Fleck rants on Greenspan
What I learned thru observing the Chairman of the Federal Reserve Bank of the United States:
1. The desired effect of lower rates has a 6 to 9 month lag on the economy.
2. Jobs creation of 2.6 million in ’04 is “credible”.
3. Once Productivity slows, hiring will follow.
4. The reason we are not seeing the desired effect on the Trade Gap despite the weaker Dollar is owing to the short-term currency hedges that have been put on by foreign exporters.
Allow me to digress. We’ll have to go to the Video for a moment to bring back a memory or two. ‘Twas not so long ago that we harped in this space about the bubbles. Yep. Plural. All four of ‘em. That’d be the Dollar, Credit, Housing and Stocks. We won’t belabor the saga of how the stock market, for example, was busted and how, owing to the unprecedented double bubble phenomenon, has been pumped up once again even more dramatically in that the inflation of names has been broad-based and not just confined to tech. Well, that game is gettin’ kinda’ old, so we’ll just wait patiently for the day of reckoning. The Dollar bubble speaks for itself, too.
Splat. But credit and housing, oo-la-la. It had always been this writer’s contention that when they finally do “get” the credit bubble, that it’s gonna’ make the busting of the double stock market bubbles look like a box o’ chocolates, i.e., nothin’ will grow on the earth for the biblical 7 years hence. It’s gonna’ be ugly. Because if you ever were wondering what the road to perdition looks like, try to visualize it as paved with debt that has beenwalked away from, most likely because the value of the collateral has dropped below the loan against it. Got it?
Good. Okay. We are certain that Monsieur Greenspan shares this same horrific vision. Keep that in mind. Thus, the game must be kept going, lest we get a taste of the biggest fireball ever created by man. So imagine now that you have been charged with maintaining a monetary policy which will not only resuscitate the US out of a recession, but which will foster and then sustain the recovery to the point where it sustains itself, i.e., business has confidence and invests, jobs are created as these businesses grow and this in turn, sees the US consumer with a paycheck which he can then spend, keeping the economic wheels turning as planned.
But the only tool you have to accomplish this big task is the providing of liquidity, despite the fact that it was your over-the-top largesse over a period of many years, which caused the excesses in the system which fostered the bubbles to begin with. Thus, providing even more liquidity in this instance is akin to dousing a drowned man with a bucket of water. But the only alternative is to “take the hit”, i.e., let a recession run its course, allowing the excess to be worked off. But for whatever reason, you opt to prolong the fantasy, i.e., you continue to pump even more liquidity into the system and over time, you lower rates to 1958 levels. But you still can’t get a pulse, despite your promises that the positive economic effect of lower rates has but a “6 to 9 month lag.” Alas, you are not lookin’ too good. Enter the government who is as desperate as you are to jump start the economy. Aha.
They sent us to Iraq and then to the mall. Government spending jumped to a multi-decade level. The US consumer, flush with tax rebates, continued to shop. Alas, these were temporary fixes provided by Uncle Sam with a goal towards seeing the economy catch fire of its own accord. But we all know that any economic pops that are inspired thru artificial stimulus are mere Band-Aids. And even Newbies know that eventually, Band-Aids fall off. Meanwhile, in the background, they also had the brainstorm of debasing the Dollar. What was the goal? To crimp Imports and expand Exports, thereby giving the US economy some oomph in that regard. You started out small by floating a trial balloon which spoke of the possibility of disinflation to be countered by a sound policy of “reflation”, spinning this as a good thing and that a “weak Dollar” was positive for the multi-national names. Well, guess what? That backfired.
What we got was some rip-roaring higher prices in commodities. (Probably so high, that the BLS is still sittin’ on the January PPI, claiming that they can’t figure out the new categories or some such nonsense. Did you think we had forgotten about that one? Nah. Wonder what’s takin’ them so darn long? Us, too.!) Anyhow, when your smashed-Dollar policy failed to work its intended magic on US Imports and Exports, you went before Congress and made the excuse that the reason it wasn’t working right now is because of the currency hedges that have been put on by foreign exporters. And that bought you a little time because Congress didn’t have enough financial background to call you on this boner. So little, by little, you, the guy in charge of monetary policy, is seeing that nothin’, but nothin’, is working. And worst of all, your worst nightmare has come true: there is no jobs creation. So, feeling awkward about that reality, you hedged yourself by jumping back on the Productivity bandwagon.
