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October 2, 2009
Believers in V-recovery gave it up this week, as did many hoping for any near-term recovery at all. The 10-year T-note broke cleanly through its post-May 3.28% low, taking mortgages below 5.00%, also for the first time since spring.
The manner in which the bond market cascaded said more than the fact. There was no new, single-piece trend-changing report, just the cumulative weight of news describing an end to the May-July bright interval, and the beginning of an economic flattening or outright stall sometime in August. Further, rates broke down before the biggest news of any month (payrolls), and in advance of next week’s Treasury auction of another $71 billion in long-term paper.
Today’s payroll losses were half-again worse than expected, down 263,000 and canceling any improving trend. Sectors you’d think had bottomed have not (construction employment is still free-falling at a 12.6% annual pace); ones you’d hope would hold have not (government jobs fell 53,000 on state and local budget cuts); and the one sector showing growth merely exposed foolish excess (health care added another 19,000 jobs in September, positive 559,000 since the recession began).
If we are stalling, the Administration and Fed all-according-to-plan position will be indefensible, and demands for new stimulus will rise. Paul Krugman and the silly-Left aside, few have the stomach for more Congressional borrowing and random cash-hosing. We need to get out of the policy box, and we have examples of alternate strategy in Europe and China, and forgotten lessons from our own past.
First, the problem: credit shortage has strangled recovery, households are in bunkers under collapsed net worth, and not coming out until home values are safe.
We speak in the US of a delicate Fed: pump-priming, fine-tuning, or jump-starting. Adding to metaphor stew, think of this Great Recession as a snow drift we must drive through. At the turn of the year, China gunned the car and simply blasted through, while we stayed on standard plan, control paramount, fussing about over-doing. Now we sit high-centered, no matter how much more traditional stimulus-gas we apply, still spinning our wheels. The force behind China’s blast: instructing banks to make loans. The chaos and error in making them was far preferable to not making them.
European finance ministers yesterday announced that all 22 big banks there had passed their stress tests, everything okay. Never mind the bodies under the rug. These banks are not making loans in China’s volume, but they are lending, in their proper role as public utilities, to be repaired over the next decade or two.
1. Commercial banks here should be placed immediately on capital forbearance and long-term capital-raising plans. Knock off the make-my-day threats to banks trying to make sound commercial real estate loans. Boards and CEOs should be advised to begin prudent lending at once, and that any found taking advantage of forbearance will be removed -- none of this Ken Lewis slinking away in his own sweet time.
2. Drop this nonsense about new bank-regulating agencies: the existing ones are competing for who’s-toughest, and have frozen the system. Proceed (please, now) with credit-rating reform, mandatory clearinghouse for derivatives, and juicing-up the SEC.
3. Housing. We’re either going to assist market absorption, dropping the pretense of loan modification, or stay in a hell of a lot of trouble. Fannie and Freddie should provide financing for any conventional foreclosure -- their loans or anyone else’s -- 5% down for a well-qualified owner occupant, 15% for an investor-buyer, no appraisal, rehab before market (all as FHA in ’87). Return F&F underwriting to some semblance of ‘70s-‘90s, especially for investors and asset-heavy applicants. We are converting from 69% national owner-occupancy to something under 65%, and each home converted requires an investor-buyer. Roll back the condo mortgage panic. Figure out a semi-government guarantee for jumbo securitization.
Nothin’ to it. Piece of cake. |
