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News
Market Comment (February 2010)
Through 2008 most global economies were feeling the same pain, although the severity varied. From the U.S. to Europe to China and other Asian economies, credit was hard to come by, demand shriveled, output plunged and global economic growth slowed sharply.
Since the 3rd quarter of 2009 signs of recovery began to appear in isolated areas around the world. The U.S. economy is recovering at a faster pace than European and Asian economies, but sustaining this pace will depend largely on if, and how, other nations modify monetary and fiscal policy. Greece, Spain and Ireland continue to struggle, which has an impact on every euro based economy. As this reflects on the currency, exports are affected, which slows output and growth. Furthermore, job losses in Europe are similar to those in the U.S. so domestic demand increases are not anticipated.
In the U.S., much of the recent recovery is due to stimulus spending. Much of this spending will end by mid-2010. As states struggle to balance budgets, they are making cuts at a furious pace as tax revenues decline due to high unemployment and sluggish consumer demand. And although the House has passed billions in job creating stimulus legislation, the Senate has yet to take up the torch.
Global economies are intertwined to the point that the pace of recovery is just as important as degree. Currency and commodity price fluctuations could be significant enough to actually dampen a recovery. Oil prices have increased to the point where the average price of a gallon of gas is nearly 40% higher than it was a year ago.
Global economies are growing at different rates but they must also grow in different ways. Countries like China, Japan and Germany must put more emphasis on domestic demand while borrowers like the U.S. cut budget deficits in order to create jobs and sustain economic growth.
Banking
Although President Obama has stated that “Never again will the American taxpayer be held hostage by a bank that is too big to fail,” it may be hard to achieve and may have a disproportionate impact on smaller financial institutions.
The President’s comments are aimed primarily at the largest U.S. based financial institutions with global operations. To solidify his intentions the President has proposed the following;
• Imposing a “Financial Crisis Responsibility Fee” aimed to recover $117 billion from approximately 50 banks and insurers over a ten year period.
• New regulations that would require banks to increase capital ratios and submit to tighter regulatory control.
• Tighter controls on financial institutions’ compensation packages.
Using history as our guide, we should be prepared for unintended consequences. Regulation Q, implemented in the 1930’s restricting interest rates banks could pay on deposits, was intended to discourage banks from risky behavior by discouraging competition for deposits. With deposit rates held artificially low, savers moved deposits to foreign markets where banks were free to set deposit rates, thus the development of the Euro market in London, and the flight to money market funds, which were not limited on the rates they were allowed to pay.
Likewise, if financial institutions are required to keep larger capital cushions to guard against future crisis, they may make fewer loans in order to keep capital levels intact. Increased capital levels alone could squeeze smaller banks disproportionately as they do not have the same access to capital markets as the larger banks do.
Tighter regulation of the financial industry is needed, but the form and degree of that regulation could create problems the regulation was intended to prevent.
Money Markets
As traditional money funds struggle to add value to municipal investment portfolios, now is not the time to accept diminished returns. With proper planning, local governments have options that could substantially improve yields over current money market returns, without increasing credit risk. If you would like to discuss these options, please contact Ken Herdeman (262-796-6164), kherdeman@bankersbankusa.com or Brian Mann (651-697-8565), bmann@bankersbankusa.com.
February 2010
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BBE Community Investment Partners, LLC
375 Bishops Way – Brookfield, WI 53005 – 262.796.6164
3060 Centre Pointe Dr – Roseville, MN 55113 – 651.697.8568
www.cip-llc.com
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