This post is from reader Gonzalo Lira. Although I beg to differ with him on a couple of his observations, it’s certainly colorful and thought provoking. I give my quibbles at the end.
Insofar as this burgeoning Millennial Depression goes, I’ve noticed there are two sorts of people: Ones such as myself, obsessively following every blog and every chart and chasing after every little Bloomberg article like a starving hunter in an African veldt chasing down every little rodent with a spear, and others who vaguely know that there’s a crisis going on but who are pretty much buying the stock markets’ rise and the mainstream media’s line that “Green shoots are sprouting, and everything will soon be back to normal.”
Obsessives like me and presumably you who are reading this are more or less outraged that these pathetic cud-chewers are placidly eating up this “green shoots” nonsense. We see our charts, we read our Bloomberg, we see one and one thing only: THE END IS HERE!!! REPENT NOW YE SINNERS!!! IT’S A SHORT SQUEEZE, YOU IDIOTS!!! SAVE YOURSELVES FROM DAMNATION!!!
We obsessives are a high-strung bunch.
Now, the economy isn’t like the weather: If the weatherman says it’ll be sunny tomorrow, the weather don’t grow cloudy to spite him. The weather don’t care what the weatherman say. But in macroeconomics, if enough people say that things are going to suck canal water, well then, things will suck canal water—hell, they’ll suck turpentine. Macroeconomics is the ultimate example of the Heisenberg Uncertainty Principle, only magnified: If some observers say it’ll get better, it’ll get a lot better. If enough observers say it’s going to get worse, it’ll get a LOT worse. A relatively small group of influential market participants—the MSM and some key people, not even necessarily powerful people—can literally create self-fulfilling prophecies.
So if we discard the old, clearly failed model of perfectly rational markets and economic actors, and instead think of macroeconomics in these more realistic terms—more-or-less rational models and charts and numbers, plus a really big slug of basic human psychology—a healthy bit of denial is actually not a bad thing. The very act of believing things will get better actually makes things get better. So when I torque down and try to coolly analyse what’s going on, macroeconomically speaking, I am actually okay with all this talk about green shoots and light at the end of the tunnel. I figure, Happy talk leads to calm people, leads to happy markets, leads to renewed confidence, leads to . . . you get the picture.
But I’m still freaking out. Why?
It’s because of what’s behind the mask.
In every economic crisis or mushrooming recession, the MSM and the leadership classes always talk up how great things really are, and how great things are going to get in just a little while, putting on a brave face and putting out optimistic talk—and that’s fine: That sort of mild deception is not only acceptable, it is in fact necessary. Putting on the happy mask is not the issue.
The issue is, what’s behind the happy mask. In other words, what are the people in power actually doing, and do they have any sense that they know what they’re doing, or where they’re going? Or are they making it up as they go along? Are they on a path—even if it’s the wrong path, or one I don’t agree with—or are they lost in a wilderness and just going around in circles?
That’s my problem. That’s why I’m freaking out.
Sixteen months into this Millennial Depression, and less than a business quarter into Obama’s administration, it is inescapably clear that Team Obama hasn’t the slightest idea what it’s doing. To pretend otherwise is self-deception. The louts and Constitutional traitors of the Bush administration didn’t much know what they were doing either—but they were flat stupid. Team Obama doesn’t have that excuse.
Let’s do a quick recap—roll tape:
The banks: The stress test was so obviously so much window-dressing that it’s rather questionable what utility the whole process actually served. I mean, c’mon: The banks negotiated the results of the test (!). This is a far cry from Roosevelt’s bank holiday in March ’33—a far cry? Hell, it’s a whole other musical genre. But even if the stress tests had been on the up-and-up, it is clear that Team Obama will not do what has to be done—nationalise the banks, fire management, liquidate the stock-holders, write off the bad assets, get the bond holders to take haircuts (or quasi-decapitations, as the case
may be) and turn the banks around and send them on their way, FDIC-style. Why they won’t do this is besides the point, through capture by Wall Street—akin to state capture of East European governments by the native oligarchy—seems to be the general consensus.