Alas, that poor bandwagon has been from pillar to post, i.e., it was not so long ago that Productivity was our panacea, our savior, our holy grail in that it was an immutable reason as to why the FED could keep lowering rates and not trigger inflation. Lo and behold if it has not now morphed into a nuisance. Right. As long as it keeps up there, there is no need to hire anybody any time soon. And again, as the guy in charge of monetary policy, you know this. But what do you tell Congress? You tell them that as soon as Productivity declines, the Employment will start. Again, nobody jumped up out of his/her seat and questioned you on the backward nature of the cause and effect of your excuse. But these are mere mortals. So you were able to skate, once again. Whew.
But we are now down to one of the last gigs you can play, seein’ as how everything else has gone completely haywire. That’d be the refi game. That works as follows: John Q. buys a house. He runs up credit card debt along with it. Is he out of the spending game now? Well, he should be, but don’t forget, this is the New Era of Moral Hazard. Thus, he goes to the bank for a refi. He not only lowers his monthly nut, he also takes some cash out. Voila, John Q. remains in the game, made whole and consumer-worthy again, thanks to those 1958-like mortgage rates. (And unbeknownst to John Q., he has even helped to keep the monetary aggregates respectable by passing all that new do-re-mi thru his account.) But eventually, like Productivity, rates hit a wall. This does not mean that rates, again like Productivity, will move quickly in the opposite direction. It simply means that for a host of reasons, one of them pride, they will go no lower. Uh-oh.
Time has now passed. Jon Q. needs to borrow more to keep his game going. Unfortunately, he locked in a 30-yr fixed back in June of ’03 at a 5.50. And last he checked, he can do no better than that. What’s an over-burdened homeowner to do? Stop spending? Default? Heavens, no! There is always the ARM. Right. The same ARM that the Maestro touted yesterday. Why, John Q. can lower his monthly nut considerably by switching to an ARM. He could save a 100 bps or more in most instances. He can even pay down some personal debt and improve his liability-to-asset ratio (which reenergizes his borrowing power going forward, too!) Nice trade, right? So there you have it. The reason why Mr. Greenspan brought up this “trade” for the American public. It’s got an awful lot of other perqs, too. Look. He saw that the refi game is over with a capital “O”. After record stimulus for a very prolonged period, everything has turned to, er, dust. The monetary aggregates have collapsed. How sorry is that, eh? And if he doesn’t keep the last hope, the homeowner/consumer scam alive, next thing you know, housing prices will start to fall which will mark the beginning of the ultimate, fiery end for us. But if John Q. can keep doing those refis, even get involved with other, sexier “alternative mortgage products”, well, this could go on forever, right?!!! Further, if he pretends that John Q.’s “ratios” are improved, the Maestro could then announce things like the US household is not in “increased financial stress”.
That’s the “ratios” trick he is referring to. But here’s the hard facts on that: Overall, It has jumped 12% since February of ’01, when they started to cut rates. This is despite the soaring of the prices of homes. Ain’t that grand? And ain’t that somethin’ else for the Chairman of the FED to be endorsing? It’s an embarrassment, I tell you. Last, we gotta’ talk about a basic truth about ARMs by posing this question: What is the single-most pressing question the average Joe asks the broker when house shopping? Right. “What is the monthly payment?” And if they tell him he can save $110 per month by doing a flighty, 2-yr ARM instead of locking in a secure, 30-yr. fixed, well guess what? Right. Are there other reasons for an ARM? Sure, some of the more affluent can afford to press their interest-rate luck. While some others, forgetting that debt is permanent but that stock prices can actually go down and stay there, might even take advantage of an ARM and what? And play the stock market! Guess who gave them that idea, eh? And yes, there are others who expect to pay off the home in a shorter period than normal. Whatever. But you gotta’ acknowledge that the current tack is quite a switch from the traditional demand for ARMs which normally occurred when rates were exceptionally high. So you took the ARM, the quick fix, with a view that rates couldn’t go higher, only lower. I still cannot get over the Greenspan comments. Then again, what do you expect? These are the same guys who have eliminated borrowing for 30 years as rates were bottoming. Next case. |
