The Meltdown is Far From Over... A New Mortgage Crisis Looms

The Associated Press published an article this morning stating that we are about to enter a new round of the economic crisis:

"Analysts said the next economic crisis might involve malls, hotels and other businesses affected by the mortgage crunch.

Malls from Michigan to Georgia are entering foreclosure, victims of the same crisis that's affected the housing market. Hotels in Tucson, Ariz., and Hilton Head, S.C., also are about to default on their mortgages. That pace is expected to quicken."

During the last economic downturn after the Internet bubble burst in 2001, the economy was born up by inveterate (and incorrigible) consumer spending. Unfortunately, that will not save us this time. The terrible retail sales of late, and the consumer's unwillingness to spend or take on new debt is weighing heavily on the fragile remnants of our economy.

The individual serves the industrial system not by supplying it with savings and the resulting capital; he serves it by consuming its products. -- John Kenneth Galbraith, The New Industrial State [1967]

Maybe I'm Simpleminded

In my simple way of looking at the economic crisis, it is easy for me to get lost in all of the machinations the government is undertaking to stop the bleeding. I do not have a degree in economics and so my simple way of looking at things keeps me from comprehending the true enormity of the crisis, and the cosmic complexity of the bailouts. But when the NY Times proclaims that the current total of all bailouts either already in place, or soon to be in place, is equal to half of the total annual Gross Domestic Product (GDP) of the United States, I get a very visceral sense of the desperation that Paulson, Bernanke, et al must be feeling.

The NY Times yesterday gave a tally of all of the bailout monies that Paulson, Bernanke, and pals have pledged to solve our economic woes. Here is a brief breakdown:

• October 3: $700 billion allocated for the TARP program
• October 14: FDIC pledged $1.4 trillion to guarantee bank-to-bank loans
• October 27: The Federal Reserve started a program to buy as much as $2.4 trillion in corporate commercial paper (short-term notes)
• $29 billion to engineer the takeover of Bear Stearns
• $122.8 billion to bailout AIG
• $306 billion of government guarantees for Citigroup's troubled mortgages and toxic assets
• November 25: The Fed commits up to $800 billion to unfreeze credit for home buyers, consumers and small businesses

The magnitude of the government's largess begs the fundamental question: Where is all this money going to come from?

As you can see from the list above, the $700 billion TARP program -- the program that the public identifies with the bailout -- is really only a small piece of the complete bailout. From Bloomberg:

Bernanke’s Fed is responsible for $4.74 trillion of pledges, or 61 percent of the total commitment of $7.76 trillion, based on data compiled by Bloomberg concerning U.S. bailout steps started a year ago.

"Too often the public is focused on the wrong piece of that number, the $700 billion that Congress approved," said J.D. Foster, a former staff member of the Council of Economic Advisers who is now a senior fellow at the Heritage Foundation in Washington. "The other areas are quite a bit larger.”

The situation is so precarious that a noted economist, Nouriel Roubini, wrote an article entitled, Can Central Banks Go Broke? The tenor of the article makes it clear that Mr. Roubini feels that there is a very real possibility that our government has bitten off more than it can chew.

All of this, to my simple way of thinking, makes me very nervous. The $7.76 trillion of taxpayer money currently at risk, according to Bloomberg, "is equivalent to $24,000 for every man, woman and child in the country. It’s nine times what the U.S. has spent so far on wars in Iraq and Afghanistan, according to Congressional Budget Office figures. It could pay off more than half the country’s mortgages."

Recall that Henry Paulson's original plan was a bold request to make himself the most powerful man in America. He wanted to be given $700 billion to do with as he saw fit, with no government oversight or accountability. He basically said, "Trust me. I know what needs to be done." Fortunately that proposal didn't sit well with congress and they modified it so that we weren't saddled with the curse of "King Henry."

Congress was right to reign in his desire of the autocratic rule of the U.S. financial services because only a few weeks later Paulson did a 180-degree reversal. Somehow, a few weeks later Paulson had determined that his original plan to buy toxic assets was not a good idea. Hmmmmm. Why doesn't this surprise me? The flailing and floundering of the the government's financial wizards engenders very little confidence that they actually have a plan.

