ft.com/intl/cms/s/0/4cd6cb8c-48e0-11e1-974a-00144feabdc0.html#axzz1kx2Cicvs) “At present, cash accounts for more than 6 percent of US non-financial companies.”
In one specific case, Apple has almost $100 billion in cash on its balance sheet, about level with the market value of firms like McDonalds, or ConocoPhillips, or Cisco Systems.
This pales against the cash holdings of US commercial banks who in January 2012 hold almost 13 percent of their assets in cash balances, up from 9.3 percent at the end of 2010.
I know that this is early in the year, but with everyone looking for positive signs that the economy is picking up steam we need to consider other signs as well. Furthermore, the current situation is not unlike the situation that existed at the start of last year…and the actual commitments never really came about.
The one word that seems to be on almost everyone’s lips concerning this situation is…uncertainty.
There is just so much uncertainty that exists in the world right now that people are unwilling to commit substantial resources to acquisitions…or capital investments.
Where is this uncertainty coming from?
In my mind this uncertainty exists from the lack of economic leadership in the world today.  Europe continues to dither…and so does the UK…and so does the US. 
No one seems to know where they are going…or where we are going. 
How can anyone commit in such an environment?
Who knows what economic policies are going to prevail in these areas over the next year or two…let alone the next three months?
Who knows how the people in these areas are going to react to whatever economic policies are going to be enacted by their governments?
We’ve seen how the governments have acted in the recent past…and these examples cannot give anyone much confidence.
Right now, I am concentrating on factors such as these to try and understand the state of the economy.  Business leaders may be prepared to commit in the future and certainly they have the means to borrow additional funds if they need them.
These leaders still face the following question: “Why should I commit to buy another company now when the economy could get worse and I could buy the same company for a lower price at some time in the near future?” 
Right now, the probability of this happening is still apparently large enough that it is causing these business leaders to hesitate to commit on acquisitions…or capital investment. 
I keep asking people to name one person in a position of political authority in the world that they would apply the title “leader” to…and I keep coming up with silence.
Unfortunately, I don’t believe that business leaders are going to commit resources until some sort of political leadership is forthcoming. 

I still believe that we can look at how corporations are using their “cash” as an indicator of future economic performance. 
For right now, though, the “cash” stays on the balance sheets!

Well, Mr. Bernanke has moved the Federal Reserve to a position of greater transparency. 
We now have projections of interest rates out until the end of 2014.  It is now believed by most members of the Fed’s Open Market that the Federal Funds rate will remain close to zero until the end of 2014.
What is the probability that the Federal Funds rate will be close to zero for the last six months of 2014?
In my mind, zero or close to it!
What is the probability that the Federal Funds rate will be close to zero for the first six months of 2014?
In my mind, zero or close to it!
What is the probability that the Federal Funds rate will be close to zero for the last six months of 2014?
You guessed it!
And, so on…
Seems like I don’t have a lot of confidence in these forecasts. 
What are these forecasts for, then?
I have already written my answer to this question.  These forecasts are to make Mr. Bernanke feel better. (http://seekingalpha.com/article/317453-bernanke-transparent-about-his-lack-of-self-confidence)
Mr. Bernanke doesn’t want to be misunderstood.  Apparently, in the past, Mr. Bernanke feels that he has been misunderstood.  Now, with the “new transparency” there should be no doubt where Mr. Bernanke and the Fed stand…and Mr. Bernanke should feel justified.
This is the first time in my mind that the Federal Reserve has done something of this magnitude so as to make the Chairman of the Board of Governors feel better.
I hope it achieves its goal because as far as I am concerned this new transparency program does absolutely nothing for me in terms of understanding where interest rates are going to be for the next two to three years.  It does absolutely nothing for me in terms of understanding what the monetary policy of the Federal Reserve is going to be for the next two to three years. 
If anything this new transparency program will assist, in the shorter-term, speculators in making lots of money.  George Soros, and others like him, loves a situation in which a government says it is going to maintain a price for as long as it can.  This type of government activity creates “sure thing” bets. 
The economy is in the condition it is in because there is still a lot of insolvency around.  By keeping short-term interest rates as low as they are helps financial institutions and other private or public organizations remain open hoping that they will be able to work themselves out of their insolvency.  According to a report released Wednesday put together by the American Bankers Association and State Bankers Associations, thirty percent of the commercial banks reporting were under some form of written agreement with regulators.  A total of 1000 banks responded to the survey, so the study should be fairly representative.  Extrapolating this to the total number of banks in the banking system we would get some 1,900 banks under some kind of agreement with the regulators.   
This is when there are still some 864 commercial banks on the FDIC’s list of problem banks, which we know does not include all the banks under some kind of agreement with the FDIC. 
Many home owners still find the market values of their homes below the amount of the mortgage that exists on the property.  Commercial real estate loans are still defaulting at a very rapid pace and many businesses are declaring bankruptcy or are near filing for bankruptcy, especially small ones.
It is understood that the Federal Reserve must continue to protect against further economic deterioration and must continue to protect those individuals and institutions that are insolvent or near insolvency. 
Because of this and the consequent slow pace of economic growth the Fed must continue to keep the economy excessively liquid.
I don’t know that publishing interest rate forecasts for the next three years will convince us any more that the Fed is attempting to protect the banking system and the economy.  I guess it must help Mr. Bernanke to sleep better to know that he is releasing all this information even if it does little or nothing for anyone else.           

