Texan
Well-known member
Fed Banker Sees Slow Recovery,
But Says Ag Banks Are Strong
By David Bowser
MIDLAND — Jason Henderson says forecasts call for a rebound in the economy sometime in 2010 or 2011, but even then, growth will be only about a quarter to half a percent.
Henderson is executive vice president with the 10th District of the U.S. Federal Reserve Bank branch in Kansas City. The 10th District of the Federal Reserve covers Nebraska, Kansas, Oklahoma, Wyoming, Colorado and parts of Missouri and New Mexico. Henderson's specialty at the Fed is agriculture.
Speaking at the Southwest Beef Symposium here, he said the good news is that agricultural banks have money.
"They have more money this year than they had last year for agricultural loans," he said.
Interest rates today for agricultural loans are lower today than last year, as well. The challenge is that the collateral requirements are higher.
Given the risks in agriculture, crop margins are expected to narrow in 2009.
The livestock sector has been struggling since 2008.
"The amount of collateral that a rancher or a farmer is going to have to put into a loan agreement," Henderson said, "is increasing."
He said agriculture debt-to-asset ratios are at historically low levels. They are at the lowest levels since the 1960s.
"Agriculture has done a good job of managing debt," Henderson opined.
He noted, however, that land values have run up.
"Land values have been rising at about a 20 percent clip."
In certain places around ethanol plants, land prices had risen as much as 50 percent by last September.
Henderson said he's starting to hear from people in the 10th District that land values are starting to decline. He said the third quarter numbers are off three to four percent.
He's also hearing increased reports of failed sales. Farms going to auction are not being sold because the minimum bid can't be met.
"Some of them then go to private sales," he said, "and deals get done, but at a much lower price."
Henderson also said that income expectations for agriculture are faltering based on third quarter numbers from 2008. He expects the fourth quarter numbers to go lower when all the numbers are in.
"We're expecting income next year to be lower than last year," Henderson said of agriculture.
Banks are concerned about their debt because bank regulators are asking them about it.
That is being passed on to borrowers. Bankers are probably asking more questions now than in the last 10 years, Henderson said, about how a borrower plans to address his debt. They want to know what risk management practices the borrower has in place to manage the volatility of the modern market, both from an output side in what he selling and an input side concerning what he's buying.
He said there are indications that ethanol plants have gotten in trouble because they've managed their input side, but not their output side.
"When the market turned," Henderson pointed out, "they were on the wrong side of the market."
He described the last few months as a roller coaster ride.
"This has been an interesting time for Fed economists."
The recession started at the end of 2007, he said. At the end of 2007, there was a stimulus package that gave everyone a thousand dollars.
"If your wife's like mine," Henderson quipped, "she spent $1500."
But it wasn't enough.
There was an extreme contraction of the economy in the fourth quarter of 2008. He expects that to continue through the first quarter of 2009.
"In August, I would have told you that we would probably escape a recession."
But that economic forecast has changed.
"There's a lot of uncertainty in the market," he said.
With every forecast that comes out, Henderson said, three weeks later, it's downgraded.
The country is going through the sharpest contraction since the 1970s.
"That's part of the problem," he said. "Anybody under the age of 60 probably has never seen this before."
Henderson said it is an extreme contraction, but in many ways, the country has seen this before, and the country has managed to get through it.
What started in the housing market has gone through the financial sector and is now affecting the labor force.
Over the last couple of months, Henderson said, the country is looking at a half-million job losses a month.
"Those won't go on forever," he pointed out. "If we keep losing half a million jobs, pretty soon everybody's unemployed. That's not going to happen."
Henderson expects more contractions in the first quarter this year, but by the second quarter, it will change. Instead of job losses, it will become about how long people are on unemployment and extending unemployment insurance for those who are unemployed.
Beginning with the last recession, 2001, in the U.S., Henderson said there have been different economic growth patterns for the U.S. and advance countries around the world.
"Developing countries are growing much faster," he said.
This is particularly true of China and India.
Developing countries are growing at the fastest rate in history.
"Real growth was about five percent on an annual basis," Henderson said. "The last time we had growth rates that high was the 1970s."
He said the current troubles all started in the housing sector.
"We overdosed," Henderson said. "We had cheap money."
