From: John K. Pollard Jr. [jpollar2@san.rr.com]
Sent: Tuesday, September 06, 2005 11:06 PM
To: "Undisclosed-Recipient:;"@spf6-4.us4.outblaze.com
Subject: Abelson in this week's Barrrons. An exerpt related to the bank sector.

Last week, if you recall, we ran a chart that depicted the rapid rise of mortgage-related loans to a formidable 61% of total bank credit. The point was that the banks now had huge exposure to the real-estate bubble and were occupying an ideal position to absorb the full jolt of the fallout, as we put it, when and if the bubble went pop.

Which brings us to this week's second chart, courtesy of MacroMavens and entitled "Never a Rainy Day?" It's a nice companion to last week's number because it shows that even while increasing their exposure to real estate to a rather hair-raising degree, the banks have been setting aside a smaller and smaller proportion of reserves against losses.

As Stephanie Pomboy, MacroMavens' proprietor and no stranger to this space, comments with her customary timidity: "That our economy and financial system are uniquely exposed to real estate is troubling. But the real issue is that we've no cushion for losses. Consumers and their bankers have grown so confident that the Fed will arrest any asset decline that they have sought (and achieved) maximum exposure, minimum protection."

After a brief "bout of conservatism" induced by the dot-com crash, she notes, consumers eagerly went back to viewing cash as trash and their housing as savings. Meanwhile, bank-loan-loss reserves have sunk to their lowest level in 19 years.

And, Stephanie glumly predicts, "with hints that the housing market is already coming off the boil, the road ahead is sure to get bumpy. As it does, the absence of any cushion will begin to rub the economy and the financial sector raw." That'll leave Alan Greenspan's successor the lovely task of dealing with the mess created by the Greenspan Fed.

That inelegant set of circumstances prompts her to observe tartly that in his parting remarks at Jackson Hole, referred to in this space last week, Mr. Greenspan, "with the kind of bristling bravado only a man outside the ring can have," admonished his successor to get tough and "resist any temptation to monetize." Don't try, in other words, to wash away the problems with torrents of liquidity or, to change the metaphor, paper them over by cowardly recourse to the printing press.

Sighs Stephanie: "Yeah, that's easy for you to say, Al. You just created the beast. The new guy's got to battle it." Now, now, Stephanie, no one's perfect.