It ain’t over until it’s over…

The yield on the 10-year Portuguese government bond closed above 14.80 percent yesterday, a new record for the euro-era. 
“The markets are pricing in a Portuguese default with 10-year bonds trading at about 50 percent of par, a deeply distressed level in the eyes of many investors.” (http://www.ft.com/intl/cms/s/0/49916f7a-468a-11e1-89a8-00144feabdc0.html#axzz1kTbnc8Yy)
“Friday the 13th may be an unlucky omen for Portugal.  On that day, almost two weeks ago, Standard & Poor’s became the last rating agency to downgrade Lisbon to junk, marking the moment for many investors when default looked inevitable for Portugal as well as Greece.” 
For more on this see my post on blogspot “Credit Downgrades and Europe” for January 16, 2012. (http://maseportfolio.blogspot.com/).
The downward spiral in defaults will continue as long as Europe fails to honestly face its problems. (See my post on blogspot for January 25, 2012 titled “How Long Will Europe Continue to Lie to Itself”: http://maseportfolio.blogspot.com/.)  
In the past, analysts, including myself, tried to explain what officials in Europe were doing by casually remarking that their actions amounted to “kicking the can down the road.”  Basically, the actions of the European officials were an effort to postpone dealing with the real issues, hoping that by delaying what was needed to be done the situation would eventually correct itself.
Now, it seems that the days of “kicking the can down the road” are reaching a climax. 
European officials hope to reach a deal on the Greek debt situation by the end of this month.  The current write down seems to be somewhere around 50 percent of face value, but there still remain issues to be decided like whether or not the European Central Bank will have to write down the Greek debt it has on its books. 
Bond markets have responded to this reality by dumping Portuguese debt.  Note that the yield on the ten-year government bond was about 10.40 percent (compared with 14.80 percent yesterday) around the middle of November, a time when it still seemed that maybe the European Union might be able to pull things together and avoid a Greek default. 
As the officials of Europe finally seriously travelled down the path to restructure Greed debt, the price of Portuguese debt started to weaken.  The price declines accelerated, as the possibility of a Greek write-down became more of a reality.  Today, the yield on the 10-year bond was around 15.00 percent.
I know that governmental officials hate to give in on these write-downs because they hate to concede to the “bond markets” and “speculators”. 
It is hard for governmental officials to admit that maybe the “bond markets” and the “speculators” might be right. 
It is a very difficult lesson for governmental officials to accept the fact that they cannot continue to cater to their constituencies with jobs and other benefits ad infinitum.  Over the longer-run, either taxes have to be raised or money has to be printed because the bond markets will not continue to underwrite debt that will be repaid, both principal and interest, by the issuance of more debt.
The economist Hy Minsky referred to this kind of debt financing as a “Ponzi” scheme.
 “Ponzi” schemes come to an end and the end cannot just be blamed on the “bond markets’ and the “speculators”.  In fact, the governments just line the pockets of the “bond markets” and the “speculators” by extending their uncontrolled spending until the collapse of the market becomes a “sure thing.” 
So the charade continues and Portugal seems to be next. 
Who will follow Portugal?  Spain…or Italy…who knows?
Yet, this is not the only concern that many of these officials are facing.  The austerity programs enacted by governments throughout Europe are not setting well with the people.  There is “discontent” and “upheaval” arising in many countries.
“The only consistent messages seem to be that leaders around the world are failing to deliver on their citizens’ expectations and that Facebook, Twitter, and other social media tools allow crowds to coalesce at will to let them know it.  That is not a comforting picture for the 40 heads of state  or leaders of governments who are attending the World Economic Forum (in Davos, Switzerland)…”  (http://www.nytimes.com/2012/01/26/world/europe/across-the-world-leaders-brace-for-discontent-and-upheaval.html?_r=1&scp=1&sq=across%20the%20world,%20leaders%20brace%20for%20discontent%20and%20upheaval&st=cse)
The situation is quite uncomfortable.  But this is what happens when you fail to deal with a problem…when you continually try to “kick the can down the road.”  The situation does not go away and the delay in dealing with the situation often turns out messier than if the situation had been dealt with earlier. 
The only way for the officials to resolve a condition like this is to get in front of it.  I don’t see anyone around in a position to do this.  The only real possibility is Merkel but the resentment that already exists against Germany makes it that much more difficult for her to achieve what is needed. 
If no leader arises then the defaults will continue…and the austerity will grow…as will the “discontent” and the “upheaval.” 
“Europe risks being handicapped if it doesn’t deal decisively with this challenge to democracy.”  Thought provoking way to end the New York Times article.    

