Capital Markets Update

By Louis S. Barnes Friday, April 1, 2011

Today's report of job gains in March has the usual suspects overheated and long-term rates rising a little. Picking up 216,000 new jobs is good news, but NYFed Prez Bill Dudley's reference to recovery as "tenuous" is dead on the mark.
There is a deeper and authentic good-news thread. Beginning circa 1990 the rise of China and the rest of the emerging world began to undercut American labor. We still have a painfully steady 8.4 million people working part-time who cannot find full-time work. We are adding new jobs, but wages are flat, not growing at all. People coming out of unemployment must often take jobs paying less than their old ones.
That adjustment has been underway for 20 years, masked by stock and housing bubbles. However, this is not a life sentence: progress is hard to measure, and we will not identify the end-point until after we have passed it. However, I think we have the first authentic signs of nearing conclusion: the ISM surveys of manufacturing are coming in at some of the highest levels ever measured (61.2 for March). This performance transcends any pipeline-filling of overdrawn inventories, and cannot be explained by a pop in car sales -- we have begun again to compete.
This progress has been bought by the sacrifice of American labor, and protected by heroics at the Fed. However, further progress is impeded by self-inflicted injury. No better date than today to explore foolishness (and to note that today is the 23rd anniversary of this publication, to be celebrated with appropriate impertinence).
Self-inflicted wounding comes in a variety of forms. First the intentional, straightforward, Darwin Award affair. Then the accidental, the extra in Braveheart who repeatedly stands in the wrong spots until.... Last the truly inventive: while trying to settle a score in a long and bitter feud, you are hoist on your own petard.
Housing markets rolled over early in 2006, prices falling in many places ever since, now passing below pre-Bubble levels. In wound-type one, the entire government reaction has been attempts to deal with the effects of falling prices, instead of considering means to make them stop falling and then rise. Thus they have pretended to mitigate the unmitigatable. They remain in foggy surprise that people who owe more than their homes are worth will abandon them. And in post-concussion confusion cannot grasp that most people will not invest in things that are falling in price.
The Braveheart extras insist that the Bubble-causing mortgage credit excesses must be stopped. Explain to them, over and over, that they have stopped, dead-ended three years ago... uh-uh. If they find any credit of any kind, they'll try to stop that, instead. Remind them: Bear, Lehman, Countrywide, all gone and the markets behind them, couldn't find a subprime loan with both hands and a mirror... uh-uh. Their relentless creed: no more bad loans, and if that means no loans, then we have succeeded -- no new loans, no new foreclosures! Try to tell them, if you have your way, prices will continue down and all loans will fail... their eyes grow ever-closer together. A leader: FDIC's Sheila Bair, a modern Joan of Arc setting alight her own stake and pyre.
Petard... a primitive grenade, often as harmful to the grenadier as the target (also old French for fart; to be hoist by one's own a 500-year-old double joke).
In 1935, the Fed through Reg Q awarded S&Ls a .25% deposit-paying advantage over banks in exchange for their dedication to savings accounts (passbook only, no checks until 1978) and mortgage lending. Commercial bankers hated them to death, finally got even via their club-mate Mr. Volcker at the mere cost to taxpayers of $400 billion. Hated Fannie, too, and now's our chance! Today Freddie, tomorrow the world!! While we're at it, get even with those quick-thinking, adaptable brokers. Consumers need discipline. Rigid is good. Slow is good. Make the world safe for bureaucrats.
Say, fellas... current mortgages outstanding amount to more money than all your bank loans. When you kill off all your ancient mortgage enemies, you do intend to make the loans? Right? You know how, have the capital and all?