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Most people didn't hear
it last week. Hear what?
The "Bernanke bell" rang loud and clear.
Last Wednesday, Federal Reserve Chairman Ben Bernanke said the
following at the Independent Community Bankers of America Conference:
"The rapid growth in commercial real estate exposures relative to
capital and assets raises the possibility that risk-management practices in community banks may
not have kept pace with growing concentrations and may be due for
upgrades."
*** This means that they are going to start putting pressure on "bad
debt loan reserves" at banks. It also means that as this develops, loans
are going to be harder to get and will cost borrowers more. This will
create a contraction problem in the economy and increase the chances that a
recession will be the induced result. Over time, this will also create a
problem for bank earnings as they are forced to allocate more funds for higher
risk loans. {NOTE: I used to be on the Board of
Directors at The Regulatory Assistance Center, Inc. ... so, I know what the
Bernanke statement means. What he is telling banks is this:
"Start cleaning up your loans, get tougher, and start to allocate much
higher bad debt reserves, or we will do it for you during your next bank
examination."}
*** This warning and action from Bernanke supports why
the Fed is flooding liquidity into the system. The Federal Reserve has pumped money at an 8%+
growth rate during the last two months, and accelerated this to a growth rate
that is over 20% during the last two weeks. This affects the market in a
short term positive manner, but this is occurring with increasing negative
market divergence and institutional selling.
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