A Curious Economy
March 28, 2008
Mortgage rates rose slightly this week, the lowest-fee 30-year from just below 6.00% to a hair above. Spreads still gape versus Treasurys, at 2.50% above the 10-year defying all of the Fed’s latest efforts. 5-year ARMs, both conforming and Jumbo, are better in availability and rate, but both are scarcer and higher than in January.
The economy itself is in a curious place. This morning’s report of a half-percent gain in February personal income was head-scratching good news, not squaring with consumer confidence measures at 16-year lows, some components at 41-year all-time lows. Yet, the income gain is consistent with a labor market still intact, no wave of layoffs: this week’s claims for unemployment insurance fell a bit. More in that income report: core inflation is holding 2.0%, just barely.
The credit crunch has not released in the slightest, deepening again in bank-to-bank loan rates, municipal finance an expensive mess, and commercial paper shrinking again. The crunch is obviously spreading sideways among institutions and in Europe and Asia, but community and regional banks feel little pressure except from nervous examiners. The crunch is likely the cause of a rolling collapse of orders for durable goods, down 5.3% in January and another 1.7% in February.
As the crunch spirals downward, the media and politicians are spiraling upward in a self-reinforcing chorus of “No Taxpayer Bailout!”
The greatest hazard at hand is policy error, and today’s policy formation is proceeding exactly as did the 10-year S&L denial waltz.
Examples. Bear Stearns was “bailed out” or “rescued.” Like hell it was: it was liquidated. More than half of its 12,000 employees will lose their jobs, stockholders lost 94% of value, and senior officers and directors are gone. The Fed will babysit $29 billion in the worst toxic waste, and wreckage-acquiring Morgan-Chase will retain all other liabilities including litigation. The only people bailed out, rescued: taxpayers saved from the effects of a massive fire sale.
The Fed has arrogated no new powers in this and other measures since August, and done nothing inconsistent with its 1913 charter, yet media and pols sound like the Casablanca inspector: “Shocked! I am shocked!” Of course, the major problem in this ongoing crisis: the Fed has not been able to do new things (like inject capital, as Europeans are doing by the tens of billions right now).
The cautionary S&L tale began in 1978: the nation’s mortgages sat in 7,000 thrifts, funded by cost-controlled deposits. The Depression-era “Reg Q” lid had to come off (obsolete and destructive), but removal was followed by inflation-adjusted oil prices as high as today’s, inflation 2% in some single months, and deposit costs rose far above the mortgage portfolio return. The industry was toast by 1981 and everyone in it knew.
A taxpayer bailout then would have been cheap, maybe $75byn in ‘08 dollars. Oh, no! Can’t do that! Instead, merge busted outfits into strong ones. Two years later, the strong were broke. Still could have rigged a cheap bailout: there was nothing wrong except low market values for low-rate mortgages. Nope, uh-uh.
No, we’ll give the S&Ls new lending and investment powers, and they’ll “grow their way out of trouble.” They grew, all right. By 1987 they had created a $300byn loss on new loans. Policy makers, not quite done, that year made retroactive changes to the tax code that just about doubled that loss, not quite ten times the original exposure.
The “S&L Bailout”, as it is still recorded in national memory, arrived in 1989 with the sales of bonds to be repaid by fees on surviving banks and earnings in the FHLB system (still ongoing) -- not taxpayers. S&L stockholders, employees, officers, directors, and most borrowers were ruined. The only parties bailed out: the depositors. Taxpayers.
This time we don’t have 10 years in which to blunder. That time the economy was insulated from S&Ls -- they could stay liquid even while broke, and by ’83 Wall Street provided mortgage credit. This time... we won’t make it without credit.
