“I don’t think the Fed can get interest rates up very much, because the economy is weak, inflation rates are low,” said Federal Reserve Chairman Ben Bernanke in his semi-annual testimony on monetary policy before the House Financial Services Committee this month. “If we were to tighten policy, the economy would tank.“
Deutsche Bank economists Peter Hooper, Torsten Slok, and Matthew Luzzetti take issue with that claim in a new report:
Often we meet we meet investors investors who argue along these lines:
“The only reason why markets are rallying is because the Fed is printing money, and once the Fed stops printing money, financial markets will crash like a house of cards.”
This is a complete misunderstanding of what is going on.
What many investors forget is that we have over the past five years witnessed a dramatic improvement in the housing market, consumer balance sheets, and banking sector balance sheets. This healing and correction of imbalances has come so far that the economy is now able to stand on its own legs and generate sustainable growth going forward. This is exactly the backdrop for why tapering can begin soon and the Fed can eventually begin hiking rates.
Hooper, Slok, and Luzzetti use the following series of charts to show how imbalances leading to the 2008 financial crisis have slowly been corrected in the past few years.
“The indicators in this chart book show that the correction of these imbalances was fastest in housing y g, followed by banking, consumers, and the labour market,” says the Deutsche Bank team. “The slower healing in the labour market is obviously important for when the Fed will hike rates but a virtuous cycle is currently playing out with higher home prices virtuous cycle is currently playing out with higher home prices supporting consumers and banks, which again supports the housing market, and this virtuous cycle will continue to support employment growth going forward.”
Let’s go to the charts.
New and existing home sales are rising.
Meanwhile, foreclosures are on the wane.
House prices are going up.
And household net worth is at an all-time high.
Meanwhile, total debt is falling.
As are new delinquent loan balances.
The percentage of loans that are current, on the other hand, is increasing.
Foreclosures and bankruptcies are declining.
And households’ ratio of debt service payments to personal income has plummeted.
Credit card balances are growing at a slower pace than in the pre-crisis period.
And credit card delinquencies are down dramatically.
Bank balance sheets have been restored.
Loan loss provisioning has returned to near 2006 levels.
And net interest margins are at the same levels today as they were in 2007.
Risk-weighted assets as a percentage of total assets are at the lowest levels in decades.
The percentage of construction and development loans that are noncurrent have fallen drastically.
And demand for commercial and industrial loans continues to strengthen.
Banks are more willing to make consumer loans as well.
The labour market is improving, especially in the all-important services sector.
Real estate and construction, two of the industries where the last crisis was centered, are recovering.
Job openings are on the rise as well.
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