“Regulators on Friday shut down a Nevada bank, raising to 83 the number of U.S. bank failures this year. The 83 closures so far this year is more than double the pace set in all of 2009, which was itself a brisk year for shutdowns. By this time last year, regulators had closed 40 banks. The pace has accelerated as banks’ losses mount on loans made for commercial property and development.”
– June 19, 2010, the Associated Press
According to the many expert economists who completely failed to see the financial crisis of 2008 or the subsequent economic contraction coming, the American economy is no longer in a recession but is nearly a year into a recovery. However, it is worth noting that the National Bureau of Economic Research’s Business Cycle Dating Committee, which is the government committee charged with delineating the official beginnings and ends of recessions, has refused thus far to state that the economic contraction that began in 2008 is, in fact, over.
While the GDP figures are positive, other statistics such as the unemployment rate, the velocity of the money supply and the ongoing reduction of debt in the financial and household sectors strongly indicate that the supposed recovery is nothing more than a statistical artifact that is the direct result of a 57-percent increase in outstanding federal debt since the second quarter of 2008. Since government spending is a primary component of the GDP equation, the G in C+I+G+(X–M), literally all of the reported growth in GDP is the result of the increase in outstanding federal debt from $5.2 trillion on June 30, 2008, to $8.3 trillion on March 31, 2010.
However, despite the recent sovereign-debt scares in Greece and Dubai, few mainstream economists pay any attention to outstanding debt or debt-insurance prices since they are not factors incorporated into most economic models. And even fewer noneconomists notice anything except their mortgage rate and the performance of their 401(k) plans. But it is interesting to note that the increasing number of bank failures is finally beginning to penetrate the public consciousness 20 months after the collapse of Washington Mutual marked the onset of the present wave of bank failures.
I have tracked U.S. bank failures for more than two years. Taken from one perspective, the problem does appear to be slightly less serious than I had initially projected. For example, I anticipated that the percentage of failed bank deposits would rise in proportion with the number of failed banks, but since the FDIC has been seizing and shutting down smaller banks this year, average deposits per failed bank have fallen from $983 million in 2009 to $690 million in 2010. If the second half of 2010 follows the pattern of the first half, the percentage of failed bank deposits will decline from 1.81 percent to 1.5 percent, which is better than I expected and is at least theoretically in line with the mainstream assertions of ongoing economic recovery.
Unfortunately, there are other signs that this apparent improvement is merely the result of the FDIC focusing its attention on smaller banks because it is reluctant to shut down larger and more visible banks in similar straits. It is also unwise to make a simple linear projection for the rest of the year because 80 percent of the deposits held in banks that were shut down in 2009 were held in banks that were shut down in the second half of the year. If that particular pattern of FDIC bank seizure is repeated, then the percentage of failed bank deposits can be expected to increase to $286 billion and 3.7 percent of total U.S. deposits. This would tend to confirm my previous assertion that the present contraction is going to generally follow the pattern of the Great Depression, as the percentage of failed bank deposits was 3.6 percent of total deposits in 1931.
Furthermore, there are other ways to compare past and present banking failures that are arguably more important than deposits. The percentage of bad assets held by a failed bank can be determined, or at least a floor can be calculated, by subtracting its deposits from its assets, then adding the FDIC-estimated losses. The total provides a low-end estimate of the percentage of worthless assets the bank was holding prior to its seizure; the reason it is a low-end estimate is that the actual losses to the FDIC’s Deposit Insurance Fund have historically been around 1.95 times the previously estimated losses.
In the first half of 2009, the 45 banks seized held $20.5 billion in bad assets. In the first half of 2010, the 83 banks seized held $33.5 billion in bad assets. So despite the smaller size of the banks being seized, the total amount of bad assets is 63 percent higher. Even worse, the percentage of bad assets being held has risen from 40.7 percent in 2009 to 45.6 percent as of June 18, 2010.
It is too soon to judge if my Jan. 1 prediction of more than 200 bank seizures and 2 percent failed bank deposits was too pessimistic or not. And it is also too soon to assert that one of the underlying themes of “The Return of the Great Depression,” that 2010 equals 1931, is correct. But the mere fact that these predictions are still quite reasonably within the realm of possibility is sufficient evidence to dismiss the claims of economic recovery that have pervaded the media for the last nine months.