Michael Panzner on Subprime Delusions

Michael Panzner at Seeking Alpha has a great post, “Donald Lambro’s Dangerous Suprime Delusions,” which I found a pleasure to read because he takes on a deserving target, namely, a pathologically optimistic piece by Donald Lambro,”Subprime Shakeout Just a Rough Patch.”

The piece is fun, in part because Lambro is such a deserving target, and Panzner goes after him with considerable gusto. Mind you, I’m not saying that there isn’t an intelligent version of an optimistic case. There is. It’s just that Lambro doesn’t articulate it. The plausible upbeat case boils down to, “Subprimes really aren’t that significant relative to the financial system.” And that is 100% true.

The problem isn’t subprimes per se, it’s that subprimes are the most visible and distressed example of a very widespread pattern of overly loose credit, which has fuelled high asset prices, particularly in US housing. So it’s really not that the “subprime contagion” is spreading. Rather, the subprime mess is making it acceptable to talk candidly about how the rest of the housing market is in the process of a correction.

But let me not detract from Panzner’s post, which is worth reading in its entirety:

A visitor asked if I’d care to comment on a recent article by Donald Lambro. After reading “Subprime Shakeout Just a Rough Patch,” my first inclination was to say “no,” because I was tired and felt it was so far removed from reality that those who aren’t caught up in the Wall Street-Washington fantasyland vision of today’s America would see straight through it.

But then I reconsidered, thinking that it was better to err on the side of stating the obvious than to have some unfortunate soul fall for this farce of a spin-job and end up with nothing more than a one-way ticket to financial disaster.

According to Mr. Lambro, “no one can know for sure what the precise impact of the subprime-mortgage-market collapse will be.” So far, so good. If he had stopped there, I would have said fine, I agree. However, he then adds:

But it is not going to deeply affect the long-term growth of our overall economy.

The reason: Our economy is too big, too resilient and its fundamentals too strong to inflict any long-lasting collateral damage to our economic infrastructure.

The number of subprime-mortgage bankruptcies and delinquencies is no doubt substantial, as last week’s industry data survey showed, and we don’t know how deeply that could dig into the larger mortgage companies. But reporting on this story, which rattled stock markets here and abroad, left out the financial context in which all this is occurring.

The subprime market’s bubble burst — as many predicted it would — at a time when the economy overall was on solid ground. Corporate profits have been spectacular overall, small-business growth has been strong. A low unemployment rate ( 4.5 percent) has pushed total employment to nearly 150 million (the highest in our history), and wages have continued to rise.

The “economy overall is on solid ground”? What about the fact that the nation’s personal savings rate and total debt as a percentage of gross domestic product have exceeded the dangerously unstable extremes last seen during the Great Depression?

“Corporate profits have been spectacular overall”? Yes, they have, but that is old news. Anyone who understands anything at all about economic history knows that the trend of corporate profit growth is one of the most reliably mean-reverting series in existence. In other words, there is only one way it can go from here, and that’s down.

“Wages have continued to rise”? Most analysts who are not in some sort of substance-induced haze acknowledge that real — inflation-adjusted — wages have lagged economic growth for several years now. Clearly, Mr. Lambro is either smoking something or is being disingenuous.

But there’s more to this bogusity:

Wall Street’s doom and gloomers, who see a recession around every corner, are myopically focused on trade deficits, budget deficits and the housing downturn, while ignoring both United States and global economic growth.

“Myopically focused on trade deficits, budget deficits, and the housing downturn”? I don’t know, I think a few are also focused on the projected $50 trillion-plus cost of social security, medicare, and other social programs that have not been properly accounted for. Or the $1 trillion of formerly hidden obligations, known as other post employment benefits, that state and local governments must now recognize under new accounting rules. Or the risks that stem from a $6 trillion financial safety net that includes government-sponsored disasters-in-the-making like Fannie Mae.

Still, Mr. Lambro carries on, spiraling downward like a heroin addict caught in the unrelenting grip of his destructive indulgences….

The piece concludes here. Enjoy!

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