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Mortgage rates rose slightly
last week, the lowest-fee 30-year from just below 6.00% to a hair above.
Spreads still gape versus Treasurys, at 2.50% above the 10-year defying
all of the Fed’s latest efforts. 5-year ARMs, both conforming and Jumbo,
are better in availability and rate, but both are scarcer and higher than
in January.
The economy itself is in a
curious place. Friday morning’s report of a half-percent gain in February
personal income was head-scratching good news, not squaring with consumer
confidence measures at 16-year lows, some components at 41-year all-time
lows. Yet, the income gain is consistent with a labor market still intact,
no wave of layoffs: this week’s claims for unemployment insurance fell a
bit. More in that income report: core inflation is holding 2.0%, just
barely.
The credit crunch has not
released in the slightest, deepening again in bank-to-bank loan rates,
municipal finance an expensive mess, and commercial paper shrinking again.
The crunch is obviously spreading sideways among institutions and in
Europe and Asia, but community and regional banks feel little pressure
except from nervous examiners. The crunch is likely the cause of a rolling
collapse of orders for durable goods, down 5.3% in January and another
1.7% in February.
As the crunch spirals
downward, the media and politicians are spiraling upward in a
self-reinforcing chorus of “No Taxpayer Bailout!”
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The greatest hazard at hand is
policy error, and today’s policy formation is proceeding exactly as did
the 10-year S&L denial waltz.
Examples. Bear Stearns was
“bailed out” or “rescued.” Like hell it was: it was liquidated. More than
half of its 12,000 employees will lose their jobs, stockholders lost 94%
of value, and senior officers and directors are gone. The Fed will babysit
$29 billion in the worst toxic waste, and wreckage-acquiring Morgan-Chase
will retain all other liabilities including litigation. The only people
bailed out, rescued: taxpayers saved from the effects of a massive fire
sale.
The Fed has arrogated no new
powers in this and other measures since August, and done nothing
inconsistent with its 1913 charter, yet media and polls sound like the
Casablanca inspector: “Shocked! I am shocked!” Of course, the major
problem in this ongoing crisis: the Fed has not been able to do new things
(like inject capital, as Europeans are doing by the tens of billions right
now).
The cautionary S&L tale began
in 1978: the nation’s mortgages sat in 7,000 thrifts, funded by
cost-controlled deposits. The Depression-era “Reg Q” lid had to come off
(obsolete and destructive), but removal was followed by inflation-adjusted
oil prices as high as today’s, inflation 2% in some single months, and
deposit costs rose far above the mortgage portfolio return. The industry
was toast by 1981 and everyone in it knew.
© 2008 - Economic Notes is published weekly by the Economics Department of
Universal Lending Corporation. |
A taxpayer bailout then would
have been cheap, maybe $75byn in ‘08 dollars. Oh, no! Can’t do that!
Instead, merge busted outfits into strong ones. Two years later, the
strong were broke. Still could have rigged a cheap bailout: there was
nothing wrong except low market values for low-rate mortgages. Nope,
uh-uh.
No, we’ll give the S&Ls new
lending and investment powers, and they’ll “grow their way out of
trouble.” They grew, all right. By 1987 they had created a $300byn loss on
new loans. Policy makers, not quite done, that year made retroactive
changes to the tax code that just about doubled that loss, not quite ten
times the original exposure.
The “S&L Bailout”, as it is
still recorded in national memory, arrived in 1989 with the sales of bonds
to be repaid by fees on surviving banks and earnings in the FHLB system
(still ongoing) -- not taxpayers. S&L stockholders, employees, officers,
directors, and most borrowers were ruined. The only parties bailed out:
the depositors. Taxpayers.
This time we don’t have 10
years in which to blunder. That time the economy was insulated from S&Ls
-- they could stay liquid even while broke, and by ’83 Wall Street
provided mortgage credit. This time... we won’t make it without credit.
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