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Fri

11

Jan

2008

Ooooooh Shit! No.... Shit. Economic Rollercoaster
Friday, 11 January 2008 22:26
by Stephen P. Pizzo

I am beginning to get the same feeling in my gut that I get when the roller coaster nears the top of the first drop.

Until then it had been all anticipation, anticipation that builds as the cars — click,click, click — inched up the steep incline towards the first crest. Then there's that singular moment, when the cars reach the top and I get the first look down the drop inches ahead. At that moment the cars seem to pause for second — before they hurtle downward in an uncontrolled rumble.

That's how I feel right now about the economy. I've known for a long time that a helluva drop was coming. But the ride to the top has been so slow, so unthreatening and comfortable that the inevitable drop seemed more theoretical than than anything I had to worry about immediately.

But suddenly here I am — here we are — paused at the top for, who knows how long, peering down an abyss without a clear bottom in sight. And like that same roller coaster moment, we know it's too late to change our minds, too late to turn back. We are on for the ride — the ride of our lives.

Okay, so enough with the metaphores. The roller coaster thing is really quite insufficient. At least on a roller coaster you know it'll all be over in a a couple of minutes and that no one is likely to get hurt. Not so when the economy goes bust. When an economy goes bust, "hurt" is the rule, rather than the exception.

Over the past couple of weeks the signs that "the end is near" have been abundant and clear. And this time, thanks to globalization, the pain will global as well.

UN Says U.S. Economy's Housing Slowdown Risks Global Recession
Jan. 9 (Bloomberg) — Erosion of the U.S. housing market and a weaker dollar might drive the American economy into recession this year and stall world economic growth in 2009, United Nations economists said.

``There is a clear and present danger of the world economy coming to a near standstill,'' the UN's Department of Economic and Social Affairs said in an analysis released today in New York. ``The domino effect of a U.S. recession would be to knock down export growth from China, Europe and Japan, in turn reducing their demand for exports from developing countries.'' (Full)


I'm not going to waste ink trying to convince neo-con dead-enders still in denial, because those folks will never admit the mess their careless and greed-driven ways are about to cause:

"Some argue that the push back against market forces is a momentary pause in a steady march toward unfettered capitalism. The libertarian Cato Institute recently issued a report in which it found that economic freedom — shorthand for smaller government and fewer regulations — has never been greater." (NYT: The Free Market: A False Idol After All? )

I have no beef with capitalism, per se. But unfettered capitalism is another matter. By "unfettered" folks like those at the Cato Institute and The Heritage Foundation, mean government should butt the hell out. This is especially true when a bubble is forming, like it was during the 1980's after they succeeded in getting the feds to deregulate the savings and loan industry.

Later they advised the feds to keep their noses out of the dot-com boom of the 1990s. They claimed the feds were wrong to be nervous about all billions of dollars pouring into startups that lacked explainable revenue models. They said it was not a bubble but rather that the old business cycle had been eclipsed by this "new paradigm." What no one had the guts to say at the time is that there was nothing new about bullshit and wiseful thinking.

When the Bush administration came to office they crowed that the good Clinton economy had only been an illusion created by the dot-com bubble. And that the nation was in recession because it went bust.

So, what did they do — they loosened lending and oversight of banks and brokers and created a housing bubble to replace Clinton's dot-com bubble.

Now that bubble has burst, as all bubbles must.

In each case those hauling the big bucks in during those bubbles argued that government intervention would only gum up the works. They complained that government-types always wanted to fix something that wasn't broken in the first place.

And everyone would back off and let the "good times" roll on. (Remember when Greenspan had a moment of clarity, worrying outloud that he feared the dot-com boom was being fueled by "irrational exuberance?" Remember too how fast he back-peddled when Wall Street bankers, who were feasting off those dot-com losers dumped on him like a ton of gold bricks.)

In each of these bubbles the players would play the "let the markets work their magic" card until the bubble burst. Then they elbowed the naysayers away from the Capitol steps and began rattling their tin cups for help... government help.

They begged the Federal Reserve to pump more money into the system, to low interest rates. They begged federal agencies to intercede in their behalf with creditors. They begged the federal judiciary to side with them against screwed shareholders. Claiming hardship, dumped their pension obligations on the federally run Retirement Benefit Guarantee Fund. And, when all else failed, the sought sanctuary in federal bankruptcy court.

Once the dust has settled and the victims limped off into obscurity, and memories faded, they dragged the old hymnal back out and, without a sign of irony or embarassment, returned to signing their "Oh Lord, give us tax cuts for the rich," and got right back on the old message again — "Protect us from the evils of government regulation,"neo-con standards.

During my 62 years I've lived through three of these cycles, and "they" have gotten away with it each time. I don't just blame them. I blame everyone for it. Doesn't the driver who leaves the keys in a unlocked, parked car share the blame if the car is stolen?

