US economy

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Citi got a new chairman. Markets welcomed the appointment of Dick Parsons by driving the US bank’s stock down 15 per cent. Former Merrill Lynch boss John Thain then resigned (by mutual agreement) from his new perch at Bank of America. Its shares were also hammered. But there is no cause and effect going on here: financial stocks across the world were lower. The truth is that the comings and (popular) goings of bank executives are a sideshow. The financial crisis is not discriminating on the basis of management quality. The economic forces unleashed by the financial crisis are so powerful that leaders have to a great extent been reduced to mere spectators.

Just look at the data released on Thursday in the US. Housing starts fell another 16 per cent year-on-year in December, to an annualised rate of 550,000 – the lowest rate since records began in 1959. Economists believe there is an excess of about 1.5m homes across America and a natural demand for housing each year of just a tad more. That means supply will not come back into balance with demand until at least the second half of next year, at current building rates.

Meanwhile, the employment horror show rolls on. The number of people who filed for unemployment benefits for the first time last week reached a 26-year high. Forget President Barack Obama’s dream of saving or creating 4m new jobs. Just putting back to work those people newly claiming benefits now requires an additional 62,000 jobs per week. Rising unemployment, at a time when there are still too many empty homes on the market, means that house prices are still only heading one way. That remains the problem for banks. With every week that house prices fall, so does the value of mortgage-backed assets on their balance sheets.

Investors understand this well. They know that there is nothing the likes of Mr Parsons can do about it.

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