Regardless, the banks are zombies—and they will remain zombies indefinitely. Zombie banks can undercut solvent competitive banks, strangling financial competition and ironically curtailing market liquidity, because the zombies know they will always be propped up by Uncle Sam (sorry for the mixed metaphors, but you get the idea). This is exactly what happened—and is still happening—in Japan. Zombie banks will take the government’s largesse, lend out no money, squeeze out their non-zombie competition, and wind up turning the entire financial industry zombie—and Team Obama has no idea how to stop this, aside from shoveling even more liquidity in their direction. Or maybe they DO know what has to be done—put an FDIC receivership bullet in the brains of these zombies—but lack the political courage to do so. Either way, the result is the same: Zombies everywhere, killing everything, ironically curtailing liquidity even as they are propped up in the name of improving liquidity.
The charitable conclusion here is, this shows Team Obama doesn’t have the foresight to envision the obvious traps of allowing zombie banks to exist. Hence they don’t have an overall plan for the banking sector—if they did, they’d realize the perniciousness of zombie banks and therefore put a stop to them by setting up a real stress test and putting the banks that failed it—no matter their size—into receivership. The uncharitable conclusion is that Team Obama are captured lackeys of Wall Street.
Industry: Team Obama’s capitulation to entrenched interests in the automobile industry—that is, the United Auto Workers Union—is a very, very bad sign. The government’s involvement, instead of being good for Chrysler and GM in their respective bankruptcy processes and shielding upstream suppliers from the harm of a drawn-out bankruptcy, will actually mean that the business decisions of these two companies will effectively be beholden to political considerations from here on out. After all, the reason these companies were nationalised was in order to save the UAW’s bacon. (BTW, to compare what’s going on at GM and Chrysler today to Chrysler in 1980 is apples and Agent Orange: In 1980, the US government guaranteed Chrysler’s bonds. In 2009, the US government is guaranteeing CHRYSLER—and GM too.)
Moreover, Team Obama hasn’t presented any rationale for the de facto nationalization of Chrysler and GM—so what’s to stop any other industry (or union) from asking to be nationalised? I’m not one of these fools who says that any state-run enterprise is “Communist” or “Socialist”—I would prefer bankruptcy for an insolvent business, but on principle I have no problem with a government takeover of a business or industry, so long as there is a clear, compelling, non-trivial, non-political reason, and so long as there is a clear horizon for the exit of the government, if the interference was for exigent or unique reasons. But
the arbitrary de facto nationalization of Chrysler and GM through this sham (and probably illegal) pre-pack bankruptcy has no rationale, no raison d’etre, aside from propping up some union (which is receiving a shockingly sweet and possibly illegal deal in the Chrysler case, a deal presumably to be repeated in the imminent GM bankruptcy)—the way it’s being done makes no rational business sense, but makes terrific POLITICAL sense. These are the twin problems with Team Obama and their auto industry meddling: It’s not that they are meddling in the private sector, it’s that they’re giving priority to political considerations over financial or macroeconomic considerations, and they’re meddling without a clear and compelling rationale, opening the door for every private business to seek state subsidy so long as they have the political muscle to get the sweet taxpayer-financed deal out of Team Obama.
This shows Team Obama’s lack of an overall plan, coupled with a lack of faith in capitalism and bankruptcy, a lack of faith that the laws and system in place will actually do what they’re supposed to do. When an administration doesn’t have faith in the law, it starts to break it. If you don’t believe me, ask the Bushies.
The military: No one is noticing this, and I know I’m odd man out on this subject, but weapons procurements and excessively large military expenditures—above and beyond the two wars being fought—are continuing apace, and no one is saying a thing. This is a disaster. Military weapons are, by definition, expenses—they’re a waste of money, at best a very inefficient redistribution of income from taxpayers to workers on the factory floors of the weapons’ manufacturers. Now, I’m no pinko-Commie-Hippie-Vegan freak—I have a gun, I ate raw baby seal with some Inuit friends in Alaska one time (delicious), and I sure as hell don’t go around wearing that stupid little semaphore sign which is really just the footprint of the American chicken. However, the exorbitant military spending going on is a tremendous drain on the economy. It doesn’t seem so because the economy has been so used to it, and because in the good times it wasn’t such a pressing issue.
Keep in mind, the Millennial Depression is the first truly serious economic downturn since the end of the Cold War. But even during the Cold War, when the Soviet Union presented an obvious and equal military challenge, there were cutbacks in ’81 and after ’73, as well as in the Fifties, when the economy got rocky. Now—with no serious or imminent enemy except low-tech terrorists—we have a massive military industry, above and beyond the endless, pointless occupations in Afghanistan and Iraq. The military would be the obvious place to start cutting—is Team Obama cutting? . . .
