General financial and economic deterioration has helped mortgage rates to fall close to their lows, still fee-heavy, but a "four" in front.

The decline in all long-term interest rates is no mean achievement, days before the Treasury will auction $63 billion in longer-term paper — the cash volume the Treasury will need every two weeks this year.

General financial and economic deterioration has helped mortgage rates to fall close to their lows, still fee-heavy, but a "four" in front.

The decline in all long-term interest rates is no mean achievement, days before the Treasury will auction $63 billion in longer-term paper — the cash volume the Treasury will need every two weeks this year.

The unemployment rate rose a half-point to 8.1 percent, and there is no reason to expect change in that rate of increase in months ahead. Stocks suffer circular distress from the imminent bankruptcy of GM and Chrysler, the descent of mighty GE to $6 and possible failure, banks priced to fail their stress tests, and freefall in the Dow and S&P.

This is not a normal cycle. It is not another standard pullback from overextension that will self-bottom or a Fed-induced inflation fight from which the Fed can retreat.

Nor are we suffering inescapable Olympian punishment for bad behavior. Nor is this a Depression rerun (pick up "Grapes of Wrath" and consider the real deal).

Through the yammering by experts, theorists, propeller-heads and punishers, stick to the heart of the matter: An ordinary episode of excessive leverage has broken into a self-reinforcing downward spiral of asset prices, the slide greased by interlocking electronic markets and failed innovation.

The value of every asset on the planet is dropping: oil, all energy products, real estate, currencies, stocks, non-Treasury bonds — and even gold is well off its high.

In the miracle of the balance sheet, asset decline wipes out net worth and begets liquidation, which drives assets lower. Of all the misbegotten voices, the ones calling for more liquidation and an end to bailouts are the ones most likely to suspend civilization.

This is not a monetary deflation that can be stopped by creating money, one of the missed fixes in the 1930s. Nor is it a failure of aggregate demand that can be repaired by massive deficits, the other missed fix of the ’30s. Spending today just falls into the asset black hole, and excessive government borrowing can crowd-out private credit. …CONTINUED

 

Nor is this Japan and "Zombie Banks." Japan’s problem was and is a zombie society, unable to change. We can change! Better than any economy anywhere ever, but change here right now is full-scale debt-reduction, spending pullback, retreat from risk, all of which push assets downhill.

What to do? Stop the asset spiral. How? The Bank of England yesterday began to buy U.K. bonds ("gilts") with printed money, first time ever. One policymaker: "We are groping in the dark, and we’ll know if it worked if the economy recovers in a couple of years." The U.S. situation is better than the U.K.’s, but we are groping, too.

President Obama has failed to grasp the magnitude of the emergency, blithering about "stocks going up and down like tracking polls," his first budget shot to pieces in days by centrists in his own party. Focus please, sir.

Geithner gets it: "Most governments make the tragic mistake of not doing enough soon enough." That would be us. Geithner is immobilized by absence of staff: His top two picks refused jobs rather than endure runaway personal digging. Today, few people who know about money are untainted.

The Fed gets the hazard, but not the urgency. The Fed will activate the Term Asset-Backed Lending Facility (TALF) this month, a might-work $1 trillion scheme — after four months of dithering in design. In another few months, the Fed will finance the first bank-toxic extraction auction. Late.

The one way to stop the asset spiral: Credit. Rivers of it. Yet, bank examiners are throttling small and regional sources in the name of prudence, and large lenders are paralyzed by asset-valuation and capital adequacy rules appropriate for ordinary times.

Take a page from China. If your economy needs credit, tell your banks to provide it, now, and save the niceties of capital and revived private providers for another day.

President Obama, no president can know ahead of time the tap on the shoulder, the call in the night, the surprise threat requiring overriding priority. Yours came fast: The world in your head is not the one out your window, and a lot is riding on your reaction time.

Full-on emergency requires full-on response. There is still time, and power aplenty.

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

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