Friday, October 03, 2008
deepening economic slide
today came the jobs report. previously -- as run down by david altig -- were disastrous reports on car sales, PCE, house prices and a particularly sharp fall in manufacturing.
As recently as three weeks ago it was still possible to argue that the state of the U.S. economy, while clearly not good, wasn’t disastrous — that the financial system, while under stress, wasn’t in full meltdown and that Wall Street’s troubles weren’t having that much impact on Main Street.
But that was then.
consequent to the credit crunch, a severe recession is in the offing. as proffered by dr. steenbarger -- look at what's become of investment-grade corporates. not to mention high-yield, commodities and the dollar.
this is a full-fledged debt deflation, the most significant such episode for the united states since 1929-1933. and the economic fallout from the detonation of wall street is going to be severe, TARP or no TARP. as bloomberg's jonathan weil notes, the paulson plan serves mostly to kick the can down the road into january -- the political cycle has ended up being a very unfortunate bit of institutional timing. and why? in part:
No. 2: The reckoning will be worse than you can imagine.
If Paulson were serious about recapitalizing rickety U.S. banks, he would infuse them with hundreds of billions of dollars of fresh government money, in exchange for ownership stakes. And if he wanted to create market liquidity for all those troubled assets on their books, he would be ordering banks to disclose everything there is to know about them, so Mr. Market could figure out their present value.
He can't let that happen. Not now. If everyone could see how much the toxic waste is worth, the writedowns would be so huge that many banks would have to be declared insolvent.
Better to let the next administration deal with the clean- up. The trouble is, the longer the government waits to address the banks' lack of capital, the worse it gets, barring a miracle.
the best outcome of the implementation of TARP -- a process that will take at least weeks from passage -- would be a break in the complete and total panic gripping credit markets. but i frankly have little hope for that now -- in my view, the delevering has probably gained sufficient momentum now to take on a life of its own independent of policy decisions. it has clearly jumped into europe, where banking frequently runs on even slighter capital, and particularly to the financial epicenter which is london. the hedge funds at the center of the global shadow banking system have descended into disarray on both sides of the atlantic -- our portfolio reporting for september has been an outright disaster, and this will be the worst month in the 20-plus-year history of our fund of funds. liquidation is now the order of the day, and the banks and insurers -- all asset holders, really -- will suffer for it.
even if it works as advertised, TARP is likely to throw off strong unintended consequences. but a break in the panic is needed to stave off disaster. if this ends up a sell-the-news event and credit markets refuse to liquify, panic will for the first time in a long time not be anything like a buying opportunity.