The Hangover After the Initial Burst of the Foreclosure Crisis Needs to be Studied

Posted on November 5, 2009
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The hangover after the initial burst of the foreclosure crisis needs analysis although foreclosures and unemployment are not a thing of the past and continue to plague American economy.

However many believe that the crisis is over as the stocks have gone up by 50% to 60% from the start of 2009. Gold prices have broken records and prices of commodities like oil are more or less buoyant.

On the international scene the trend to de-leverage the financial system of the West is continuing. Banks are raking in profits but a good number of financial entities continue to need funds. The worst hit banks like Citibank, Lloyds Bank, Spanish Bank Santander etc are continuing to talk about raising new capital or selling down their assets.

The governments are keen that the banks should lend. But in all likelihood the banks would like to clean their balance sheets before resuming lending. The mortgage securitization market is feeling most the de-leveraging effect. The market is still shaky about buying securitized debts because the future prospects of the real estate sector and business in general is still not clear.

Another trend is that it is obvious that from now regulations will be tougher. The regulators will be wary especially in supervising those banks in which states have a sizeable ownership because of having taken funds from rescue grants. The government has also guaranteed staggering number of deposits and thus acquiring a stake. The regulators will want to clamp down on generous bonus for bank executives. Reduction of risk taking will invariably impact negatively on the profits of the banks.

At the moment the banks are benefiting because they have not reduced their lending rates but the rate at which they borrow has gone down to nearly zero. But once normalcy returns and the banks start competing among themselves, the loans will be harder to get because of risk fears. Thus the golden age of investing in the banks is most probably over.

Another trend is that while the imbalances in the economy of USA continues the Asian supply line will move away from being export oriented towards developing a home market. It means there will be excess goods in the export section and reduction in profits.

The recovery noted in 2009 was mainly due to the massive infusion of funds and other fiscal measures taken by the government. But how far that can be sustained, only time can tell.

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