Secretary Geithner will analyze auto recover plans later this week.
As Chrysler and General Motors were sending recovery plans to the Treasury Department, it was releasing economic data that confirmed what the auto makers were saying to a skeptical U.S. Congress back in December. The economy is in deep, deep trouble. Banks aren’t lending. Potential car buyers can’t get credit.
Looking at data it received from the largest banks that received taxpayer money under the Capital Purchase Program (CPP) that used your money to prop up banks, Treasury said it was “difficult” to refute charges that banks aren’t providing credit to borrowers since it is common for lending to contract during a downturn. These large banks have roughly 90% of deposits. The deposits are used to provide credit, a process the banks control completely. What the banks can’t control is larger economic trends. Here the news is grim.
Treasury said that during the past nine recessions, inflation-adjusted total private sector lending per quarter has contracted on average 30% from peak to trough, while real GDP has contracted 2.0%.
If only some of the new data were that good: During the last quarter of 2008 (Oct.-Dec.) unemployment rose from 6.5% to 7.2% and more than 1.5 million jobs were lost. Real GDP, what we produce in goods and services, decreased by 3.8%, nearly twice the average drop in output. This looks to be much more than a downturn.
Due to decreasing loan demand and tighter underwriting standards, as well as charge-offs or loan write-offs, banks reported a trend of “modestly declining” total loan balances. Translation: There are fewer loans. The problem in interpreting this is that demand for credit by consumers and businesses falls during an economic downturn, reflecting caution by both lenders and borrowers to take on new risk. Treasury concludes that without your tax dollars it would have been worse.
We will never know.
What we do know is that at current rates of economic activity, and vehicle sales under 10 million units annually, no car company is profitable in the United States, and they are all scrambling to cut costs. Oh, and tax receipts will decline as well sending the government, this means you, deeper in debt.