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September 19, 2008
I wrote last week that I heard “hoofbeats of cavalry on the way.” For a while this week it looked as though John Wayne had arrived to shoot the settlers and give firewater to the Apaches.
Mark this day: the worst of this crisis has passed. However, not yet the halfway point in time: we are thirteen months into this wreck, and you’ll sure as hell feel credit-market distress thirteen months from now. The greatest risk has passed.
Until yesterday the nation labored under the illusion that this crisis was a financial matter -- banks and markets thrashing around, remote from Main Street, something that would either solve itself or be calmed by usual means. In reality, of course, the financial matter was not remote and had been hopelessly lost by August, 2007.
Now this crisis is officially public property, in the political sphere, put there by final disaster on Wednesday, formally acknowledged today by the Fed, the Treasury, the President, both houses of Congress, both parties, and both Presidential candidates.
Before post-mortem, medals, and booby prizes, a brief timeout for the real world. The economy is sinking and will continue to do so, partly because it must to pass the inflation pig (no lipstick) still moving through the national python. New claims for unemployment insurance are continuously rising beyond forecast, 455,000 weekly now, and housing is not close to bottom, new-builds last month falling to a 17-year low.
Mortgage rates have risen to about 6.125%, a wrecked credit system unable create leverage to support higher prices for $5 trillion in mortgage-backed securities and lower rates. However, a somewhat less distracted Treasury Secretary will go to work on that problem shortly. So he said today (again). He and everybody else know that mortgage credit must be unlocked for housing to bottom.
The authorities, including White House and Congress, have obviously been working on today’s fix for months. Fed examiners have been inside securities firms since June for the first time ever, “lifting the kimono” to discover the Street’s secret losses. Thus we have an initial funding amount; not enough, but most to be recovered one day.
The authorities could not go public with planning until the market damage was so severe that a majority of both parties in Congress was willing to go along. The most difficult part of the journey ahead: helping the American people to understand, and to stay together despite contrary charlatans by the thousand.
Top honor: to Perfesser Bernanke. Quiet, no grandstand, the technician with the life-study knowledge of 1930 and the determination to prevent 1932.
An Honorable Discharge, no medal, to Hank Paulson. You hire an investment banker to look around corners for you. Relentlessly surprised, annoyed at the waste of his valuable time, Hank has only recently discovered that there are corners.
Medal of Honor: Tim Geithner, NY Fed Prez. If we are very, very lucky, this extraordinary man will stay in public service for a while longer.
The Boobs... oh, my. Start with the CEOs and boards of the failed firms. Name them, publicly humiliate them, and then shun them. Forbid them ever again to participate in a public company. That’s authentic “moral hazard.”
The Liquidationists. Find the hottest corner in Hades for those who thought (and still think) that mass bankruptcy and liquidation will bring proper punishment, future caution, and recovery. The Lehman butchery led directly to the AIG bloodbath and total system meltdown. Andrew Mellon, Herbert Hoover’s Treasury Secretary in 1931: “Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate... and recovery will follow in a few months.”
Another high honor goes to the irrepressible American spirit under pressure. On Tuesday, news crackled over Lehman’s in-house squawk box that Barclay’s Bank would buy half the wreckage, and perhaps 10,000 people, many
of whom lost their life-savings, would still have jobs. Then the box played “God Save The Queen” to cheers.
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