“Bank Seeks To Avoid Taking Loss On Bonds.”
So reads the headline for the New York Times article on the dilemma of the European Central Bank. (http://www.nytimes.com/2012/01/25/business/global/eu-officials-continue-to-press-for-a-quick-deal-on-greek-debt.html?_r=1&ref=business)
“European leaders have begun discussions with the European Central Bank on several options that might keep it from having to take a loss on its 55 billion-euro portfolio of Greek bonds.”
“The deal could address what has long been one of the more vexing questions in reaching a broad agreement on reducing Greece’s mountain of debt: how to get the central bank, the largest holder of Greek bonds, to participate in a debt restructuring without having to take a large loss that would have to be covered by European taxpayers, German ones in particular.
Private sector investors, including large European banks and hedge funds, have complained bitterly—and in some cases threatened legal action—over the central bank’s insistence that its 55 billion euros in Greek bonds were exempt from the loss that the private sector is facing, which some have estimated at 60 cents on the euro.”
The European Central Bank cries, “You can’t hold me responsible for my actions!”
There are articles all over the place on this issue. 
For example, on the front page of the Financial Times: “IMF urges ECB to take a hit on 40 billion-euros in Greek bond holdings.” (http://www.ft.com/intl/cms/s/0/74d2b31a-46b2-11e1-bc5f-00144feabdc0.html#axzz1kTbnc8Yy)
Greek debt will be written down…finally.
But, will people still be avoiding reality in some affected areas?
And, remember, this is all voluntary to avoid kicking off the credit default swaps outstanding…what a crock!
Still on the list of lies…Portugal…Spain…Italy…
Lies have a long life and can come back to haunt you in many…often, unfortunate…ways.  Just ask people up at Penn State these days. 
The resolution of a situation in which people cover up and try to avoid the truth never ends well.  The leaders (and I use this term lightly) of Europe that are perpetuating this comedy continue to draw it out as long as possible. 
The problem is that the European dilemma will continue to exist until it is dealt with.  For more on this see my blogpost “Credit Downgrades and Europe” posted on January 16, 2012 on my blogspot site (http://maseportfolio.blogspot.com/).  

The key issue in the area of mergers and acquisitions in 2012 is still uncertainty. There seems to be a lot of anticipation that the activity in this area could pick up during the year, but, like last year, there may be little to come of it. (http://www.ft.com/intl/cms/s/0/a29392 10-41d0-11e1-a1bf-00144feab49a.html#axzz1jqA4rKTp) Many corporations still seem to have a “ton” of cash around.  Furthermore, the corporate bond market is flush; companies “sold $44.2 billion of both high- and low-rated corporate bonds this year, the highest on record for the time period….” Investors are “snapping up bonds…pushing the cost of borrowing for some issuers to record lows.” (http://professional.wsj.com/article/SB10001424052970203750404577171341742782200.html?mod=ITP_moneyandinvesting_3&mg=reno-secaucus-wsj) “The yield on below-investment-grade, or ‘junk’ bonds fell to 7.93% Wednesday, the lowest since August 5 according to a Barclays Capital index.  An index for investment-grade bonds, which are of a higher credit quality, was at 3.62%.  In comparison, on Thursday the 10-year Treasury note yield rose to 1.972%.”Funds are available.  Corporate breakups are likely to continue or even accelerate in 2012.  Economic growth is not picking up speed.  Europe looks as if it is in another recession and this does not bode well for the rest of the west.  Companies are finding that the conglomerate structures they built up in recent are not very helpful in times like these, especially for those organizations that are suffering under the burden of too much debt.  The western world is re-grouping from the excesses of the past ten to twenty years.  Those that still have the time to adjust are downsizing…laying off employees and discarding non-central businesses.  Those that don’t have this time are attempting to sell outright. Those looking for deals have the ammunition to pull off these deals and they know that this is a “buyers” market with depressed valuations available.  They have the capability of being aggressive.   Whether or not they activate this aggressiveness is another question. This is because a cloud remains over the M & A market, a cloud that kept many firms on the sidelines in 2011.  First off, a great deal of uncertainty exists with respect to the future of the economy.  Government stimulus policies, both monetary and fiscal, have not worked to any degree and it is debatable whether or not any additional actions will achieve much more.In addition, Europe appears to be in recession right now and, given its sovereign debt crisis and the state of its banks, any recovery seems to be some way off.  It is uncertain how the situation in Europe might play out in the United States. (http://seekingalpha.com/article/317268-issue-number-1-for-2012-recession-in-europe) Second, there is the upcoming election in the United States.  The uncertainty surrounding the policies of the American government with respect to business and finance over the past three years has been enormous…and largely uncalculable. At this time, we just don’t know how much the uncertainty in this area has retarded the recovery of American business and economic growth.  Further uncertainties exist with respect to the impact of other actions of the federal government in areas like health care, the environment, and foreign affairs.  Some people are just learning about the expenses they are going to have to absorb with respect to Medicare, doctors fees, and health insurance.  As people learn more and more how their budgets are going to be affected, adjustments will be made to spending patterns and they won’t be up. Third, in addition to the uncertainties created by new financial regulations and the complexity of these new regulations, there appears to be a growth in the government’s application of the anti-trust laws.  The recent treatment of the AT&T/T-Mobile merger is a case in point.  The government, ‘feeling its oats’ from this action, will probably step-up its aggressive behavior in this area, leading to even greater uncertainty relative to M&A activity. Early in 2011, it looked as if there might be a big pickup in merger activity for the year.  Many of the same conditions we see today existed at that time.  And, what happened?M&A activity did pick up in 2011 from previous years but we did not see the ‘big jump’ that many of us expected.  Instead of buying companies, many firms used their cash on hand or their ability to borrow at ridiculously low interest rates to buy back their stock.  This, of course, helped stock prices but it did not help the economy.But, even a pick up in M&A activity will not do a lot to help the economy, especially in the short-run.  Buying companies outright or buying pieces of companies will initially result in efforts to achieve greater corporate efficiencies, higher levels of productivity, and will mean more reductions in employment.  This is a part of the “creative destruction” of a market economy.    And, this should not be surprising.  The American economy has been subject to fifty years of credit inflation.  In such a time, among other things, businesses come to focus more on finance rather than production, they acquire other businesses that are not related to their core operations, and they hoard labor.  The other side of the business structure created by credit inflation is the need to unwind and restructure what was built earlier.  That is what we face now.  Let’s hope the boom in M&A business does take place.  Let’s hope that the corporate cash and corporate borrowing do not go just to corporations buying back their own stock.  Let’s hope that the unwinding and restructuring takes place because that is one prerequisite for business to get back to the capital investment activities that do drive economic growth. 

