I've been getting a bit...um... un-awesome... in my posting frequency. But I've been feeling physically, emotionally, and spiritually sick, so it's been hard to rally up the spirit to write anything. And this is mostly a rant, so beware.
On the physical illness front, my entire family decided to come back from our vacation with the 24 hour stomach virus, which had a ferocious tenacity. We were felled like Christmas tree, one after another, and though I have the dubious honor of being the last to be stricken, stricken I was, and stricken hard. As anyone with children knows, when bugabooed with a persistent illness like this bugger of a bug, there is a whole 'nother level of complexity as J and I struggled to figure out who could be around when to take the girls to the doctor, or pick up Loo when school called mid-day with the dreaded, "you need to come get your child" message. Nanny had extra hours, but there are limitations, as she does not drive.
On the emotional front, I've realized that I've become increasingly paralyzed with fear about what is happening to the US economy. Now, I am an eternal pessimist... I know this of myself, which is why I've consistently rejected the entrepreneurial in favor of the risk-free (hello! lawyer, anyone?). But I like to be a rational pessimist, a logical pessimist. And there is a lot of conflicting signals out there.
Deflation/Inflation
Clearly, at least in the short term, we are experiencing mild deflation. The bursting of the housing bubble has caused housing prices to decline, significantly in certain areas, though only (frustratingly) modestly in my own region. Oil prices have collapsed pretty magnificently, and even with the brief run-up we've been seeing due to the Israel/Hamas conflict and the Russia/Gazprom situation, we're back down below $40/barrel as I write this. Retailers had a staggeringly bad December, reflecting both poor demand and the insane margins that retailers were willing to take in order to trim inventory. And, more importantly, there are starting to be lots of talk of people taking wage cuts in order to prevent mass lay-off. A good sign of humanity, though pretty shit bad for deflation (as it signals wages becoming "unsticky"). As far as I can tell, the only things that are increasing in prices are certain foodstuffs.... and gold.
But the amount of "money printing" has been nothing short of extraordinary. Outside of TARP and the proposed Obama stimulus, which already add up to $1.5 trillion, the Federal Reserve's balance sheet has exploded by a magnificent $1.2 trillion. I understand that this is not money printed today, but money that we're promising to someone, and mostly foreign someones, tomorrow.
This is a transference of leverage from the private sector to the public sector.
But the funny/ironic thing is. The very people that we are borrowing from won't allow the US dollar to get weaker. This is the part of this economic recession that has been so endlessly mind-boggling. That because a whole lot of Americans took out mortgages for homes that they shouldn't have, and a whole lot of American banks packaged those mortgages into supposedly risk-free securities, countries like Iceland, Ireland, Spain, Greece, Latvia and to a lesser degree, Germany and China are in far worse economic shape than they could have ever expected.
Japan has all but said that they wouldn't allow the Yen to get stronger than 70 to the dollar (if that), and China has stealthily (or not so stealthily, I guess) pegged the Yuan (and hard) back to the dollar. Who knew that for these Asian governments, it would be more important to maintain the trade imbalance between themselves and the world's consumer nation than to literally have that country (that would be the US) at their mercy financially?
And, unsurprisingly, if other countries won't let the US dollar inflate, then guess what, apparently, the US dollar won't inflate.
Credit Crunch/Insolvency
So the fed is oh so proud of itself because the credit market has been showing marked signs of improvement. The TED and A2/P2 spreads have both narrowed, and significantly (both signs that interbank lending and commercial paper lending are moving again). I've heard that most of the lending volume is still clustered around loans w/ short maturities, so things are not perfect. But on the whole this is theoretically considered promising.
Yet, at the same time, there is now a whole lot of hand-wringing about how the first 1/2 of the TARP funds have been used and the expansion of the Fed's balance sheet. Which lead to this doozy of a House hearing:
I know how this plays, and I know that us blues are supposed to love a Fed Vice Chair coming off as a total slime-bag asshat tool, but honestly, I want to know...
Do any of the politicians in Washington actually understand WTF they are talking about?
(1) Congressman Grayson is apparently asking the Fed Vice Chair about the expansion of the Fed balance sheet (by $1.2 trillion), and Kohn is trying his very best to explain that the money is lent and not spent. Then Grayson wants to know which financial institutions got the loans.
Oh, this is such disingenuous crap.
The "categories" under which Fed has lent money is actually known. In fact, here is a chart of them:
What this chart says, right off the bat, is that a HUGE chunk of money is what was committed when Bear Stearns was bailed out (Maiden) another huge chunck is the Commercial Paper Lending Facility (CPLF), which yes, was probably lent to specific banks to guarantee their commercial paper, but was something that everyone and their mama was very insistent on when Lehman's failure caused that money market fund to break the buck. And of course the Term Auction Facility (TAF).
My point being, it's hugely hypocritical to be the congress that passed the TARP on the one hand, which was all about propping up the failing banks, and then on the other hand be all up in arms about the expansion of the Fed Balance Sheet, which has been all about propping up failing banks.
(2) In these lending situations, Mark-to-Market is as much a fiction as anything else. The point is that banks have some really bad, worthless crap that they can't get any money (which they need) for. The Fed is lending them cash and holding that really bad crap as collateral. Two things can happen. Either the banks will pay the Fed back, in which case the Fed is out nothing. Or the banks won't, in which case the Fed will get to keep the really bad crap, which is worthless, and the Fed will be out what it loaned. However, if the objective is to prop up failing banks, and you insist that the collateral be valued at market, they would be valued at crap (near 0) and then the Fed won't be able to lend any money to the banks because they can't pony up any valuable collateral. No banks saved.
So either you just decide that the bad banks should fail (my personal preferred option) or you play this ball. Asking for marked-to-market accountability on collateral when the goal is to save desperate financial institutions is... idiotic.
(3) It is, and I have no link now, but I believe this is true, a long standing, well-established principle that the Fed does not reveal who it lends to at the Discount Window. Like the FDIC's watch list, which banks are never revealed, this is to prevent runs on weak banks, which would pretty much completely destroy any chance a bank might have at preventing insolvency. Of course, it is arguable that all banks are weak at this point, so what does it hurt to reveal.
I think this shield principle is rational. And it works reasonably well when not every financial institution is on the brink of insolvency. If we want to change this, say, for exigent circumstances, then we should do it through the appropriate procedures, and not during some 10 minute congressional cross-examination.
(4) And finally, let's remember, this is the Fed's lending program, and not the TARP, which was money given away (yes, with theoretical upside, but let's face it, it is a bank handout program), which should have accountability and transparency, and which, at least according to the New York Times, some amount of transparency does in fact exist.
The two are not the same, they are not interchangeable.
And don't get me wrong, I have so many many problems w/the lending facilities. But I go back to the core and really think that we needed price discovery, and a few more Lehmans, despite the inevitable pain. But this, this is hypocritical idiocy.
Oh, craptastic, it's late. I need zzz's. More later.
Love the unique perspective and it makes me realize that sometimes I need to look at these things with a slightly less critical conservative bent.
Wearing either blue or red-tinted glasses when looking at these situations can be detrimental to independent analysis of the situation and thanks for kinda pointing that out to me with this post :)
Posted by: Junior | January 15, 2009 at 01:33 PM
Just checking in to read this again while I'm not tripping on cold medicine. Still trying to sink in. I don't know why, but I understand these things when you explain them.
Did you read about our move?
Posted by: hoppytoddle | January 19, 2009 at 12:59 AM