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December 14, 2007
In as strange a stew of news as you’ll ever see, mortgage rates have risen close to 6.25%, led by the 10-year T-note’s leap from 3.85% to 4.25%.
Beginning two weeks ago, the financial markets began to trade on the prospects for government bailout of a fibrillating financial system. Then, yesterday, new economic data whiplashed them from preoccupation with financial failure to worry about inflation.
Last first. The data surprises: reasonably healthy retail sales for November, a full stop to the rise in new claims for unemployment insurance (i.e., no increase in layoffs), a modest .3% gain for industrial production, and awful inflation numbers. November CPI jumped .8% -- 4.3% year-over-year -- and the all-important “core” rate rose .3%, way out of the Fed’s 2%-annual range. $95 oil will have is effects.
“Trade on prospects for government bailouts...” Wahazzat?!
Last week, when Treasury Secretary Henry Paulson announced his foreclosure workout plan, stocks soared in relief at salvation and interest rates rose from panic pit. The whole thing reversed in two days. The plan will save two families in Arizona, another three in California, nine in Florida, and Etta Mae Huntzinger in Topeka. Hank Paulson spilt for China and hasn’t been heard from since.
Late last week through Tuesday morning, anticipation of rescue by the Fed set off another salvation rally. In minutes after the Fed’s reasonable .25% rate cut but clueless-about-crisis statement, the Dow dove 300 points, rates back down.
Dawn Wednesday, big Fed hoo-ah: global central banks will make bigger and longer loans to banks. Dow back up 270... for two hours, then down almost 400. Markets are learning that the authorities’ idea of rescue does not match the need. Stocks finished the day back where they were before Paulson began these timid shows.
The inflation risk is hard to measure, but the consequence of risk is not. The Fed’s cautious statement on Tuesday was not as clueless as it seemed: in a choice between preventing inflation and preventing recession, the economy is on its own.
The acute economic problem today is the functional bankruptcy of the Western banking system. Losses in trillions of dollars of weird assets have impaired systemic capital; central banks have kept the system liquid, and undoubtedly will continue to do so, but nobody has an idea how to get the system to make new loans. You have to have capital to do that, and we’re fresh out.
So long as these unrecognized but very real losses impair the balance sheets of the system, new credit will fall below the economy’s subsistence level. Many people think that stagflation will result; others that Mr. Market will fix things; still more that we’ll muddle through; and stock market people are only dimly aware that something is wrong. I think they’re all wrong: markets today are too interlocked and quick for us to go through the 10-year S&L stumble to bailout. We need another one, and soon.
The hostility to rescue is pervasive among American civilians, at center the blind fury at all participants in the housing run. The desire for blame and punishment is stronger than for self-preservation. Most Americans think the S&L bailout rescued the institutions, unaware that the officers, directors, stockholders, and borrowers lost everything, and only the depositors were saved.
A bailout now would not be hard, except politically: I’ll describe the financial means in a hopeful holiday message next week.
The political path goes this way: before a recession unfolds, I think we’ll have a financial accident -- a morning when a market cannot open, or a few large institutions fail, or a counter-party virus runs wild. Then Mr. Bernanke and Mr. Paulson will visit the White House to tell the Duck in Chief what happened to the family car. In an election year. To ask for wise and bi-partisan action from Congress, and Presidential candidates.
They’ll only do it if you tell them the society is more important than your anger.
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