Interest rates were at record low levels and many people refinanced their homes. A lot of them turned their homes into ATM machines. They would refinance, take the money they got back from the equity on their homes and spend it.
Housing boomed from 2004 to 2006, then started to collapse.
It wasn't just that there was easy money, Henderson added. Money was being loaned to people who couldn't pay it back.
"Loan to value ratios were 120 percent in some places," Henderson said.
When home prices started falling, some people found themselves upside down on their loans. They owed more than the houses were worth.
In 2007, the supply of homes grew.
"Usually, we have a four-month supply of homes," Henderson said. "That's our inventory."
By 2007, the inventory had grown to six to seven months’ supply of homes.
"If you have a lot of inventory," he pointed out, "there's only one way to get rid of it. You have to sell more homes."
The home industry began selling more and building less.
"We thought we were going to get out of this in 2007," Henderson reminded.
Inventory levels started to fall a little, but then the market just collapsed.
Since then, inventories have grown.
"We have almost a year's supply of homes sitting around," Henderson said. "It's not a good situation to be in. That's where we are today."
This wouldn't have been so bad if mortgage companies had kept those mortgages on their own books, but they don't do that anymore.
The mortgages were sliced up and securitized in a secondary market. The bank originating the loan no longer cared if the borrower could pay it back.
As home prices fell as much as 30 percent in some areas and foreclosure rates rose, the securities, which were based upon mortgage payments, came in default.
Mortgage-backed securities were simply pieces of paper that people on Wall Street were trading.
The underlying asset was people's ability to pay off their mortgages. If they paid off the mortgage, the people owning the security made money.
As foreclosure rates rise, Henderson pointed out, that paper becomes worthless.
It's a matter of credit risk.
"If you go to a bank," Henderson explained, "and you're classified as high risk, you get a high interest rate."
He said the market is always based on trust.
"Wall Street companies don't trust that these securities they're trading are actually worth what they say they are."
In September 2008, the market broke down.
"Nothing was being traded."
Everyone was trying to get cash and save assets.
Banks weren't lending each other money overnight, Henderson said. That's come back, but lending is now for only one month.
"Banks will trust another bank to lend them money for one month and charge them half a percentage point," Henderson said, "but if a bank wants to borrow from another bank for three months, you tack on another 1.5 percent."
He said it's a lack of trust and confidence and a psychological perception of what's happening in the economy.
"I think a lot of that is what's going on," Henderson opined.
A lot of people haven't seen this situation before, and they are very concerned.
"Financial markets have frozen up," Henderson said. "They're starting to thaw a little bit."
He said the financial companies are learning the lessons that agriculture learned in the 1980s.
Except that in today's case, it is the mortgage-backed securities and home loans.
"After values start to fall and you have high debt levels," Henderson said, "you go bankrupt."
That's what happened in the 1980s in agriculture. That's also what happened in oil and gas in the 1980s.
"Wall Street is now learning that lesson."
Today, Henderson said, financial institution debt levels are almost 120 percent higher than one year of annual Gross Domestic Product.
"Households in this country," he said, "debt levels are 100 percent of GDP."
Non-financial businesses have debt that's 80 percent of GDP.
A lot of what's happening now, Henderson said, is focused on re-capitalizing the banking system.
"What we're doing at the federal reserve," he said, "is we've lowered the Fed funds rate to zero. We're now purchasing assets that we've never purchased before in our entire history."
Henderson said the Fed will purchase the mortgage-backed securities and bring them onto the Fed's balance sheet.
The Fed's balance sheet, which traditionally has been in the neighborhood of $900 million, has now been ratcheted up over the past three months to $2.2 trillion to buy time.
"The one thing that we all have to have to get through this is time," Henderson explained.
Private banks don't have time, but that's one thing the federal government and the Federal Reserve Bank do have.
"We have time to hold these assets and get through this period and sell them at a later date when their values appreciate."
He said the Fed bought the mortgage-backed securities because there is no market for them.
"If there is no market, no trading, what's the value of that asset?" Henderson asked.
Under current accounting rules, the value of those securities is zero.
"But we know that 95 percent of all home mortgages are not in foreclosure," Henderson continued. "They're being paid on over time."
