Four weeks ago yesterday marked the turning point in the Great Run of ’08: after the Lehman disaster the White House and Congress vowed to intervene as necessary.
Last Monday afternoon marked the fact of effective intervention, with authorities for the first time moving ahead of the crisis. The Treasury summoned the CEOs of the nine largest bank-survivors and broke the capital shortage by involuntary injection — an event and scene without American precedent.
During these four wasted weeks, frozen credit markets did serious harm to an already recessionary economy. September industrial production collapsed by 2.8 percent, the largest decline since 1974; and retail sales slid 1.2 percent, double the forecast.
However, a weak labor market has resisted free-fall: last week 16,000 fewer people filed new claims for unemployment insurance. Foreign economies are sinking faster than ours, reinforcing global-price decline: September CPI was unchanged and will soon go negative. The commodity collapse is already reversing pressure on consumers at the gas pump, will soon at the grocery, and by winter by prices for lots of things.
Many books will be written about the events leading to Monday’s meeting at Treasury. For the first time in a long time, at least back to the ’70s, the federal government asserted control over commercial banks. The Gucci cowboys of finance and their right-side buddies have since cried all sorts of foul out of arrogant habit, but from the day in 1933 that the first bank accepted an FDIC-eagle decal in its window, and deposit insurance, American banks were and are a form of public utility.
The Treasury did not tell the Nine why they were summoned, just "Be here at 3 o’clock." They were seated in alphabetical order, none more equal than the others. Across from them were "Perfesser" Bernanke, Secretary Paulson and FDIC’s Bair, who read the riot act to the Nine: the economy is failing, the credit markets flat-lined, and extraordinary action is necessary. The authorities slid across the table nine term sheets showing the amount of federal capital each institution would intake, filled out in advance and without consultation, for signature. Now. Not for negotiation. For signature. Now.
Only one CEO argued (the Wall Street Journal and New York Times accounts agree): Wells Fargo’s Kovacevich insisted that his bank didn’t need any capital, and was concerned for his $183-million retirement package. He will not enjoy the parts of future books about his conduct, and he signed with the rest, anyway.
That $125 billion in capital will likely come back to taxpayers in time, and another $125 billion will go to smaller banks (also to return) — more beyond that as necessary. This capital injection should have been planned, politicked, and ready to go way back last spring, when the risks of arriving at this moment were so clear. If so, we would still be in recession, but it wouldn’t be so hard to jump-start credit. All accounts of the wasted September concur: TARP (the Troubled Assets Relief Plan), the Rube Goldberg extraction of bad assets, was Paulson’s work, at last giving way to the capital replenishment long-recommended by the Fed.
Many commentators have us sentenced to a long recession. I doubt it: my hope and hunch holds that the September stumble precipitated a sharper but shorter affair. The rescue came just in time, the risk of black hole intercepted. When Perfesser Bernanke says that he and his people "will not stand down" until we are on safe ground, believe him, and believe that he knows what to do. Progress will come in stages: first stabilization and pull-back from panic. Then the beginnings of adequate credit offered. Then the slow resumption of risk-taking by borrowers.
Opportunity for policy error will remain, but will move to the political sphere. Congress will demand a new, several-hundred-billion "stimulus" package. Tell them, "No!" They will also try to throw money at defaulting households — no to that, too. The best way to help housing: an adequate supply of mortgage credit. The authorities will grope a while longer on that one, but the easy fix is in underwriting: last year credit swung from silly-easy to zilch, and re-centering would be a huge help.
Lou Barnes is a mortgage broker and nationally syndicated columnist based in Boulder, Colo. He can be reached at firstname.lastname@example.org.
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