The Solution to The Recession

Plenty of areas to take a look at tonight, so we will just get started.

A Word About the Health Care "Debate"
If you do not like anything political, skip to the next section.

I try my best to stay away from anything political here, unless it has direct bearing on economic matters. While Health care may be 1/5th to 1/6th of the US economy (estimates vary) whether or not there is "reform" makes little cost difference, so this issue is a wash on that level.

What I wanted to point out instead is the way the "debate" is being carried right now. It seems those opposed have particular gripes (some very important, others less so) but that there are clearly issues that have a difference of opinion. I myself am against the health care reform bill, as written, for a myriad of reasons.

The problem comes when one side decides that they are "smarter" or more "intelligent" than the other side and then the whole basis for their arguments is that the opposing view is "stupid" or "dumb". Just today I have seen officials pretty high up on the scale relegate the health care debate to "if you are against this bill you are a neanderthal".

I wanted to say thanks to the supporters of health care reform for their help. While I would have liked to debate the issue, I now see that debate is impossible because I cannot think. I came to my position on health care by reading chain emails and watching YouTube. My whole life I have been trying to find my way, find out who I am, and find out just what I feel about many things in this crazy world, but now I know I am a brainless automaton with no ability to reason. This should make things simple for me going forward, so I wanted to say thanks!

Further Evidence of the Real Credit Market
When I read the following article this morning I thought that a better example for just how far from functioning the credit markets are without government support. After reading this disgusting piece, you need to take a shower, so maybe save it until the last thing you read before bed:

Fannie Mae, Freddie Mac Likely to Be Wound Down, Moody’s Says
The U.S. government is likely to decide within 18 months that Fannie Mae and Freddie Mac need to be wound down and replaced with a similar entity that would support U.S. housing, Moody’s Investors Service said.

The government-chartered mortgage-finance companies, which were seized by regulators in September 2008 and since have used $85.7 billion of their capital lifelines, face mounting losses that will mean “it could take a decade or longer” before they are able to emerge from U.S. control as “viable standalone entities,” the New York-based ratings company said in a report.

The increasing losses that will be caused in part by government efforts to use Washington-based Fannie Mae and Freddie Mac of McLean, Virginia as tools to stem the housing slump, as well as the probability it will be “politically untenable to resurrect” the firms, mean the U.S. will likely create a new organization that won’t be owned by shareholders to play a similar role in the economy, Moody’s said.

“This is not bad news for Fannie Mae and Freddie Mac bondholders as the U.S. government has become entwined with these companies and the creation of a new entity to support housing finance likely means the orderly conclusion of Fannie Mae and Freddie Mac,” Brian L. Harris, Craig A. Emrick and Robert Young, Moody’s analysts, wrote in the report yesterday.

Moody’s rates the companies’ senior debt Aaa because of their “very strong” government support, the report said. The companies can tap up to $200 billion of taxpayer capital, and can turn to an emergency financing facility at the U.S. Treasury through at least yearend. The Federal Reserve is buying as much as $1.45 trillion of the debt and mortgage securities through yearend in an effort to lower home-financing costs.

The companies own or guarantee about $5.3 trillion of the $12 trillion in U.S. residential mortgage debt.

So while Fannie and Freddie (both up over 25% today alone!) are too far gone to stay alive for more than a decade, never fear, a new entity will be made up instead.

As for the failing companies themselves, no worries either. The US Government is behind their debt 100%, and thus bondholders should sleep easy. No haircuts here.

Remember this story the next time you see a "credit markets thawing" report.

The Solution to The Recession
I spend a ton of time trying to bring attention to the many dangerous aspects of our debt fueled economy. In late 2007 it seemed nobody would listen because they were too busy buying homes. Last fall it seemed nobody would listen because they were too panicked to hear. Here we are in the late summer and now nobody will listen because they just want it to go away. With the indices on a never ending tear to the upside, any talk about underwater home owners, banks with heavy exposure to commercial real estate, falling real wages, and plenty of other areas of concern just are glossed over. Lost in space as it is.

As an example of just how pie in the sky the thinking is right now, consider this snippet from an article about the "Cash for Clunkers" program:

"...The unemployment rate is already at a 26-year high of 9.5 percent, and economists expect it to top 10 percent by the end of the year -- even if the economy starts growing again.

Rising unemployment and stagnant or shrinking wages mean Americans will stay fairly cautious about spending in the months ahead. They are "many quarters away from a shop-until-you-drop phase," predicted Paul Kasriel, economist at Northern Trust Global Economic Research.

Analysts predict the economy will start to grow again this quarter, mostly because of businesses restocking inventories. Last quarter, businesses reduced them at a record pace, setting the stage for a pickup in production.

In the second half of this year, experts figure the economy will grow at roughly a 2 percent to 4 percent annual rate. They estimate the $3 billion from "cash for clunkers" could provide a lift of 0.25 to 1 percentage point.

For a sustained recovery to take hold, businesses and people must spend and invest at normal levels again, and banks have to lend more freely. The housing market must get back on its feet. And unemployment needs to ease.

Economists are counting on the government's $787 billion stimulus package to help. One piece of it, spending on big public works projects like road repairs, should help spur job creation next year.

To be fair, the article is a pretty broad take on the many issues facing the economy. It is just lacking in any remedy ideas, just some quotes from "experts".

The solution to the recession is simple:
For a sustained recovery to take hold, businesses and people must spend and invest at normal levels again, and banks have to lend more freely. The housing market must get back on its feet. And unemployment needs to ease.

Translated;
For a recovery to be sustained we have to get the US consumer to go back down the debt accumulation road.

Of course how this happens frames current policy attempts by our leaders to get spending going no matter the results. No questions as to the "Why?" just the "How?".

Next week is another stuffed to the gills bond auction session. This is the mechanism of the "How?" The Housing Time Bomb covers today's 35 Billion short term (70 day) paper auction and reports:

Quick Take:
The bid to cover wasn't bad but look at the lack of participation by the indirects(China and the other FCB's)! Only $5 billion of the $35 billion auction was bought by the world. This is pathetic and very frightening. It tells you that they are running for the hills when it comes to buying our treasury debt!

China has been warning for weeks that they planned on diversifying out of treasuries. Folks, if we lose the indirect bidders we are going to start seeing failed bond auctions. At that point the economy will be toast.

The lack of indirect bidders is very troubling. Very recently the reporting of indirect bidders was changed, and at first this was causing the indirect bidder number to be much higher than normal. After a few more auctions, the indirects are now much lower than usual. Seems even trickery has its limits!

Issuing government debt chasing a dream of a return of spending by consumers back to the highest possible level in history seems like a losing bet. Rather than have a backup plan, or even clearly articulated end points for just how far they will go, the numbers just get bigger every month. It seems it is bubble or bust for the US economy. The race has been on since last fall. We are heading into the home stretch and the consumer is far behind. The government will attempt to spend enough money to allow the consumer even more time to catch up, but they not see that the consumer has stopped trying to gain.

Have a good night.