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s, where over half its revenues come from fees paid by merchants, is suffering as charge volume falls and delinquencies and charge-offs on its credit cards rise, leaping 6.7% in September from 3.6% a year earlier. Consequently, the firm recently became a bank holding company so it could qualify for TARP money and hopes to get a $3.5 billion infusion. Credit card issuer Capital One has received preliminary approval for $3.55 billion in TARP money. Credit card issuers are also reacting to weakening volume and jumping charge-offs by raising interest rates and fees.
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len Category er, reported a delinquency rate of 9.4% in September vs. 8.5% a year earlier. Parents, suffering from stock losses and the disappearance of home equity, are no longer able to bail out their debt-swamped offspring. Meanwhile, SUV and other vehicle owners who are now upside down on their auto loans due to weak used vehicle prices have limited zeal to keep up on loan payments.
TALF
Adding the general freezing of credit markets to these conditions and it's not surprising that investor buying of securitized consumer loans, which normally provide the funds to make fresh loans, has dried up. In October, there was only one $500 million deal compared to $50.7 billion a year earlier. And the interest cost has leaped. From June to October, the risk premium on a triple A credit card deal jumped from 3.2 percentage points over 2-year Treasurys to 4.67. Treasury Secretary Paulson recently said that that market "is currently in distress, costs of funding have skyrocketed and new issue activity has come to a halt."
So the government bailouts that we predicted in our October Insight have commenced. The Department of Education is buying $6.5 billion in federally-guaranteed loans, which doesn't affect troubled private student loans directly but does bolster the student loan market overall.
Much more importantly, the government in late November initiated the Term Asset-Backed Securities Loan Facility (TALF) under which the New York Fed will extend up to $200 billion in nonrecourse loans to holders of asset-backed securities backed by highly-rated auto, student, credit card and small business loans. The program may be expanded later to include commercial and residential mortgage-backed securities. The Treasury is kicking in $20 billion from TARP to absorb any losses, as noted earlier.
The hope is that this $200 billion infusion will re-ignite consumer loans. But, as discussed in our October report, leaping delinquencies and the eventual huge writedowns by financial institutional holders of bad consumer loan-related securities suggest that the zeal for consumer loans on the part of lenders or investors will remain subdued. Like TARP, TALF is likely to be no more than a bailout for distressed lenders who made a lot of bad loans. Since the Nov. 25 announcement of TALF, yields on bonds backed by credit card and auto loans remain at record levels.
Foreign Financial Woes
Phase 2 of the recession, financial woes, are, of course, a global phenomenon. And so are the responses. The U.K. initiated the direct injection of government money into banks to buy preferred stocks. The British government had hoped to attract some private capital into HBOS and Royal Bank of Scotland, but collapsed share prices left the government with most of the new stock. Barclay's avoided government help, but with its stock down 70% this year, it may ultimately end up with a third of the bank owned by Middle East investors as it raises $10 billion. The Bank of Japan is injecting another $32 billion into the financial system by expanding lending and easing collateral requirements.
Switzerland depends heavily on her reputation as a super-safe haven for international money, and her financial services industry contributes 11.4% to GDP and employs 5.9% of her workforce. Yet the condition of her banks has deteriorated to the point that in October, her Economics Minister had to state publicly that the government would not allow big banks UBS and Credit Suisse to fail. The government is injecting $5 billion into UBS to back $50 billion in illiquid UBS assets. That bank has suffered over $40 billion in losses due to bad mortgage-related securities.
Credit Suisse is in better shape but suffered a $2 billion third quarter loss due to writedowns on mortgage securities and unsold buyout loans as well as currency trading losses. The bank still holds $26 billion in leveraged loans and conventional mortgagerelated securities. Both banks are closing their bond funds for outside investors due to huge withdrawals following losses.
Meanwhile, the Netherlands agreed to inject $13 billion into the banking and insurance giant ING. In 2000, the Spanish central bank introduced its "dynamic provisioning" system that required Spanish banks to build up considerable reserves against potential future losses. As a result, Spanish banks began this year with 200% coverage of nonperforming loans compared with 59% for the average EU bank in 2006. Still, Spain recently set aside $41 billion to fund illiquid assets of her banks. And turbulent market conditions prompted Banco Santander, Spain's largest bank, to unexpectedly announce last month a $9 billion rights issue.