Here we sit, in the midst of the worst financial crisis since the great depression, house prices are falling, people are losing their jobs, retail sales are in the pits, and, according to Bloomberg, "the worst financial crisis in two generations has erased $23 trillion, or 38 percent, of the value of the world’s companies."

Worst of all, the people in charge of fixing the problem are just winging it! This seems crazy!

But, maybe I'm just simpleminded.

Was there ever such an autumn? And yet there was never such a panic and hard times in the commercial world. The merchants and banks are suspending and failing all the country over, but not the sandbanks, solid and warm, and streaked with bloody blackberry vines. You may run upon them as much as you please--even as the crickets do, and find their account in it. They are the stockholders in these banks, and I hear them creaking their content. -- Henry David Thoreau in his journal, October 14, 1857

Paulson's Bailout Shenanigans (Quote of the Day)

"For those that may not know, Hank Paulson made all of his hundreds of millions while running Goldman Sachs (GS). That was his job before being anointed as Treasury Secretary; the next brain from Goldman that would save us all.

What people should know - what everyone should know - is that Goldman was one of the major players in the creation of most of the derivatives being blamed for our debt implosion and severe recession, namely credit default swaps." -- Kip Herriage, in a blog post, Fire Hank paulson Now

Fewer companies willing to pay for green

As noted in a previous post, the worsening economic conditions pose a very real risk to the green movement. Now, this article from the Austin Business Journal seems to validate my concern:

"Companies are demanding green buildings but are less willing to pay for environmentally friendly office space compared to last year, according to a new survey from CoreNet Global and Jones Lang LaSalle.

Despite the fact that corporate real estate executives support the idea of energy efficient and sustainable buildings, only 42 percent of those surveyed said they were willing to pay a premium to lease green space"

We're so engaged in doing things to achieve purposes of outer value that we forget that the inner value, the rapture that is associated with being alive, is what it's all about. - Joseph Campbell

Quote of the Day

“We do not believe it is likely that these adverse economic conditions, and their effect on the automotive industry, will improve significantly in the near term, notwithstanding the unprecedented intervention by the U.S. and other governments in the global banking and financial systems.” --from the General Motors 10-Q filing, November 10, 2008

Quote of the Day

"Bailing out Wall Street or the auto industry or the insurance industry or the housing industry may at most help satisfy creditors for a time and put off the day of reckoning, but industry bailouts won't reverse the downward cycle of job losses.

The real problem is on the demand side of the economy.

Consumers won't or can't borrow because they're at the end of their ropes. Their incomes are dropping (one of the most sobering statistics in Friday's jobs report was the continued erosion of real median earnings), they're deeply in debt, and they're afraid of losing their jobs.

Introductory economic courses explain that aggregate demand is made up of four things, expressed as C+I+G+exports. C is consumers. Consumers are cutting back on everything other than necessities. Because their spending accounts for 70 percent of the nation's economic activity and is the flywheel for the rest of the economy, the precipitous drop in consumer spending is causing the rest of the economy to shut down."

-- Robert Reich, Former Secretary of Labor and a professor at the University of California at Berkeley. His latest book is "Supercapitalism."

Quote of the Day

"I remain of the view that the current recession, which was initially dismissed by the many, will have a shelf life unlike prior recessions in both scope and duration. It seems very unlikely to this observer that third-quarter economic statistics are a template for future growth and economic conditions." -- Doug Kass, Market Analyst at The Street.com

Quote of the Day

''My forecast is I don't see any economic growth through 2009. The credit crisis reached up and grabbed the throat of the global economy and choked off economic growth.'' -- Richard Fisher, Dallas Fed President

Jack Be Nimble, Jack Be Quick...

The stock market looks very tempting right now. You can hardly look at any of the financial press without finding someone declaring that the market has hit bottom; or that we are in a bear market rally and you should take advantage of the buying opportunities which can be found everywhere.

