PhD economist John Hussman has some great quotes in his current market comment:
For background, see this and this.It appears to be wishful thinking to believe that the credit crisis is over. Most likely, what we've witnessed in recent months is little more than the combination of a lull in the [mortgage] reset schedule coupled with a wholly unsustainable burst of deficit spending amounting to over 7% of GDP.
My impression of the U.S. banking system is that it is quietly going insolvent, in a manner that will become evident only when the slack for “significant judgment” (provided by the FASB earlier this year when it altered mark-to-market rules) is taken up so tightly that the rope snaps. Presently, this slack has allowed banks some time, but the question is, time for what? The rules encourage banks to neither modify loans nor foreclose, both which would trigger a restatement of value on the mortgage asset. Meanwhile, banks are reluctant to allow “short sales” in lieu of foreclosure (where a homeowner sells a home to avoid foreclosure, but at a price less than the residual loan value, so the bank has to essentially eat the loss). This again defers the restatement of asset values for a while, but makes business sense only if home prices are expected to recover faster than the foregone interest that could be earned on new loans.
So if you talk to people who oversee these assets, including people who work with the FDIC, you'll hear that there is an inventory of unrecognized losses being built up, in hopes that the underlying mortgages will turn around without the need for loss reporting. In view of the CRL foreclosure projections, all we can think is – fat chance...
Our policy makers bailed out bank bondholders instead of focusing on debt restructuring. The bad assets are still in the banking system, millions of families will still lose their homes, the Treasury and Fed have jointly issued trillions in new government obligations, but the bondholders of Bear Stearns will still get 100% of their principal and interest.
Despite the current enthusiasm of Wall Street, this story has probably not ended, and the evidence suggests it will end badly.
Technical note: Hussman thinks that stocks are extremely overbought.
The chief problem that the US economy faces is private debt gone bad on a massive scale. Private debt must be serviced through income, savings or selling assets. Otherwise, it must restructured, or default will be the outcome. Thus, there are two ways the the government can intervene. The first is by forcing restructuring to forestall default, and the second is by moving quickly to close the output gap so that declining income does not compound the problem. Neither of these is being pursued with urgency or purpose.
ReplyDeleteInstead of dealing with the problem at the level of private indebtedness, the government has apparently decided to conceal toxic waste in the financial system through various subterfuges while attempting to reflate asset value to pre-crisis levels. This would leave the debt intact and rescue the financiers that extended it.
The irony is that this was not an inevitable choice. It was not a matter of either rescue the banks or fix the real economy while restructuring debt in danger of default. The numbers were known before the stimulus package was submitted to Congress, and the necessary amount was never on the table, and its composition was watered down with a high proportion of relatively ineffective tax cuts before negotiations even began, when targeted spending was needed.
This was purely a political decision, made because of "bipartisanship." That is to say, conservatives of both parties would have howled at the size the stimulus package based on erroneous neoliberal economics equated with national policy.
The notion that the US banking system is insolvent is not correct either. Some banks, especially those "too big to fail" (the oligopolies) are likely insolvent due to imprudent risk-taking amplified by excessive leverage. These are the institution that are being protected, while the smaller institutions that acted prudently are being disadvantaged.
The Obama administration is perpetuating the same crony capitalism that characterized the Bush administration.
Vietnamese proverb: The dung heap remains the same, only the flies change.
Hey Tom, you think the problem is private debt? Not. I have zero personal debt. I (and you) are still screwed. We're on the hook for roughly $60,000,000,000,000. That's with T. And that's not going down anytime soon. This is the most massive transfer of wealth in recorded history. It is a "banking function"
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