Team Obama’s failure to cut non-occupation military expenditures shows a lack of political will, even though from a rational point of view, cutting weapons procurements and the excessive military in order to redirect those monies to more productive, more clearly stimulative programs is obvious and indeed necessary, if the rationale for the recently passed stimulus package is to be believed. Yet Team Obama does not have the will to do so.
The deficit: Here we come to the big kahuna, the ultimate issue. Team Obama delivered on its promise to stimulate—boy did they deliver! What a doozy of a stimulus package! And the financing of that stimulus? Deficit. The Constitutional traitor Dick Cheney declared that “deficits don’t matter”, and Team Obama is drinking from the same Kool Aid. The budget deficit is being financed by the emission of Treasury bills, notes and bonds. This year, I believe $2.3 trillion worth of Treasury paper will be sold.
Question: What happens when there are no buyers for those Treasuries? Don’t tell me it can’t happen—that’s what they told me last year about Lehman going under, and then they said the same about AIG. In the Millennial Depression, anything can happen. Simple math makes it obvious that those Treasuries won’t find foreign buyers like before—not when the petro-states are selling less oil and at cheaper prices than a year ago, not when China and Japan are exporting a fraction of what they did before. The Fed is willing and able to buy those Treasuries, effectively printing money—and Team Obama is a-okay with that. No budget cuts, just print money. Is anyone else realizing that the dollar will eventually crash if this isn’t stopped? Or am I whistling Dixie in a hurricane?
This shows that Team Obama is either willfully irresponsible in its cavalier attitude towards the currency, or else hasn’t seriously thought through what a crash of Treasuries and a run on the dollar could actually mean for the United States. I can tell you what will happen: In a nutshell, it would mean out-and-out chaos: Fighting in the streets over food. It’s happened before, elsewhere and in the U.S. immediately after the Civil War. No reason to believe it can’t happen in America today.
This is a quick recap, light on detail, maybe a bit on the hyperbolic side, yes—but you who are reading this, an obsessive like me, know all the details already. You can fill in those blanks, and the picture they paint is unmistakably clear: Team Obama is lost, with no guiding principles or overall plan, making it up as they go along.
I didn’t even go into abortions like the P-PIP or the collapsing balance sheets of the state and local governments (which the Federal Government is doing nothing to alleviate) or the looming pension fund blow-up, not to mention credit-card asset blow-ups (happening even now as I rant), CMBS blow ups (which are about to hit like Katrina), and on and on and on. I don’t have to mention any of this: All these details only add to the picture—Team Obama gives a great speech with a huge happy mask firmly in place.
But behind the mask, there is nothing. No plan, no vision for the endgame or the way out of this Millennial Depression, no idea what to do except put out every little fire that pops up in front of them while the general conflagration goes on all around. Team Obama doesn’t even believe that they should do nothing, on the assumption that time alone will heal the banks and the economy—if they really believed that time itself would be the cure for our current ills, they wouldn’t have passed such an aggressive stimulus package, or be playing with legal fire in the Chrysler and GM bankruptcies, or playing with financial Armageddon with the shockingly massive Treasury paper sale.
Team Obama does not have a clue what it is doing. Behind the happy mask of green shoots and hope we can believe in, there is nothing: Just a plastic, reassuring, empty smile.
That’s why I’m freaking out. Am I the only one?
Yves here. OK, the quibbles. On the zombie banks, the mechanism here is different than Japan, although you get to the more or less the same place. As John Hempton points out, corporations were saddled with debt which should have been written down or off, but instead it wasn’t. So companies weren’t borrowing and were trying to pay down the debt, and banks were sitting there with deposits and not lending.
The US is in debt up to its eyeballs, but unlike Japan, we have fat lending spreads. The benefit of the super cheap funding and the subsidies is not even partially being passed on to borrowers. Banks are increasing fees and not lowering spread commensurate with the fall in their funding costs. While some reduction in lending is salutary (too many weak credits got loans) the increases in charges are in many cases indiscriminate. High spreads are feeding the banks at the expense of enterprise.
Re the auto companies, I don’t see the solution as being about saving the UAW’s bacon. For GM, intransigent bondholders have proven to be a bigger impediment than the union. I see this as more a “this is what deal guys could craft” as opposed to being as politicized as Lira suggests. And when I went to B-school, some companies with high levels of unions ownership were models of efficient and responsive manufacturing. I am more disturbed that there was not a single auto industry expert involved in this process. There is a good team at MIT, and I am sure there were other sources too.