The Credit Crunch Continues
March 21, 2008
Some progress this week by the authorities has helped mortgage rates to fall to the 5.75% area for the first time since January. However, the improvement is limited to vanilla “Agency” loans, the Jumbo and even Agency ARM markets still broken. The Crunch is still alive, growing tighter, the financial system unstable.
Meanwhile, there is also still an economy out there, very much alive. It is deteriorating, but at a remarkably gentle slope. Industrial production slipped .5% in February, but 80.9% of capacity is in use, a half-dozen points above the last, shallow recession. The weekly total of new claims for unemployment insurance is crawling up to the 375,000 range, about right for recession onset, but not spiking.
The break in commodity prices this week may not hold, but even if not is likely a foreshock of the real thing to come. Gold and oil each lost 8% of value since Tuesday, and overall indices are off 10%; even the Almighty Euro has begun its overdue fade.
Aside from the thumbtack-in-shoe sensation while driving past a foreclosure sign or pulling into a gas station, the most difficult aspect of this time is sorting through misinformation to find bits of reality. The commodity/currency break, if durable, will silence all that yammering about inflation, stagflation, dollar-to-hell-in-handbasket, gold gold gold GOLD!, and let us move on to real concerns and solutions.
Progress and the authorities.
Although Perfesser Bernanke is certain to have understood the danger in the Crunch from its onset in August, he has throughout appeared reactive, always late and surprised by the failure of the prior measure and next ugly development. Rather like a man who has parked his car on a hill and left it in neutral: as it began to roll, he walked alongside, puzzled, unable to grasp the need to jump back in to put on the brake. As speed has gathered, he has tossed his coat, then a few books, then briefcase under the wheels, buying time but losing ground to momentum.
Secretary Paulson has appeared above it all. It’s not his car, after all. His are safe. This is a little-people problem (from where he sits, all are). For months he has chanted, “Losses should be recognized and written off; those who need capital should raise it.” Eat some cake while you’re at it.
We have not heard that demented mantra since the failure of Bear Stearns got through to both men. As with most history, the magnitude of a crisis is clear only after it has passed. Last Thursday afternoon, SEC and Fed teams began to review Bear’s situation. After the all-nighter, the authorities knew that Bear had one more day of life, that Friday, and would not be able to open for business the following Monday. If it did not open, Bear’s integral role in the tangle of financial-system counterparties would cause the rest of the system to close shortly after attempted opening.
The Bear Stearns event missed by 10 days the 75th anniversary of FDR's “bank holiday,” and by an inch a repeat. The only solution to panic in 1933 was to close the banks and stock market for five days, pass bank-guarantee legislation (Congress did not even debate the bill; FDR signed still-wet copies eight hours after passage), cross fingers and try to reopen. That time, the economy was so badly damaged that it took six more years and WWII spending to pull it out.
This time the economy is still in good shape. Housing needs new credit more than anything else, and emergency measures have begun to help with cost if not supply and strangling standards. Regional and local banks are in fine condition, crunch and recession not yet causing defaults. Basic business conditions are good, most Americans annoyed by energy, food, and home prices but wondering what all the fuss is about.
However, the authorities are still behind. The problem is a system trying for eight months to implode upon diminished capital. Whether market- or government-supplied, or guaranteed, capital must be found. The annualized yield on a 90-day T-bill was 0.65% yesterday, panic still in the belly of the system. In 1933, T-bills paid 0.52%.
