Europe has set the clock back to 2007

Commentary: Global economies no closer to recovery than they were 5 years ago

The world’s financial markets now behave like not very bright but exceptionally well-trained seals, barking and clapping their flippers whenever they hear the words "central bank."

On Wednesday these circus performers talked themselves into belief in a rescue of Spain’s banks, and a new round of "quantitative easing" by the Fed, and faith that these efforts would work. Dow up 280, 10-year T-note up from all-time bottom one week ago at 1.41 percent to 1.7 percent, mortgage borrowers startled by the run-up.

Two days later, no mackerel from their trainers, the seals are back in the tank.

The European end of this is straightforward: No one but Germany can float Europe, but it cannot unless all the rest of Europe accepts German discipline, and the ability of non-German economies and societies to adapt is more in doubt every day.

Spain needs help, but wants to retain sovereignty, fearful that Europe will do for it what it has done for Greece. In terminology from another time, in order to save the village it became necessary to destroy it. So, wait on a Greek election that doesn’t matter, wait on a variety of other meetings and standoffs, wait until something breaks.

In his first interview with Western media in five years, the chairman of China’s sovereign wealth fund, China Investment Corp’s Lou Jiwei (no relation): "There is a risk that the euro zone may fall apart, and that risk is rising." Senior Chinese officials are not given to casual comments, not even once in five years.

The overall central bank situation is more complicated and indefinite. Herewith an explanatory parable, told to rookies by generations of scarred merchandise managers.

The president of a large department store noticed the extraordinary profitability of household furnishings, and marched with his entourage to the seventh floor to congratulate the manager. That honest person said it was not her doing, all the work of the young man in charge of lighting fixtures. The parade moved on to his desk.

The president offered praise, a raise, and promise of promotion, and asked the young man to describe the mechanics of his profitability.

"Well, sir, when we have inventory that’s not selling I mark it down and get it sold, and to avoid the loss I mark up the prices of the rest of the inventory," the young man said.

More congratulations, and the presidential crowd moved on. But one deputy assistant caught an elbow on a table lamp and knocked it flying. The young lighting manager leapt through the air, landing flush-and-thud on the tile floor, just in time to catch the lamp before it crashed.

The president, not known for personal compassion: Good heavens! Your devotion to duty is admirable, but you could have been badly hurt saving an ordinary lamp!

"Sir, you don’t understand," the assistant said. "That’s the million-dollar lamp."

Since the global, wholesale bank run began in July 2007, the central banks of Europe, the U.K., the U.S. and Japan have increased their aggregate ownership of various government IOUs from $3.5 trillion to $9 trillion. All bought with invented money, and not counting a similarly vast sum of government IOUs held by these banks as collateral; all with the sensible, defensible purpose of putting down the bank run and preventing fire sales of assets of all kinds until economies recover.

Good plan. However, in the aggregate global economies are no closer to recovery now than in 2007. The U.S. is in much better shape, although too weak to pull the rest, all of whom are deteriorating. Why the U.S. is still too weak, and what it might do, are questions eluding leadership and most observers. Certainly central: the 20-year undercut of U.S. wages by overseas competition, fair and not.

But, another, more easily released drag jumps from the pages of the Fed’s Z-1 released yesterday. In the first 90 days of 2012, residential mortgage credit contracted by $90 billion, $262 billion year over year. Some, of course, from write-down and foreclosure, but the beneficial effect of record-low rates is strangled by garroted supply and too-high standards. The mania to make banking safe is resulting in a global shortage of credit, making the world safe from economic growth as well.

Lou Barnes is a mortgage broker and nationally syndicated columnist based in Boulder, Colo. He can be reached at lbarnes@pmglending.com.


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