Saturday, March 14, 2009

Kremlinologists--FDIC--what is the meaning of this?

Three tidbits--

1. Bernancke is scheduled for the entire hour of 60 minutes this Sunday.
2. Over 200 FDIC personnel have been sent to Puerto Rico for undisclosed reasons.
3. No banks were closed this Friday.

Speculation--point one has nothing to do with points two and three, but points two and three are related.

There are any number of messages the Fed Chairman could plan to deliver Sunday evening. One might be reassurances over the seizure of Citicorp or BofA, but that is only one, and coming on the heels of the G20 Finance Ministers meeting, not the most likely. It is possible, but not likely.

OTOH, the last week has seen positively bizarre announcements about Citicorp. An admission of hardly surprising contingency planning was immediately followed by a claim that the operating results of the bank were the best in several years (which did the stock so much good that Lewis of BofA made the same announcement about his bank later in the week). Somebody needs to tell those guys that their problems are in the operating results of the commercial banking operations, they lie in the areas of asset quality and capital markets trading activities.

As far as points 2 and 3 are concerned, the point towards the FDIC gearing up for an operation of a new order of magnitude. So far, the bank closures have been small--WAMU excepted, and that was orchestrated as a handoff to Chase. IndyMac is the biggest institution to date where the FDIC has actually taken control. My guess is that the feds are trying to get their ducks in a row for a larger resolution, though probably not the Citicorp size. There are a number of problem regionals--Ohio has a nice collection--and stepping up to one of those situations may very well be the next move.

Ah, for the days of decoding the meaning of who stood by whom on Lenin's Tomb reviewing the May Day Parades of days gone past.

Friday, March 13, 2009

Be Careful What you Wish For

Declining Chinese trade surpluses mean a reduced demand for U.S. Treasuries as a place to park the proceeds. That will make refunding operations more difficult and expensive, at precisely the time that they are ramping up to cover the costs of repeated bailouts of the financial services sector, the fiscal stimulus package required by the general economy, and the expansion of the federal balance sheet to substitute for contract private leverage.

For the last few years, loud complaints about currency manipulation, foreign purchases of U.S. Treasuries and a flood of cheap imports have been endless. The facts offered enough support for the arguments so that, even though the analysis and policy prescriptions were ludicrously flawed, the braying never ceased.

It would now appear that we may have to live in a world where the Chinese appetite for our debt is not endless, the flood of cheap imports turns to a trickle, and the currency manipulation argument is a dim memory. Of course, to entice purchases of U.S. debt, the coupons will have to rise, life without the cheap imports will be poorer and more frugal, and a stronger yuan will buffer Chinese consumers from higher energy prices just when they are biting Americans all the harder. Oh, and we get to live through all this with house values down in nominal and real terms. In the U.S., the next ten years may feel a lot like Buffalo, Cleveland and Pittsburg, 1970-80.

Be careful what you wish for.

Thursday, March 12, 2009

Class Warfare

America has never seen much of it.

And America's unlikely to see much of it. But the conservative commentators seem very concerned that the lower classes are losing their respect for and deference to the wealthy, and raising the specter of class warfare. If this economic situation deteriorates sufficiently that serious scapegoating is required, and if it bites hard enough that the 'family values/religious right' agenda loses its appeal the the lower middle class, you could see an interesting repolarization of American politics.

Right now, the suggestion seems to be that increasing the progressivity of the federal income tax structure is tantamount to class warfare on the wealthy. I disagree. All that is on the table right now is modestly undoing the diminuition of rate progressivity that has been the pattern for the last quarter of a century.

Class warfare would be using the tax code to destroy certain ways of life. For example, the tax code currently imposes a confiscatory excise tax on the proceeds from the sale of machine guns. If you amended the tax code to impose a confiscatory excise tax on any income derived from investment of the proceeds of a bonus paid in the last X years by an institution that subsequently received TARP funding, that might be construed as class warfare. Particularly if you did it in such a way, with presumptions of attribution, etc., that essentially confiscated the future income of any bonus recipient.

