Economic Musings

For some reason, I find myself in total agreement with the Bush Administration today. Maybe it's this thing I hear about whereby one gets more conservative as one gets older. Or maybe even a stopped clock is right twice a day:

WASHINGTON -- The Bush administration is hardening its opposition to the chorus of Democrats, bankers, economists and consumer advocates calling for a big-money government rescue program for struggling homeowners.

In an interview yesterday, Treasury Secretary Henry Paulson branded many of the aid proposals circulating in Washington as "bailouts" for reckless lenders, investors and speculators, rather than measures that would provide meaningful relief to deserving, but cash-strapped, mortgage borrowers.

Mr. Paulson's comments came amid signs that the nation's housing market is getting worse, not better. Indeed, at a House hearing yesterday, Federal Reserve Chairman Ben Bernanke kept the door open to further interest-rate cuts to boost the economy, even as he warned that inflation pressures have intensified in recent weeks.

...Both Democratic presidential hopefuls have criticized President Bush, saying he exacerbated the housing market's woes by tolerating overly aggressive lending practices. Sen. Barack Obama (D., Ill.) has advocated the creation of a $10 billion fund to help borrowers avoid foreclosure or buy first homes, while Sen. Hillary Clinton (D., N.Y.) has proposed a 90-day moratorium on foreclosures and a five-year interest-rate freeze on adjustable-rate mortgages.

Several major banks, including Credit Suisse Group, have floated plans that would expand an existing federal program run by the Federal Housing Administration to extend government insurance to thousands of troubled loans. Former Fed Vice Chairman Alan Blinder has proposed reviving a Depression-era agency to buy up troubled mortgages and refinance them at affordable rates.

Even the Office of Thrift Supervision, an independent agency within Treasury, is developing a plan that would make it easier for banks and thrifts to refinance loans for homeowners whose houses are worth less than the amount they owe.

Rep. Frank's plan would provide about $10 billion in loans and grants to help states buy foreclosed homes, plus a similar sum to allow the FHA to guarantee new, more-affordable mortgages for homeowners on the brink of losing their houses. Democratic lawmakers, including Senate Majority Leader Harry Reid of Nevada and Sen. Chris Dodd of Connecticut, chairman of the Banking Committee, have legislative remedies in mind, as well.

I just look at this and think the market has to find a bottom, even if it's a deep, deep bottom, and it's better for everyone if the process proceeds quickly. Real estate markets take forever to adjust anyway (it took five years to find a bottom after the 1990 crash in California real estate values, for example). Lost homeowners have to stop trying to hang on, admit that they are screwed, surrender in the face of bone-crushing destiny, throw the kids and the dog in the minivan, and move on. Hang on, and they'll have to do the same thing anyway, just three years (and numerous dysfunctions) later.

The housing foreclosure crisis is likely to moderate this year, which is good. Just move on, just move on....

Left: Five-year Dow Jones Industrial average performance. NASDAQ and the S&P500 indices show similar behavior.

Actually, I'm surprised how well the stock market is doing, but then Bernanke et al. are doing their best to keep it propped up.



Left: The value of the Dollar in Euros, for the last five years.

The inevitable downside, of course, is that the value of the dollar is cratering. It's not possible for the Fed to simultaneously lower interest rates, keep inflation at bay, and support the dollar. Of course, it puts the Administration in an awkward spot. For example, Bush stated recently:

"I believe that our economy has got the fundamentals in place for us to ... grow and continue growing, more robustly hopefully than we're growing now," he said. "So we're still for a strong dollar."

Who believes this stuff? Certainly no one on Wall Street. The Europeans would be too embarrassed to lie so readily. The Administration made its decision to keep economic activity high, let the dollar tank, and let loose the hounds of inflation. Case closed. Just move on, just move on....


Left: The value of the Dollar in Yuan, for the last five years. Ten percent of the Chinese holdings in dollars, completely vaporized! Advice to the Chinese: Diversify your holdings! Make the Americans pay in Euros!




It looks like we're segueing into a major, major increase in gasoline prices! Over $102/bbl oil today! $102 isn't even on this chart, it's so high. Amazing! It isn't even the summer driving season yet. It's like we're back in the 1970's again! Stagflation, here we come!

The cause of stagflation in the 70's was the deficit spending hangover for the Vietnam War (inflation) coupled with high oil prices resulting from OPEC's manipulations (stagnation).

The cause of stagflation in the 00's was the deficit spending hangover for the Iraq War (inflation) coupled with high oil prices resulting from higher Asian (mostly Chinese) demand, refining capacity that hasn't kept pace with consumption, and difficulty finding new oil reserves (stagnation).

By August, I bet we start seeing gasoline at $4.50/ gallon at the pump.