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5 CREDIT BUBBLE
BULLETIN Wrong
call Commentary and weekly
review by Doug Noland
COMMENTARY I've been examining
the Fed's quarterly Z.1 "Flow of Funds" data for
some time now; I can't recall a report as
intriguing as this one. In the face of mounting
financial crisis, total (non-financial and
financial) credit growth accelerated from the
second quarter's 8.6% pace to a remarkable 11.1%
annualized rate. The rate of non-financial debt
growth increased to 8.9% from 7.2%. The pace of
corporate borrowings rose to 11.0% from Q2’s
10.3%, while
household mortgage debt growth
slowed to 6.8% from 8.0%. Federal debt growth
expanded at an 8.8% pace, up from Q2’s slight
contraction. The booming state and local sector
cooled somewhat, with debt growth reduced to 8.4%
from Q2's 10.3%.
Importantly, domestic
financial sector borrowings expanded at an
alarming 15.6% rate, up from Q2's already
overheated 9.8%. The banking, money fund, GSEs
(government-sponsored enterprises) and agency-MBS
(mortgage-backed security) sectors all
accelerated, expanding at double-digit rates (more
detail than you care to know below). Wall Street
finance abruptly hit the wall.
During the
third quarter, total credit market borrowings
(TCMB) increased at a record seasonally-adjusted
and annualized rate (SAAR) of US$4.989 trillion to
$47.864 trillion. This was a significant
acceleration from Q2's $3.811 trillion and
compares to Q3 2006's $3.448 trillion. For
perspective, growth in TCMB averaged $1.237
trillion annually during the nineties. For the
seven years 2000 through 2006, TCMB growth
averaged $2.803 trillion. Financial Sector
Borrowings expanded at an unprecedented SAAR
$2.321 trillion during the quarter. This compares
to a $494 billion average during the nineties and
the $981 billion annually during the period
2000-2006. Total credit market debt has now
ballooned 20% in two years. Since the beginning of
2003, total debt has surged 50% - rising from 298%
of GDP to 343% - in the greatest credit inflation
in history.
With Wall Street finance under
heightened stress, bank assets expanded a record
SAAR $1.586 trillion during the quarter, or a
16.2% rate to $10.873 trillion. To put the scope
of this ballooning into perspective, recall that
bank assets increased a record $897 billion during
2006, after expanding $763 billion during '05,
$762 billion in '04 and $495 billion during 2003.
Bank assets expanded, on average, $215 billion
annually during the nineties. For the third
quarter on the bank asset side, loans expanded a
record SAAR $957 billion, up from Q2's $461
billion and Q3 '06's SAAR $411 billion. In nominal
dollars, bank loans expanded more during Q3 ($249
billion) than they did for the entire year 2003
($215 billion).
Bank mortgage loan growth
slowed to SAAR $205 billion (vs Q2's $266
billion), while business Loan growth jumped to a
record SAAR $561 billion (vs Q2's 195 billion).
Bank securities holdings were little changed,
although the composition was altered markedly.
Agency and GSE-MBS holdings declined SAAR $256
billion, while corporate and foreign bonds jumped
SAAR $296 billion.
How did the banking
system finance this record expansion – or what
(perceived money-like) liabilities were created in
the process? Total deposits grew at a 12.3% pace
during the quarter to $6.355 trillion. Deposits
were up $539 billion, or 9.3%, over the past year.
Credit market liabilities also increased markedly.
The liability "other loans and advances" increased
SAAR $332 billion and miscellaneous liabilities
SAAR $437 billion. During the past four quarters,
bank credit-market liabilities increased 31.5% to
$1.184 trillion, Fed funds and repo, or repurchase
agreements, 11.5% to $1.351 trillion, and bond
liabilities 21.3% to $655 billion.
Over
the past year, bank assets have inflated $1.070
trillion, or 10.9%. Mortgage loans have increased
$333 billion, or 10.5%. business loans were up
$221 billion, or 13.1%. Corporate bond holdings
gained $173 billion, or 23%, and miscellaneous
assets grew $233 billion, or 13.6%. Over two
years, bank assets increased $17.7%, with total
loans up 23.7%.
Breakneck banking system
expansion was matched by (non-Wall Street-backed)
structured finance. In the face of faltering
marketplace liquidity, GSE assets expanded a
record SAAR $617 billion, or a 20.7% rate. This
compares to 2006’s asset growth of $61 billion and
2005's contraction of $64 billion. GSE ballooning
peaked at $344 billion during 2001. In nominal
dollars, the $154 billion increase in GSE assets
during Q3 surpassed even the $137 billion increase
during (the infamous LTCM reliquefication from) Q4
1998. The entire GSE expansion is explained by the
unprecedented SAAR $759 billion surge in Federal
Home Loan Bank (FHLB) loans and advances. In
nominal dollars, the $180 billion Q3 increase in
FHLB loans and advances' amounted to a 112% growth
rate, with y-o-y growth of 27.7% to $822 billion.
Meanwhile, agency (Fannie and Freddie
guaranteed) MBS expanded a record SAAR $623
billion to $4.26 trillion during the quarter. For
perspective, agency MBS increased $295 billion
during 2006, $174 billion during '05, $63 billion
in '04, and $331 billion in '03. In nominal
dollars, MBS grew $168 billion, or 16.4%
annualized - increasing y-o-y growth to $475
billion, or 12.6%. Booming agency MBS issuance
filled the huge void created by Wall Street's
faltering "private-label" mortgage and ABS
marketplace. After expanding a cumulative $1.0
trillion during the preceding six quarters, the
ABS market abruptly ground to a halt during the
summer, managing only a $2.4 billion increase
during Q3 (to $4.276 trillion). This slowed y-o-y
growth to $470 billion, or 12.3%.