Stocks are cheap! Don't miss out on this once in a lifetime buying opportunity!

Yes, it is very tempting... if you believe the hype. The trouble is, you shouldn't.

We Know It's Bad...

We are no longer debating whether or not we are in a recession. Instead we are debating how bad it will be and whether or not it will become a depression. If you bother to do just a little digging beneath the surface of the headlines and hype, you will find plenty of intelligent commentary expressing the reasons why this recession is just getting started, and why it is in real danger of becoming much worse.

Perfect Storm

Just consider the unprecedented confluence of calamities we have encountered in the last three months. Can you apprehend that and really believe that the worst is behind us?

Consider the fact that 1 out of 5 homeowners owes more on their house than it's worth; that consumer confidence is at an historically low level; that the financial underpinnings of our economy have collapsed and are near complete failure; that major titans of the financial services industry have completely vanished - either through bankruptcy or "bailout"; that economic activity in the US manufacturing sector is grinding to a halt; that bank lending has already all but ground to a halt; that credit card defaults are rising; that the US auto industry is on the verge of total annihilation; that the US housing industry will take years to work off the glut of new houses in inventory; that unemployment is rising and forecast to get much higher; that many foreign economies are in worse shape than our own; that the massive deleveraging and CDS (credit default swap) valuation (devaluation) has the mass and weight to destroy an already weakened financial system; that the looming crisis in the private equity markets just might be the proverbial straw on the back of our economic camel? Considering all of that, can you possibly think that this perfect storm won't wreak havoc?

Cassandra or Pollyanna?

So, do you look at everything with rose-colored glasses? Is wishful thinking all you need to make your investment decisions? If you can truly ignore all that's brewing in the global economy right now, then, yes, it is time to buy stocks. If current valuations and PE ratios are the only parameters which inspire your investment strategies, then how can you not buy stocks at these levels?

Are you as Nimble and Quick as Jack?

I am a wishful thinker, too, but a very pragmatic one. I, too, see a lot of attractive prices in the market. But I also see a world economy which is very fragile. I can almost guarantee that we have not seen the worst of this recession yet, and that the recent surge in the stock market is only a bear market rally. Do you really want to enter a long position on any security knowing that it could, and probably will, be wiped out by a certain resumption of the bear market? Can you be nimble and quick enough to get out of your positions when (not if) we have another huge market downdraft?

Cash Is King

We are facing a very real possibility of spiralling deflation. If that comes to pass, you definitely do not want to have your money tied up in the stock market. The only way to survive deflation is to have a lot of cash. Perhaps you think that inflation is the focus of Ben Bernanke and the regulatory bodies. Disabuse yourself of that notion right now. The Fed recently reduced interest rates to 1%. If inflation were the worry, rates would be raised, not lowered.

You Can Lead a Bank to Liquidity, But You Can't Make it Lend

The fact that many of the banks which have received government bailout money are reluctant to loan means that, so far, the government bailout of the banks has yet to get traction. The banks are hoarding cash. Perhaps you should, too.

You Can't Go Below Zero

The specter of spiralling deflation is every bit as fearsome as hyper-inflation, and right now, monetary policy is geared toward preventing deflation. The problem is that the Fed needs to be able to govern policy with a very fine precision. If they don't do enough, we will fall into the deflationary abyss. If they do too much, they will likely put us into the opposite and equally ominous prospect of hyper-inflation. With interest rates at 1%, they are running out of anti-deflationary ammunition. As rates approach zero, that avenue gets cut off, and the only strategy left would be to put the monetary printing presses into overdrive.

Pull the Trigger?

Whether you believe all of this doom and gloom talk or not, you would be doing yourself a disservice not to consider the possibilities (none of them good) presented by the current economic situation. If you can seriously look at these admittedly worst-case scenarios and still believe that worst is behind us, then by all means pull the trigger on those stock purchases you are looking at. I wish you the best.

Advice is what we ask for when we already know the answer but wish we didn't. -Erica Jong