Greed vs Fear

Treasuries and gold are fear investments. Investors have bid up the price of 10-year Treasury bonds, driving down the yield to 3.178%. Fear. Gold has just hit a new high, $1038. More fear. Stocks are a greed investment, and stocks are looking tired, moving sideways after a 7 month rally. As the rally has continued, volume has seen a mild but steady decline.

If Wall Street is torn between greed and fear, what about Main Street? Unemployment continues to rise, hitting 9.8% as of last month. The economy seems to be continuing to shed jobs, albeit at a slower pace. Incomes are falling, as is the average workweek. More are working part-time when they’d like to have full time jobs. The housing market continues to decline, offering a benefit for some Americans: falling rents. Thousands of condos that cannot be sold, and thousands of homes that were bought by speculators who don’t want to sell at current prices but need cash to pay the mortgage hit the rental market, have pushed rents steadily downward. In addition, people are consolidating, doing with less.

People are even borrowing less. Total consumer credit has declined by 3.6% during this recession. Comparable declines haven’t been seen since 1991. Even with those declines, the consumer remains heavily mired in debt, so it seems reasonable to expect it will take consumers some time to lower their debt levels, as seems to be their preference. Many consumers are saying now that they wouldn’t return to their ‘spend now, pay later’ ways.

Corporations are facing the shock of billions of dollars of worthless assets clogging their balance sheets, or, even worse, these toxic assets are not on the balance sheet, because they are not being valued honestly. New accounting rules have allowed corporations more flexibility in their amortization of gains and losses, i.e., less transparency for investors, meaning more risk. Corporations have been hollowed out by two decades of mergers, acquisitions, restructurings, layoffs, and re-brandings. The CEO and upper management—facing little opposition from the Board of Directors, shareholders, workers, or other stakeholders—have looted the corporation. New models of leadership will be needed for corporations to move forward. I expect the wild executive compensation of the boom years will swiftly fade away.

Meanwhile the various levels of government struggle with massive revenue shortfalls and budget deficits. Most states are cutting spending and raising taxes. The former is good during a recession, the latter, disastrous. Many are following California’s example, turning toward debt to put off their budget problems. In the face of all this, the Federal government considers a health plan that will fine people who don’t have health insurance, and we debate over whether to call this a new tax or not.

In the battle between greed and fear, there is no contest. Indeed, I’ll believe in the recovery when I see some genuine signs that greed has returned.

PermaRenter: "Full Commanding Denial"

I liked this comment that I found on patrick.net, written by PermaRenter:

Full Commanding Denial

If central casting called for a poised, straight-talking, and capable-seeming president, it would be hard to come up with someone better than the Barack Obama who walked and talked around the White House grounds with Steve Croft on “60-Minutes” Sunday night. He may perfectly represent the majority who elected him, though, because he also appears to be in full commanding denial of the realities overtaking our American experience.

Those realities include the fact that we can’t possibly return to the easy credit and no money down “consumer” economy no matter how many nominal dollars get shoveled into the fiery furnaces of banks too-big-to-fail. As Treasury Secretary Geithner’s underling, Stephanie Cutter, said last week, “Our singular focus is on increasing lending to support economic recovery. Everything we do to stabilize the financial system is done with that goal in mind.”

Lending on the scale that became normal over the last decade is for sure the one thing that we will not recover. We turn around in 2009 to find ourselves a much poorer nation than we thought we were a year ago, especially among that broad range of formerly middle-class wage-earners who lived so luxuriously until yesterday. The public can’t process this reality and the president, for all his relaxed charm, is either not ready to articulate it, or can’t process it himself.

Everything that we’re doing right now is engineered to avoid reality, to sustain the unsustainable, to recover the unrecoverable, when the mandate of reality compels us to face our losses in order to move on to the next chapter of a collective American life. The next chapter would be a society that runs on a much more local and modest scale, centered on essential activities like growing food, requiring harder physical work, and focused attention — in other words, the opposite of a society lost in abstractions, long-range daisy chains of off-loaded responsibility, and incessant pleasure-seeking.

In retreat from this reality, we’ve set in motion two forces that are pretty certain to bring us to grief. The first proceeds from the fateful FMOC [sic.] decision last week at the Federal Reserve Bank to begin buying massive amounts of our own treasury bonds and bills. This is predicated on the idea that the mechanisms of wealth production — even of illusory wealth, such as the fortunes created by trading securitized unpayable debt — can keep chugging along, spinning off limitless additional suburban villas, chain stores, car trips, and deep-fried snacks. It would be sententious to explain how this destroys currencies, but wherever “monetizing debt” has been tried before in history, that is the outcome. The result would be ruinous at every level and would lead straight to the second terrible force: social upheaval brought on by the conversion of economic problems into political turbulence.

