Markets are barely trading at all while waiting for a conclusion in Europe. Now at center ring are 17 panicked, flower-squirting clowns trying to jam themselves into a Volkswagen Bug. Although terribly at risk, financial people no longer care how it turns out. Fix it, blow it up, but drop this act.
As much as Euro bears would like to bet on Euro breakup by buying bonds and mortgages, they don’t dare — can-kicking will not end until it ends. And the bears are matched by a ton of people who still think that all the clowns will get in the car.
The Occupy Wall Street movement is a daily reminder of the greatest hazard to the world since 2007, and perhaps greater today than ever. I can’t take the OWS micro-mobs seriously — I am a child of the ’60s, and if we had turned out like OWS, water fountains would still be segregated and we’d still be drafting soldiers for Vietnam.
Even when we were wrong, we had clear objectives; these OWS sign-makers do not know what Wall Street did before the "Dark Side," during it, or what it does now.
That mass ignorance of money and banking is our deepest hazard, and has led to the strangest political confluence of my lifetime. The left believes in regulation — that an infinite number of pages and agencies will stop the bad stuff and leave the good stuff operating.
Professors of law think that way. The right’s answer to ignorance is simplicity: shrink or dismantle the system and go back to cash. In combination: financial Luddites mixing up Jim Jones Kool-Aid.
Good things have happened in the bubble aftermath: living wills for systemic-risk institutions, a global drive to limit the size of any bank, and a separation between safe, deposit-taking banking and risky operations. However, lost on the body politic: the near-absolute inability to shrink the system during a time of economic distress.
Example: the drive to increase bank capital. In good times, it’s not hard to sell stock. Excessive capital reduces profitability and lending capacity, but it can be done. Today, no sensible person would provide more capital to a bank only to watch it written off in new losses. The Europeans dare not let sovereign debt to default because it would wipe out banks; but, to force them to recapitalize and then write down fails also.
Bankers’ standard solution to capital-add pressure: Shrink the bank. A given unit of capital then will meet new requirements. Unfortunate follow-on effects: a reduction in credit, which tends to stall economic recovery and to undercut assets and to increase losses. Worse, if every major bank tries to shrink at the same time, they must all try to sell the same stuff into the same markets, crashing the innocent along with the guilty.
At this moment of maximum vulnerability, enter the Kool-Aid team. Insist that in any bank failure that only depositors be made whole. In the U.S., not so bad; in Europe, 60 percent of bank funding is "wholesale," IOUs issued mostly to other banks, the banks in the aggregate three to four times European GDP (in the U.S. only about 70 percent).
Civilians in the 1930s knew exactly what a bank "run" was because they and their parents and their parent’s parents since childhood had seen long lines of frightened depositors in bank "panics." Today’s civilians have neither experience with nor concept of the utterly invisible bank-on-bank run that began in 2007.
Disembodied, detached from their own wallets, it’s the easiest thing in the world for two opposite political wings to agree on free-lunch, disastrous solutions.
Thus, to protect taxpayers, the Fannie-Freddie conservator Edward J. DeMarco has adopted an ultraconservative stance, which is making taxpayer losses all the larger. To protect its taxpayers, Germany insists that before it will help the others they must adopt policies that will make their losses larger than Germany can solve.
One place has it right. Devalue your currency, accept some inflation, balance your budget mostly by cutting spending; and to keep things going until you heal, let your central bank buy assets with invented money, and force your banks to provide credit. Policy aside, all should study the unique national character traits that in difficulty avoid self-deception and allow getting on with it. In England, Wales and Scotland.
Existing-homes sales are relatively stable, but when glancing at this chart, remember that 35 percent to 40 percent of today’s sales are distressed, versus less than 5 percent prior to 2006.
The usual happy-talkers found joy in starts of new homes, but it’s a tad early to party.