16 April 2009

Satyajit Das ~ Financial optimism 'delusional'

A prominent American risk analyst says optimism about economic recovery is delusional because the economic growth in America and much of the world was a mirage built on debt.

The warning comes as Americans turn to their leaders for reassurance that the chill of recession is giving way to the green shoots of recovery.

US President Barack Obama says he can see "glimmers of hope" on the horizon, despite the country battling its deepest depression in decades.

New figures released today showed US retail sales in March went backwards by more than 1 per cent, after two months of recovery.

In January and February, real dollar sales were still tens of billions of dollars below the levels of late 2007 - to mid 2008.


Risk analyst and author Satjayit Das says despite the rate of change, the aggregate total dollar amounts are still 10 to 15 per cent lower.

"That's 10 to 15 per cent of demand that doesn't exist in the consumer sector which translates into lower investments and therefore lower growth," he said.

Mr Das says one of the main reasons optimism about recovery is delusional is because banks have no capacity to lend on the same scale they did before.

"One way to look at it is banks need to have about $1 of money in terms of capital to create $10 of credit," he said.

"The banking system is now running, after all the losses and even after the recapitalisation, with a shortfall of between $1 and $2.5 trillion of capital.

"That translates into a reduction in the amount of credit available to the global system of somewhere between 20 to 30 per cent."

'Double subsidy'

In turn, this translates into a massive hit to demand, consumption and economic growth.

Markets rallied this week on news that some of the biggest names in American banking were once again making profits, most notably Goldman Sachs.

But for those looking for signs of sustainable economic recovery, the accounts did not bear close scrutiny.

"The first thing, the profits are still down 20 to 30 per cent on last year and if you look at their traditional core businesses, they're all down 20 or 30," Mr Das said.

All the profit growth for Goldman's came from its fixed income, currency and commodities business.

Part of that came from clever but risky trades; and part, it seems, from underwriting bonds issued by other banks, that were already guaranteed by the US Government.

Mr Das says the first factor was all the government-guaranteed banks around the world issued a lot of debt to actually raise money and the second was that corporate could not raise money from bank-issued bonds.

"Traditionally government debt isn't underwritten and the interesting thing here is ... it is being underwritten," he said.

"It's almost a double subsidy. One from the guarantee, then a transfer of wealth from the taxpayer to the underwriters, like Goldman Sachs, and the major investment banks were underwriting the bonds."

"So it's a double subsidy in effect."

1 comment:

Anonymous said...

The double subsidy sounds like fraud to me.

Why would any bank issue debt and ask GS to underwrite unless, the bank was able to do the same in return to make some underwriting fees ?

Why the hell not call it what it is-- a crime ?