|
February 20, 2009
Weakness overseas has overtaken the US economy as the chief worry in financial markets, knocking the knees from under the stock market, but in perverse benefit has made it easier for the Treasury to borrow and held mortgages below 5.00%.
That shift in fear center this week has created the mis-impression that markets actively dislike Obama’s financial rescue plans. Certainly, these plans are far from full effect, and the most important one (credit fix) still hazy, but don’t buy the scaremongers selling helplessness and incompetence. That was last year.
Tuesday brought news of extraordinary declines in Asian GDPs and exports, followed by similar news from Europe, and of new bank exposure there in loans made to Eastern Europe. The most disturbing thought from Europe: the low but rising threat of a national default going dominoes and exposing the euro currency.
Ireland, Italy, Greece, Spain, Belgium, and Portugal desperately need to devalue their currencies, but cannot because they are all on euro standard. Iceland has been the only sovereign default so far; from international bankers back to fishing. However, the world is running on sovereign credit guarantees alone, and at some moment someone’s guarantee will fail... then hell to pay. Russia is on the high-doubt list, even the UK worrisome. There is still time for multinational cross-support, but Germany and the European Central Bank will have to join the game. Quickly and massively.
As disorderly as US response to this crisis may seem, we are way, way ahead of the rest of the world. Herewith an update on the blur of domestic rescue efforts.
Stimulus. Any program despised by Paul Krugman, the Democratic Left, and the Republican Right can’t be all bad. Knock off the sniping. Keynesian Rulebook Item One: in a collapse of aggregate demand, it is government’s job to spend to replace the lost demand. Doesn’t matter how: fill helicopters with C-notes and criss-cross the country, pushing them out into the rotor wash. Nobody knows how to spend this money wisely, or how to “create jobs” with it. Just spend it. Concerns for ultimate debt and follow-on generations... get over it: follow-on generations would not be so damned happy to be raised in shacks and caves.
Foreclosures. The new proposal is excellent. The new rhetoric, “Stop preventable foreclosures... Help responsible borrowers” is the first acknowledgement that there is a huge volume of inevitable foreclosures. The $75 billion to be spent is the least that could buy silence from Barney Frank. We ran home ownership from 65% to 70% in the last ten years via $2 trillion in suicide loans to households unprepared for ownership, and we’re gradually going to firesale and foreclose our way back toward 65%. Most workouts will fail because mortgages are already structured for the lowest possible payment. The incentives and bankruptcy cramdown are good policy, but at 4%, each $10,000 of principal reduction knocks only $47 off the monthly payment.
The Fed. Perfesser Bernanke’s new speech and the minutes of the January meeting reside at www.federalreserve.gov. The Fed’s staff has weakened its economic forecast; appropriate, as every one of its forecasts has been high-side wrong since summer 2007. Bernanke’s run-down on Fed emergency efforts (and their future consequences and unwinding) is brilliant and reassuring: those who found Geithner short on shock and awe will find it here. The Fed within a week or two will deploy at least $2 trillion in financing for everything from cars to corporate bonds, and stands ready to finance another couple of trillion worth of toxic bank assets.
Mr. Geithner. The big-bank worst-case “stress-test” is underway. We must at last get in front of and stop the negative asset-value spirals in progress, and Geithner’s chosen, correct, and ultimate line of defense is the banks. The survivors will be cleansed of suspicion; the mid-range group patched and sent back into the line; the fatally hit finished off, busted up and sold. The stock market says Citi and BofA are goners. We must get credit flowing again, and this is the only way. Also the last.
|
