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Mon

20

Aug

2007

The Day the Economy Went Cold Turkey
Monday, 20 August 2007 14:04
by Stephen P. Pizzo

Did you see what happened last week? I mean did you really see what happened?

What happened was the US economy, and much of the world economy entangled with it, was forced to go cold turkey.

But first a look at how they got hooked on junk in the first place.

For the last five or six years America's alleged free marketeers took a page from Barry Bonds' personal play book. America and Americans were already heavy hitters on the world economic stage. But why be satisfied with being just good. Why not leverage our economic strength by pumping it up with artificial wealth – cheap, easy credit.

And so it came to pass.  Debt became the enhancing drug of choice for heavy hitters and wannbe heavy hitters.

And it worked, at least for a while. Even after cutting taxes and increasing spending, a seemingly endless supply of cheap, easy credit flowed in to fund government spending from pushers in Asia.

Corporations took notice and began doing the it too, borrowing, buying other companies, borrowing against those assets, buying more companies, building entire corporate empires upon mountains of debt.

Joe Sixpacks down on Main Street figured they'd like to be heavy hitters too. So they beat a path to credit pushers, their own banks, credit card companies, DiTech and such. Consumers loaded up on the stuff.

And it worked for them too, for a while. They bought all kinds of crap they would otherwise not been able to afford -- SUVs, flat panel televisions and, most importantly, houses. If they already owned a house they used it as collateral for more of the stuff, more credit, more debt.

By August 1, 2007 nearly everyone from Washington to K-Mart shoppers were hooked on cheap, easy credit.

Wall Street analysts and government economists downplayed the problem with the standard junkies refrain, “We can stop any time we want.”

Of course they never tried to prove it. They never did stop.

Then suddenly last week their drug of choice dried up. From San Francisco to New York City, from Dog Patch, Idaho to Sacramento, California, from Washington to Hong Kong, London, Germany, France, not a cheap, easy credit pusher in sight.


For three, painfully long days, cheap, easy credit disappeared. And by day-two world markets went into what can only be described as “withdrawals.” Cut off from their picker-upper of choice, banks, mortgage lenders, hedge funds, bonds, mutual funds, home builders and foreign banks began going through the DT's.

By Thursday things had become so unruly, the whines and cries for “spare change,” gotten so shrill, that the Federal Reserve Bank, the pusher of last resort for credit junkies, finally stepped forward and provided the markets the only thing that would calm them – a booster shot of cheap, easy credit.

What happened next should erase any remaining doubt that America's free market big talkers have become nothing more than credit addicted phonies. Because, as you may have noticed, their DT's eased within a hour after the Fed injected their drug of choice – billions of dollars of bargain basement priced credit.

And the Fed did not even try to get these junkies into treatment. On the contrary. The Fed actually sweetened the deal, allowing already debt weakened institutions to get all the credit they say they need to remain afloat at wholesale prices.

But wait, there's more. The Fed's fixes are being handed out through what it calls its “overnight discount window.” Discount window Fed loans have traditionally been overnight loans given to banks to smooth the flow of capital between institutions. The loans the Fed approved in the wee hours of Thursday night are 30-day loans.

But wait, there's more. If, at the end of that 30-day period a bank claims it can't pay the money back, the Fed says the banks can roll them (renew) them for another 30-days.. and then another and another. And, like the sub-prime rules that allowed unqualified borrowers to get those loans without documentation or other proof of worthiness, the banks endlessly renewing these Fed “loans,” are not required to prove they really need to in order to remain solvent. (A 'if you can't beat them, join them,” tactic by the Fed.)

But wait, there's more. Since there was suddenly no market for the billions in mortgages and mortgage backed securities these banks were saddled with, the Fed, for the first time, allowed the banks to use those now nearly worthless assets as collateral against which troubled institutions can borrow even more cheap, easy terms money.

Well! Nothing quite perks up a junkie like a fresh fix! The DOW index soared the moment markets opened Friday morning.

And our Euopean co-dependents felt the rush too:

Paris shares soar on news of Fed discount rate cut; banks lead charge

PARIS (Thomson Financial) - Share prices rebounded in spectacular fashion in afternoon trading following the Federal Reserve's decision to cut its discount on loans to banks to 5.75 pct from 6.25 pct, citing increasing risks to economic growth, market sources said.Announcing the rate cut, the Fed stated: 'Financial market conditions have deteriorated, and tighter credit conditions and increased uncertainty have the potential to restrain economic growth going forward.' (Full)

Of course, all the Fed accomplished Thursday was to temporarily stabilize all those twitching credit addicts.  They also managed to reinforce the irresponsible behavior that has created a world economy all hopped up on credit-juice. In the weeks ahead expect the Fed to pump more of the stuff into the body-economic by lowering interest rates.

What's really needed is a tough-love intervention. But, with a national election just over a year away don't expect anyone, in either party, to tell credit junkies, from Countrywide Mortgage to CitiBank to Uncle Sam himself, they need to get off the junk and back to basics.

Of course, anyone who knows a junkie or an alcoholic understands that sooner of later such matters take care of themselves. Rock bottom looms in the future of every untreated junkie. It's not a matter of if, but when. It's an ugly way to get the message. But for the worst of the worst, it's often the only way.

Unfortunately, when this mega-addict plummets into that pit the rest of us are going to be sucked along by the downdraft.
 
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