The Mad Policy Hurting Bank Recovery
Why bank shares have been depressed and negative interest rates could lead to recessions.
March 7, 2016
Callum Newman
Economic Consultant

Today we are asking you to put aside the stories about China, oil, gold, and the swings in the stock market for a moment.

They’ve been done to death everywhere.

But did anyone highlight for you the news out of Florida?

It could prove to be more important…

A bellwether state for the world’s biggest economy

The Herald-Tribune reported earlier last month that foreclosure inventory was down 41% year on year for the Sunshine State. This inventory measures the number of homes at some stage of the foreclosure process.

Florida is in the top four US states when it comes to foreclosures. This is the long tail of the 2007 subprime collapse still wagging after all these years.

The fact that these are slowly being hoovered up shows the US recovery is genuine. It’s also releasing a lot of Americans from the negative equity they became trapped in after 2008.

High employment is the strong tailwind behind this. To give you can idea of how strong, CNN Money even suggested the US has too many job openings.

According to the US Labor Department, there were 5.6 million job openings in December, just below the all-time record of 5.7 million.

Companies can’t satisfy all the demand because of skill shortages. Why on earth anyone thinks the US will go into recession when this is the case is a mystery to me.

The mad policy hurting bank recovery

We can see this recovery playing out in Europe too, if in a different way. The Financial Times reported last month (February) that last year there were over $100 bln in loan sales.

Or as the paper puts it, ‘investors continue to chip away at the debt that has hamstrung the continent’s banking system since the crisis.

That $100 bln figure is the highest level since the financial crisis, according to data the FT quotes from KPMG. This significant activity is forecast to keep running for the next couple of years.

This process is important. It will make Europe’s banking system healthier.

What’s blurring this issue however is the additional costs banks now have to cope with in the countries with negative interest rates.

That effect of that process on the banks’ loan growth is not completely clear at the moment.

All I know is it will raise bank’s costs and depress the spread they make. That’s hurting bank shares all over the world right now. But they’ll recover.

What’s even more bizarre is the central banks doing it are hurting their own banking systems more than anything else.

The Bank of Japan’s decision to use negative rates will most likely drive the country into recession again.

Hungary of all places is proving one of the shrewdest. Bloomberg reports that the central bank of the country plans to start buying non-performing commercial loans.

This will clear out the bad debts in the Hungarian banking system. At a basic level, this is what all the countries with a backlog of bad debts need to do to create a recovery.

The fact that central banks are using negative interest rates suggests another agenda — one of their own. It certainly not to help the wider economy to recover.

So what, then?

When there’s plenty of development happening to keep the wider economy ticking along there is no need for negative interest rates.


Callum Newman 

This article first appeared in the Money Morning:

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Callum Newman
Economic Consultant

CALLUM NEWMAN is an editor at The Daily ReckoningAustralia’s biggest daily financial email. He’s also the associate editor of investment advisory Cycles, Trends and Forecasts and hosts The Daily Reckoning Podcast. Originally graduating with a degree in Communications, Callum decided financial markets were far more fascinating than anything Marshall McLuhan (the ‘medium is the message’) ever came up with. Today Callum spends his day reading and researching why property markets, commodities and stocks move like they do. So far he’s discovered it’s often in a way you least expect.