Fixing the Financial System and Double Dipping

Below is the video of Chris Whalen of Institutional Risk Analytics, Nouriel Roubini and Ian Bremmer of the Eurasia Group giving their assessment of the financial system and the overall economy. The group was on CNBC earlier this week talking about the impact of the financial reform bill on the financial sector and the overall economy. It was mostly Whalen making calls during this video.

It was interesting to see Chris Whalen doing macro because he comes at this from a banking perspective.  He sees a double dip because of a lack of good earning assets for bankers to lend against and continued balance sheet pressure at lending institutions. His view is that the reform bill and its increased capital requirements will be negative for credit growth going forward. He also thinks that bringing all of the shadow banks under the fed’s regulatory umbrella will also be negative for credit growth because of shadow banks’ inexperience in dealing with regulators. He uses GE as an example.

Whalen notes that a senior Fed official told him there have been very few quarters over the past 15 years when the financial sector hasn’t benefitted from extraordinary fiscal stimulus or extraordinary actions by the central bank. We are in one of those quarters right now "“ and Whalen believes this bodes ill for economic growth in the real economy.

More than that, Whalen thinks the Federal Reserve is in a policy cul-de-sac of its own making and suggests increasing rates now because the time value of money has skewed investing decisions away from "real collateral."  Whalen also indicates he believes that there is a lack of political and financial leadership in this crisis. He says we have run out of ideas. His contacts inside the Fed are "as depressed and lacking in leadership" as he has ever seen them.

Pretty strong words which Roubini and Bremmer take issue with "“ both in terms of the global leadership and increasing interest rates because of the negative impact higher rates could have on the overall economy. Whalen’s view is that although we have a the steep yield curve now, lenders are soon going to be in a world of hurt as many loans are now rolling over. The new lower interest rates will reduce net interest margins at lenders and hurt earnings "“ therefore reducing credit.

Watch the last minute for comments on how the reform bill deals with too big to fail.

Interesting conversation. Feel free to add your thoughts in the comments?

Update: Given Chris’ questioning of the zero interest rate policy of the Fed, it occurred to me that the Fed is applying the same medicine it always has. The last time we went through this exercise, the Fed was also worried about a double dip and deflation. So I have started a poll asking whether the economy would have double dipped in 2003 without the low rates. Please see Would The U.S. Economy Have Double Dipped If The Fed Raised Rates in 2003? to participate.

Related postsWould The U.S. Economy Have Double Dipped If The Fed Raised Rates in 2003? ECRI Weekly Leading Index falls further into negative territory Bill Gross: Fed on hold through 2010 Financial Reform Bill Encourages Risk-Taking US existing home sales falls despite tax credit

If Alan Greenspan had raised rates in 2003, the US would have double dipped

View Results

Edward Harrison is the founder of Credit Writedowns and a former strategy and finance executive with twenty years of business experience. He started his career as a diplomat and speaks six languages, a skill he uses to provide a more global perspective. Edward holds an MBA in Finance from Columbia University and a BA in Economics from Dartmouth College. He is a regular contributor at Seeking Alpha, Naked Capitalism, and Roubini Global Economics. Edward has often spoken on television and radio in the US, the UK, Canada and Russia. Contact him at edh at creditwritedowns dot com to schedule a media appearance or for a question about this site.

Donation Amount: (Currency: USD)

Repeat Donation: Do not repeatDailyWeeklyMonthlyYearly x

Topics bailout banking bankruptcy blog bonds Britain budget capital cars central banks China corruption credit credit and credit cards credit cards credit crisis credit ratings crisis solutions debt deflation derivatives distraction double dip Economy election Europe FDIC finance charts financial bubbles financial history financial news financial statements foreclosure forex Germany gold government Greece Housing inflation interest rates international investing investment Japan jobs journalism law leverage local manufacturing market wizards mergers money mortgages Obama oil outlook Politics property psychology RBS recession recovery regulation retail saving Society Spain stimulus stocks trade United States video Willem Buiter

Our Site If you want to find out what's going on in the credit crisis, you've come to the right place.

See the Credit Crisis Timeline, which includes a timeline of major crisis events and links to a list of crisis events organized by financial institution. This is the most comprehensive data set of credit crisis-related events on the Internet.

To contact us, click here.

See more information about us.

©2008-2010 Credit Writedowns and Global Macro Advisors, LLC. All rights reserved. Proudly using WordPress Themes

Disclaimer: All data and information provided on this site is for informational purposes only. Creditwritedowns.com is not a financial advisor, and does not recommend the purchase of any stock or advise on the suitability of any trade or investment. The ideas expressed on this site are solely the opinions of the author(s) and do not necessarily represent the opinions of firms affiliated with the author(s). The author(s) may or may not have a position in any security referenced herein. Any action that you take as a result of information or analysis on this site is ultimately your responsibility. Consult your investment adviser before making any investment decisions.

Get free updates via RSS - Twitter - Daily E-mail - Weekly E-mail