Russia has been floating on a sea of crude oil, but has sunk along with oil prices. Russians are fleeing the ruble for dollars and $83 billion left the country from August to October. The government has raised interest rates and spent heavily to cushion the currency's descent and avoid a repeat of its 1998 collapse. Still, the ruble is down 5% from its August high, and a halving of its current value is forecast. Meanwhile, plunging crop prices and a lack of credit is curtailing Brazil's soaring farm sector.
In Asia, Pakistan, which reluctantly sought a $7.6 billion IMF loan, really needs $10 billion to $15 billion to prevent economic collapse, government officials say. Dubai's pell-mell economic growth has been heavily financed by international debt that may be hard to refinance. South Korea, responding to shortages of foreign currency for her banks and businesses, in October announced a $100 billion government guarantee on foreign currency loans and a $30 billion infusion of dollars into her banks. More recently, that country has problems with high household debt, which leaped from 38% of GDP in 1997 to 66% last year and is probably higher today. And rising credit costs and falling stock and corporate bond prices are slashing the profits of Japanese banks and their ability to provide capital to the international financial system.
Central Bank Responses
Central banks have responded to the global financial crisis in three ways. First, the Fed cut the discount rate and then the federal funds rare repeatedly, starting in August 2007. The Fed has continued this traditional easing approach and other central banks have followed more recently and aggressively, including the European Central Bank, the Bank of England and the central banks of India, China, Australia, Norway, Sweden South Korea, the Czech Republic, Switzerland, Japan and even Indonesia.
Nevertheless, it became clear early on that rate cuts were of limited value since banks were so scared that they didn't want to tend to each other much less customers. The spread between the London Interbank Lending rate on U.S. interbank loans and Treasury bills, which leaped in the summer of 2007, remains wide. Furthermore, central bank rates are approaching zero at which point, as we understand it, they'll stop falling. So the ammunition of rate cuts is almost all shot off. The horse didn't want to voluntarily walk to the water and, besides, the pond is almost empty. Fed Chairman Bernanke recently said, "The scope for using conventional interest rate policies to support the economy is obviously limited."
So the Fed moved quickly to step 2, leading the horse to the water. It introduced a succession of facilities to auction money to member banks, make it available to nonbank government security dealers, etc. The ECB and the Bank of England introduced similar facilities. Last August, the People's Bank of China, her central bank, relaxed credit quotas so most banks can lend 5% more this year and, more recently, allowed local companies to easily sell yuan-denominated debt of three-to-five years' duration. Then China, it increased quotes for state-controlled lenders by $14.5 billion this year, encouraged local governments to support credit guarantee firms and opened new financing channels including loans for mergers and acquisitions and for consumer finance.
India's central bank has repeatedly reduced bank reserve requirements as has China's. And the Fed has attempted to satisfy foreign banks' gigantic demand for Treasurys by mushrooming its currency swap agreements with foreign central banks and then providing unlimited dollars to the ECB, Bank of England and Swiss National Bank for lending to local banks. The top policymakers of the cautious ECB recently called for an "abundant and generalized" capital infusion into banks. But all these central bank efforts resulted in the proverbial pushing on a string. The funds have stayed in the banks and haven't been lent out and entered the money supply to any meaningful degree as banks want nothing but Treasurys. The central banks led the commercial bank horse to water, but he wouldn't drink.
So it's on to step 3 with the Fed and other central banks, as well as governments, investing directly in Fannie and Freddie, AIG, banks, credit card issuers, insurers, etc. here and abroad, buying commercial paper and, most recently, purchasing indirectly credit card, auto, student and small business loan-backed securities and maybe extending later to commercial and residential mortgagebacked securities as well as subsidizing mortgage rates, as noted earlier.
