'New normal' will be a painful place
[Emphasis added]
In Jane Anderson’s made for HBO movie Normal (2003), based on her stage play, her US husband of 25 years, Roy (Tom Wilkinson), announces to his wife that he wants to change his gender and become a woman named Ruth. Residents in his small, semi-rural Midwestern town find out, and don't think very highly of the idea. Thinking of the most lacerating insult that will cut poor Roy/Ruth to the quick, "you are not normal" is scribbled in the dirty back window of Roy's pick-up.
But what is "normal?"
The American Heritage New Dictionary of Cultural Literacy defines "oxymoron" as "as rhetorical device in which two seemingly contradictory words are used together for effect"; commonly used examples for illustration are things like "jumbo shrimp" or "military intelligence".
A new oxymoron is currently slashing through the lexicon of popular usage - "the new normal", supposedly, the stasis point the economy is, or soon will settle in after it finishes reacting to the financial crisis.
Normal, of course, infers customs and practices sufficiently tested by time to become generally accepted as a sort of bell curve's apex - new, and pretty much the opposite. Also, in reference to the financial crisis, the phrase implies that the economy has already reached "new normal"; that very little further decline can be expected. Indeed. besides being an oxymoron, "new normal" may be, at most points in time, a logical impossibility, as, instead of resting at stasis points for extended periods of time, "normal" in the economy and financial markets more often than not implies movement from one point where certain customs are accepted to another where another, different set rules. Indeed, a true "new normal" may be a very rare phenomenon , more so than even Nassim Nicholas Taleb's famed "black swan" now purportedly seen on most street corners.
The effort to ascertain as to whether we have reached new normal will be assisted once we turn back and look at the long, sad road we have just traversed. No analysis of the present is ever really complete without a look into the past.
Many times I've written here that the key metric in the ongoing economic holocaust is not home prices or unemployment, but the ratio of debt, both public and private, to total US gross domestic product (GDP). Watching this number climb over the past few years is reminiscent of the 1981 Gabriel Garcia Marquez short story, Chronicle of a Death Foretold, although in this case the title would be "Chronicle of the Death of an Economy Foretold".
After being stable at around 1.5 (that is, the economy was carrying $1.50 of debt for each dollar of GDP) from the end of the Great Depression to the middle 1980s, the ratio then commenced its long, slow, inexorable climb. Passing the pre-Great Depression highs around 1995, the line just kept on going and going further up, reaching a ratio of 3.49 just as the recession was commencing in early 2008.
Where all that money was going, of course, was into real estate, primarily US real estate, but with British, Irish, Spanish and even Icelandic real estate seeing its share as well. Wherever the money did slosh ashore, it engendered huge spikes in real estate prices, as what was then apparently unlimited streams of money competed with each other to buy, at least in the short term, the relatively limited and fixed supply of real estate.
Millions were being made every day, and millions more every night, as poets and schoolteachers came home from their day jobs to flip real estate; even secondary school dropouts could dream of being a real estate tycoon with their own cheesy reality show, but the process did carry within it the seeds of its own destruction. This can be illustrated by an example of a very simple real estate transaction.
A man wants to buy a house that costs, let's say, a dollar. He needs a loan, a mortgage for the purchase price. Another man is willing to lend him that dollar, at say 5% interest.
The buyer purchases the house, and in one year the house's value rises 30% - as was not at all uncommon during the boom years. He pays $1.05 for a year's worth of principal and interest to own something worth $1.30, and feels he's doing fine.
Not the lender. Sometime in the future he wants to buy a house as well; he has no intention of spending life in a pup tent. He was hoping that, if he deferred his consumption for a while, the added funds that would accrue to him in interest would aid him in the process, but it is the exact opposite that seems to be happening. The $1.05 the lender gets back in interest now only buys $0.81 of house (1.05/1.3)
The same happens the next year, and the year after that. Eventually, the lender's business becomes more of a philanthropic enterprise, a wealth transfer machine from him to the borrowers, instead of an actual profit-making enterprise. Maybe going back to develop a business model better than to lend cheap and fixed in a high inflation rate environment, the lender withdraws his funds from the lending marketplace until circumstances more favorable to his interests are restored in the markets.
This, of course, is the heart of deleveraging, the credit market contagion that is starving the world for capital. In essence, like a parent taking away junior's car keys until he can prove to be able to drive more responsibly, deleveraging is lenders pulling back from new lending until the system proves itself responsible enough to lend in such as way to protect the purchasing power of the old lending. With all the talk about the credit crisis and deleveraging, with consumers and businesses having their lines of credit cut, you'd expect this number to be shrinking, right?
Wrong.
As for the first quarter of 2009, the total US debt/GDP ratio was 3.82, up from about 3.50 the year before. If the United States is being starved for capital, how can it be going deeper into debt?
Part of this, of course, is the over $2 trillion in new US government debt being taken onto the federal budget in the past year. Part of it is the fact that the denominator, GDP, in the debt/GDP equation is shrinking; that would raise the ratio even if there had been no increase in total debt.
