Mixed Messages on Lending

Last week's decision by the Fed to buy $600 billion in Treasury bills was intended to give banks' greater incentive to make loans and help expand the economy. But a new report - from the Fed itself - seems to undercut that strategy somewhat. A survey showed that over the past quarter, banks had already begun to ease their standards for business lending. They also were more willing to make consumer installment loans and relaxed the terms on credit card loans.

But that doesn't mean that more of these loans are being made. The same survey found that demand for business lending had fallen during the quarter, after having been up somewhat during the previous quarter. Over the past two years, since December 2008, business lending has dropped from $1.62 trillion to $1.22 trillion. Demand for mortgages also remained weak during the quarterly survey period.

So apparently the expansion of credit is being held back as much by a lack of demand as it is by the banks' unwillingness to lend money. It is of course in the banks' interest to lend money, since that is how they make their profits. What they need now is not more money, but more customers.

Signs of Life

In the New York Times yesterday, financial columnist Gretchen Morgenson checked in with an economist named Ian Shepherdson, who was predicting a housing collapse to be followed by a recession way back in 2005. That kind of foresight deserves a lot of respect, so what does Shepherdson see on the horizon now? Economic growth.

The key, as Shepherdson sees it, is the amount of credit available to businesses. At this time last year, the total amount of commercial and industrial bank credit was at $1.32 trillion, and shrinking by $7 billion a week. It finally bottomed out this past June. Now that amount of credit has started building again, although very slowly.

The upshot of all that credit available for business expansion is growth, particularly among small businesses, although not exceptionally strong growth. Shepherdson predicts GDP growth staying at its current rate of around 2 percent for a while. By the second half of 2011, he says, we may be up to about 3 to 4 percent. At this point, that might be the best we can hope for.

The First Round of Quantitative Easing

Yesterday, we talked about the Fed's second bout of quantitative easing and what that might mean for our economy. As we wonder whether it will work like it's supposed to, it's worth taking a look back at the first round of QE and assessing its success.

It was just after the banking-system meltdown when the Fed announced, in November 2008, that it was planning to buy $500 billion in mortgage-backed bonds, at a time when 30-year fixed mortgage rates were at 6.09 percent. The following March, it increased that figure to $1.25 trillion in mortgage-backed bonds, and 30-year fixed rates had dropped below 5 percent, to their lowest level since records had been kept starting in 1971.

So on that level, the first round has to be considered a success. In the larger sense, its success has to be measured against how bad you think the downturn would have been without it. Some economists have given the Fed’s action credit for helping to avert a second Great Depression, but on the other hand, the recession and its recovery period have been extraordinarily difficult for the American economy, even with the Fed's action. The move have may have achieved its goal, but it didn't save us from a lot of hardship.

QE2

As expected, the Federal Reserve Bank announced yesterday it would try to jump-start the economy with quantitative easing. This would be the second bout of quantitative easing the Fed has engaged in, with the first coming back at the end of 2008, in the midst of the banking meltdown. That has some financial pundits referring to the new measure as QE2.

Quantitative easing is a fancy term for a simple concept: buying up Treasury bills, as a means for the Fed to put more money into circulation. This time around the Fed is purchasing $600 billion worth of Treasury bills, at a pace of about $110 billion per month. The Fed buys these securities from banks around the country, paying for them with assets it basically creates out of nothing aside from accounting tricks, which is why some people refer to quantitative easing as “printing money.” There are two basic results of this:

1. There is instantly a great deal more money in circulation, for banks to lend and for consumers to spend.
   

2. Since there are now more people invested in Treasury notes, it becomes cheaper for the Treasury to borrow money.

Will it work? There are a lot of different motors running in the American economy, and it’s hard to attribute is success or failure to any one instrument. But after watching this sluggish recovery drag on for month after month, we are certainly all ready for some good news.

Surging Personal Credit

Here are a couple of reports that are interesting in a reading-the-tea-leaves kind of sense: MasterCard announced its quarterly earnings yesterday and ended up far ahead of the analysts' estimates. Its third-quarter income came in at $3.94 a share, easily beating the estimate of $3.54 a share. Last week, MasterCard's rival Visa announced its quarterly revenue was up a whopping 51 percent.

Remember, these aren't the banks that issue these cards who are reporting these earnings. Visa and MasterCard are relatively small companies that process payments for member banks. Despite the fact that it serves 23,000 financial institutions worldwide, MasterCard itself has only about 5,000 employees.

So what we're looking at here is the growth in the use of credit and debit cards by consumers. Worldwide, Mastercard said that spending using one of its cards had grown by 7.9 percent, to $514 billion, in the past quarter. That kind of consumer spending and increased consumer confidence can only be good for our economy.

The Unelected Government

It's ironic that the day when we elect the people who will run our government for us is also the day that some of the most powerful people in government - people no one ever voted for - will sit down and determine certain key elements of our economy. We're talking about the governors of the Federal Reserve Board, who will meet today and tomorrow and decide if the economy needs another infusion of cash, and what form that infusion should take.

The members of the Fed's Open Market Committee - which includes the seven Fed governors and five presidents of the Fed's 12 regional banks, on a rotating basis - are appointed by the president. (There's a vacancy on the Board of Governors right now, reducing their number to six.) And they serve terms that are long enough to ensure that there is almost always a mix of viewpoints and political backgrounds. Here's how the people who are trying to plan the future of our economy got their jobs:


Chairman Ben Bernanke: appointed by George W. Bush and re-appointed by Barack Obama
William C. Dudley, president of the New York Federal Reserve Bank: appointed by Obama
James Bullard, president of the St. Louis Federal Reserve Bank: appointed by George W. Bush
Elizabeth Duke, board of governors: appointed by George W. Bush
William Hoenig, president of the Kansas City Federal Reserve Bank: appointed by George H.W. Bush
Sandra Pianalto, president of the Cleveland Federal Reserve Bank: appointed by George W. Bush
Sarah Bloom Raskin, board of governors: appointed by Obama
Eric Rosengren, president of the Boston Federal Reserve Bank: appointed by George W. Bush
Daniel K. Tarullo, board of governors: appointed by Obama
Kevin M. Warsh, board of governors: appointed by George W. Bush
Janet Yellen, board of governors: appointed by Obama

Revving Up the GDP

Friday's GDP report from the Commerce Department fell squarely where the estimates had it pegged: Our economy grew at 2.0 percent in the third quarter of 2010. The consensus view is that this rate of growth would be perfectly acceptable in normal times, but is not robust enough to get this stalled economy going again.

It is, however, a small improvement from the second-quarter figure of 1.7 percent. The biggest difference between the two quarters comes from a somewhat surprising area: carmakers. While the automotive industry subtracted 0.06 percent from the nation's economy in the second quarter, it added 0.42 percent in the third quarter.

Leading the way has been Ford, which last week announced its sixth straight quarterly profit. In fact, Ford's third-quarter profit of $1.7 billion was a record for the venerable company. Its rival General Motors is scheduled to have its IPO later this month, and the success or failure of that will be an indication of how broad the automaking rebound really is.