Northman's Fury

At least some people are noticing:

John McCain, fresh from a whirlwind tour aimed at demonstrating his foreign-policy credentials, took a somewhat different approach. There's an emerging theme surrounding his campaign: The problem with the last eight years isn't that the Bush administration had the wrong policies or was incompetent. No, the problem is that it lacked intensity. Which is why McCain is bent on offering a more concentrated, sustained, high-energy form of Bushism.

. . .

Reading McCain's economic agenda and listening to his speech, it appears that the problem with the last eight years is that we haven't seen enough tax breaks for the wealthy, that economic royalism hasn't been pursued with sufficient vigor, and that the middle and working classes haven't been stiffed sufficiently.

Along with further tax breaks for corporations and the wealthy during a time of war, (a war certain to continue if he has anything to say about it), something he actually fought against back in 2001 and 2003, he has taken the "Socialism for the Rich" approach to the housing crisis.

Poor decisions should not be rewarded—unless those poor decisions are made by really rich people who run investment banks and hedge funds. While "those who act irresponsibly" shouldn't be bailed out as a matter of principle, it's OK to take extraordinary measures to help banks prevent "systemic risk that would endanger the entire financial system and the economy."

I can't wait to see how bad things will get with this guy in charge.

Listen, I understand that it will be painful for all of us when the effects of massive overspending and debt catches up with the US, but I don't think playing crack dealer to the American consumer's spending addiction is really the best long-term plan.

Krugman was interviewed yesterday and offered his view:

I think home prices will fall enough for us to produce about 20 million people with negative equity. That's almost a quarter of U.S. homes. If home prices are rising, or if there's positive equity, you can refinance or sell. But if you have negative equity, you can end up being foreclosed on, and then some people will just find it to their advantage to walk away. We're probably heading for $6 trillion or $7 trillion in capital losses in housing.

. . . If the recession started in January 2008, then that would mean July 2010 is the first month we have anything that feels like a recovery. But I wouldn't be surprised if it goes longer than that - maybe into 2011.

. . . I'm now reasonably sure that they will cut again and again and again. A few cuts of 75 basis points and we'll be down to zero. And there's a pretty good chance that we're heading to zero, and that there's going to be a Japan-style ZIRP, zero-interest-rate policy.

The article reminded me of a post by Ian Welsh I noted way back in August speaking about just the same thing; How Bad Will the Housing Bubble Hangover Be? The answer he and Ben W. came up with was a timeframe much longer than the one Krugman offered.

. . . this bubble, as the chart shows, has gone on a lot longer and a lot higher than prior bubbles. Even if you decide to ignore the 95 to 2001 period and concentrate on the 01 to 07, well, it's way up and it took longer to get there. Other bubbles have taken about as much time to crash as they took to inflate. So you're looking at... 6 years - till 2012 or 2013. If you want to count the entire runnup - you're looking at, oh, 14 years or so. 2021. Ouch.

They also used Japan as their guide for the overall economic consequences, and the story isn't a pretty one.

And note this very carefully - Japan's central bank loosened very agressively, eventually going down to 0%. It didn't stop the deflation and in fact Japan, ever since then, has been in the economic doldrums, sputtering along, never quite getting a good economic cycle going - ever again, despite all the monetary stimulus in the world.

The real fear underlining all of this, is that thanks to all the fancy new financial instruments that were being passed around the last few years, no-one seems to know just where all the bad paper is or what effect it will have when its finally tracked down. That it will be ugly is about the only certainty.

Bear Stearns, pushed to the brink of bankruptcy by what amounted to a run on the bank, agreed late Sunday to sell itself to JPMorgan Chase for a mere $2 a share, narrowly averting a collapse that threatened to cascade through the financial system.

The price represents a startling 93 percent discount to Bear Stearns’ closing stock price on Friday on the New York Stock Exchange.

. . .

Reflecting Bear Stearns’s dire straits, JPMorgan agreed to pay just $236 million for the firm, a figure that includes the price of Bear’s soaring headquarters on Madison Avenue in Manhattan. At $2 a share, JPMorgan is buying Bear Stearns for a third of the price at which the troubled firm went public in 1985. Only a year ago, Bear’s shares fetched $170. The cut-rate price reflects deep misgivings about the firm’s prospects.

Friday's close left Bear Stearns at about $3.54 billion. A year ago, if my math is right, it was worth just over $20 billion. That's a lot of paper wealth up in smoke, and the Fed is on the hook for at least another $30 billion in Stearn's "less-liquid assets".

Add to that a bit more panic by the Fed:

The Federal Reserve, in emergency decisions aimed at containing a crisis of confidence in the U.S. financial system, cut the rate on direct loans to commercial banks and opened up borrowing at the rate to securities firms.

. . .

The Fed's first weekend change in borrowing costs since 1979 is Chairman Ben S. Bernanke's latest step to alleviate a credit squeeze that's exacerbating the U.S. economic slowdown. The dollar tumbled to a 12-year low against the yen and Treasury notes rallied as traders increased bets that officials will reduce their main rate by 1 percentage point when they meet on March 18.

That's a well that can't be gone to very much more.