Look To The End
The birth of finem respice comes at an unfortunate time. This site's motto, finem respice, seems particularly apt when the long-term consequences of ill-considered ventures threaten to be so severe. Incredible as it seems, the possibility of a default by the United States is no longer considered alarmist. In fact, after a little bit of reflection, this doesn't even seem all that incredible anymore. Whatever your view of the likelihood of an actual default- and flaccid arguments about the semantics of the term “default” notwithstanding- it is difficult to overstate the gravity of this kind of sentiment. If anyone needs a more definitive statement of the danger of a crisis of confidence for a highly leveraged institution, then they weren’t paying attention when Lehman Brothers slipped smoothly beneath the dark and frigid waters of financial ruin.
And what end is there in sight? Perhaps I have missed something, but I am presently unaware of any official or budgetary authority that expects a budget surplus of any kind in the foreseeable future. The Congressional Budget Office’s January, 2009 figures have deficits running out to 2019, as far as the estimates are made1 and offers few if any credible scenarios for any mitigation of the debt. Even a total freeze of discretionary appropriations at 2009 levels will only pull $1.2 trillion off of a $3.1 trillion shortfall over the next 10-years, and most of that would occur in the last five years of the period.2 Consider for a moment the implications of this. Aside from some soft mewings from the President about a “fiscal-responsibility summit”3 (a more surreal call from this Administration with this Congress I could not have invented with an unlimited pizza and Pepsi budget and a whiteboard and cushion filled room populated only by George Markstein and Patrick McGoohan) there is simply no plan of any kind, credible or otherwise, to cease deficit spending in the next decade. One might plausibly speculate that the United States has actually forgotten how to exist in the absence of deficit spending.
As a first approximation, is difficult to escape the conclusion that the United States will either:
- Be unable to pay its bills in the coming years.
- Be forced to impose crushing taxation to make up the difference.
- Inflate away as much as possible.
- Some combination of the three.
The only questions are: Which bills, how crushing, how much inflation?
There is a great deal of discussion surrounding, for instance, the wisdom of making changes in Social Security benefits as a means to make up some of the shortfalls. This, in turn, has become the nexus for the "that's not technically a default" argument. Of course, it is a default. It just happens to be a default against creditors who have no real leverage or power over the debtor: taxpayers- the ultimate non-recourse lenders.
And what are we really getting for this massive increase in leverage?
The Effort to Rewhip the Housing Froth
Given that some $275 billion of the "new, new stimulus plan" is dedicated to housing recovery and foreclosure relief, I feel safe in observing that the Administration has quietly marooned the many houseocaust deniers on a large shovelful of sand without so much as a palm tree for sustenance. Unfortunately, the Administration is also in danger of repeating the same mistakes that got us here in the first place. Regardless of what you think of foreclosure assistance, and the astute finem respice reader will predict my position thereon quite easily, giving $200 billion to Fannie and Freddie is like leaving the family business with Fredo for a month and hoping for the best. This is colossally stupid.
Housing prices as an asset class will never see, should never see pre-crash levels again in the next decade. Foreclosure assistance is a populist wet dream, incurred in a cheap motel and followed hard upon by a hurried, early-morning departure leaving maid service to undertake the resulting cleanup effort. Foreclosure is how housing deleverages. Period. Tamper with deleveraging in this environment at your (and the rest of the world's) peril. Add to that judicially administered cram-downs and you promise to make mortgages unmarketable even at current prices, much less the frothy goals you have set for yourself.
I am amazed at those who in one breath (rightly) decry the steadfast adherence to the "law of conservation of froth" exhibited by Greenspan et alii (for he was not alone in this and many willing enablers and co-conspirators endeavored to aide him) by transferring the bubble from tech to housing and yet somehow fail to see the parallel to the present efforts to re-inflate the ruptured latex gasbag of housing.
