The credit markets this week continued to thaw. All-important LIBOR fell to 2.38 percent for 90-day money; and one-year is down to 2.84 percent — ARMs resetting next month will settle just a hair above 5 percent. 30-year mortgage rates with no fees made it to 6 percent, but for the umpteenth time this year stopped at that barrier.
Central banks and treasuries around the world this week increased already massive intervention: The Bank of England cut 1.5 percent in one whack yesterday, joined by the ECB’s 0.5 percent cut in the Eurozone. The Fed’s overnight rate is 1 percent, but actual domestic interbank trading has been 0.23 percent. They will succeed in stabilizing the patient.
The economic data are awful. You knew that — no point in reciting. However, the pattern unfolding is important.
The last two recessions, ’01-’02 and ’91-’92, were miniature affairs discovered after conclusion, typical of all post-WWII recessions except the two big ones, ’73-’74 and ’79-’82. Those were the first central bank fights against oil-spiked inflation; this fight began in 2006, and by summer caused a general economic slowdown. However, the breakdown in September was caused by a credit panic, not the Fed.
We have been here before. Not in 1930, and not in Japan, but in the spring of 1980. In October of 1979, with inflation over 12 percent, Paul Volcker stood on the brakes and the economy quickly slowed. In late winter, benighted Jimmy Carter wanted to help with the inflation battle and decided that "credit controls" were just the thing: Get Americans to stop borrowing, and inflation would die.
Even brutal Volcker took a dim view. The Fed had already jacked its rate to 17 percent, so it watered the controls to insignificance. However, following the president’s March 15 patriotic appeal to the nation to stop borrowing, that’s what we did. Credit panic.
The economy collapsed: GNP growth free-fell 9.9 percent (annualized) in the second quarter of 1980, the deepest single-quarter decline in modern times. Then, chaos: The Fed had to ease in a still-inflationary economy, wasting the first year of the inflation fight, and then in September re-tightened, causing four more negative quarters scattered through ’81 and ’82, and unemployment crested at the very end, 10.8 percent.
Lessons: This is not a "still-inflationary" economy, and there will be no "re-tightening" — not until the economy is in recovery. The credit panic underway will make this fourth quarter the worst negative since ’79-’82, but concerted central-bank action is as likely to pull us out now as then. Slow in 2009, but not into the pit.
The central banks and treasuries are going to need some help. From the banks: loans! France this week threatened to fire senior managers unless they began to lend and at rates reflecting lower cost of money. The U.K. is hard at the same thing: banks to make loans an explicit quid pro quo of government capital injection. Bankers here better get with it, or President-elect Obama will turn loose Barney Frank — a fate worse than firing.
More help. Investors must resume risk-taking; and there’s nothing for that like the liquid courage of near-zero cost-of-cash.
And help from you. Do not accept passively the cancellation of a line of credit or a cap on a credit card. Inform someone senior in the miscreant bank that their contemptible and unpatriotic behavior will cost them reputation. Then march straight to a nearby small bank or credit union that will be delighted to hear from you.
Then educate yourself. Every financial crackpot in the nation is loose, scaring and confusing everybody from your neighbors to policy makers.
"Secrets of the Temple" is a superb, readable history of the Volcker era, and of the Fed itself. The first half of imposing but enthralling "Freedom From Fear" is the best current account of the onset of the Depression, and the desperate and futile effort to find the fixes that are understood and available today.
For the technically adept, nothing beats Bernanke’s own essays in "The Great Depression." All in paperback — and to see the breadth of opinion among escapees from the economic funny farm, scan the reviews of these books at Amazon.
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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