The US Economy is Fragile and Anemic in the Extreme
$DIA, $SPY, $QQQ, $VXX
If we were to believe US President Barack Hussein Obama and the Democrats nominee Hillary Clinton, the US economy is in great shape and safe from another financial crisis. And more liberal policies to better distribute the benefits would deliver Americans into another Golden Age but the facts belie this.
The facts are, as follows:
Barack Obamacare, state and local minimum wages laws, new federal overtime rules, and disincentives to work imposed by the recent build out of federal social programs have raised the cost of hiring workers. Higher businesses taxes, especially for smaller enterprises, and tougher regulations have pushed up the cost of deploying capital.
Consequently, Americans are suffering through one of the weakest recoveries on record, and conditions in Europe are no better.
The US Justice Department (DOJ) is proposing Deutsche Bank (NYSE:DB) pay $14-B to pay for its role in a mortgage securities scandal that contributed to the Y’s 2008-2009 financial meltdown, and other European banks still await their US treatment. Even a settlement 1/3 that size would require the bank to sell new stock to replace lost capital, and it is not well positioned to do so.
The largest bank in Europe’s largest economy has a balance sheet still burdened by dodgy securities and is badly run and not very profitable.
Virtually all European banks are suffering from slow growing economies and ultra-low interest rates that make moving bad loans sitting on their books from the financial crisis tough, and identifying suitable candidates for new loans and earning profits even tougher.
About 17% of loans held by Italian banks are underwater, whereas at the height of the financial crisis the figure for U.S. banks was only 5%.
The picture is grim elsewhere on the continent too.
We are told over and over again, Deutsche Bank is no Lehman Brothers. It cannot pull down the global financial system, because the European Central Bank(ECB) stands ready to lend virtually unlimited amounts of cash against the bank’s assets.
However, as was the case with Greek banks during their crisis, the ECB likely would require the German government to cosign those loans essentially, underwrite the kind of bailout German Chancellor Angela Merkel has firmly denounced. As importantly, many of Deutsche Bank’s assets are derivatives and difficult to value securities that could prove hard to peddle in a crisis.
Deutsche Bank may have to resort to a “Bail-in” as recent European bank reforms require. That is, compel bondholders to take stock to replace their claims and bear shaves and haircuts in the bargain.
As panic spreads among bondholders elsewhere in Europe, the potential for a general economic collapse is enormous.
In Italy ordinary depositors have been encouraged to purchase bonds in the manner that Americans invest in certificates of deposits. Bail-ins would impose huge losses of household savings and purchasing power, and a contagious recession that could easily undo Europe’s fragile welfare state economy once and for all.
American regulators may believe Dodd-Frank regulations make US banks less vulnerable to a meltdown in Europe but do not bet on that. Deutsche Bank has wide inter-connection with banks around the world, including the US’ towers of finance in NYC.
Cumbersome new compliance requirements have substantially reduced lending and driven down profitability. And those require big banks to write living wills that specify how they would sell off assets in a crisis.
But like Deutsche Bank and US banks in Y’s 2008-2009, most of their assets and stock could prove unmarketable should the economy turn South.
It is worth noting that all of this came about from the cavalier, careless and power grabbing policies of the Clinton Administration and the Greenscam Fed, aided and abbeted by then Robert Reich, Chris Dodd and Barney Frank
A Hillary Clinton Administration would likely 2X down on heavy haanded regulatory measures. If Congress permits her to do so and expand Barack Obamacare, impose a national $15 minimum wage, finance broader subsidies for child care and college tuition, and impose other new regulatory burdens, such as, federalize the California Fair Pay Act that would likely cook the US economic Goose, that once laid Golden Eggs..
Taken together all of that policy would further reduce bank lending, raise the cost of capital and labor, discourage entrepreneurs from forming new businesses, and drive existing businesses to move more operations offshore, push the US economy from slow growth into another Great Recession.
By Peter Morici
Peter Morici economist and business professor at the University of Maryland, and a national columnist.
Paul Ebeling, Editor
Monday, the US major stock market indexes finished at: DJIA -51.98 at 18086.40, NAS Comp -14.34 at 5199.82, S&P 500-6.48 at 2126.50
Volume: Trade was light with just 689-M/shares exchanged on the NYSE.
- Russell 2000 +6.6% YTD
- S&P 500 +4.0% YTD
- NAS Comp +3.8% YTD
- DJIA +3.8% YTD
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