In part of one of my previous posts, I made a reference to the fact that a recession can/should reset prices and cleanse the markets. This idea goes beyond price and demand bubbles. It also applies to the use of credit. As I’ve said, easy money, backed by the fed through freddie and fannie, caused the unnatural increase in demand for housing which snowballed by bringing in an unnatural amount of speculators, causing the bubble. That easy money overflowed into every corner of the markets. So now that it has been cut off, we are seeing the effects.
I’m of two minds concerning what to do. The conservative and principled part of me sees the absurdity of overuse of credit, and wants to say that cutting it off should teach businesses, government, and individuals to learn how to better live within their means, something this country needs badly. (that’s the cleansing effect I’m referring to)
Alas, I afraid the other part of me might be more practical. I think they’re going to take away my libertarian decoder ring for saying this.
You see, you can’t just take the heroin away from the junkie because the withdrawls might kill him. You have to ween him off it. It seems terribly ironic that we give addicts perscription drugs that are often equally addictive as their illegal counterparts. But, what choice do we have? When you switch a heroin addict to methadone, there’s a small chance he will kick the habbit. Most likely, he will just live out his days addicted to methadone instead of heroin, but it’s even more dangerous to cut him off completely.
Our credit problem is much the same. Many businesses cannot operate without spending next quarters’ earnings, simply because they have become so used to operating this way. If credit ceases to flow, our economy suffers from withdrawals.
The irony is much the same as in my analogy. The problem was caused by government-backed over-leveraging, and we are attempting to solve it through more leveraging. Injecting liquidity into the credit markets to deliberately re-expand credit, when the problem was caused by too much credit in the first place (easy money).
Am I saying that the current Fed action is correct? No. But it might be necessary. I’d love to say let’s go cold turkey; It might be a decade before we see real growth again, but at least it would be growth built on hard work, rather than growth built solely on credit. The problem is, I’m not sure we can survive the detox.
Of course the problem in all of this is that I in no way trust congress or the Fed to handle this the way it should be handled. That is, inject JUST ENOUGH credit to keep things alive while business get their accounting practices back on solid ground. Then slowly draw back the artificial credit expansion so that credit once again becomes a function of mutual benefit of both borrower and lender. (with REAL default risks written into the rates, as opposed to ignored because of Fed backing and rate-fixing).
Instead, I’m afraid the economy is just going to be addicted to methadone instead of heroin.
The National Debt Clock in New York has officially run out of digits. The clock was erected in 1989 to highlight the ridiculously high national debt of $2.7 trillion. it has now exceeded $10 trillion.
This highlights the fundamental problems with government right here. In it’s desperate attempt to solve every problem and constantly justify it’s own bloated existence, government has screwed us all. When did they think this was going to end? Did anybody really think this wouldn’t catch up to us? That we could spend further and further into the future forever with no consequences?
Keynes was soooooo wrong.
Ok, so that last post was kinda doing exactly what I was bitching about; that is, scaremongering and trying to make everything seem negative.
So here’s the optimism:
- Housing prices are way down, which is GOOD, despite what they tell ya. once the credit markets stabalize, more people will be able to afford housing.
- Speaking of those credit markets, the media has been saying for weeks (months?) that it is impossible to get a loan out there. The stories are all the same, they find some sap who got turned down for his loan and turn anecdotal evidence into trend-revealing data. The truth is though, that most lenders are doing business as usual with one big difference; they are only lending to well qualified borrowers with good credit. GASP! If you want a loan, I suggest you go to a small local bank. There are 9,000 of them and the vast majority have perfectly healthy balance sheets.
- unemployment is way way way way up! Or maybe just a couple of points. it’s hovering at around 7 percent in my area, which is supposed to be one of the hardest-hit cities. It exceeded 40% during the Great Depression. Also, most economists consider anything under 5 percent to be a fully employed market. It will probably continue to rise, but you can count on the media to panic at every tenth of a percent increase.
- The DOW drop on monday is being called the largest single-day point drop in history. What the headlines don’t tell you is that a couple of decades ago, the DOW couldn’t have dropped 777 points because IT WASN”T EVEN THAT BIG. Moday’s ‘crash’ was about a 7 PERCENT drop, which is the 17th largest percent drop in history. If you look at where those other drops occured, many of them were during periods that aren’t even considered deep recessions. Also, the DOW jumped back about 500 points the very next day. So….. don’t panic. Just to put things in perspective, the DOW has more than quadrupled since 1990. So veteran investors have made a lot of money, and can probably weather a 7 percent drop in values.
- The financial markets and the economy are not one and the same, despite the picture being painted by Paulson. A large crash in the financial markets will definitely hurt the national economy, but it can and will survive. The companies that will fail are the ones who cannot operate without being over-leveraged. It’s time we stop propping up companies who’s business models simply are not profitable.
- The last deep recession had a cleansing effect that reset prices and values back to reality, and ultimately led to a couple of decades of uninterupted growth. It wasn’t until the last 8 or 9 years that that the markets got greedy and the fed started ignoring it’s own regulations, leading to an easy money situation that increased demand WAY beyond natural levels and led to a huge bubble. This recesssion, if congress doesn’t screw us, should have a similar cleansing effect. It should have, and could have been, a perfectly healthy market correction. A recession is painful, but ultimately healthy and neccessary for the markets. Friedrich Hayek said in 1932: “Instead of furthering the inevitable liquidation of the maladjustments brought about by the boom during the last three years, all conceivable means have been used to prevent that readjustment from taking place; and one of these means, which has been repeatedly tried though without success, from the earliest to the most recent stages of depression, has been this deliberate policy of credit expansion. … To combat the depression by a forced credit expansion is to attempt to cure the evil by the very means which brought it about …” What an amazing parallel.
The last thing I want to say sort of changes the subject, and also politicizes this post. But it’s something that has been really bothering me. Free market types, economists, libertarians, etc. are very often attacked for being corporate shills, being pro-corporate welfare, etc. People like Naomi Kline and Thomas Frank constantly accuse libertarians of things like disaster capitalism and profiting through victimization of the poor and blah blah blah. I find it incredibly ironic that the free market voices are the same voices arguing against the bailout. The ones who normally rail against big corporations and complain about how unfair it is that some people are incredibly wealthy while others are incredibly poor, they are the ones who are now supporting bailing out companies who made terrible business decisions? Why do they want to prop up housing prices? That is an attack on renters. It’s an attack on the lower class to keep housing unaffordable.
I guess one small benefit of the current situation is that it is exposing a lot of people for who they really are, and what they really believe in.
This is just about the scariest graph I’ve ever seen.
The teasurey secretary, chairman of the federal reserve, the administration, and congress are all trying to convince us that the economy is about to crumble around us. I don’t want to be cliche but it’s becoming a self-fulfilling prophecy. That 777 DOW drop on monday? That wasn’t because of any independent market conditions, it was because of the rhetoric coming out of washington scaring the crap out of investors. The runs on the bank, low consumer confidence, these things are all a direct result of the political rhetoric we have been hearing lately. So not only are they damaging the economy through negative propoganda, the bailouts and new monetary policy are going be a silver bullet to kill our markets. Fifty dollar loaf of bread anybody? Take a look at that graph. Amazing. 11.6 percent increase in the monetary base in ONE MONTH.