The Great Run of '08

Commentary: Fed’s ‘nuclear’ fireworks fizzle
By Lou Barnes, Friday, October 10, 2008.

Inman News

I continue to have great confidence that the authorities will succeed in ending the Great Run of ’08, and jumpstarting credit. However, there was no progress this week, and financial markets are a shambles not worth talking about.

The Main Street economy downshifted in August, entering a still-steepening decline, but … but, amazing strength remains and positive developments are baked into nearby cake. In newest distress, consumer credit outstanding in August fell by the largest margin since the data began in 1943 — declining by denial and cost, not a shortage of need. Then, good news: Claims for unemployment insurance fell by 20,000 last week, and pending sales of homes jumped 5 percent, foreclosure resales flying off the shelf.

In better news on the way, consumers are a few weeks from $2.70 gasoline (wholesale gas broke two bucks yesterday, oil down 40 percent to $80/bbl, natural gas by 55 percent). In fact, the price you’re paying for almost everything will begin to fall before Christmas: The dollar has soared 15 percent or more against major exporters to us, and import prices will slide quickly. Corn, the key in the food-cost chain, has fallen in half since July, as have wheat and soybeans; coffee has dropped 35 percent, cows and hogs by 20 percent, copper by 45 percent, and lumber 40 percent. CPI may drop 1 percent-2 percent in single months.

The Fed this week “went nuclear.” It fountained almost a trillion in cash into the system, began to guarantee most commercial paper, and coordinated rate cuts among all developed-nation central banks. Good show, but it did not work.

The London Interbank Offered Rate (LIBOR), which tracks the rates banks charge each other for loans in 10 currencies for durations ranging from overnight to 12 months, is still a mile high, 4 percent-5 percent, intentionally priced to avoid lending, and panicked buying drove T-bill yields back down to 0.03 percent. In the end-stage of a run, all players hoard cash: Banks simply dumped the Fed’s cash into mattresses, never to be loaned. Banks aren’t worried about the credit of counterparties or customers — they are worried about their own credit! They are worried that when their next-maturing debt comes due, the lender to them won’t roll it over and neither will anyone else.

Europe has avoided concerted action, but will get at it within hours or days. The U.K. overrode the Bank of England’s demented concern for inflation (its director, Mervyn King, should be locked in the Tower or at the bottom of the Thames) and ponied up $87 billion as direct capital injection to rescue its banks. Very well done; will work quickly.

History will not be kind to Henry Paulson. His TARP baby is a total bust. May work someday, but this is a first-order, right-now, national emergency. Gordon Brown, U.K’s prime minister, told Parliament derisively, “The time for extracting troubled assets has passed.” Late and surprised again, Paulson this week gradually stumbled toward capital injection, but still clung to a market-based “voluntary” approach, and obviously and again had no well-formed contingency plan.

Injecting capital means taxpayers ahead of stockholders, and means control. The usual jackdaws already object to “nationalization” and “socialism.” Get over it. The leaders of our largest financial institutions have shown that they cannot be trusted with the nation’s interests. If they will not use their banks to make loans, then as Abe said to General McClellan about his idle army, we’re going to borrow them for a while.

One at a time or together, give these orders to the hoarding CEOs: “We will provide sufficient capital, and your stockholders will have as long as they need to pay back the taxpayers. Begin to extend credit on Tuesday after this holiday. You will forthwith stop ‘deleveraging’ and begin to restore portfolios of quality municipal, corporate and mortgage bonds. You will call every bank counterparty and every commercial customer and determine their needs and satisfy them by the sound credit standards of 1999.”

Further: “You will re-open every line of credit you have closed, except as underwater by new, actual appraisal. Buy the NFL advertising package Sunday, and tell the nation that you are open for business and ready to make loans to any strong applicant and will not withhold credit for local-market or local-industry weakness. Fail to comply, or drag your feet, and security will remove you forthwith. Good day