Powerline blog has a story about a recent Fed forecast of a slow recovery for the economy. Well... duh. Put me solidly among those who aren't convinced there is a recovery - the current bump is very likely the result of massive and unsustainable deficit spending.

The reasoning behind the slowness is that banks aren't lending. Well... duh. Here's some of the things they are looking at:

1. The bailout kept a huge amount of bad investments in the banking system that should have been purged through bankruptcy and pennies-on-the-dollar sales last Autumn. The resulting revaluation would have been extremely painful (as if what happened instead wasn't...), but it would have placed real income in the hands of healthy institutions rather than keeping deflated balance sheets on life support. We would have probably lost a lot of "too big to exist" banks, and in their place we would have some new names and a few old names with right-sized financing capabilities. Instead, we have a bunch of flailing brontosauri - giant institutions on cash-swallowing life support keeping the mammals around the fringe.

2. Barney Frank won't shut up. The regulations bill coming down the pike is the typical DC disaster. Long after the public has realized that maybe banks were just operating under instructions from the FDIC, FMA, FHMCA, GMA, CRA, and the rest of the alphabet soup of agencies that so blatantly fell into the "irrational exuberance" trap (probably for kickbacks... but that only happens in Central America, right?), this congress is trying to create a veritable pterodactyl. Banks don't want to move when doing so could break the law in a year. It is quite clear at this point to everyone in finance, and not clear at all to most of the voters, that banks do what the government says. If the government says to lend to questionable borrowers, you either lend or you get pushed out of business. I don't even know if lifting the regulatory burden would do anything good... the industry needs to be weened slowly from the Federal teat. Instead, BF wants to do the opposite.

3. Business sucks right now. The stock market is back to neutral. Housing may be bottoming out, but that's like saying the Michael Jordan had a "bad night" when he scored only 35 - it's really back to where it should be. IPO regulations have all but killed the venture capital industry as an agent of growth. The American government is currently acting like one big barrier to entry. To top it off, American people are shocked into saving, which is good, but their savings are going to feed the flailing brontosaurus. Instead of contributing lending cash to institutions on good footing, they are contributing the disappearing money that should have been destroyed months ago in bankruptcy court. So yeah, investment isn't going too well right now.

4. The government is using all the credit. True. Any cash that is in the system - from foreign government or US banks - seems to be flowing directly to the Treasury. People with money are spending it on treasury bills, notes, and bonds, which is kind of like a self-fulfilling bet on another turndown... although, another turndown without inflation, which is very unlikely. The point is, there's so much "safe" government debt out there, why would any institution actually do the hard work of building a portfolio? This kills big companies, because they have to out-price government bonds. Yields grow, profit dies, and people get layed off.

5. Finally, the fundamental flaw has not been fixed, if anything it has been further fundamentalized and flawed. We as an economy are in a precarious spot. We charge 5x more for our time than anyone else. As protectionism slowly falls away, the problem will get worse. I know a lot of laborers, and I feel for them, but I honestly can't look them in the eye and say that they should really be able to work for 5x as much as an Indian or Mexican who is willing to do the same work. The US needs to continue to create new industries better than anyone else, it is regression to the mean for us. But we are choking that off with inane immigration policies that treat smart people like slaves and kick them out of the country, and treat hard working people like criminals and force them under the table where they lower wage rates for everyone. Not to mention all the things in 3) that are killing wealth creation. And when we do create wealth, our politicians sic on the creators legally, rhetorically, and financially. It's unsustainable.

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