Quantitative easing, you see, isn’t reaching those parts that the other stimuli cannot reach.
The last issue of the house magazine kicked off with an editorial written in July which forecast a double-dip W recession. It was pleasing that come October that Michael Geoghegan, the CEO of HSBC, agreed with us, followed within hours by the endorsement of Nouriel Roubini.
If he’s known as Dr. Doom, what does that make me? Dr. Gloom? And have I got news for you: it’s going to get a whole lot gloomier. One day I’ll stop doing this to you, I promise, but our editorial policy is to keep our clients informed of the actuality coming over the horizon.
Let me explain. The Bank of England and the Fed both thought their QE programmes would underpin the recovery, but they’ve noticed that all the cash ends up back with them, on deposit at the central banks from the High Street banks. The banks, you see, aren’t lending, they’re conserving, and worst still losing and deleveraging.
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First the losses: Moody’s has said that the UK banks will lose £240.0 billion in the run up to 2012, of which only £110.0 billion has been written off to date, and the IMF says the UK banks need an extra £130.0 billion of new capital. The IMF also says the Eurozone banks are facing projected losses of $900.0 billion by end-2010, of which only 20% has been written off so far, their Tier One Capital Ratio is only 7.3% and they need an extra $375.0 billion capital, whereas US banks have Tier One capital of 10.4%, but they still need $275.0 billion in new capital.
That is just the beginning of the challenges facing the banks. The real problem for the rest of us and the economy is that in the quarter to end August, the annual rate of contraction of US bank loans was a staggering 14%, including an epic 9% in August alone. This is by far the severest contraction ever in bank credit in US history, worse than the 1930s, down $261.0 billion dollars in a single quarter, and M3 is down at an annual rate of 5%. That’s 5% down. QE, you see, isn’t reaching those parts that the other stimuli cannot reach.
Remember the definition of a banker: he’ll lend you an umbrella when the sun is shining; but this time they lent a giant umbrella in the boom that covered the whole economy and now they’re taking it back. These are potential Banking Crisis II and Great Depression II figures in the making.
Michael Geoghegan of HSBC has got the message: “I think the biggest jolt has passed through but there are other shocks to come.” Having banked his £12.0 billion rights issue, he’s selling the bank’s HQs in New York, Hong Kong and Canary Wharf for another £2.7 billion and quitting London for HK and a future in the Orient.
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All of which reminds me of the story of the Englishman who saw a disconsolate Welshman sitting by the side of the road. “Cheer up,” said the Englishman, “It could get worse!” So the Welshman cheered up, and it did get worse! Just thought I’d leave you in these gloomy times with a smile on your face…
