One week ago today, Henry Paulson announced that federal efforts had "stabilized the banking system." On Wednesday a new panic rolled through markets, running to Treasurys. T-bills 90 days and shorter fell to 0.01 percent, and the 10-year T-note dropped from 3.61 percent to 3.01 percent. Few ran to mortgages: Rates fell briefly below 6 percent and are back there today. All ran from non-federal credits, dumping munis and corporates.
In prior recessions, the fearful dumped stocks but bought IOUs of most kinds. The resulting cut in the cost of credit helped the economy to bottom. This Treasury separation from all other IOUs began in September, had not been seen since 1930, and marks terminal shortage of credit to the private sector.
The S&P 500 closed yesterday at 748. On Dec. 5, 1996, the day Alan Greenspan delivered his "irrational exuberance" speech, the close was 745. The old SOB knew what he was talking about after all. Too bad he forgot later on.
Why this new panic? Pending bankruptcies of GM and Chrysler. Understanding that Citibank will not survive as-is. The Fed forecasts GDP decline into mid-2009. New unemployment claims rose to 542,000 last week (the record was 700,000 at the tag end of the ’79-’82 post-war worst, and we’ll beat that in some miserable week next year).
All bad, but no surprise. This new panic, putting us right back where we were in the September shutdown, was the direct result of the Paulson-Bush decision last week to mothball administration rescue efforts. The announcement refused a new battle with Congress for access to the second half of the $700 billion TARP funding, and all in the markets knew they were back on their own.
Our economy — really the global economy, now — has been "in the grip of an adverse feedback loop" (quoting Janet Yellen, fine president of the San Francisco Fed). Credit defaults have cut credit availability, which has cut GDP, which has caused more credit defaults, which have cut credit, which will cut GDP … The Treasury market separation described above is the signal that the spiral cannot stop by itself.
Only government can get in front of it and stop it. The application of infinite government resources must convince all economic players that their panic is self-defeating. Then it will stop and risk-taking will resume. Just 30 days of TARP effort had big effect, and then Paulson and Bush shoved all downhill again.
The resources of government are still available. I promise that the Fed was not a party to the Paulson-Bush decision and will not take a day or an hour off between now and inauguration. There will be a big fight between the money hosers (aggregate stimulus, checks in the mail, infrastructure spending, foreclosures …), Democrats controllable only by a new president; and the capital-injectors, who know that the only spiral-stopper is adequate credit — and who will prevail.
In soft times, both leadership and those led give priority to the trivial, ignore the substantial, and defer the critical. When times have been too easy for too long a terrible word comes into play: decadence. When times turn tough, that internal rot for a time prevents self-salvation. Only for a time.
Then the spectacle of decadence and the anger it brings to us, and at our own participation — that starts the turn. The three auto CEOs, private jets but no plans; Paulson and Bush; bankers taking public capital but making no loans and canceling old ones: credit cards, lines of credit, car loans, student loans … decadence personified.
Today on NPR, Chris Dodd, D-Conn., U.S. Senate Banking chairman and in ordinary times ego-bloated and obnoxious, revealed good judgment, serious intent and merciless fury. If I were a bank CEO or board member, I would today take off my toga, put down my grapes and goblet, and scramble on chubby legs to make loans.
As is said of another high authority, the wheels of Congress grind slowly, but they grind exceedingly fine.
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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