Mortgage Credit News – December 31, 2009

Prognostications for the New Year are governed here by Peter Drucker’s law: “Nobody can predict the future. The idea is to keep a firm grasp of the present.”

Deal. Attitude first, then the particulars.

Last year opened with panic, and all year long we looked over our shoulders for its return. Instead, we should go into 2010 with curiosity, not foreboding. Next year may not turn out terribly well, but that panic of ’08-’09, firesales and systemic runs — that was a once-in-multi-generation affair.

The tricky part: curiosity about what?!? Dismissing the irrelevant and finding the heart of the matter — that is everything. Each in descending order of importance, first the trivial, then the central.

Gold. Pay no attention. Given the immense global economic expansion underway and the shortage of the commodity, its price ought to go up. Then again, given cost of production at $600/oz and doubled price, nobody knows at what point balance will appear. If you want an inflation indicator, watch inflation.

Dollar. Currency values are relative to each other, not absolute, and are effect, not cause. In the old days you could assume that a weak currency brought inflation, or that you got some benefit from having a strong currency. Today, China has no inflation problem and tries like hell to keep its currency cheap. Watch economies themselves.

Jobs. Fresh from health-care success, Congress will soon attempt to fix the economy by deploying “job creation” programs. A good economy produces jobs and raises wages — can’t help it, which is why a too-strong economy is inflationary. Therefore we should focus on how to help the economy. If the economy is too weak to need more workers, then artificial hiring is a human bridge to nowhere.

Growth. Growth is nice, but the level matters more. You’re going to see a lot of growth stats in 2010 (I hope), but the hole into which we fell during the panic is deep; the idea is not mere progress up the side, but to get all the way out. Which leads to the big stuff….

Tax revenue. As both indicator and outcome, revenue matters more than everything else combined. The recovery brigade doesn’t want to talk about it, but if you don’t have rising tax revenue, you don’t have a recovery in progress. We need revenue in order to stop borrowing too much. If revenue doesn’t rise, we’ll get away with borrowing-roulette for a while, but ultimately be faced with spending cuts or tax increases or both. Doing either or both while still non-recovered is the stuff of black holes.

Housing. Until households get the sense that their primary investment is safe and relatively liquid, they’re not going to spend or take risks.

Credit. Cart and horse problem. Thou cannot simultaneously de-leverage and enjoy rapid economic growth. Thou cannot simultaneously force banks to add capital and expect them to lend. And any sector suffering loan losses will lose more without new credit. Loosen up, or do without growth. Limit growth after you have restored it. And the imponderables….

China. Will it… can it… remain indifferent to its impact on its trading partners, everywhere undercutting wages and financial stability? Same for its total disinterest in global security, or even regional burden-sharing?

Leadership. Never really know about this one. By historical comparison to other times of modest crisis, the major political parties and Congress today are led by midgets. Even more out of pattern: it has been common for one party to abandon the political center to the other, but today both have. Is this a sign that the choices ahead for American policy are so tough that forting-up in rhetorical corners is more comfortable than making deals and doing things? As I needle friends of both political wings, this is a democracy, and our government is a mirror of the people.

My deepest curiosity for 2010: what will that mirror reflect next year? Are we done, vigor and resourcefulness in decline, or just on break?