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Monday, December 01, 2008


NBER dates recession to december 2007

but it still hasn't acknowledged that we are in a depression, and one which is growing desperately deeper with every passing datapoint. today we might cite the ISM, via john jansen. or meredith whitney's commentary in the financial times, via ed harrison of credit writedowns.

I estimate that the mortgage market will shrink for the first time in US history and that the credit card market will be 18 months behind it. While just over 70 per cent of US households have access to credit cards, 90 per cent of these people use credit cards as a cash-flow management vehicle, or revolve payments at least once a year. While the credit card market is small relative to the mortgage market, it has grown to play a key role in consumer liquidity. Declining liquidity here will have disastrous effects on consumer spending and the economy. My primary concern is preserving liquidity to consumers, who command more than two-thirds of gross domestic product.

There is no doubt that time will be the greatest healer, but there is a strong argument for putting the financial system through a methadone-clinic-style rehabilitation as opposed to the “cold sweats” rehab that we face. The US government appears to feel the same, which is why various versions of direct government lending and quasi- as well as real bail-outs have been announced. Certainly, credit was extended to unworthy borrowers, but the baby is now being thrown out with the bath water. I expect more broad-based credit contractions but, specifically, more than $2,000bn in credit lines to be cut in reaction to risk aversion, constrained capital and regulatory change.

that would be, as calculated risk noted, a 45% reduction in outstanding consumer credit card availability. joe nocera passes on some insider opinion on the coming apocalypse in consumer credit -- the banks have committed a spectacular suicide by lax underwriting here just the same as in mortgages and auto loans.

meanwhile, ben bernanke is expanding quantitative easing and discussion the monetization of the united states' debt -- but that's to be seen as a function of the fact that every measure so far taken to combat the deflation of the credit bubble has failed utterly. ed harrison discusses how even the quantitative easing so far undertaken has done nothing but increase bank reserves being held at the fed -- not only has bank and shadow bank lending not increased, but it has continued to collapse with disconcerting effect.

If we are to take him at his word, Bernanke will print money — lots of it — to avoid deflation. The key, of course, is high-powered money. ...

This experiment is not working, though. Before the preset day, conventional wisdom was that in Japan in the 1990s and in the U.S. in the 1930s, policymakers waited too long to begin any quantitative easing. Deflation had already set in and QE was pretty much a bust, as a result. However, we are beginning to see that it was not only the delay in policy, but the natural course of deleveraging which caused credit and the money multiplier to contract.

this is the essential observation -- monkeying with the money supply is going to do absolutely nothing until the impulse to deleverage has run its awful course. we are witnessing a nascent debt repudiation. not only is there no will to lend; there is no longer any will to borrow. weak banks cannot be compelled to lend to weaker credits for fear of insolvency and failure; but even if you nationalize the banks in part or in whole, you cannot force people to borrow. as of now, the only people who want to borrow are the people no one would want to lend to, a pool that is growing remarkably as businesses fail and jobs evaporate -- and that is a problem government simply cannot get around.

as it becomes clearer that the government cannot get around it, a lot of ideas associated with conventional keynesianism -- of the kind frequently espoused by the most respected economists, such as paul krugman -- will credibly come under the kind of attack being offered now by michael panzner or ben bitroff, while documenting the end of the finance economy in the west. krugman and many others have long maintained that new deal policies and dollar devaluation were successful in ending the great depression -- but while they would claim the observable record as supportive, this is not a scientific view. there is no experimentation that has demonstrated the truth of the claim, thank god. and in the sample known as the great depression, the new deal was only implemented following a massive four-year delevering which devastated the world economy.

so which was responsible for relieving the depression? fiscal and monetary stimulus? or a titanic delevering? no one has been able to say, but -- as harrison above notes -- early returns on fiscal and monetary stimulus pre-empting delevering are not looking very good so far.

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