And then there's the "Fool me once, shame on you. Fool me twice, shame on me," thing. "They" get us every time. We fall for the promise that, eventually we will all share in the goodies, if only we let the people who know what their doing, do it unfettered by bothersome rules and regulations.

Suckers!

The flaw in the "unfettered capitalism" theory is so obvious that it staggers. Those who peddle it claim variations on this theme:

An unfettered capitalist will always do the right thing, because it's in their long-term self-interest to keep the economic system healthy and growing. So why burden businesses with a bunch of bureaucrat-cops who couldn't run their own businesses if their lives depended on it? Why, they ask a successful business foul its own nest by abusing it?

Three times in the last 30 years we've gotten an answer to that rhetorical question:

Way too many of those folks will vigorously and enthusiastically abuse the system when it dawns on them that the enormous short-term gains they can make abusing the system eclipse anything they would make over the long-term toeing the line.

Duh!

During the 1980s they looted their own savings and loans into insolvency, forcing the feds to step in and replace nearly $200 billion in stolen, federally-insured deposits.

During the 1990s they stuck shareholders with hundreds of billions in worthless dot-com stocks peddled by some of the largest brokerage companies in the country on behalf of venture capital clients.

And now a "credit crunch" has pulled the vail away form the phony-baloney housing bubble. Of course housing is actually just one card in a much larger credit house of cards that's about to tumble in a heap. Credit cards, auto loans, student loans, reverse mortgages, payday loans.

But wait, there's more. This time around government itself has finally actually lived up to the Cato types description as part of the problem. Since 2001 the federal government has been run by the Cato types. As a result its embraced the "unfettered" part of that philosophy. Borrowed money spent just the same as earned money, so what the hell, borrow away. And so it has come to pass. Our federal government has become the biggest credit junkie on earth.

Things aren't much better here in the Golden State. Last night I listened as Gov. Arnold Schwarzenegger describe California's budget mess. And what a mess it is. After convincing voters a couple of years ago to let him borrow $38 billion to make ends meet, he seems to have come up $14 billion short for this year's bills. Now he wants voters to let him borrow a few more billion to keep the lights on, fund schools and pay for a healthcare insurance plan for the state's uninsured.

Maybe we need to change the way we describe borrowed money. Instead of calling it "borrowing" we could call it "renting." Because that's what credit really is — renting money. People borrow stuff they never return all the time. But when you "rent" something you are keenly aware that if you don't pay the rent, shit happens. Imagine if the a governor, or company CFO announce he/she was "renting $40 billion." How would voters or shareholders react to that? Differently, I am sure. After all, no business class I ever took taught that a person could borrow themselves to (sustainable) wealth.

Anyway, it's too late now to do anything about what's already been done. We are at the top. Up til now, life's been good — though fueled by borrowed money and on borrowed time. But time's up. The rent's due on trillions of dollars of this and that — some of it real, way too much of it little more than wishful thinking.

There's a part of me that hopes this time the consequences will be so painful that ordinary Americans will finally get it. I hope that, once dust settles from this crash, we all can agree that, just as we need cops to keep people from speeding, we need federal regulators to keep "fetter" the unfettered capitalist just enough to assure they can no longer profit at the expense of everyone else. That they are only allowed to profit when they create real wealth, not hot air.

Mankind has been slow to learn this lesson though. Seems this has been going on long before the the term "capitalism" was even coined. St.Thomas More wrote over 400 years ago, words as true today as they were then:

"I can perceive nothing but a certain conspiracy of rich men procuring their own commodities under the name and title of the commonwealth. They invent and devise all means and crafts, first how to keep safely, without fear of losing, that they have unjustly gathered together, and next how to hire and abuse the work and labour of the poor for as little money as may be."
St. Thomas More

So it's not capitalism that's the problem, but simple, and entirely predictable, human nature. Leave stuff laying around for the picking and, unless there's a cop on the beat to keep an eye on it, you'll discover there's no shortage of pickers waiting to relieve you of it.

Anyway, as I said above, it's too late to get off this ride now. So my friends, keep your hands and arms inside the ride until it comes to a full stop. It's gonna be a wild ride.

No S....t

Yesterday, in a bid to reassure nervous investors, Federal Reserve chief, Ben Bernanke, announced that the central bank was going to try to put the toothpaste back into the tube.

The markets weren't impressed by Bernanke's hint that the Fed is ready to cut half a precent off the Fed Rate at the end of this month. There was a time, a couple of years ago, when the Fed could have made a difference, not by cutting rates, but raising them to cool the overheated housing market. But the Fed (and Federal banking regulators) succumbed to pressure from the lenders, builders, Security dealers and Realtors who were feasting off the bubble easy credit had created.