True, in the present conservation of froth effort, the Administration may manage to transfer some of that ugly housing leverage to the Treasury in hopes that its lower cost of capital will buy time, but that is all it will do. Given the size of the problem, this is a painfully obtuse way to address what is still a richly overvalued asset class. Bucks up the troops though, doesn't it? Not totally, no.
It is already becoming clear via the increasing volume of clamoring by the newly "foreclosure assistance disaffected," that crude handouts to some fraction of today's politically expedient or politically sympathetic debtors is breeding resentment in others.4 What did the Administration expect? Live by the sword of class warfare, die by the sword of class warfare. The problem with class warfare is that you have to keep splitting classes until you are splitting hairs. Each time you draw a line, you anger those on the wrong side. Doubtless, those complaining will be dealt with via shouting down greed (everyone in this particular disaffected class is guilty of it so that works nicely) and invoking the many tenants of class warfare to minimize their claim to assistance.
A "I Swear I am Not a Socialist" Merit Badge for the Administration
Read: "The Appearance of Nationalization Avoidance Fund"
I have no sympathy whatsoever for the Administration's public relations predicament when it comes to the "bank nationalization issue," that would appear to be forcing them to pour money into flagging financial institutions. A host of commentators have pointed out that nationalizing a bank should look like it does when the FDIC takes the handlebars and peddles the institution into an asset sale, or otherwise transfers the deposits therein into a viable institution. Most quick. Mostly clean. Why should we fear the "N-word" then? It happens all the time, technically.
This would be fine, if the Administration had stuck to this from the beginning. It did not. Quite the reverse it was used, quite nefariously, as a means to incite class warfare, implement particular pet theories of industrial policy and provide the foundation of a re-election platform. Even as I type this, banking firms that took TARP money when Paulson insisted the entire financial edifice may crumble and collapse (and anyhow if you don't we'll pull out your fingernails slowly- we have some influence with your regulators, after all, you understand) are coming to find it came attached with retroactive political license to brutalize executives (deserved or not) and subject them to the gentle mercies of e.g. Maxine Waters for hours at end. (Incidentally, only Dr. Vikram Pandit is possessed of a sufficient mastery of the dark arts of passive aggression to judo these crude attacks back onto e.g. Bank of America. Ken Lewis never knew what hit him).5
After some reflection, it should be clear that it really is worth examining Pandit's testimony carefully. This, dear reader, is the new face of the executive: obedient lapdog to an Administration that is beholden to so many interest groups that the hope of any legislation with less than a four-digit page count is long gone. The executive corps will quickly become a cadre of perfectly saccharine sycophanta, their image-conscious, public-spin expertise honed over dozens of appearances in front of legislative committees and oversight boards almost as varied as the fractional interests they owe their power to. An executive far more concerned with avoiding the ire of their varied masters than with obtaining praise- for the latter is all but impossible when the committee you must please has seventy members. The safest course is the least active. Lots of motion, little action. Light and noise is the new standard. Don't think it is limited to financial institutions either. One need only recall the spectacle that was Big Auto's hearings to realize that no one is immune.
In short, the Administration made it very clear that even small, minority stakes with no voting rights would be leveraged to the full extent of the law of mob rule to impose the populist schizophrenia of political and industrial policy on those institutions unfortunate enough to be caught up. You better be lending to who we tell you to... or else.
Given this, we are surprised that the word "nationalization" is now met with a recoiling horror? Even if Americans can not quite articulate it yet, this is the essence of fear that lurks deep in that rarely accessed and never discussed part of a common understanding of the dangers of legislative committee rule.
- 1. Congressional Budget Office Budget Projections Data, January 7, 2009 (148kb .xls file).
- 2. Ibid.
- 3. Obama to Shift Focus to Budget Deficit, The Wall Street Journal, February 14, 2009.
- 4. Some Americans, Underwater but Ineligible, Are Riled Up, The Wall Street Journal, February 19, 2009.
- 5. Use of Federal Funds by Financial Institutions, Part 1, The House of Representatives Committee on Financial Services, CSPAN Online Library, February 11, 2009.