The real value of those assets are higher than zero, but the market is frozen and is not allowing the assets to be traded.
"There's going to be some changes in accounting standards," Henderson predicted, "but how do we value those assets?"
Henderson said that in talks with his counterparts in Dallas, many of the numbers are similar.
"When I look at the Texas numbers that I do have," Henderson explained, "compared to ours, the story is the same."
He said banks report that their asset values are falling. Banks have a lot of debt on their books. They're tightening credit requirements to preserve capital.
With regard to mortgages and commercial real estate, 60 to 80 percent of the banks in the nation are tightening credit standards for loans, Henderson said.
"If you go in and try to get a loan today," he said, "it's going to be much tougher than it was a few months ago, let alone last year."
Henderson said the $700 billion government bailout was designed to increase loans.
"The bankers say that it is," he said. "If they didn't have the bailout money, they say, you should have seen what the numbers would have been."
Half the money has been given out, and Henderson admitted that it's hard to trace that money. With the other half being distributed, the challenge is going to be to track what's going on.
A lot of people are taking their money and sitting on it to see how the situation plays out.
The Fed is putting money into the system to get it working again, Henderson said, but it's a balancing act.
"We have all this money in the system," Henderson explained. "What happens when we start to come out of it? What happens if people, instead of hoarding, start spending?"
Inflation, he said, is a real fear.
"Everybody is focused on growth," Henderson said. "Everybody is focused on kick-starting demand. Once you do that, there's a lot of inflationary pressure out there."
Another part of the puzzle is the value of the dollar.
Since September, Henderson said, the value of the dollar has risen against other currencies.
The only thing the world has confidence in is the U.S. Treasury, he pointed out.
Treasury notes can only be bought with U.S. dollars.
"When confidence begins to be restored," Henderson said, "what happens to the value of the dollar?"
If the dollar goes down, he asked, what happens to commodity prices?
"Once we get through this psychological episode and there's confidence in the system," Henderson said, "there is the potential for the value of the dollar to fall."
In such a market, Henderson noted that the Fed will have all the mortgage-backed assets it will try to sell.
http://www.livestockweekly.com/papers/09/02/12/index.html
But Says Ag Banks Are Strong
By David Bowser
MIDLAND — Jason Henderson says forecasts call for a rebound in the economy sometime in 2010 or 2011, but even then, growth will be only about a quarter to half a percent.
Henderson is executive vice president with the 10th District of the U.S. Federal Reserve Bank branch in Kansas City. The 10th District of the Federal Reserve covers Nebraska, Kansas, Oklahoma, Wyoming, Colorado and parts of Missouri and New Mexico. Henderson's specialty at the Fed is agriculture.
Speaking at the Southwest Beef Symposium here, he said the good news is that agricultural banks have money.
"They have more money this year than they had last year for agricultural loans," he said.
Interest rates today for agricultural loans are lower today than last year, as well. The challenge is that the collateral requirements are higher.
Given the risks in agriculture, crop margins are expected to narrow in 2009.
The livestock sector has been struggling since 2008.
"The amount of collateral that a rancher or a farmer is going to have to put into a loan agreement," Henderson said, "is increasing."
He said agriculture debt-to-asset ratios are at historically low levels. They are at the lowest levels since the 1960s.
"Agriculture has done a good job of managing debt," Henderson opined.
He noted, however, that land values have run up.
"Land values have been rising at about a 20 percent clip."
In certain places around ethanol plants, land prices had risen as much as 50 percent by last September.
Henderson said he's starting to hear from people in the 10th District that land values are starting to decline. He said the third quarter numbers are off three to four percent.
He's also hearing increased reports of failed sales. Farms going to auction are not being sold because the minimum bid can't be met.
"Some of them then go to private sales," he said, "and deals get done, but at a much lower price."
Henderson also said that income expectations for agriculture are faltering based on third quarter numbers from 2008. He expects the fourth quarter numbers to go lower when all the numbers are in.
"We're expecting income next year to be lower than last year," Henderson said of agriculture.
Banks are concerned about their debt because bank regulators are asking them about it.
That is being passed on to borrowers. Bankers are probably asking more questions now than in the last 10 years, Henderson said, about how a borrower plans to address his debt. They want to know what risk management practices the borrower has in place to manage the volatility of the modern market, both from an output side in what he selling and an input side concerning what he's buying.