Back then no one was interested in lectures from the Fed on sustainability or risk. Then was the time to reel them in, kicking and screaming and accusing the Fed of driving the economy into the tank with higher interest rates. If they had the market would not be in the tank, and heading into recession today.

Here's why Fed rates cuts now will not — cannot — work.

First here are the only choices the Fed has to choose from now:

1) Avoid a recession by sparking inflation
2) Avoid inflation by causing a recession
3) Have both at the same time — stagflation.

Option 1) The Fed could try to avoid a recession by lowering interest rates and increasing the money supply. The idea would be to encourage more borrowing and another round of consumer spending. That would do it, at least in the short run. But that would just put things back where they were before the housing bubble burst. Consumers are already burdened by more debt than they can manage. And the combination of more borrowing and an economy awash in printed money would surely ignite raging inflation.

Once that happens everyone starts chasing their own tail. Workers demand a raise to keep up with the cost of living. Those higher wages spark more inflation. Consumers can feel their cash losing value in their wallets and purses and therefore exchange (spend) them for "stuff" because "stuff" at least is increasing in value. The demand for "stuff" thusly drives the price of "stuff" even higher .. and on and on it goes. (Gold hit $900 an oz. today, not because gold is intrinsically worth that, but because gold is the "stuff" of choice for investors when paper money starts losing value.)

Option 2) The inevitable surge in inflation would eventually force the Fed to increase interest rates. But raising rates would drive already debt-burdened consumers even deeper into trouble. Credit card companies tie their rates to benchmark rates, like the prime rate. Then they add their usurious mark up to that. So, when the Fed raises it's rate it trickles through the entire system. Credit card rates jump from an already unconscionable 20% to $25%. Be one day late on paying your monthly minimum payment and that rate can soar above 30%. (Eat your heart of out John Gotti.)

And then there's the already moribund housing market. Higher interest rates now would be like trying to cure a guy with cirrhosis of the liver by putting him on a straight moonshine diet.

Option 3) Stagflation is often described as getting hit with the worst aspects of a recession and runaway inflation at the same time. I lived through the last bout of stagflation, during the Carter administration. His predecessor, Gerald Ford, had left things in quite a hash, and it only got worse during the Carter administration. All Ford did was have a few lapel buttons printed up that read: W.I.N. — which stood for "Whip Inflation Now!" Somewhere in the bowels of the Capitol or in a dark corner of the White House basement are boxes full of rusting and dusty WIN buttons.

At this point in time, stagflation this looks like the most likely outcome of the troubles that face the economy. If we get out of this mess with just a three or four years of stagflation, we should consider ourselves lucky because, with Options 1 & 2 clearly not a solution, stagflation is the only option standing in way of an old-time depression.

The markets know that too. Which is why Bernanke's rate cut promise yesterday was met this morning with a resounding vote of no confidence from Wall Street. That should be no surprise since Wall Street firms, having had a big hand in creating this mess in the first place, may be the only folks on earth who know where all the investment zombies they created are hidden.

As for Bernanke's promise that the Fed is ready to do whatever it can to head off recession, it's not that it's too little, it's that it's too late. Fed inaction when they really could have had a meaningful impact, had now made the Federal Reserve all but irrelevant. Bernanke is now just another captive rider on the roll coaster with the rest of us.

I wonder if he'll scream?
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g. Anton said:

0
The Mighty Fed--Regulator Or Collaborator?
The Fed is forcing some banks to put off-book sub-prime instruments on-book at reasonable market prices. Why don't the do the same thing with CDS's and CDO's? They won't do it because the TRUTH hurts too much--from the Fed's point of view, too much TRUTH is not a good thing. It's okay for some banks to hurt a bit, but not to go under!
 
January 12, 2008
Votes: +0

Jim said:

0
Housing bottom may not happen for 5 more years
http://www.HousingBottom.com
Japan RE was going down for 12 years since the early 90s.
 
January 12, 2008
Votes: +0

dude said:

0
cato types ?
you don't understand the cato types
this bubble is from the community baning bill and it's 2003 enhancement
BIG GOV lov of housing ,not lp at all
 
January 13, 2008
Votes: +0

Robert McMahon said:

0
Manipulating Recessions
Without question, the reading of Wealth of Nations should be mandatory for anyone in Congress (or even the Fed). The inevitability of the boom / bust cycle as a result of "irrational exuberance" is a given. Periodic small busts are the "safety valve" which prevents what we are about to go through. The busts have been engineered out by the Fed's monetary policies. We are not prepared for what is coming. HANG ON.
 
January 14, 2008
Votes: +0

carol said:

0
...
"this bubble is from the community baning bill and it's 2003 enhancement "

And you, dude, are illiterate.
 
January 14, 2008
Votes: +0

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