I really don’t see much to like in the United States banking system. 

With interest rates so low across the board, commercial banks have very little interest rate spread to work with.
With Congress and the regulators so screwed up and yet so anxious to pass laws and regulate, the “regulatory risk” and the “complexity risk” facing the industry is enormous.
There is still plenty of evidence that commercial banks have a lot of unrecognized overvalued assets on their balance sheets. (http://seekingalpha.com/article/320370-bank-stress-tests-a-substitute-for-mark-to-market-accounting)
There seems to be growing interest in suing banks that are alleged of “making misleading public statements as the property market crumbled in 2007 to hide internal downgrades of loans from investors” (http://professional.wsj.com/article/SB10001424052970203735304577169360314402158.html?mod=ITP_moneyandinvesting_2&mg=reno-secaucus-wsj) or for other reasons that banks failed to appropriately disclose their financial condition.  There are also other settlements coming related to bank lending practices in the 2000s.
Bank earnings are a mixed bag, at best.  The larger banks are not performing well because trading profits and profits on many non-traditional banking operations are off.  (See JPMorgan and Citigroup)  The returns to trust banks (BNY Mellon, State Street Corp. and Northern Trust Corp.) are sagging because these institutions have taken a “defensive position” with respect to the financial markets and shifted a substantial amount of funds into cash and ultra-safe assets. (http://www.ft.com/intl/cms/s/0/140b9e70-41da-11e1-a586-00144feab49a.html#axzz1jqA4rKTp)
Only the banks that have stayed pretty much as traditional banks (like Wells Fargo, U. S. Bankcorp, and PNC Financial Services Group) have held up, profit-wise, in recent periods. This performance seems to be connected with some minor pickup in loan growth. 
Even in the case of loan growth, analysts are relatively pessimistic about the future.  “It appears that much of the commercial loan growth we have seen at the large cap banks is coming from large corporate syndicated lending.  Not all banks are players in this market.” This from Christopher Mutascio at Stifel, Nicolaus & Co.  Note that Mutascio is expecting “total loan growth and commercial loan growth” to slow in 2012.  No bounce here. (http://professional.wsj.com/article/SB10001424052970204555904577168510658669178.html?mod=ITP_moneyandinvesting_2&mg=reno-secaucus-wsj)
In my most recent blog I discussed the effort of BankUnited, a Florida-based bank, to sell itself because of the condition of the banking industry, especially in Florida.  BankUnited wanted to grow and yet could find no other banks to acquire…and they had looked at about 50 banks in the Florida region and elsewhere.  Because of the state of the banks available to acquire, BankUnited decided to sell.
Well, yesterday, BankUnited pulled itself “off the market”.  The bank had attempted to set up an auction for itself but only Toronto-Dominion Bank and BB&T Corp. submitted preliminary offers.  These offers did not come up to the price of that BankUnited received when it went public last year.  Thus, the bank withdrew its offer to sell. (http://professional.wsj.com/article/SB10001424052970203735304577169400198108514.html?mod=ITP_moneyandinvesting_1&mg=reno-secaucus-wsj)
Some of the banking statistics reflect the stagnant nature of the banking system as a whole.  For example, total commercial banking assets in the United States rose by about $700 billion last year. 
Note, however, that cash assets at commercial banks rose by about $515 billion!  That is, almost 75 percent of the growth in bank assets came from an increase in the cash holdings of the banks. 
Also, note that about 80 percent of this increase in cash assets at commercial banks in the United States occurred at foreign-related financial institutions. 
Furthermore, these foreign-related financial institutions increased their commitment to Net Deposits Due to Foreign-related offices by almost $650 billion.  Thus, these foreign related institutions took U. S. dollars and shipped them off-shore!  Thank you Federal Reserve System!
In all, the share of United States banking assets going to foreign-related financial institutions rose from about 11 percent to almost 15 percent from December 2010 to December 2012.  The largest twenty-five domestically chartered banks in the United States continue to account for almost 60 percent of the banking assets in the country.  The smallest domestically chartered banks (about 6,300 of them) continue to shrink as a proportion of banking assets. 
The American banking system is welcoming more foreign-related financial institutions to the ownership of its assets…note that one of the two bidders for BankUnited was Toronto-Dominion Bank…and is also seeing more and more of its assets being held by larger banks.
Right now, the commercial banking system seems to be going nowhere, just restructuring. 
This is just a very, very tough time for the banking system.  It is a time of transition.  The whole industry is changing. (http://seekingalpha.com/article/319449-the-banks-they-are-a-changing) But, then, the whole world seems to be going through a period of transition.  

