“The Stimulus Didn’t Work” – An Overlooked Fact that Needs Mention
In the Wall Street Journal of September 17, 2009 (John Cogan, John Taylor, and Volker Wieland: The Stimulus Didn’t Work - WSJ.com) the title is in past tense, implying the $787 billion package has been fully utilized and now we can determine the success or failure of this big bill. The merits and flaws of this opinion piece have been published and more will be written. I would like to add to one important fact which underscores that the authors need to hold their horses until more evidence is available to conduct an objective analysis. According to the Congressional Budget Office only 24% of the authorized expenditure under the American Recovery and Reinvestment Act (ARRA) will have been disbursed by the end of fiscal year 2009, which is September 30. Economic data are now available only through July/August 2009. Need we say more about why an impartial and complete evaluation has to wait for a later day?
Loan Delinquency and Charge-Off Rates at Troughs of Business Cycles
An economic recovery is underway as of the third quarter of 2009. The stability of the financial system and a working credit machine holds the key to sustained economic growth. The latest Senior Loan Officers Survey indicates that bankers remain skeptics and reluctant to lend. In the meanwhile, the Fed has injected boat loads of liquidity to support the financial system and restart the credit machine. Unfortunately, the Fed’s support has led to a surge in excess reserves. The upward trend of loan delinquency and charge off rates make a case for bankers to be strict underwriters of loans. What is the guidance from history about loan delinquency and charge off rates? Caveat: This analysis is based on the short history of data series published by the Fed.
The peak of delinquency and charge off rates for consumer loans has occurred after the trough of a recession in the 1991 and 2001 cycles (see chart 1). The 2001 recession was an exception, the consumer loan delinquency rate peaked one quarter prior to the end of the recession. This time around, the delinquency and charge off rates for consumer loans both have hit new record levels (see chart 1). The third quarter information will be published in mid-October.
Delinquency and charge-off rates for residential real estate loans present a different picture (see chart 2). The nature of the housing market turmoil has left the delinquency and charge-off rates at record highs in the second quarter of 2009. The absence of a visible pattern prevents us from drawing firm conclusions from the short history of these data series.
What about commercial real estate loans? The charge-off rate peaked well after the recession ended in 1991 and the peak in 2001 coincided with the trough of the 2001 cycle. The peak delinquency rate of commercial real estate loans in 1991 and 2001 recessions coincided with the troughs of these two downturns. There is a growing expectation that commercial real estate loans will be the sector causing the next phase of the crisis in the banking industry. The Fed is examining books of bankers to prevent another turmoil (FT.com / Financials - Fed wants picture of banks' property exposure).
The delinquency and charge-off rates of commercial and industrial (C&I) loans largely peak after a recession has ended (see chart 4).
