MarketSheep.com

Okay so here we are again, it is earning season and to the market’s surprise banks are showing some profits. When I make the above statement I can’t help to picture a older man in a suit riding a bike with training wheels saying “Mom look, I can ride a bike”.

All it took was nearly a trillion dollars to suppress mortgage rates; billions of dollars of direct aid, small change to Market to Market accounting and a commitment from the US government indicating they will not them fail.

Meanwhile earnings of companies who do not have the favor of the government are falling rapidly. Housing starts again appear to be retrenching (remember this was a pillar which Wall Street put such angst on citing recovery). A large commercial real estate firm (holds over 200 malls across America) filed for bankruptcy protection today with a disclosed $29.6 billion in assets and $27 billion in liabilities. What banks are on the hook for that?

The US economy cycles through expansion and contraction of credit. This process has occurred for centuries. Since the Federal Reserve started to maintain control of the overnight bank rate the cycles have become somewhat more predictable. This predictability occurs because as the Federal Reserve identifies where the US economy is in a cycle it responds with a rather predictable action. This action has a somewhat predictable response.

When the economy approaches over expansion of credit the Federal Reserve raises the overnight bank rate to raise the cost of lending, which theoretically should slow growth. When the economy starts to contract credit, the Federal Reserve lowers the overnight bank rate to lower the cost of lending, which theoretically should spur growth.

The actions to save banks over the past year are meant to contribute to the above mentioned goal. The US Government and Federal Reserve are attempting to reduce the cost of lending to spur growth. The dilemma that is facing the United States is that currently its citizens are contracting out of fear. The average US citizens’ mindset has changed from over consumption to conservation. Since US consumers makes up about 70% of GDP, growth cannot occur without them.

To stabilize the US consumer you most likely need to improve unemployment to reduce this fear. This week showed an improvement in claims (attributed to the holiday week) but continued claims are still rising (over 6 million). This indicates that finding a job is still a challenge. For job growth to resume, someone needs to start hiring. The US government is attempting to take this role artificially with their behemoth stimulus they passed.

It appears the US government is attempting to put training wheels on its economy by trying to shoulder the weight on their own. These banks that have already had the training wheels attached are profitable off the actions of the US government, at the expense of the US taxpayer. I was under the impression that companies went out of business because not enough business to support them. What happens when (if?) the US government takes off the training wheels? Will the economy ride on its own or break a leg?