Glimmers Of Hope In Financial Crisis

While there is still plenty of bad news to go around, a few glimmers of hope are popping up to indicate that we may be approaching the bottom economically, and starting to turn the economy around. In no particular order:

* Citibank, one of the big four American commercial banks, has turned a profit for the first two months of 2009, for the first time since the third quarter of 2007, which has helped restore confidence in the stock market.

This is good because the stock market yesterday hit its lowest point since September 12, 1996 (almost twelve and a half years ago), continuing the stock market's trend of falling at the same pace as it did during the first seventeen months of the Great Depression.

* Used car prices are starting to increase again, after bottoming out in the shadow of declining new car sales, declining new car prices, and reduced credit availability. Used cars continue to replace new car sales, however. Buyers are often making down payments and monthly payments similar in size to those used to purchase new cars, but are opting for used vehicles so that their loan terms are shorter and the total loan amount is smaller. February new car sales are the lowest that they have been since 1967 at 9.1 million vehicles sold.

* Relative normality is returning to the commercial paper market. Commercial paper is a short term loan from an operating business obtained for use in operations as working capital.

In good economic times, the difference in the interest rate on commercial paper from the most creditworthy firms and the less creditworthy firms is a fraction of a percentage point. The risk premium paid by less creditworthy firms rose to about one interest rate percentage point in the middle of 2007, when the subprime collapse started to rear its head. Then, starting around September 2008, the risk premium paid by less creditworthy firms trying to borrow short term funds spiked, eventually reaching 5.86 interest rate percentage points. Now, the risk premium paid by less creditworthy firms to obtain short term loans has dropped to one interest rate percentage point again, back to where they were when the subprime crisis started to catch the market's attentions but before the financial markets melted down last fall.

The TED spread, which measures the different in interest rates between a 90 day Treasury Bill, which is risk free in principle, and the interest rate on an identical loan from another commercial bank (in amounts beyond those which are FDIC insured), has also returned to relative normal levels. The risk premium for lending to a bank rather than the federal government now at 1.09%, about where it was before the height of the crash in the fall of 2008. "The peak was 4.63 on Oct 10th and a normal spread is around 0.5."

Thus, while big lenders are still more concerned about the risk of default in short term loans to large companies and banks than before the current downturn began, the panic stage is over for now.

* We are well into the coincident and even the lagging indicators of a recession at this point, and should look for rebounds in residential investment and personal consumption expenditures as leading indicators that a recession is ending.