The skinny on double dipping

The funny money sloshing around the credit markets, from subprimes to CPDOs and other such brought down the economy last year.

Then the phoney money printed and given away by the world's consensual bankers pumped it back up again. "It" being the stock markets, not the real economy.

U.S. GDP growth revised down to 2.8% rate for third quarter

Spurred by government stimulus programs, the economy expanded at a 2.8% annualized rate in the third quarter, the Commerce Department reported Tuesday.

Massive job cuts by businesses are paying off for them, according to the GDP report.

However, the 2.8% growth rate is below the government's initial estimate of 3.5%

Latest GDP numbers prove sobering

After all, growth under 3% won't do anything to restore the millions of jobs lost in the recession.

Corporate earnings have been improving this quarter, and the market's been happy about that. But the numbers reflect cost cutting, rather than revenue gains. And, as Tuesday's GDP numbers suggest, consumer spending isn't as robust as initially thought.

Anyone standing on the corner of Wall Street and Main would tell you there's an unsustainable disconnect, and the bonuses being paid by the brokers are simply hand writing on the Wall when the Main guys are broke.

It's beginning to look a lot like a "W."

The duration of unemployment as a percent of the labor force is the highest in at least a quarter of a century. More people are being forced to work part-time and/or beneath their skill level while the job openings rate is the lowest in recent memory.

Consumer spending is also being suppressed by the $13 trillion in wealth people have lost because of the decline in prices of homes and stocks, along with their high debt loads and depleted savings accounts.

And now it's the sober money that's drying up.

One in Four Borrowers Is Underwater notwithstanding that Home Prices Post Monthly Gains

U.S. home prices logged their fifth monthly increase in September, according to the S&P Case-Shiller home-price indexes, according to the S&P Case-Shiller home-price indexes. But, For the third quarter, the broader S&P Case-Shiller U.S. National Home Price Index posted an 8.9% decrease from a year earlier. For the 18th straight month, every region posted year-over-year declines.

Monday, the Commerce Department said purchases of used homes surged in October to the highest level in two years, as a big tax credit and low prices and mortgage rates emboldened buyers. But the previous week, the department reported a surprise drop in October home building, which erased months of gains.

The proportion of U.S. homeowners who owe more on their mortgages than the properties are worth has swelled to about 23%. Nearly 10.7 million households had negative equity in their homes in the third quarter, according to First American CoreLogic.

These so-called underwater mortgages pose a roadblock to a housing recovery because the properties are more likely to fall into bank foreclosure and get dumped into an already saturated market. Economists from J.P. Morgan Chase & Co. said Monday they didn't expect U.S. home prices to hit bottom until early 2011, citing the prospect of oversupply.

Home prices have fallen so far that 5.3 million U.S. households are tied to mortgages that are at least 20% higher than their home's value, the First American report said.

More than 40% of borrowers who took out a mortgage in 2006 -- when home prices peaked -- are under water. 11% of borrowers who took out mortgages in 2009 already owe more than their home's value.

Distressed Homeowners Ponder Whether to Stay or Go

Number of Troubled Banks Rises to 552; FDIC Fund Sinks Into the Red

Fifty U.S. banks failed in the third quarter, the largest quarterly total since 55 banks went bust during the second quarter of 1990. The FDIC's list of "problem" banks swelled to 552 at the end of September, its highest level in 16 years and up from 416 in June.

Despite the turmoil in the industry, banks posted a modest $2.8 billion profit in the third quarter of 2009, as their securities portfolios recovered and banks with less than $10 billion in assets saw margins improve.

[As John Mauldin pointed out, what with all the Sinful Bank bailouts, Banks are essentially getting free money. If you are a banker and can't make money in this environment, you need to quit and find meaningful employment.]

The FDIC has already called on the industry to prepay $45 billion in assessments at the end of the year that will be set aside to cover the cost of bank failures in 2010.

Banks Scramble as Debt Comes Due

Banks have spent the past year dealing with a mountain of bad assets. Now attention is turning to trillions of dollars of debt they have maturing over the next few years.

The situation was caused by banks engaging in cheap borrowing during the credit-market boom that began in the middle of the decade and lasted through 2007. As financial markets hit crisis mode, banks were propped up by government guarantees that enabled them to keep selling debt -- but with much shorter maturities.

[There you go again -- it's the government's fault, as Ronald Reagan might have said.]

The life span of bank debt has shrunk to historically low levels, forcing banks to deal with the problem sooner rather than later. Globally, the average maturity of new debt rated by Moody's fell from 7.2 years to 4.7 years in the past five years. In the U.S., banks have seen maturities drop to 3.2 years from 7.8 years in the past five years. In the U.K., the average maturity for new debt fell to 4.3 years from 8.2 years, Moody's said.

Large banks such as Citigroup Inc. and Bank of America Corp. said they expect no problem refinancing at affordable rates and that they have historically high levels of cash to cover maturing debt. Their funding needs are likely to be lower anyway because of sluggish lending and sales of assets or business that require debt funding. [Read that over to yourself again. Slowly.]

Concern remains about how banks will deal with souring assets, such as loans they made to borrowers to fund purchases of homes, offices and land. But attention turning to the other side of the bank balance sheet is significant.

A key government lifeline, the Temporary Liquidity Guarantee Program, which provides federal banking for bank bonds, expired last month. Debt issued under that program, which guaranteed the debt, had relatively short maturities. Banks will have to pay back debt back before 2012, putting their refinancing on a collision course with five-year debt that was sold in 2007, as markets were soaring.

It doesn't help that buyers of that government-backed debt tended to be investors attracted to safe government debt, Barclays Capital analysts said. Those investors may not be willing buyers when the banks need to refinance without government backing.

The government debt also was sold at markedly cheaper costs. A Baa-rated bank that sold government-backed three-year debt would have paid a coupon of about 1.3%. That same bank would have to pay 7.75% to sell 10-year debt, according to Moody's.

Rising borrowing costs for banks could spill into the broader economy at a time when consumer and corporate borrowers already are under stress. Banks could pass on the costs in the form of higher interest rates.

Oh, and then there's this:

In addition to the difficulties affecting home mortgage debt and bank debt, the profligate Uncle is facing his own debt Waterloo. And, of course, we're all shareholders in that one.

Wave of Debt Payments Facing U.S. Government

Even as Treasury officials are racing to lock in today’s low rates by exchanging short-term borrowings for long-term bonds, the government faces a payment shock similar to those that sent legions of overstretched homeowners into default on their mortgages.

With the national debt now topping $12 trillion, the White House estimates that the government’s tab for servicing the debt will exceed $700 billion a year in 2019, up from $202 billion this year, even if annual budget deficits shrink drastically. Other forecasters say the figure could be much higher.

In concrete terms, an additional $500 billion a year in interest expense would total more than the combined federal budgets this year for education, energy, homeland security and the wars in Iraq and Afghanistan.