Two of the most accurate forecasters of the credit crisis anticipate that economic conditions will deteriorate further. Nouriel Roubini, who has been consistently been on the dire end of the opinion spectrum, characterizes our current situation as stag-deflation. Meredith Whitney, who was the first banking analyst to call the crisis in financials, and has made some notably astute calls, recently said her outlook for the industry had been “too optimistic.”
In a comment in today’s Financial Times, Whitney gives some recommendations for the financial services industry, all of which are sensible. But the most striking part of the piece is her downbeat reading:
I am more bearish today than I have been in the past 18 months. In so far as the market has impacted on the economy, capital destruction has been so intense that multi-trillions in capital raised by institutions through both private and public capital has gone to plug holes and not stabilise the effects of shrinking liquidity to corporations and consumers. More than $3,000bn (€2,365bn, £1,955bn) of available credit has been expunged from the markets and therefore corporate and consumer borrowers so far this year.
I estimate that the mortgage market will shrink for the first time in US history and that the credit card market will be 18 months behind it. While just over 70 per cent of US households have access to credit cards, 90 per cent of these people use credit cards as a cash-flow management vehicle, or revolve payments at least once a year. While the credit card market is small relative to the mortgage market, it has grown to play a key role in consumer liquidity. Declining liquidity here will have disastrous effects on consumer spending and the economy
I strongly recommend reading the entire piece. One of her suggestions for regulators to focus on encouraging regional rather than national lending operations. Whitney stresses, as we have, that local/area knowledge is necessary for sound credit judgments; reliance on FICO scores has proven to be a disaster.
Whitney does not call for breaking up big banks (and that would be more interventionist than anything on the table right now), but the idea that big banks are better has proven to be a canard. One of the key selling points, that bigger banks are more efficient, is utter baloney. Every study ever done of US banks has found that the industry has an slightly positive cost curve, meaning that costs rise as assets under management grow beyond a certain size threshold (some studies have found as low as $100 million, but the more common level is in the low-mid single digit billions). That means that all the cost savings achieved in mergers could have been realized by each institution separately.
So what has been the real impetus behind bank consolidation? Bank CEO pay is highly correlated with the size of the bank.