Digging a bit deeper into the data reveals where the problem lies. Total household financial debt declined $151 billion in the first quarter of 2009, after declining $271 billion in the financial panic of last year's final quarter. Still, with total household borrowing still running at an almost $1.4 trillion annual rate, America has hardly become a nation of misers.
That's where all the slashed credit card limits and all the defaulted and eventually charged off mortgages have gone. The household debt total, at $1.3679 trillion, is the lowest for this measure, with the exception of 2008's second quarter, since early 2003.
So is that it - all that lenders will require to open their silk satchels once again is that $422 billion of private sector deleveraging? That's what the economy's current cheerleaders, both in the government and out, would like you to believe.
The essence of the "green shoots" economic recovery argument is essentially above, that government deficit spending has replaced what the private sector has taken out of it - and a lot more after that - net, the economy is ready to rock once more. Conservatives say that the numbers prove that the problem was not all that substantial to begin with; it was all liberal media hype, and, yes, the economy is ready to rock again.
If both are advancing the same argument, it should not be surprising if both are wrong.
For one thing, it is believed that the US Federal Reserve data capture little, if any, of the so-called "shadow banking" sector, the recent experiment with wave after wave of leveraged financial instruments that the banks worked hard to keep separate from their regular balance sheets. As that this market was totally unregulated, there can be no totally reliable estimates as to what is, or what was, its size, but many observers estimate that, at its pinnacle last year, up to 50% of the lendable capital in the system appeared from out of this financial ether, and has now disappeared right back into it.
At $900 billion, the total quantity of US and European bank writedowns may be a rough proxy for the status of the entire shadow banking system, but nobody knows for sure.
Perhaps the Fed numbers, and the ratios and measurements derived from them, are useful as pointers as to the direction of the debt markets rather than their absolute level. If that's the case, there are four words that scare the bejesus out of the "new normal" crowd, those that say that the credit market borrowing and the actual economy has already reached a level where growth can recommence.
Those words are "reversion to the mean".
At their heart, all economic statistics are just that - statistics. One of the most common occurrences in statistics is that when numbers in a reportable series start going out of line with what was previously reported; they may run away from the area where most previous observations occurred, but eventually they'll fall back to their moving average, their "central tendency", their mean.
"Reversion to the mean" is the operating principle behind one of the most common strategies in chartism, sometimes known as stock technical analysis. Many savvy investors watch a stock or commodity break out from a recent extended trading range, wait for it to revert to some mathematical mean, be it a 12-, 50- or a 200-day moving average, before hazarding a new buy.
So what happens if US debt levels have to revert to a 20-year mean before the lending spigot opens again? That question produces some very grim results.
As opposed to today's total government and private-sector debt load of almost $53 trillion, the 20-year period average is down at $43 trillion - that implies another $10 trillion of debt somehow disappearing, being written off, or (the most unlikely case) paid off. In the case of the solely "households and non-profit organizations credit and equity market instruments liability", another $1.2 trillion, in addition to what has already been vaporized, has to be written off as well.
You can see it all around you. The empty lot which yesterday held a car dealership; the cars have been seized, and, when they are sold away at auction, will disappear from the debt load. The credit-card limit cutbacks. The defaulted-on mortgages which are not being replaced by new mortgages written to prospective borrowers - slowly, like the retreat of a mammoth glacier at an ice age's conclusion, the debt mountain, built up over 20-plus years of incredible fiscal profligacy and licentiousness, melts away.
Of course, the next question is obvious. How much more blood will the monster demand?
Many Americans still with jobs seem to be coping with the crisis much along the lines of what they've heard from their grandparents regarding life during the Great Depression and World War II. Yes, there was hardship and privation, and grandpa sailed around somewhere in a navy uniform while granny put down her apron to work in a factory with her best friend Rosie Ripperton; but it all ended quickly, and soon the post-war prosperity that US baby boomers felt their due birthright commenced.
As applied to the current crisis, this belief implies that the glory days of easy money, from the 2004 US Securities and Exchange Commission decision that boosted leverage limits for US investment banks to the top of the real estate market late in 2006, will be back soon - a little bit of belt tightening, of purchasing and suffering through the store-brand vegetables rather than the name brands, and everything will be all right.
There is virtually no evidence that this is, or even will be, the case in the near term. Indeed, with virtually all of the short-term money markets nationalized, businesses are still being starved for credit and real-estate prices are still falling. No matter how much virgin blood the diabolical Goldman partners are lapping up in their dark covens underneath Water Street in lower Manhattan, the US, and much of the world economy, continues to exsanguinate capital like a coke-addled US yuppie getting gored on the streets of Barcelona. The "new normal" is not here yet. It's somewhere else, and even if we're still only "reverting to the mean", it will be a much more painful place.
But perhaps most importantly, are there any real indications that American society and its economy are ready to start treating the granting of credit more responsibly? Not many, probably not any. I've already written about the Barack Obama administration's caving to popular desire over prudent banking as regards the valuation of mortgage-backed securities (see Bankers get a model rush, Asia Times Online, April 9, 2009), and the pressure real-estate interests are putting on Congress to return to the phony individual house appraisals of the boom (see Cheating still beats real work, Asia Times Online, July 2, 2009).