Those two forces are underway right now, in fact, since the overt monetizing of last week was preceded by the shoveling of bail-outs, which tacitly guaranteed a collapse of credibility in US debt instruments. I’m not in favor of violence and anarchy, but after the AIG bonus affair, it’s hard to imagine that we are not one more corporate misdeed away from a rocket-propelled-grenade, or something like that, being fired into a glass office tower somewhere — and then the “first-broken-window” rule of social disintegration comes into play. Meanwhile, I stick to my time-table of six-to-eighteen months before the reckless creation of new money-for-nothing filters through the system, overcomes even compressive mass bankruptcy, and starts expressing itself in the sinking value of dollars and the revved up velocity of their circulation in pursuit of tangible commodities.

We’re already seeing the first twinges of that in the up-creep of oil prices, busting through the $50-a-barrel barrier last week. Since scarcity tends to express itself in gross volatility, it’s easy to imagine oil prices rising swiftly beyond the $147-per-barrel record level of last year. As that occurs, the most basic premises of everyday life in the USA will be called into question. If you think car sales have been bad lately, with oil in the $35-a-barrel range most of the winter, just wait. The newly-minted unemployed will be marooned in their subdivisions. They will not be buying GMC Yukons on 48-month installment contracts, let alone X-boxes on their Visa cards. They might be very very hungry, though. All bets are off as to how these social classes may organize themselves to alleviate their hunger (and express their anger about it).

Given all this, it’s kind of hard to believe that the savvy, thoughtful Mr. Obama is going along with such a disastrous program as the one his “team” is rolling out. Perhaps his ease and confidence masks a tragically conventional world-view, an incapacity to imagine “change” outside a very narrow range of possibility. I must say I doubt this is the case. I think, he is going along, for the moment, with a consensus of wishes to prop up life as we know it at all costs. This consensus emanates from the top down and the bottom up. The millions of “Joe-the-Plumber(s)” out there don’t want to rethink the terms of existence anymore than the lords of Goldman Sachs. I also think that circumstances will force Mr. Obama’s hand before long — specifically that a moment will arrive when he goes on TV and tells the American public that things have changed way beyond the scope of what they even imagined when they pulled the levers last fall and voted for an uncharted future.

Capable observers are calling, meanwhile, for a robust bear market rally moving through Spring, on technical grounds that have little to do with the greater forces roistering in the background. Reality is a cruel mistress. If the stock market rally rolls out as predicted, it will surely fake-out the mainstream media. They’ll conclude wishfully and foolishly that something like “recovery” is underway. They may even interpret rising oil prices as a “positive sign” that the great groaning enterprise of the something-for-nothing economy is back “on track.”

They’ll be shocked sometime after Memorial Day when it all comes off the rails again. We have a lot to sort out and very little time to get on with job. Notice, I haven’t even mentioned the potential for mischief and instability coming out of the rest of the world — enough black swans to blot out the sun. Want some concrete advice? For those of you sitting on US Treasury bonds and bills, now would be a good time to get out.

Wow. After that summary of our woes, check out my Reasons for Economic Optimism - coming tomorrow!

Should We Cap Interest Rates?

A new article in Harper's Magazine (subscriber only, but here is an interview where he gives the main points) by Thomas Geoghegan offers an interesting solution to the problem of financial collapse: cap interest rates.

His argument is provocative: by deregulating interest rates, we encouraged the massive growth of the financial sector, for the simple reason that capital can obtain much higher rates of return through lending consumers money at high interest rates than it can get in, say, manufacturing. Securitization separated the lender from the owner of the debt, which created an incentive for lenders to engage in misleading practices and really sell the idea of debt to consumers. The average working family got killed by higher and higher interest rates.

He's right about so much of this that I find it frustrating that he arrives at the conclusion of capping interest rates.

Yes, the growth of the financial sector was because of higher profit rates; yes, securitization separates lender from owner of debt, creating some bad incentives; and yes, the average household is getting killed by high interest rates. But to cap interest rates would simply mean that much of the lending to consumers would simply dry up or be driven underground at much higher interest rates. (The classic deal with a loan shark is "a point a week", or 52% yearly interest.)

High adjustable-rate interest is simply the market's response to inflation. Eliminate the inflation, and you will eliminate high interest rates. Indeed, the sooner the market correctly prices the asset-backed securities that are based on debt, the better, because that will be the day when this scheme is finally buried once and for all.

To get the government involved in this process would be a mistake. Government-based pricing does not tend to produce good outcomes, it tends to produce shortages and surpluses.