WSJ/MW: Shadow banking system ... showing no improvement

www.marketwatch.com...

THE FED

Feb. 26, 2010, 12:00 p.m.

Financial conditions may exert bigger drag on recovery

'Shadow banking system' stuck in the doldrums, study finds

By Greg Robb, MarketWatch

NEW YORK (MarketWatch) -- Conditions in financial markets may be weaker than generally believed, according to a new measure developed by a group of prominent economists including a former Federal Reserve Board official unveiled on Friday.

The link between financial conditions and economic activity has never been more crucial. Financial conditions gradually worsened starting in 2007 until they froze almost completely following the bankruptcy of Lehman Brothers in September 2008. This was followed by the deepest recession since the Great Depression.

Most indexes of financial activity show that things have been slowly improving of late -- but appearances can be deceiving, the team of economists believes.

The economists -- Jan Hatzius of Goldman Sachs, Peter Hooper of Deutsche Bank, former Fed governor Frederic Mishkin, Kermit Schoenholtz of New York University and Mark Watson of Princeton University -- used a University of Chicago sponsored- conference here on financial markets and the Fed to say they've developed an index they think can better track actual market conditions.

It includes more surveys of consumer trends and also measures of the so-called "shadow banking system," such as asset-backed security issuance as well as commercial paper and repurchase loans outstanding.

In particular, the new measure includes quantity and survey measures of credit availability. Older modes have focused on the slope of the yield curve as well as stock market prices.

It's this shadow system that is showing no improvement, the economists said.

Issuance of asset-backed securities and reverse repurchase loans, as well as total financial market capitalization "have failed to improve much if at all," the economists said.

"Whereas existing measures of financial conditions show the current level of financial conditions to be back at or slightly better than 'normal' levels, our index has deteriorated substantially over the past two quarters," they said.

"Indeed, the index has retraced nearly half of the sharp rebound that had occurred earlier in 2009," the panel said.

"This setback suggests that financial conditions are somewhat less supportive of growth in real activity than suggested by other financial condition indexes," the economists said
...

More at link...

[edit on 27-2-2010 by Dbriefed]

The fundamentals are broken. At least a few economists are talking about it.

Sad, but the only improvements we see are slight of hand and mirrors. Recovery? What recovery?