“The FDIC Board yesterday issued a notice of proposed rulemaking that would require FDIC-insured state nonmember banks and state-chartered savings associations with more than $10 billion in total consolidated assets to conduct annual capital-adequacy stress tests. As of Sept. 30, 2011, the FDIC regulated 23 state nonmember banks with more than $10 billion in total assets. 

The Dodd-Frank Act-mandated proposal defines the term “stress test”; establishes methodologies for conducting stress tests that provide for three different sets of conditions, including baseline, adverse and severely adverse conditions; establishes the form and content of a stress-test regulatory report; and requires covered banks to publish a summary of stress-test results. 

The proposal is similar to one the Federal Reserve published in December.”  (Daily Newsbyte release of the American Bankers Association, January 18, 2012)

The commercial banking industry has not wanted to adopt “mark-to-market” accounting.  There are several reasons bankers do not want to do so, but, in my mind, the most prominent reason is that they don’t want to be accountable for taking on risk…both credit risk and interest rate risk.
Remember, I have been a banker for a large part of my professional life.   
Generally, you hear bankers complain about mark-to-market accounting after-the-fact.  That is, they complain when the value of their assets have declined.  The decline in the value of an asset has either come because the asset has “gone bad” (for whatever reason), or, because interest rates have risen and the price of a security has declined.  
In the first case, the argument forthcoming from the bankers is that either the asset needs time for the economy to recover or the asset needs time for the bank to help “work out” its problems.  In the second case, bankers argue that they will hold the asset to maturity so that no capital loss will need to be realized on the asset. 
Thus, the bankers have put on assets that have higher than average credit risk or long term assets that possess interest rate risk and have not had to account for any increase in the over all riskiness of bank assets until they either write off the asset or sell the asset for a price that is below its purchase price.
But, that can mean that there are a lot of “over-valued” assets on the books of the banks.
Because banks do not have to mark their assets to market, the banking system can have lots of “zombie” banks around, banks whose financial condition is unknown to their investors or depositors. (http://seekingalpha.com/article/319205-there-are-still-zombie-banks-around)
The presence of these banks, and not just the largest banks, can be noted in the Wall Street Journal article about Florida’s BankUnited. (http://professional.wsj.com/article/SB10001424052970203735304577167241414198390.html?mod=ITP_moneyandinvesting_0&mg=reno-secaucus-wsj) The BankUnited situation is unique in that it is a bank that was acquired by an individual, John Kanas, and a group of private-equity firms.  BankUnited was a failing bank that was purchased from the FDIC and made into a profitable organization, one that is well capitalized and growing. 
Yet, the desire was for the bank to grow more, and grow by acquisition, but this has not been possible because “other Florida banks are either too sick or too expensive…“Mr. Kanas’s team has examined more than 50 potential targets in the past few years but pulled the trigger on just one.” 
The banking system is still not healthy and when “outsiders”, like Mr. Kanas and his team, actually get to review the assets of a bank during a due diligence, they find out just how fragile the banking system is. 
The original acquisition of BankUnited was done in an assisted deal that “The FDIC estimates that the failure will ultimately cost its deposit-insurance fund $5.7 billion.”  Deals are still being made for “failed” or “troubled” banks, (there are still about 850 banks on the FDIC’s list of problem banks) but the efforts to complete them and the frustration connected with “the regulatory red tape that is increasingly gripping the industry” are costly and tiresome.
Mr. Kanas is in the process of selling BankUnited and is leaving the industry.  “’He is just tired,’ said a person who knows Mr. Kanas well.”
It seems to me that the imposition of “stress tests” on the banks with more than $10 billion in assets is a way to for the regulators to “mark-to-market” the assets of these banks!   The regulators are to see what happens to the value of the assets of a bank under “three different sets of conditions, including baseline, adverse and severely adverse conditions.”
These “stress tests” are just simulations, but, the purpose of the tests are on to determine how vulnerable banks are to changing market conditions.  In other words, are the banks sufficiently capitalized to withstand detrimental movements in financial markets.
This exercise basically “marks-to-market” the loans and securities held by a bank under different scenarios.  And, the exercise is conducted by the bank regulators and not by the banks themselves.  Furthermore, the Dodd-Frank mandate “requires covered banks to publish a summary of stress-test results.”  That is, the results of these tests cannot be hidden.
Because the commercial banks would not reveal their risk exposure voluntarily and of their own making, the regulators will now design the tests relating to the risk exposure of the banks and will force the banks to reveal the results of the tests publically.
One just wonders how long it will take for the regulators to extend these “stress tests” to all financial institutions with assets of $1.0 billion or more.  And, then...
I hope the bankers are happy with the consequences of their failure to disclose!    