In January 1933, the United States Senate's Committee on Banking and Currency hired one Ferdinand Pecora, an assistant district attorney from New York, to write the final draft of the committee's report on the causes of the Great Depression. Pecora asked for and was granted permission to hold extra rounds of highly publicized hearings; his enterprise has come to be known as the Pecora Commission.
During Pecora's phase of the investigation, the emotional mea culpas proffered by many of Wall Street's pre-1929 elite were riveting fair on the radios and movie newsreels of the time, and the hearing transcripts of the Pecora Commission are still one of the most important primary sources of research into the 1929 Great Crash and subsequent Great Depression.
The recommendations of the commission provided key support for some of the financial system protection initiatives such as the Glass-Steagall Act and the Securities and Exchange Act, which led to the creation of the Securities and Exchange Commission. Pecora's aim was true; the regulatory framework set up following his commission protected markets and investors until the mid-1990s, right up to the time of the barking hounds of neo-liberalism flushing away the wisdom of the 1930s to enable the miseries of today.
Many current observers have been calling for a contemporaneous Pecora-type commission to investigate the current financial collapse, and last week, two years after Bear Stearns' first subprime hedge funds collapsed, Washington heard the call.
Obama signed into law legislation authorizing the creation of the Financial Crisis Inquiry Commission. The commission, chaired by former California state treasurer Phil Angelides, will be composed of six members appointed by Congressional Democrats and four by Congressional Republicans; notable among the Democratic appointees is the triumphal return of Brooksley Born, the Bill Clinton-era chair of the US Commodity Futures Trading Commission who warned of and tried to legislate against the danger that financial derivatives posed before she was ground under the soles of the feet of the establishment (see Born again - and again, Asia Times Online, April 2, 2009.)
But it is in the four Republican appointees that can apparently be seen what the GOP's pollsters have found as a potent talking point back to power.
The Republican vice chair, former chairman of the powerful House Ways and Means Committee, Bill Thomas, was a classic poster boy for the Republican majority Congresses of this decade, essentially handing over the writing of important committee legislation to corporate lobbyists to construct as they saw fit. Many prominent Republican solons from the time were said to be figuratively sleeping with lobbyists - in Thomas' case this was, according to a report that was never denied from a newspaper in Thomas's district, literally true, with the married chairman intimately knoodling over policy, or whatever they call it in Washington, with a healthcare lobbyist.
Two of the other commission appointees, Douglas Holtz-Eakin and Keith Hennessey, are standard-issue laissez-faire think-tank mud grunts; Eakin was a chief economic advisor to Senator John McCain's presidential campaign. But it is in the choice of the final commissioner, Peter J Wallison of the conservative American Enterprise Institute, that can be seen where the right wing in the United States thinks a rich crop can be harvested from the seeds of the crisis.
Wallison is man with a mission. In a contention now completely discredited by many, if not by most academic researchers of the housing market, he says that it was the federal government's support of increased home ownership for the disadvantaged and ethnic minorities, by first the Jimmy Carter administration in the 1970s and then the Clinton administration in the 1990s, that essentially put into place a sort of Manchurian Candidate "sleeper cell" that demolished the world's capital markets starting in 2007 - the fact that this all happened under an incompetent laissez faire Republican president and a corrupt laissez faire Republican Congress was nothing but a remarkable coincidence.
I'm not going to further demolish the Wallison thesis here; I've done that before, as have many others. What I do find most remarkable is the fact that this man has been chosen by the Republicans to carry ideological water; in effect, to rewrite the past in an effort to control the future. His message is not that the financial markets created too much credit and should act with more circumspection in the future. It is that the markets were fine; it's just that too many poor, black and brown people were finding a way to get the loans the market was making. Sure, the message to US suburbia here is, we can rev up lending back to 2006 levels for the "new normal", just be more careful to watch who's getting the loans.
The response to this by capital seeking to maintain its value must be similar to something former ABC News anchor Ted Koppel once said to 1988 Democratic Party presidential nominee governor Michael Dukakis after receiving an insufficiently red in tooth and claw response about the death penalty. "Governor, you just don't get it."
Does America yet "get it", the realization that, unlike what has been the norm over the past 20 years, credit is something that must be used not with wild abandon and dissolution but with prudence and probity? When it does is when the economy will probably stabilize into the "new normal".
It took 62 years from the Wall Street bubble of 1929 to what some say was the savings and loan crisis housing bubble of 1989; 11 more years to the dot-com bubble; but only seven years to the current financial crisis. If a society was really learning from its errors, you might expect the interval between those errors to be lengthening, but just the reverse is happening, and lots of social forces are doing all they can to get the next crisis blowing even earlier.
"They had learned nothing and remembered everything," was what Talleyrand reportedly said about the Bourbon monarchy after it took power back from the revolution and Napoleon in 1815. Will the US middle class get its most fervent desire and be able to blow a new speculative bubble?
If so, when in a few years it collapses so hugely that no government intervention can then save the day, Talleyrand's quote will be able to be updated for that future circumstance, namely, that America had learned nothing, remembered everything, and so then owned nothing and ate nothing.
atimes.com
Jim |
