Perspective Please...

Perspective Please...
by: Marcus Garcia



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I just logged on to CNN.com and found a Breaking News headline that read:
“Regulators shut six more banks; closures for 2009 reach 51, more than
twice as many as all of last year.”

And for good measure this headline was in a big bright red box at the top
of the page to make sure I noticed it…and noticed that it was probably
bad news.

It certainly isn’t good news. So I guess that makes it bad news. Of
course that begs the question of just exactly how bad this news really
is. The way this headline reads one would assume it is catastrophically
bad news.

If I was a lawyer and this information was introduced by opposing council
I would object to it on the grounds that it is “leading the witness”.
(For the record, I’m not a lawyer; but I’ve watched so many episodes of
Boston Legal that I think I could be.)

All of this got me to wondering how many people read that headline,
swallowed it whole and are now sitting depressed in their homes awaiting
some impending doom. And further, how many of us actually stop to think
deeply and critically about the information that is fed to us in today's
24/7 non-stop news cycle?

So in the interest of trying to preserve everyone’s sanity…what do you
say we actually put this headline into broader perspective and see what
happens?

By the way…since I first saw this “Breaking News” announcement, the
number was corrected upwards to a total of 52 failed banks in what is
essentially the first half of 2009 vs. a total of 25 bank failures in all
of 2008.

That’s not good.

How “not good” is it? To have any understanding of that we need to ask a
few questions…

Question one: what does the number 52 represent relative to all banks? Is
that a big number? Is that a small number? Is it half? With no
perspective it doesn’t really mean anything.

So let’s get some perspective.

There are approximately 8,300 FDIC insured banks today. Thus, 52 banks
represent a failure rate of 0.0063%.

That doesn’t sound so scary.

But the media is fond of ensuring that nobody forgets that we are in the
worst economic crisis since the great depression and absolutely the worst
recession in the past 25 years.

That sounds scary; and it leads us to our next question…

Question 2: how does today’s number of bank failures compare to bank
failures during the great depression? And how does it compare to bank
failures during the recession that started in the 1980’s?

Have a look at these two charts both of which are from a site called
Calculated Risk (a very worthwhile site to visit I might add):

This one shows the number of bank and thrift failures dating back to
1921. This data includes banking failures from 1921 to 1933 which was
prior to the formation of the FDIC. The FDIC was formed Jan 1, 1934
specifically to insure bank deposits and to bolster confidence in the US
Financial System in response to the thousands (yes, thousands) of bank
failures during the 1920’s and early 30’s.

52 bank failures is barely a blip on the radar compared to depression era
bank failures; which were literally thousands per year. The same is true
relative to bank failures from the recession that started in the 1980’s
which included more than 500 bank failures in 1989 alone.

Even if we continue at the same pace (or an accelerated pace) we aren’t
going to come close to the number of bank failures that took place back
in the 80’s and 90’s.

Maybe it’s not so scary after all; and that leads us to our third
question…

Question 3: if it isn’t scary then what is it? Besides providing
confirmation of a recession we already know we are in, what does any of
this tell us?

Good question.

The best answer that I could find is that it doesn’t really tell us much
of anything. If you take a look at this chart you’ll see that there is no
systematic relationship between FDIC interventions and annual US stock
returns. (You can even check out the pretty scatter diagram complete with
the Pearson correlation and the R2 statistic if you are totally into
overly complex statistical modeling)

In fact, the FDIC bank intervention rate can only explain about 1% of the
variation in stock returns, even when you include the extreme
intervention cases during the great depression and the recession during
the 80’s.

In other words…this news, while being newsworthy, is not a predictor of
anything. In this case, it’s just news. Like the score of a baseball
game; it has no bearing on what the score will be tomorrow.

So what should we do with all this new found perspective?

First…can we please stop beating this dead horse? We’re in a recession.
We know already. You don’t have to tell me all day, every day.

Second…did you notice we got out of that last recession without
nationalizing everything under the sun? Can we stop with all the auto
bailouts, the farming subsidies, the idiotic stimulus spending projects
(like under highway turtle crossings…not joking) for a while and see if
this patient (the economy) really needs more of that medicine? You do
realize there is such a thing as over-medicating don’t you?

And finally…relax. We say the economy is cyclical for a reason; that
being that when the economy needs to correct it will swing down, the
market corrects, and then it goes up again. Always has...and if we let
it...always will.

So why don’t we let the mechanism that has worked for the past 200 years
- a free(ish) market – get us the rest of the way back.

Otherwise I’m afraid the number 52 is going to become awfully scary;
because it will no longer be a 0.0063% failure rate…it will be our tax
rate.

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