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Mortgages struggled to stay as
low as 5.75% (more below on the stubborn refusal of mortgages to follow
the Fed down).
The biggest news of last week:
the off-the-table January ISM survey (the ineptly re-named purchasing
managers’ association), one of the very best real-time indicators, the
54-to-41 plunge the worst monthly result ever. A general intake of breath
followed, not yet released. January retail sales were the worst in five
years; credit cards declined in use and increased in distress; and
Wal-Mart reported, sadly, that shoppers are using holiday gift cards to
buy necessities -- diapers, pasta sauce, and detergent.
The only questions remaining:
how deep and how long the recession?
This one is different in pattern from others (save perhaps ’91-’92 affair,
a micro-mini crunch). By summer ’07 consumers were stressed by energy and
housing, but the economy was still rolling along when the August Crunch
began to tip it over. Standard recessions are consumer-first, then
financial and credit trouble; this is vice-versa. Caught by atypical
surprise, policy makers have floundered and flinched.
The problem: the August
revelation of some $4 trillion in troubled assets. They had accumulated
for years under the pretense of performance, but deteriorated steadily
since ‘05. Each banker knew his own trouble, and in flash chain reaction
each stopped dealing with his peers for fear that they were in as bad
shape as he. Crunch.
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That crunch was symptom, not
cause. Since August we have been in an episode of “House”: while the Fed
medicated the interbank symptom, the actual disease worsened, the crunch
broadened, the economy deteriorated, and new symptoms forced the Fed into
an undignified rate cut. Four times the Fed has cycled this way, patient
sinking.
Enter Congress. Treasury
Secretary Paulson set up Mr. Bernanke as messenger boy to plead for
spending stimulus. New medication, wrong disease. There’s a lot we could
do with $160 billion (one-fifth would have re-capitalized the bond and
mortgage insurers, preventing perhaps hundreds of billions in write-downs
ahead). This package will do nothing for the underlying problem, and was
unnecessary: the Federal deficit has suddenly exploded from $150 billion
to $400 billion, stimulus aplenty.
Bad ideas are pouring from
pols and regulators, trying to get foreclosure toothpaste back into the
tube instead of working on the real problem ($4 trillion...). There is no
solution to foreclosures; most of these households were bad credits to
begin with.
Brand new from energetic but
dim Sheila Bair at FDIC: forgive loan balances (Whose? Ours? Please?).
Increase the speed of workouts (From zero and pretending, to what?).
Senator Dodd: intercept foreclosures by Treasury purchase of bad loans
(Why just those?). Mrs. Clinton: freeze rates (ARMs began in 1980, rates
fell for 25 years, and the first time rates go up, cancel the contracts?).
© 2008 - Economic Notes is published weekly by the Economics Department of
Universal Lending Corporation. |
Freeze foreclosures for 90
days (What to do on day 91?). James Lockhart, regulator of Fannie and
Freddie, working overtime to disrupt their mission (Mr. Power-Freak, we
created them for this moment!).
Fellas... look: What are you
going to do with the $4 trillion in bad paper? The “plan” seems to be to
leave most of it in the banking system, financed by central bank credit.
Hapless investors hold an unknown fraction, paralyzed as new buyers of
securitized credit. The Fed-reduced cost of money will widen banks’
investment spreads, increase earnings and over time generate new capital.
Over time. Meanwhile -- years -- the financial system cannot provide new
credit because of the rotting mess in its belly.
Why are mortgage rates stuck
up high, at just the moment that housing is desperate for cheap,
well-underwritten credit? Banks cannot buy new Fannies, Freddies, and
Ginnies because they are short of capital. Rather worse, they face new
losses, balance sheets crowded with bad assets. So, they are sellers of
the only good stuff they have. Sellers of our stuff. Sellers.
We would very much like to be
proven wrong, but the word is “bailout”: extract the rot from the system
and put it into a nouveau RTC. Then markets can function.
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