December 17, 2008

The Economy : What's next?

PhotobucketThis is gonna have to be somewhat short due to a meeting this AM and far too many things to do.

First up, the Fed's decision to drop the Funds rate to 25 bps is not unexpected but it is a little irritating and tells me two things:

1) Paulson is a pussy
2) Bernanke is a cunt

You do this, if you're the Fed, to provide liquidity to the banks so they can rebuild their balance sheets (we're about 60% of the way there) and start lending again. Of course, that's what the Fed and Treasury have been doing this entire time, with every rate cut and TARP purchase and TAF usage. And banks have, in turn, decided to continue to tighten the screws on businesses and consumers. As a result, unemployment is rising sharply, consumers have frozen spending, businesses are pulling back (they couldn't get capital now anyway) and we're staring at a very deep recession. I guess we should be happy it's not going to be a depression, right?

Wrong. If the banks don't move off dead center, all that has transpired will be pretty worthless. Which means the Fed and Treasury need to do one of two things...

1) Nationalize as many big banks as it takes to turn the spigot back on. This, honestly, is my favorite because it has the potential to squeeze the hell out of these glib CEO's. Call Citi and BofA and tell them, "You either lend or we wipe out your equity. And your pay package. And you can sue the Federal Government."

2) Inflate the money supply but not by issuing debt. Just print more. This one is dangerous like a motherfucker because it leaves nothing on the table and devalues the dollar. Depending on what happens overseas, that could lead to a flight from dollar denominated assets leaving us with far higher rates over time. It would boost export income and would alleviate our real BOP issues (we're selling more overseas and paying off past debts with nominally cheaper dollars). However, there are already so many dollars out there that when asset prices stabilize and increase, we're going to have (in effect) the same issue. This is, in effect, like pouring gasoline on the fire. Krugman and Mankiw think it can be managed. I think they're crazy.

Neither Krugman or Mankiw would be especially comfortable with option one because both are operating under the illusion that you can, through elegant measures like printing money, bully the banks. I prefer the more direct approach that creates real consequences. Neither understand that the 'free market' is functionally dead. We're back to managed capitalism in the US because it's clear that greed overrides common sense. We're not heading toward socialism but our latest flirtation with laissez-faire has failed, just like the others. The laws R's and some D's have spent the last three decade dismantling, as it turns out, were absolutely necessary. Who knew?

Mankiw's uncomfortability with admitting error is especially clear in light of his disdain for new federal spending as it will burden our children. Please. Greg, in the abstract, is absolutely right. However, this is about stimulus and infrastructure investment. Personally, I don't think we need stimulus I think we need to spur the banks to loosen guides and lend some of this cheap money they've been given. They can then rebuild their balance sheets with the spread income, consumers will lower debt burdens and business will have the operating and expansion capital they need. That's why I like Option 1. Option 2 leads to a banana republic.

As for Mankiw's dislike of other federal spending, I have only this to say... BITCH, WE NEEDS US TRANSPORTATION INFRASTRUCTURE. If you're so worried about the debt burden on your damn kids, think about how much more expensive building these roads will be in 2020 or 2030. We spend a trillion dollars and for that money we modernize our infrastructure for the next 20 years? It's a bargain and you should be looking at it that way, especially since all this debt being issued to finance it is functionally free.

Right now, Housing is starting to turn. We still don't have a solid loan mod platform but prices are beginning to stabilize and the refi market has gone through the roof, mostly because the Fed and Treasury have been buying MBS dropping interest rates on home loans for consumers. Those rates got passed through because there are alternatives to banks for mortgages. Not so with most other types of borrowing. Given that, it's time the Fed and Treasury start acting like they have a pair and beat the fuck out of morons like Ken Lewis.

Posted by mcblogger at December 17, 2008 09:55 AM

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