Meredith Whitney Sees Bleak Second Half in Stock Market, Small Business Credit Crunch, Double Dip in Housing, Says European Banks in Worse Shape

Meredith Whitney is concerned about financial reform that will punish banks just for the sake of doing something. This she says, will hamper small business lending right at a time state and local cutbacks will cost 1-2 million jobs.

The Wall Street Journal covers this in The Small Business Credit Crunch

Over the next 12 months, disappearing state and local government jobs will prove to be a meaningful headwind to an already fragile economic recovery. This is simply how the math shakes out. Collectively, over 40 states face hundreds of billions of dollars in budget gaps over the next two years, and 49 states are constitutionally required to balance their accounts annually. States will raise taxes, but higher taxes alone will not be enough to make up for the vast shortfall in state budgets. Accordingly, 42 states and the District of Columbia have already articulated plans to cut government jobs.

So the burden on the private sector to create jobs becomes that much more crucial. Just to maintain a steady level of unemployment, the private sector will have to create one million to two million jobs to offset government job losses.

Herein lies the challenge: Small businesses continue to struggle to gain access to credit and cannot hire in this environment.

Unless real focus is afforded to re-engaging small businesses in this country, we will have a tragic and dangerous unemployment level for an extended period of time. Small businesses fund themselves exactly the way consumers do, with credit cards and home equity lines. Over the past two years, more than $1.5 trillion in credit-card lines have been cut, and those cuts are increasing by the day. Due to dramatic declines in home values, home-equity lines as a funding option are effectively off the table. Proposed regulatory reform—specifically interest-rate caps and interchange fees—will merely exacerbate the cycle of credit contraction plaguing small businesses.

If banks are not allowed to effectively price for risk, they will not take the risk. Right now we need banks, and particularly community banks, more than ever to step in and provide liquidity to small businesses. Interest-rate caps and interchange fees will more likely drive consumer credit out of the market and many community banks out of business.

It is important now to support any and all lending activities that would enable small businesses to begin hiring again. If the regulatory reform passes with rate-cap and interchange regulation amendments incorporated, small businesses will be hurt rather than helped.

Interview with Maria Bartiromo

In an interview with Maria Bartiromo, Meredith Whitney goes much further. She sees a double dip in housing, a bleak second half in the stock market and says European banks are in much worse shape than US banks.



Partial Transcript

Meredith: One of my biggest concerns over the last few years is you have a lot of regulatory change being crammed into the system, just at the time when you need more liquidity.
For example, banks obviously price for risk. But they have been told by the card act that they cannot effectively price for risk anymore. You have already seen $1.5 trillion in credit lines cut from the system. The proposed amendments are going to make it even more difficult to price for risk. ... I think you will see at least another $1.3 trillion sucked out of the system.

Maria: You write that massive job cuts at the state level between 1 and 2 million over the next 12 months could also be part of this.

Meredith: That's our estimate. You look at how grossly underfunded state and local budgets are 2.5 times what they were after the dotcom crash. There is no way to resolve this. ... We are going to have a really dangerous, chronically high unemployment situation on our hands for a very long time. This is exactly what politicians ought to be focused on, not jamming down last minute regulation to appear to be tough on banks.

Maria: What's your sense of the European banking situation? Would you put any new money to work in any of the European banks given this selloff?

Meredith: Not in a million years. The European banks are still underfunded, still carry assets that are worse marked than even the US banks. You have hundreds of billions of dollars of recaps that need to take place in Europe.

Maria: What kind of second half are you expecting for the stock market.

Meredith: I think it's going to be bleak. I think that you have really no end demand from the consumer. I think you are going to see the double dip in housing take place in the second half and it's going to be rocky sledding.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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