He said there are indications that ethanol plants have gotten in trouble because they've managed their input side, but not their output side.
"When the market turned," Henderson pointed out, "they were on the wrong side of the market."
He described the last few months as a roller coaster ride.
"This has been an interesting time for Fed economists."
The recession started at the end of 2007, he said. At the end of 2007, there was a stimulus package that gave everyone a thousand dollars.
"If your wife's like mine," Henderson quipped, "she spent $1500."
But it wasn't enough.
There was an extreme contraction of the economy in the fourth quarter of 2008. He expects that to continue through the first quarter of 2009.
"In August, I would have told you that we would probably escape a recession."
But that economic forecast has changed.
"There's a lot of uncertainty in the market," he said.
With every forecast that comes out, Henderson said, three weeks later, it's downgraded.
The country is going through the sharpest contraction since the 1970s.
"That's part of the problem," he said. "Anybody under the age of 60 probably has never seen this before."
Henderson said it is an extreme contraction, but in many ways, the country has seen this before, and the country has managed to get through it.
What started in the housing market has gone through the financial sector and is now affecting the labor force.
Over the last couple of months, Henderson said, the country is looking at a half-million job losses a month.
"Those won't go on forever," he pointed out. "If we keep losing half a million jobs, pretty soon everybody's unemployed. That's not going to happen."
Henderson expects more contractions in the first quarter this year, but by the second quarter, it will change. Instead of job losses, it will become about how long people are on unemployment and extending unemployment insurance for those who are unemployed.
Beginning with the last recession, 2001, in the U.S., Henderson said there have been different economic growth patterns for the U.S. and advance countries around the world.
"Developing countries are growing much faster," he said.
This is particularly true of China and India.
Developing countries are growing at the fastest rate in history.
"Real growth was about five percent on an annual basis," Henderson said. "The last time we had growth rates that high was the 1970s."
He said the current troubles all started in the housing sector.
"We overdosed," Henderson said. "We had cheap money."
Interest rates were at record low levels and many people refinanced their homes. A lot of them turned their homes into ATM machines. They would refinance, take the money they got back from the equity on their homes and spend it.
Housing boomed from 2004 to 2006, then started to collapse.
It wasn't just that there was easy money, Henderson added. Money was being loaned to people who couldn't pay it back.
"Loan to value ratios were 120 percent in some places," Henderson said.
When home prices started falling, some people found themselves upside down on their loans. They owed more than the houses were worth.
In 2007, the supply of homes grew.
"Usually, we have a four-month supply of homes," Henderson said. "That's our inventory."
By 2007, the inventory had grown to six to seven months’ supply of homes.
"If you have a lot of inventory," he pointed out, "there's only one way to get rid of it. You have to sell more homes."
The home industry began selling more and building less.
"We thought we were going to get out of this in 2007," Henderson reminded.
Inventory levels started to fall a little, but then the market just collapsed.
Since then, inventories have grown.
"We have almost a year's supply of homes sitting around," Henderson said. "It's not a good situation to be in. That's where we are today."
This wouldn't have been so bad if mortgage companies had kept those mortgages on their own books, but they don't do that anymore.
The mortgages were sliced up and securitized in a secondary market. The bank originating the loan no longer cared if the borrower could pay it back.
As home prices fell as much as 30 percent in some areas and foreclosure rates rose, the securities, which were based upon mortgage payments, came in default.
Mortgage-backed securities were simply pieces of paper that people on Wall Street were trading.
The underlying asset was people's ability to pay off their mortgages. If they paid off the mortgage, the people owning the security made money.
As foreclosure rates rise, Henderson pointed out, that paper becomes worthless.
It's a matter of credit risk.
"If you go to a bank," Henderson explained, "and you're classified as high risk, you get a high interest rate."
He said the market is always based on trust.
"Wall Street companies don't trust that these securities they're trading are actually worth what they say they are."
In September 2008, the market broke down.
"Nothing was being traded."
Everyone was trying to get cash and save assets.
Banks weren't lending each other money overnight, Henderson said. That's come back, but lending is now for only one month.
