New Banking Crisis, No Double Dip and Flattening the Yield Curve for Growth

Jack Ewing, in The New York Times, writes about an impending banking crisis arising from the need for banks around the world to roll over more than $5 trillion in short term debt by 2012. The problem is probably biggest for European banks, but about $1.3 trillion is in the U.S.

Dave Kansas, in the Wall Street Journal, writes about why the double dippers are wrong.

While I won’t dispute much of what Kansas cites as his reasons for optimism, I can’t help but notice that some of the things are what he expects will happen. Ewing, on the other hand, discusses some facts that are pretty cut and dried. The consequences of the facts cited are where the debate would lie.

Take a look at both articles. If you had to vote for one or the other as being a more significant discussion of what lies ahead, which would it be?

Now, take a look at what Caroline Baum has to say at She says that a recession is virtually impossible with zero interest rates at the short end of the yield curve unless long rates also go to zero. This is close to what happened in Japan over the past twenty years when they held short term interest rates near zero for much of the time. Baum does not discuss the Japanese experience in her article.

Baum says that a flat or inverted yield curve is a necessary condition for a recession. And it is true that it has occurred before every U.S. recession for the last 40+ years. And it is also true that a steep yield curve, 300 basis points or more, traditionally has preceded or accompanied strong growth. We now have a yield curve steepness well above 300 bp.

However, banking analyst Chris Whalen has suggested that growth could be encouraged by flattening the yield curve with an increase in the short term rate. Whelan’s logic seems quite perverse, but it is centered on the thesis that flattening the yield curve would decrease the attractiveness of the Treasury “curve trade” and cause banks to start seeking private lending opportunities. One weakness in Whelan’s argument is that there seems to be little demand in the private sector for loans. The low level of C&I (commercial and industrial) loan activity by banks was discussed yesterday.

If you think that anyone has figured out what the coming months, quarters and even years holds in store, then you better stop reading what others are saying. When you pick several essays at random it is likely that each will have major points in disagreement with all the others.

Disclosure: No positions.