The problem is the free flow of capital throughout most of the world. 
When capital flows freely you cannot escape the consequences of your actions.
What is called the “trilemma” problem of international economics makes this very clear.  The “trilemma” problem states that a country can only choose two of the following three options.  The three options are to be a part of world capital markets where capital flows freely; have a fixed exchange rate; or, be free to run an independent economic policy.
If there is a free flow of capital internationally, then the choice is reduced to just one of the two remaining options.  But, there are consequences to either choice.
First, if a country choses to run its economic policy independently of all other nations, then it must let it currency float in the foreign exchange markets.  Generally, a nation that wants to run an independent economic policy has particular domestic economic goals it wants to achieve and so wants to be able to choose an independent economic policy that supports these goals.
The goals most often chosen in the latter part of the twentieth century have been full employment and social welfare programs like government jobs, early retirement, substantial amounts of vacation, and high pension levels.  The means of achieving these goals has often been a policy of public sector credit inflation. 
If a country chooses the path of credit inflation then the price of its currency in foreign exchange markets must be allowed to float.  And, if credit inflation becomes extreme, the value of the currency in the foreign exchange markets will decline.  And, this will bring on other problems. 
This is one reason John Maynard Keynes wanted restrictions on the international flow of capital in the 1920s and 1930s. (http://seekingalpha.com/article/167893-john-maynard-keynes-and-international-relations-economic-paths-to-war-and-peace-by-donald-markwell)   A limited flow of capital internationally was a reality when Keynes helped to craft the Bretton Woods agreement that created the rules for the post-World War II international monetary system.  This agreement also included fixed exchange rates between the currencies of the participant nations. 
The purpose of this system was to allow member countries to follow their own economic policies aimed at achieving high levels of employment in their own country.  Therefore, a policy of credit inflation could be followed in each country without disrupting changes in foreign currency rates.
The Bretton Woods system fell apart as international capital markets opened up in the 1950s and 1960s and the credit inflation created in the United States in the 1960s resulted in a situation where the United States could not maintain its fixed exchange rate.  On August 15, 1971, President Nixon choose to float the value of the U. S. dollar.
A second choice, given the unrestricted flow of capital internationally, is to choose a fixed exchange rate.  But, if a nation chooses a fixed exchange rate then it must give up its sovereignty with respect to running an economic policy that is independent of other nations. 
This is what the European nations did when they choose to form a monetary union based on a single currency, the euro: in essence, they choose to have a fixed exchange rate between member nations.  But, the nations forming the union did not want to give up their sovereignty with regards to the formation of their government budgets. 
Oh, they allowed for budget deficits to be run, but they were to be limited in scope.  This, they felt, gave the included nations some flexibility in creating their budgets, but, they were not supposed to exceed the set limits.  The problem was that these limits were unenforceable. 
Which brings us to the current time.  Budget limits have been grossly exceeded and the nations forming the European currency union and these eurozone nations are unable…or unwilling…to give up the sovereignty of running their own economic policy or abiding by the rules of the union.
The “trilemma” analysis states very clearly that in circumstances like this the monetary union must be broken up and the countries must form a central budgetary unit or must once again establish their own currency units whose price will be floated against the other currencies of the former eurozone countries. 
The ultimate cost of running independent economic policies and trying to run a single currency monetary union will be the destruction of the sovereign political bodies as we know them in Europe or the euro, as we know it now, will have to become history.
Current events now relate to the break down of solvency talks, which had been taking place between the Greek government and private investors in Greek debt.  An “unrealistic” proposal has been rejected by the debt holders.     
Furthermore, the credit downgrades of France and other nations, which took place over the past week, were expected, yet no one really exhibited any sense of urgency.   Now that the downgrades have taken place a downward spiral seems to be starting.
“Both events are important because they show us the mechanism behind this year’s likely unfolding of events.  The eurozone has fallen into a spiral of downgrades, falling economic output, rising debt and further downgrades.  A recession has started.  Greece is now likely to default on most of its debts and may even have to leave the eurozone.  When that happens, the spotlight will fall immediately on Portugal, and the next contagious round of downgrades will begin.” (http://www.ft.com/intl/cms/s/0/987fd2fe-3ddc-11e1-91ba-00144feabdc0.html#axzz1jd5VycTs)
The European Financial Stability Facility has also been downgraded and this means that its effective lending capacity has been reduced.  The ability to “bailout” distressed countries has declined.  And, the European Central Bank cannot resolve the longer-term issues.  There is very little still available to the European officials to “kick the can down the road” any more.
I just do not see the European countries at this time getting over their resistance to form “a strong central fiscal authority with power to tax and allocate resources across the eurozone.”  Hence, I don’t have much confidence for the continued existence of a common currency for Europe, except maybe, on a much more limited scale.  Right now, I don’t see alternatives to the downward spiral mentioned above.
The bottom line is that the conditions of the “trilemma” problem seem to hold.  Given that capital is flowing freely throughout the world nations cannot just totally ignore the consequences of their choice of economic policy.  And, if the consequences of that economic policy are not realized immediately, the evidence shows that they will be realized sooner or later.  This is a lesson in macroeconomic decision-making that all countries need to take into account when determining what economic policy they should be following.  Are you listening America?     