"Banks will trust another bank to lend them money for one month and charge them half a percentage point," Henderson said, "but if a bank wants to borrow from another bank for three months, you tack on another 1.5 percent."
He said it's a lack of trust and confidence and a psychological perception of what's happening in the economy.
"I think a lot of that is what's going on," Henderson opined.
A lot of people haven't seen this situation before, and they are very concerned.
"Financial markets have frozen up," Henderson said. "They're starting to thaw a little bit."
He said the financial companies are learning the lessons that agriculture learned in the 1980s.
Except that in today's case, it is the mortgage-backed securities and home loans.
"After values start to fall and you have high debt levels," Henderson said, "you go bankrupt."
That's what happened in the 1980s in agriculture. That's also what happened in oil and gas in the 1980s.
"Wall Street is now learning that lesson."
Today, Henderson said, financial institution debt levels are almost 120 percent higher than one year of annual Gross Domestic Product.
"Households in this country," he said, "debt levels are 100 percent of GDP."
Non-financial businesses have debt that's 80 percent of GDP.
A lot of what's happening now, Henderson said, is focused on re-capitalizing the banking system.
"What we're doing at the federal reserve," he said, "is we've lowered the Fed funds rate to zero. We're now purchasing assets that we've never purchased before in our entire history."
Henderson said the Fed will purchase the mortgage-backed securities and bring them onto the Fed's balance sheet.
The Fed's balance sheet, which traditionally has been in the neighborhood of $900 million, has now been ratcheted up over the past three months to $2.2 trillion to buy time.
"The one thing that we all have to have to get through this is time," Henderson explained.
Private banks don't have time, but that's one thing the federal government and the Federal Reserve Bank do have.
"We have time to hold these assets and get through this period and sell them at a later date when their values appreciate."
He said the Fed bought the mortgage-backed securities because there is no market for them.
"If there is no market, no trading, what's the value of that asset?" Henderson asked.
Under current accounting rules, the value of those securities is zero.
"But we know that 95 percent of all home mortgages are not in foreclosure," Henderson continued. "They're being paid on over time."
The real value of those assets are higher than zero, but the market is frozen and is not allowing the assets to be traded.
"There's going to be some changes in accounting standards," Henderson predicted, "but how do we value those assets?"
Henderson said that in talks with his counterparts in Dallas, many of the numbers are similar.
"When I look at the Texas numbers that I do have," Henderson explained, "compared to ours, the story is the same."
He said banks report that their asset values are falling. Banks have a lot of debt on their books. They're tightening credit requirements to preserve capital.
With regard to mortgages and commercial real estate, 60 to 80 percent of the banks in the nation are tightening credit standards for loans, Henderson said.
"If you go in and try to get a loan today," he said, "it's going to be much tougher than it was a few months ago, let alone last year."
Henderson said the $700 billion government bailout was designed to increase loans.
"The bankers say that it is," he said. "If they didn't have the bailout money, they say, you should have seen what the numbers would have been."
Half the money has been given out, and Henderson admitted that it's hard to trace that money. With the other half being distributed, the challenge is going to be to track what's going on.
A lot of people are taking their money and sitting on it to see how the situation plays out.
The Fed is putting money into the system to get it working again, Henderson said, but it's a balancing act.
"We have all this money in the system," Henderson explained. "What happens when we start to come out of it? What happens if people, instead of hoarding, start spending?"
Inflation, he said, is a real fear.
"Everybody is focused on growth," Henderson said. "Everybody is focused on kick-starting demand. Once you do that, there's a lot of inflationary pressure out there."
Another part of the puzzle is the value of the dollar.
Since September, Henderson said, the value of the dollar has risen against other currencies.
The only thing the world has confidence in is the U.S. Treasury, he pointed out.
Treasury notes can only be bought with U.S. dollars.
"When confidence begins to be restored," Henderson said, "what happens to the value of the dollar?"
If the dollar goes down, he asked, what happens to commodity prices?
"Once we get through this psychological episode and there's confidence in the system," Henderson said, "there is the potential for the value of the dollar to fall."
In such a market, Henderson noted that the Fed will have all the mortgage-backed assets it will try to sell.
http://www.livestockweekly.com/papers/09/02/12/index.html