Most important of all, investment banking (buying and selling assets) is now no longer separate from commercial banking (taking deposits and making loans). J. P. Morgan taking over Washington Mutual this week is just the latest chapter in this most fundamental of all changes in how finance operates. Among other momentous changes, investment banking is now subject to the same regulation as commercial banking. One of the most important changes, therefore, is that leveraging (borrowing multiple dollars for every dollar of assets) will now be subject to the reserve requirements of commercial banking, effectively limiting leveraging going forward.
In the future, if a mortgage is in default, because the financial institution borrowed less money against that asset, it may not be forced to sell off assets (at fire sale prices). In short, with one step, there is a chance the financial market panic of the last 13 months may never occur again. But first the panic has to be calmed. The huge rescue plan, if passed, is only a first step.
Tuesday, September 30
10:00am Consumer Confidence (The Conference Board)
Consumer expectations have dropped dramatically, and jobs continue to shrink. Are these conditions changing?
Wednesday, October 1
Vehicle Sales
Despite low prices and low borrowing rates, vehicle sales remain minimal (about 15 million, annualized). They are not picking up even as the new 2009 models are introduced. Some hybrids are hot sellers. But the SUV and light truck markets have declined sharply, perhaps permanently. It helped that gas prices are down about 40 cents from the summer peak. But when crude oil prices jump from roughly $100/bbl to $125/bb, and back to $110/bbl as happened this past week, drivers remain wary. And those former drivers now riding the bus or train are unlikely to switch back. Lastly, with credit availability a problem in many parts of the country, even those willing to buy a new vehicle face an obstacle in getting a loan approval. The auto market remains fundamentally weak.
10:00am Help-Wanted OnLine Data Series (The Conference Board)
The forward indicators of labor market activity have been pointing to continued weakness through the rest of the year. Did this change in the latest report on online activity?
Friday, October 3
8:30am Employment Situation (Bureau of Labor Statistics)
The decline in jobs has not been large, but it has been persistent. That was true in August. The only change in September was that job losses probably went higher than the recent trend of 70,000-to-90,000 (manufacturing, construction, and a few "core" service-sector jobs, which excludes health and education). In fact, it might have jumped above 100,000, even without a loss of financial jobs, due to the ongoing turmoil, and Hurricane Ike, which disrupted normal activity in the West South Central region.
But sustained job weakness is still not enough to allow wage costs to fall below the 3.4 percent mark (year-over-year). Regionally, the Midwest and Northeast have been weak for some time. The South Atlantic region has gone from one of the strongest to one of the weakest. Now due to weather impacts, another strong region is showing some stress. The real news, though, is that there is no improvement elsewhere offsetting these negative developments. Finally, The Conference Board Employment Trends Indexes for the regions suggest conditions are months away from turning around. A national recovery, then, is even further away - perhaps next spring at the earliest. But even that somewhat optimistic view is predicated on a quick calming of financial market panic.
BY THE END OF THE WEEK
The domestic economy is not the only one wilting under the pressure of financial markets in panic. And as if that wasn't enough, oil prices were quite volatile this past week. The Conference Board Leading Economic Indicators continue to point to slower growth virtually across the globe. How much slower greatly depends on getting financial markets, especially credit markets, back to something closer to normal operations. Fundamentally, the attention is focused on existing loans being serviced, and rightly so. But the big issue going forward is who can and is willing to extend new credit.
