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Grim Fairy Tales

I saw this AP story, Bernanke: Recession more likely without bailout, at the Miami Herald.

So, who is going to tell the Chairman of the Federal Reserve System that we have been in a recession since at least November of 2007? I realize that the official announcement hasn’t been made, but I have also noticed that people are playing with the numbers to make it seem like it hasn’t happened.

The surest test of a recession is the Christmas stocking index. It has nothing to do with feet, it deals with the preparations that retailers make for their largest sales period in the year. You watch when they start stocking for Christmas and how much stock they put out. Then you factor in the timing of the sales.

In 2006 you could barely get through the aisles, but there was no problem at all in 2007. In 2007 some of the earlybird special sale merchandise for the first people into the store on the Friday after Thanksgiving were still available on Sunday. It was a grim season indeed.

Fewer people still have jobs, and those that do are not keeping up with inflation. That is a big factor in the public reaction to this bailout – Main Street is hurting, but they want to help Wall Street.  The real people are not amused.


1 Rook { 09.23.08 at 7:56 pm }

A recession is more likely? Where does he have his head situated? From where I sit, we are, and have been, in a recession for months.

2 Badtux { 09.23.08 at 8:07 pm }

Actually, I think Bernanke is being an optimist. Yes, all that bogus paper floating around is, well, bogus. But it’s currency, used as asset basis for loans, and you can’t just un-do it without deflating the currency and causing a deflationary spiral like that of 1930-1932. And the problem is that the mortgages backing this paper are toxic and are never going to be paid, and the other alternative — paying off people’s mortgages for them so that this paper is actually worth something — keeps housing prices outside of the affordability index and rewards irresponsibility.

In short, there’s no good way forward here, but the more we wait, the more the chance that banks are going to start collapsing like dominos because, well, they’re already effectively bankrupt. So the question is whether we hurt future homebuyers by keeping housing prices outside of the range they can afford to buy, or whether we hurt homebuyers who took out toxic mortgages. We hurt homebuyers either way, but as a future homebuyer as vs. buyer w/a toxic mortgage, I’d prefer the solution that allows the mortgages to go sour and turns those homes back onto the market, as vs. the solution that props up home prices and keeps homes unaffordable for prudent Americans not willing to take out toxic mortgages.

In other words, let the mortgages default, foreclose, and be dissolved. Let the mortgage issuers and those who took out these mortgages take their hits. The end result will be more affordable homes for those of us who are prudent. In the meantime, avoiding a deflationary spiral is the #1 goal of any central banker at this time, and while trading toxic paper for treasuries may seem akin to loading up C-130’s with dollar bills and flying low and slow over cities while throwing bails of dough over the side, but I’m not seeing a better solution for avoiding that deflationary cycle that does not in turn cause even worse problems than rewarding those who invested in bad debt.

– Badtux the Monetary Penguin

3 Bryan { 09.23.08 at 11:41 pm }

For some time I tagged the start as November of last year, and others are saying October, but we have definitely been in a recession for a while, Rook. OT: aren’t you supposed to be on hiatus?

Badtux, I want to buy the mortgages at the real market value, which is at least 30% off, and then do re-finances into standard 30-year fixed mortgages, so there is some cash flow to cover the expenses. Taking a 30% hit is bad for Wall Streeters, but it’s probably better than what they’ll get in bankruptcy.

Doing that stabilizes the housing markets and drops the prices back to reality. Not everyone will be able to handle the mortgage, even after the re-fi, but they shouldn’t have been in the market in the first place.

They can sell the foreclosed houses to qualified buyers who prove they can handle the load, generating more cash flow.

The 30% drop is going to happen, so they may as well get over it, because, until it happens the crisis conditions continue.

Currently in South Florida the bids are 50% off, so 30% can look pretty good.

This isn’t the first time this has happened. The French went through in the early 1980s and ended up nationalizing the banks, as did the Swedes in the 1990s. I would just as soon not nationalize banking if it could be avoided because one of the problems is that the power became too centralized and the government is forced to deal with it.

4 andante { 09.24.08 at 12:56 pm }

“the government is forced to deal with it” – and there’s always the risky possibility that ‘the government’ will be as ‘fiscally responsible’ as the one we have now.

5 Bryan { 09.24.08 at 3:01 pm }

Exactly so, Andante. We need a return to smaller banks that understand and can react to their local market. When everything is run from Wall Street, no one knows that the real estate market is collapsing in Boca Raton, Florida, or Santa Maria, California. That isn’t going to change if they move banking to Washington, DC.

The son of a friend was in banking locally and was very successful because he grew up here and knew the crooks from the good guys. They promoted him and shipped to Jacksonville on the other side of the state and he doesn’t know who to trust.