A big week ahead will bring the best chance to touch mortgage lows just under 5 percent, and also the best chance for chaos during the last 20-months’ falling-apart.
On Monday, Treasury Secretary Timothy Geithner will tell us what sort of financial system we may look forward to, if any. The details are secret, hence no idea how markets will react. On Tuesday, Federal Reserve Chairman Ben Bernanke will begin two-day testimony to Congress. (I don’t know who I would least like to be: Bernanke, a senator, or out here watching.) On Thursday, Treasury will complete the three-day sale of $67 billion in new bonds, and spasms like that are often followed by a modest rate decline.
To set the stage: Today’s job data were awful, unemployment to 7.6 percent, but very uneven regionally — the worst in the "bubble" zones (California may have hit 10 percent). Press reports emphasize the number of jobs lost compared to the worst post-war recessions, but stick with percentages: There are 100 million more Americans today than in ’74 and ’82, and we’re still a long way from those prior crests at 9 percent and 10.8 percent.
We’re also a long way from the top of this cycle. The 50 percent decline in Big-Three car sales guarantees assisted bankruptcies before summer.
Our government is not set up for crisis management. In fact, it was designed to stop quick reaction to almost anything. Founders fearful of emotional lurching thought checks, balances and deliberation were worthwhile sacrifices.
So, we have emotional lurching without action. First thing: Forget about 4 percent. I’ll be happy to apologize if wrong. This factoid began as a push-rumor at the Realtors’ and builders’ associations ("Maybe if we get this whisper rolling, they’ll have to do it!"). This week, Mitch McConnell, Senate Republican leader, pushed 4 percent in a purely cynical effort to create the appearance that his party has ideas other than "No."
The near-term impossibility of 4 percent is not a matter of choice or policy, just arithmetic. In the last month, markets confronted with $2-trillion-plus new Treasury borrowing this year have pushed the 10-year T-note yield up almost a percent (2.07 percent to 2.94 percent) and the 30-year T-bond to 3.65 percent.
Meanwhile, there are $10 trillion in U.S. first mortgages outstanding. If the Treasury is struggling to sell IOUs, how can anyone honestly propose to refinance five times as much 30-year mortgage paper at about the same rate as 30-year Treasurys?
This collision between borrowing need and market capacity exposes more than just these deceitful four-flushers. The primary unanswerable challenge facing policymakers on stage next week: Having borrowed our way into trouble, how do we borrow our way out?
The Keynesian rulebook, and principal "could-a-been" lesson from the Depression says we must borrow to spend whatever is necessary to support aggregate demand. Probably correct — despite even Sen. Harry Reid, D-Nev., stuffing in home-state goodies. Theory says it doesn’t matter how we spend, just spend, even if all we’re doing is throwing pillows into an elevator shaft. No jump-start, just cushion the landing.
I get all of that, but the itchy spot at the nape of my neck says that aggregate demand is not the problem. The problem is an unwind in asset values; overvalued and overleveraged to be sure, to begin with, but credit withdrawn in such haste, asset-decline and lender-panic in self-reinforcing spiral for two years.
I don’t see aggregate stimulus stopping the spiral. This is not the 1930s; this is different. And, if massive borrowing pushes up interest rates, then the spiral will worsen, or force the Fed to buy the paper (might work, might not; brings its own hazards).
Narrow, pinched and punishing "liquidationists," Libertarian types and Mr.-Market fix-its insist that all weak banks be closed, that surviving ones should not be forced to make "bad loans," and that there isn’t any loan demand from good borrowers, anyway.
They are mistaken. The only way to stop the asset spiral is irrational banking: Take the risk of higher defaults by hosing credit into the worst of a recession. If not, the ultimate losses will be vastly larger, maybe unstoppable. Good luck, Mr. Geithner.
Lou Barnes is a mortgage broker and nationally syndicated columnist based in Boulder, Colo. He can be reached at email@example.com.
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