Warnings against class warfare will probably cease when it dawns on those making them that right now the idea has a certain amount of political appeal. Politically, that appeal appears to be growing. Candidly, it's about time that the pendulum swing on the income distribution front.

Tuesday, March 10, 2009

Gloom in the Blogosphere

'Bleak, negative and forboding' pretty much sums up the economic outlook of the blogosphere as I've reviewed it over the last two days. Obama has been captured by his experts and is flat wrong when he publicly claims that the blogosphere is a realm of simple-minded one-issue commentators. It is a good deal more nuanced than that. But, there does seem to be a certain unanimity about just how grim the future will be. And, after spending a week driving across the American West, which, amber fields of winter wheat lightly dusted with snow and purple mountains majesty (also snow glistening), is still there, still hiring and still dealing, I'm a little curious about the disconnect. Normality, in a minor key, on the one hand, and a crescendo of doom, on the other.

Three possible explanations--

1. The Jungian collective gesalt of the blogosphere is correctly anticipating a political, cultural, economic and military phase change that will end the world as we know it. In other words, this is the winter of 1915 or 1931.

2. This is the psychological capitulation that accompanies a market bottom. That doesn't mean a recovery is imminent. Nor does it mean that further declines will be avoided, since there are multiple markets. But it does mean that animal spirits are dead, that in some markets, at least, we've bottomed, even if the general economy will continue to deteriorate, housing prices will continue to drop, the consumer will stay on the sidelines, and the financial services sector continue to unwind.

3. People active in the blogosphere tend, as a group, to be close to the financial services sector and so they feel proximity to the victims of the direct impact of the current events. I suspect the first wave of Wall Street layoffs, through last summer, weeded out the marginal performers, an enhanced version of regular performance reviews. Starting last summer, good people started losing their jobs. This winter's bonus season was a pale imitation of last year's rewards. The bonus culture is dead. It will be many years before it comes back. Ask a option holders, ca. 2002.

None of the people (a few special situations excepted) laid off are finding new positions. Further cutbacks are on the way. The savings/assets people had to tide them through are losing value at an astonishing rate. There is a practical limit to how much a person can reduce his living expenses by without leaving town. If you leave town, there is no where to go. There guys are in worse shape than the Enron employees trapped in that wreckage after it collapsed.

I suspect the gloom is the product of a combination of 2 and 3. I've never been a Jungian. Capitulation is the classic explanation. But I've felt for some time that, because in the current crisis high income professionals in the services sector will feel the pain as much as hourly blue collar workers, the cries and lamentations will be louder.

Sunday, March 8, 2009


I'm not sure anyone has a good handle on what is, and what is not, important economic data right now.

There may be a tendency to emphasize the familiar and close by over the important and the alien. one of two things can happen when the situation gets confusing--either you open up to new stimuli, or you default back to the familiar..

My sense is that the media and the political establishment is desperately trying to regain their comfort zones. That may not lead to either good policy or accurate reporting. It will lead to an obsession with the mechanics of readjustment and preclude any kind of coherent response to the need for reform to keep this from happening again.

Driving across the Western United States last week, I couldn't help noticing a number of things. One, there seems to be a fair amount of hiring going on, at least at the bottom of the pyramid. Two, the collapse is itself creating economic opportunities, if you believe the touting on the billboards on the interstate through Salt Lake City. Three, there is a huge swath of country that, having missed out on the bubble, is not being splattered too badly by its bursting. Four, life goes on.

For instance, if residential real estate prices fall far enough, transaction volumes pick up. If transaction volumes pick up, commissions (and related transaction fees) start flowing again. All that happens at lower levels, of course, and doesn't do any good for the non-survivors. The glory days are over, but life goes on . . .

And perhaps a bleak and sodden economic climate is exactly what' needed to nurture the requisite reforms.