by Calculated Risk on 3/07/2009 07:47:00 PM

From The Times: Lloyds primed for 1980s slump

[T]he worst-case scenario envisaged by the Financial Services Authority and the Treasury is a 1980s recession, when there was a 6% drop in GDP from peak to trough. This led to a fifth of UK manufacturing shutting down, a legacy of unemployment and an economic hangover well into the latter part of the decade.

The government wants to ensure Lloyds is equipped to cope with such an outcome and that is why it was forced to take part in the government’s asset-protection scheme – an insurance policy to protect the banks from further losses. Lloyds will place £260 billion of loans into this scheme and in return the government will see its stake in the bank rise from 43% to as much as 77%.

The "more severe" U.S. scenario is for a 3.3% decline in real GDP in 2009 following the 1.7% decline in real GDP the 2nd half of 2008 (from the peak in Q2 2008).

These two scenarios are somewhat close for 2009.

The U.K. economy contracted 0.7% in Q3 and 1.5% in Q4, so a decline of 3.3% in 2009 (assuming no recovery later in the year) would put the peak to trough in the U.K. around 5.5%.

by Calculated Risk on 3/07/2009 03:12:00 PM

The following article from the NY Times is based on an exclusive interview Friday with President Obama: Obama Ponders Outreach to Elements of the Taliban. Here are some excerpts:

Mr. Obama indicated that the end was not in sight when it came to the economic crisis and suggested that he expected it could take another $750 billion to address the problem of weak and failing financial institutions beyond the $700 billion already approved.

The budget plan he released last month included a placeholder estimate of $250 billion for additional bank bailouts — an amount that represents the projected long-term cost to taxpayers of a $750 billion infusion into the financial sector — and in the interview Mr. Obama indicated that those figures were what he was likely to seek from Congress.

“We have no reason to revise that estimate,” he said.

And on the economy:

Mr. Obama urged Americans to “be prudent” in their personal financial decisions, but not to hunker down so much that it would further slow the recovery.

“What I don’t think people should do is suddenly stuff money in their mattresses and pull back completely from spending,” he said.

Still, he avoided guessing when the situation might begin to turn around. “Our belief and expectation is that we will get all the pillars in place for recovery this year,” he said. “How long it will take before recovery actually translates into stronger job markets and so forth is going to depend on a whole range of factors.”

And on bloggers:

“Part of the reason we don’t spend a lot of time looking at blogs,” he said, “is because if you haven’t looked at it very carefully, then you may be under the impression that somehow there’s a clean answer one way or another — well, you just nationalize all the banks, or you just leave them alone and they’ll be fine.”

My feelings are hurt (just kidding).

by Calculated Risk on 3/07/2009 12:43:00 PM

Last year I wrote a post about how falling oil prices would provide some cushion for the U.S. economy: The Oil Cushion. Here is an update ...

The following graph shows the monthly personal consumption expenditures (PCE) at a seasonally adjusted annual rate (SAAR) for gasoline, oil and other energy goods compared to the U.S. spot price for oil (monthly).

Click on graph for larger image in new window.

The good news is at current oil prices (U.S. spot prices averaged about $39 per barrel in February), oil related PCE will be in the $250 billion seasonally adjusted annual rate (SAAR) range in Q1 - well below the $440 billion SAAR of the first 8 months of 2008.

This is a savings of about $16 billion per month compared to the first 8 months of 2008. That savings will definitely provide a cushion for consumers.

The previous two quarters (Q3 and Q4) saw two of the four largest percentage declines in PCE in the last 40 years (-4.3% and -3.8% respectively). But there was little or no oil cushion in Q3, and about $7 billion per month in Q4 ... and as expected, the Q4 oil cushion showed up more as savings, as opposed to other consumption. But savings is a help too, because rebuilding savings is a necessary step towards rebuilding household balance sheets.

In Q1 the oil savings is much larger and will probably provide more of a cushion for consumers.

Data sources:
PCE from BEA underlying detail tables: Table 2.4.5U. Personal Consumption Expenditures by Type of Product line 117.

Oil prices from EIA U.S. Spot Prices.

by Calculated Risk on 3/07/2009 12:44:00 AM

The employment (or unemployment!) report was the big story on Friday. The BLS reported payroll employment declined by 651 thousand jobs in February and the unemployment rate jumped to 8.1%. Here is a graph of unemployment rate and the year over year change in employment, and a graph comparing job losses in post WWII recessions, and a graph of the number of workers working part time for economic reasons.

In an interesting speech, Kansas City Fed President Thomas Hoenig called for nationalization of insolvent banks: Too Big has Failed

The FDIC reported that the 17th bank failed this year: Freedom Bank of Georgia, Commerce, Georgia.

Meanwhile the Senate is considering a bill to temporarily allow the FDIC to borrow $500 billion from the Treasury. From the WSJ: FDIC Bill Dodges a New TARP Fight This sounds like some larger bank failures are coming.

And the House is considering a bill to make changes to mark-to-market accounting. From the LA Times: House bill would create panel to OK accounting rules

Get ready for another push to suspend "mark-to-market" accounting rules.

A bill introduced late Thursday by Rep. Ed Perlmutter (D-Colo.) and Rep. Frank Lucas (R-Okla.) would create a federal board to "review the application" of accounting principles -- including controversial mark-to-market rules.

Best to all.

by Calculated Risk on 3/06/2009 10:21:00 PM

Another video from Jim the Realtor. In the comments: "not a house. This is a time machine. To 1976"