Washington officials cringe at the suggestion that these measures amount to "quantitative easing," the Japanese policy initiated in 2001, because it failed to rapidly spur Japanese bank lending and the economy and arrest deflation. The Bank of Japan drove its target rate to zero with no effect and then tried to hype the quantity of money by buying government bonds, asset-backed securities and even stocks.
Current quantitative easing by the Fed may not be any more successful than it was in Japan since the global financial system is in a classic liquidity trap, as in the 1930s when bankers were defined as people who wanted to lend to those who didn't need to borrow and didn't want to lend to those who did. Today, banks don't want to lend to anyone but the U.S. Treasury.
Consumer Retrenchment
The financial crisis spawned by the collapse of the residential mortgage market and the follow-on Wall Street woes obviously just had to depress the goods and services economy, and it has in Phases 3 and 4 of the unfolding recession. With the collapse in stock prices and evaporation of home equity, consumers have no other meaningful source of borrowing to fund their spending growth in excess of their after-tax income gains. Notice that home equity withdrawals through cash-out mortgage refinancing and home equity loans reached about $900 billion at annual rates, or around 10% of consumer spending. Now it's negative as principal repayment exceeds home equity withdrawals. So consumers' 25-year borrowing and spending binge, as witnessed by their quarter-century saving rate decline (Chart 5) and borrowing rate surge (Chart 6), is over.
U.S. Personal Saving Rate
Total Consumer Debt and Debt Service

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In addition, Americans, especially postwar babies, have saved little for retirement as they concentrated instead on spending. The nosedive in stocks has only made retirement prospects more bleak. In the last 15 months, $2 trillion has disappeared from workplace retirement accounts, including 401(k)s, which now are the primary saving vehicle for 60% of employees.
Jobs
As the housing and financial sectors continue to drop and U.S. consumers retrench, layoffs and unemployment will continue to mount. Payroll employment, which fell 533,000 in November (Chart 7), will probably continue to see monthly declines of 500,000 and the unemployment rate will likely exceed 8% by the end of 2009.

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Payroll Employment
Housing and financial services job cuts are already large and more are coming. But job losses have spread well beyond housing and finance. Manufacturing jobs will continue to be lost as consumers buy fewer domestic goods and foreigners buy fewer American-made products. Retail jobs, normally the employment of last resort for the newly unemployed, are shrinking rapidly. Retail trade employs 10% of the total, but since November 2007, accounted for a quarter of jobs lost, or 320,000, as consumers cut their spending. And another 209,000 retail employees had their full-time hours cut to part-time. Estimates are that 6,100 U.S. stores -- ranging from mom-and-pops to major chains -- will fold this year, up 25% from 2007, and followed by 14,000 stores in 2009.
Impotent Monetary Policy
Conventional monetary policy ease through central bank target interest rate cuts at present is nearly useless, i.e., pushing on a string. Qualitative easing, now actively pursued by the Fed and the Treasury and by central banks and governments abroad, will probably at best only stabilize demoralized financial structures by substituting government securities for questionable assets with little near-term rejuvenation of lending and economic activity.
Also, bear in mind that in democracies, governments are almost guaranteed to be behind the curve in dealing with financial and economic crises. That's because voters elect them to respond to their concerns, not to act in anticipation of yet-unseen problems. Politicians are responders, not planners. In 2006, neither voters nor politicians wanted to prepare for a mortgage market collapse, but voters demanded and got swift action after the crisis unfolded in 2007 and this year.
This means that any resuscitation of the global economies falls on fiscal policy and, as usual, the effects will be delayed, influencing the recovery after the recessio qWww Fhaloanrateequitymortgage G Loan Rate Equity Mortgage Loan Rate Equity Mortgage Szh Category Hardware Loan Rate Equity Mortgage Semi-Annual U.S. Economic Outlook: Collapsing On Scheduler Loan Rate Equity Mortgage Loan Rate Equity Mortgage 1 zWww Fhaloanrateequitymortgage G Loan Rate Equity Mortgage Loan Rate Equity Mortgage Szh Category Hardware Loan Rate Equity Mortgage Semi-Annual U.S. Economic Outlook: Collapsing On Scheduleh g g Loan l l Loan Rate Equity Mortgage Loan Rate Equity Mortgage