The banking system is going through massive changes.  The morning papers are filled with stories about what is happening in the banking area, although they cover only a minor portion of what is going on in the industry.
The Wall Street Journal trumpets, “Bank of America Ponders Retreat.” (http://professional.wsj.com/article/SB10001424052970204409004577156881098606546.html?mod=ITP_pageone_0&mg=reno-secaucus-wsj) The current Bank of America represents, perhaps as well as any organization the excesses of the financial institutions over the past twenty years or so.  Currently selling at 33 percent of book value, the Bank of America can be potentially classified as one of the “Zombie” banks that now meander through the environment. (http://seekingalpha.com/article/319205-there-are-still-zombie-banks-around)
The Journal article does not give us much faith that management has a firm grasp on the situation…or, at least, is not revealing to us the reality that they face.  “Bank of America Corp. has told U. S. regulators that it is willing to retreat from some parts of the country if its financial problems deepen…”
The crucial hedge word is “if”.
Commercial banks have to recover from the binge that has taken place in the banking industry over the past fifty years.  This binge has seen commercial banks grow to enormous size and many have become “too big to fail.”  It has resulted in a massive shift in employment in the United States as the proportion of people working in the manufacturing trades has declined substantially relative to those working in the financial industry.  It has resulted in a huge shift in risk-taking in the industry, a move to more and more financial innovation, and a substantial increase in the amount of financial leverage used in the industry. 
Several of the articles in the morning paper discuss the reductions that are taking place employment.  For example, yesterday the Royal Bank of Scotland Group PLC announced that it will be laying off 3,500 people.  Cutbacks have also been announced by UBS AG and UniCredit SpA and well as Credit Suisse Group AG and many other major players.  The reductions in staff of the smaller institutions do not get as much publicity and play in the press. 
Some have argued that the industry is going through a cyclical shift that generally happens after a downturn in the economy but more and more industry analysts are claiming that they see a more permanent shift taking place.  And this is true of other parts of the financial industry than just the commercial banks.  “It isn’t just the lackluster business environment that is prompting banks to rein in their lofty investment-banking ambitions.  A realization is sinking in among securities-industry executives that because of the huge potential losses they are exposed to in bear markets, the business just isn’t as attractive as it once seemed.” (http://professional.wsj.com/article/SB10001424052970204409004577156833880721736.html?mod=ITP_moneyandinvesting_0&mg=reno-secaucus-wsj)
The fifty year period of credit inflation bought out over time many of the bad decisions and allowed the banks to go merrily on their way.  As “Chuck” Prince, former CEO of Citigroup expressed it…”As long as the music continued to play, people had to keep dancing.”
But, this continual pressure to grow and expand and take on more risk resulted in a massive change in the banking industry itself.  Going from around 14,000 commercial banks in the 1960s the commercial banking industry now contains less than 7,000 banks.  My forecast is for this number to drop below 4,000 in the next several years. 
And, the banking industry is bifurcating: almost two-thirds of the assets in the banking system are owned by the largest 25 banks in the country.  That leaves just one-third of the assets in the hands of about 6,300 banks.  More and more wealthier personal banking relationships are being handled by firms that cannot be considered to be community banks.  The products and services in these banks are many and the electronic interchange and access between financial assets and transactions are seamless and almost instantaneous.  
One could imagine a banking system in which the wealthier people worked with institutions like these and the less wealthy “banked” at non-profit credit unions, the non-profit institutions being the only ones that could provide the products and services needed without having to achieve a competitive return on shareholder’s equity.
The last factor producing major changes in the banking industry is the advances taking place in information technology.  Finance is nothing more than information.  That is, finance can ultimately be just a recording of 0s and 1s.  Thus, as information technology advances, so does the innovation in the financial industry. 
And, don’t think of how you use banking services right now…think about the electronic gadgets that your children or your grandchildren are using.  This is where you will see what financial institutions are going to need to provide for in the coming years.  What goes on in “electronic stuff” is real to these children and will become a part of the financial system as electronic finance becomes ubiquitous in the future. 
Furthermore, as advances in information technology has allowed “finance” to become more innovative, my guess is that for the future…we haven’t really seen what financial innovation can do.
This has tremendous implications for the regulatory efforts going on in the United States and the world.  I have argued for three years now that the efforts of the United States Congress and others throughout the world have been to create a regulatory system that will prevent a 2007-2008 financial collapse.  To me, the commercial banks in the United States are way beyond this system already.  Oh, the banks fight Congress and the regulators all along the way.  But, how much of this is real and how much of this is a smokescreen. 
Throughout my professional career…and I have run three banks…the banks have always been ahead of the legislators and the regulators in terms of what is going on in the banking system.  I am no less confident now that the banks are still far ahead of legislation and regulation and will continue to be so into the future. 
I can’t imagine what banking will be like in five years…but, it will be something substantially different than it is now.  It will be more electronic, it will be more innovative, and it will be harder to control.  The only way we can hope to keep up with what is going on is to increase the openness and transparency with which the banking system operates.   