Also
playing a pivotal role in risk intermediation
during a tumultuous quarter, money market fund
assets (MMFA) expanded at a remarkable 50% rate to
$2.80 trillion. It's worth noting the composition
of the growth in assets. In SAAR dollars during
the quarter, foreign deposits increased $130
billion; time and savings deposits $182 billion;
security repos $444 billion; treasury securities
$162 billion; agency and GSE MBS $128 billion; and
municipal securities $149 billion.
MMFA
ballooned $635 billion over the past four
quarters, or 29.3%. With the money fund complex
now occupying such a critical position in the
credit mechanism, we'll take a closer-than-normal
examination of fund assets.
Over the past
year, money fund holdings of foreign deposits'
increased 45% to $102 billion; time and saving
deposits 25% to $261 billion; security RPs 38% to
$507 billion; open-market paper 20% to $666
billion; treasury securities 79% to $128 billion;
agency- and GSE-backed securities 16% to $162
billion; municipal securities 22% to $431 billion;
corporate and foreign bonds 22% to $416 billion;
and miscellaneous 113% to $124 billion.
Despite all the market turmoil, total
mortgage debt (TMD) still mustered an 8.0% growth
rate to $14.360 trillion. In SAAR dollars, the
$1.099 trillion quarterly increase was down
sharply from 2006's record $1.409 trillion, yet
still surpassed 2003's $996 billion expansion. And
keep in mind that TMD expanded $268 billion
annually during the nineties and surpassed $1.0
trillion for the first time in 2004. It is also
worth mentioning that Q2 mortgage debt growth was
revised up to a curiously strong 9.6% rate. During
Q3, home mortgage debt (HMD) slowed from a Q2's
8.3% to a 7.1% rate, while commercial mortgage
debt (CMD) cooled from a blistering 15% to a still
hot 11%. Over the past year, HMD increased 7.9% to
$11.028 trillion and CMD 13.3% to $2.406 trillion.
Expect these numbers to come down significantly
during Q4.
The securities broker/dealers
saw their incredible boom hit the wall during the
third quarter. After Q1's 41% growth rate was
followed by Q2's 23%, growth tanked abruptly to
less than 1% during the past quarter. Over the
past year, broker/dealers assets have expanded
$616 billion, or 23.8%, to $3.201 trillion, fueled
by a 37% increase in credit market instruments (to
$735 billion) and a 24% increase in miscellaneous
assets (to $1.865 trillion). And while total
assets were little changed during Q3, the
composition certainly shifted.
In nominal
dollars, agency and GSE MBS increased $72 billion
(to $195 billion) and Treasuries gained $72.1
billion (to negative $53 billion), while
miscellaneous assets dropped $70 billion (to
$1.865 trillion) and securities credit declined
$36 billion (to $298 billion). Corporate and
foreign bonds were little changed at $467 billion.
On the liability side, securities repos increased
$55 billion to $1.297 trillion, with notable
one-year growth of $333 billion (34.6%). Over the
past two years, broker/dealer assets have
ballooned 51%, while repo liabilities have
inflated 83%.
Funding corp (funding
subsidiaries, nonbank financial holding companies,
and custodial accounts for reinvested collateral
of securities lending operations) assets expanded
nominal $144 billion during Q3, with y-o-y growth
of 19% to $1.792 trillion. Fed funds and repo
expanded at a 6.9% rate during Q3 to $2.799
trillion, with one-year growth of 18.2%. Finance
company assets expanded at a 5.6% rate during the
quarter to $1.924 trillion and savings
institutions a 12.9% rate to $1.759 trillion;
real-estate investment trusts contracted at an
8.2% rate to $607 billion; credit unions expanded
at a 0.6% rate to $748 billion; and the life
insurance sector grew at a 5.7% pace to $4.950
trillion.
National income was up 5.3%
y-o-y to $12.307 trillion during Q3, with total
compensation rising 6.4% y-o-y to $7.917 trillion.
State and local government receipts held steady at
up 5.1% y-o-y, while savings and loan expenditures
rose 6.2% y-o-y. Federal receipts slowed, with
Q3’s 7.0% y-o-y increase down from Q2’s 8.0%.
Federal expenditures were up 6.0% y-o-y. Expect
both state and local and federal government
receipts to slow going forward.
The
household (and non-profit) balance sheet remains a
key analytical focal point. Total household assets
expanded at a 4.8% rate during the quarter to
$72.761 trillion. Household liabilities increased
at a stronger 6.7% rate to $14.157 trillion. Yet
in nominal dollars, assets inflated $858 billion
and liabilities increased "only" $234 billion -
leaving household net worth up $625 billion during
the quarter to a record $58.604 trillion. It is
worth noting that the growth in real estate assets
slowed to only $119 billion during Q3, while
credit bubble excess inflated household financial
assets by $699 billion. Over the past year,
household assets inflated $5.039 trillion (7.4%),
with a $1.035 trillion (7.9%) increase in
liabilities leaving a $4.004 trillion (7.3%)
increase in net worth to fuel the US bubble
economy. Declining
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