Economy

One of my chief concerns is that our leaders in DC do not really understand the nature of this crisis and are therefore going to either perform ineffective actions or, worse, harmful ones.

I have been silently crossing my fingers beneath the table, hoping that Obama’s team would figure out that this crisis is unique and will require some non-status-quo solutions.

Although I titled this "Analyzing the Obama Plan," this is neither a partisan nor political posting, and not even as much a critique of Obama himself as it is an examination of how the DC machinery currently operates.  No one person controls much more than a sliver of the overall process and results that emanate from DC.

Now that there’s finally some meat on the plan which we can react to, let’s parse the numbers.

Here’s a very interesting observation put out by the great writer and very observant economic and social commentator Charles Hughes Smith.

As we cast our gaze back on the year, it is clear that, even as the world’s monetary and fiscal authorities applied gigantic solutions directly to the banking industry, their efforts went largely unnoticed by the real economy.

The theme for the period from 2000 to 2008 was “globalization.” It turns out that this may have been a fad.

The problem with a deflationary collapse of a credit bubble is that everything that worked for you on the way up works against you on the way down. It’s sort of like Judo gone wrong.

• Where rising levels of credit masked poor business decisions and models, shrinking credit will expose them.
• Where credit led to more credit, defaults will lead to more defaults.
• Where optimism fueled the ride up, pessimism will drag it back down.

The difficulty for the Federal Reserve and the Treasury Department (and soon, Obama) is that all the big solutions with the big numbers being thrown at the big problems are insufficient. The stimulus is not reaching the right places – it’s getting stuck in the big institutions.

So even as prodigious amounts of money are being created and applied to “the problem,” the evidence suggests that their efforts are not working down on Main Street.

The reason for this is very simple – it is not possible to solve a crisis of solvency with liquidity. It is not possible to fix a crisis of malinvestment with the purchase of bad debts.

Here’s one example. Take retail store space. On the ride up, malls were developed at a furious pace. By every definition or comparison, the US overbuilt capacity in this sector by a very large amount. Given this, what’s going to happen next when this malinvestment is exposed? Well, we don’t have to wait to find out the opening notes of this symphony.

Albert Barlett is a man I hold in very high esteem.

First, for his ability to speak in clear, concise language, which is the hallmark of someone who has mastered their material.

Second, because he sees the obvious and dares to point it out.  Let me reframe that:  He sees things that are incredibly obvious to others once he points them out.  But because these things are most often "hidden in plain view," they are actually noticed by very few.

His work on growth and population deserves the widest attention possible.

Recently, I had a nice email exchange with Dr. Bartlett, and he closed with this:

Between 2002 aand 2005, Alan Greenspan dropped interest rates too low for too long.  This created a property bubble which was really no surprise at all to anybody who follows such matters.

In fact, there are reams of papers written by PhD Fed staffers that explore the unusually tight correlation between real estate and mortgage interest rates. There’s really not a lot of mystery as to why this is the case.

To make an extreme example of it (and leaving the principal payments out of it), if you can afford $12,000 per year towards mortgage payments, at 10% interest you’d be able to afford a $120,000 mortgage whereas at a 1% rate of interest you’d be able to afford a $1,200,000 mortgage.

Well, folks, history was made today. The US now has an official "range" of between 0% and 0.25% for the Fed Funds interest rate.

Of course this is no different than what the effective interest rate has been for a while (so the Fed is, as always, merely following the market), but now it’s official.  

Perhaps our fellow readers from Japan can tell us what comes next.

In a foxhole there are no atheists. But well before the praying begins, you find out what people are really made of. Perhaps the big, muscled kid who was unstoppable in basic training goes all to pieces while the skinny guy with the thick glasses saves everyone’s bacon. Or vice versa. The point being that prior to a crisis everything rests on appearances. During a crisis it is actions that matter. That’s when we find out what people, and institutions, are really made of.

Today the Federal Reserve effectively freaked out in the foxhole and declared the spirit of democracy, if not the rule of law, to be disposable conveniences of better times.

Mayday! Mayday!

Amidst all of the Fuzzy Numbers offered up, there are two that I trust implicitly because they cannot be gamed, massaged, seasonally adjusted, imputed, or hedonically inflated.

They are taxes and gaming revenues.

Today there were a couple of mind-blowing numbers. Think about these next two articles as if you were a government budget official trying to make plans or a social scientist attempting to assess the current social mood.