In Europe, “On average the 31 companies in the Euro Stoxx Banks Index (SX7E) trade for 39 percent of common equity, or book value, according to data compiled by Bloomberg.  France’s Credit Agricole SA (ACA) trades for 23 percent of book.  Yet somehow the European Banking Authority last month concluded it had no capital shortfall.
The situation in the U. S. is better, but not good.  Bank of America Corp. (BAC), for example, trades for 33 percent of book and insists it doesn’t need to sell new common shares, in spite of the markets’ contrary verdict.”  (See http://www.bloomberg.com/news/print/2012-01-12/financial-frankness-is-a-bad-dream-for-a-bank-commentary-by-jonathan-weil.html.)
“Zombie” banks are banks that have substantial amounts of worthless assets on their balance sheets but are afraid to write them down.  In essence, the financial markets are doing the “writing down” for them.
Bankers are reluctant to write down assets in the first place.  First of all it is an admission of a failure…of underwriting, of intuition, of forecasting, of lax behavior.  The bankers that are holding your deposits don’t like to admit that they have made a mistake.
I know this is true…I have completed three (successful) bank turnarounds in my career…so I have seen the other side of the asset acquisition process in commercial banks.
Furthermore, bankers don’t like to write down assets way after the time in which they should have written them down. 
Bad assets accumulate and the longer that bankers  “paper over” their bad asset problems the problems tend to grow and “the eventual clean up” becomes even worse.  Rather than admitting that a problem exists and allocating resources to “clean up” the problem at an early stage, the bankers postpone devoting enough effort to resolving these issues and, in consequence, they find that the difficulties of their job increases in a non-linear fashion as the number and complexity of bad assets grow and multiply.
The problem now is that most of these “zombie” banks want to raise more capital to satisfy the new, higher regulatory requirements for capital but find that their stock prices are so depressed that raising additional capital can be extraordinarily expensive. 
The author of the Bloomberg piece, Jonathan Weil, discusses this in the above quoted article.  He focuses on UniCredit, the Italian bank that took a large writedown in the third quarter of 2011, which resulted in a 10.6 billion euro loss.  On top of this the European Banking Authority determined, after the latest stress tests, that UniCredit had an 8 billion euro capital shortfall.
As of September 30, 2011, UniCredit had 950 billion euros in assets and only 52.3 billion in euros in common shareholder equity on its balance sheet.  The stock market value of the bank is 14.8 billion euros.  Something doesn’t add up here.
And, that is where the concern over the other European (and American) banks comes in. 
With bank valuations in the range of those mentioned in the first two paragraphs of this post, the financial markets seem to be indicating that many of these banks have substantial amounts of questionable assets on their books that they have failed to publically acknowledge.  And, this is one of the problems financial markets face…if the institutions they invest in are not brave enough…nor honest enough…to reveal this to the marketplace…then investors just have to guess at how serious the problems are. 
In times like these, the guesses will tend to be on the negative side.  And, this certainly doesn’t help the bankers to raise the capital they need to get back onto a solid capital footing. 
Are there still a lot of “zombie” banks “out there”?
I believe there are.  Although the FDIC only closed 92 banks in calendar year 2011, the number of banks in the United States shrunk by more than double this number.  In the third quarter alone, only 26 banks were closed yet a total of 61 banks left the banking system.  While the number of banks closed in the 12-month period ending September 30 was around 100 in number, the banking system had 271 fewer banks.  So for 2011 it seems as if the number of banks leaving the banking system were two- to three-times the number of banks that the FDIC actually closed.
There was cheering when the number of banks listed on the FDIC’s problem list fell in the third quarter to 844 banks, down from 865 banks the quarter before.  But, this means that although the problem list dropped by 21 banks, 61 banks, most of them troubled in one way or another, dropped out which means that maybe around 40 new problem banks got added to the FDIC’s list. (For more on this see my post http://seekingalpha.com/article/310644-while-small-banks-disappear-big-banks-get-bigger.)
My point here is that I don’t believe that either Europe or the United States is finished with its banking problems.
I still contend that one of the major reasons that he Federal Reserve pumped so much money into the banking system was to keep banks liquid enough so that they didn’t have to write off bad assets at too fast a pace, so that the banks had more time to try and work out these bad assets, and so that the FDIC had sufficient time to either close these banks as smoothly as possible or arrange for acquisitions to eliminate a substantial number of the “bad” banks.
Sooner or later, however, the bad assets on the balance sheets of banks are going to have to be recognized. 
The problem is still sufficiently severe so that these “zombie” banks are unwilling to admit to the world that they remain troubled.  For a more realistic valuation of their assets we will just have to look at market values.
But, these banks are not out of the woods yes, for in Europe the “next” recession seems to be in progress.  How this recession will play in the United States is, of course, unknown. (See my post, http://seekingalpha.com/article/317268-issue-number-1-for-2012-recession-in-europe.)
How much better it would have been for these banks to “recognize” and “claim” these bad assets earlier and to have fully disclosed them and then set out to work to correct the situation than to postpone recognition and “paper over” the problems which, in the end, creates major difficulties.
Bankers vociferously fight mark-to-market accounting and the timely writing down of “worthless assets” after-the-fact, that is, after the damage has been done.  The problem is that mark-to-market accounting and the timely writing down of “worthless assets” are aimed at getting bankers to do their jobs before the financial crisis occurs.  The hope is that the early proper recognition of the problems will lead to earlier resolution of them thereby avoiding major cumulative collapses.