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Wednesday, February 11, 2009


second wave

that's the notion put forward by favored government-bailout-frontrunner PIMCO via bloomberg, and i don't imagine anyone can fault it.

“The economic setback is still in its early stages,” Koyo Ozeki, head of Asia-Pacific credit research at Pimco’s Tokyo office, wrote in a report published today on the company’s Web site. “Any further decline in housing prices could accelerate the downturn, intensifying the pernicious feedback loop and possibly leading to a second wave in the financial crisis in the next six to 12 months.”

“To overcome that second wave, governments worldwide would have to spend vast quantities,” Ozeki wrote. “The resulting erosion in their finances would increase the risk of dangerous side effects.”

economy feeds back to financial sector in the form of further bank weakening and a massive increase in failures -- royal bank of scotland is predicting in excess of a thousand american bank failures in the next few years, or one in eight american banks.

it's interesting to contrast the opinon of bill gross, who in his latest missive again pleas for government to "stop the decline in asset prices", with those of ozeki. here is gross:

PIMCO’s advice to policymakers is as follows: you can’t bail out everyone, yet economic recovery is not possible unless certain critical asset sectors are not only reliquefied, but rejuvenated in price. The prior Administration’s focus on the banks has been critical but unidimensional. The shadow banking system with its leverage and financial innovation, powered a near 25-year global economic expansion, but it is the delevering of those hidden quasi-banks that is now threatening its petrification. Policymakers should not focus entirely on one-off bailouts of large real estate developers, municipalities, or even credit card issuers like they have with Citi, BofA, and AIG. Rather, they should recognize that supporting critical asset prices such as municipal bonds, CMBS, and even investment grade corporate bonds is a necessary step towards eventual economic revival. Capitalism at its philosophical and practical center depends on credit, and while new loans can be and are being advanced via the banking system, it’s a much more difficult task to force shadow banks to lend. That lending depends on securitization which in turn depends on stable and eventually higher asset prices than currently exist. The original focus of the TARP was on asset prices, but the prior Administration quickly lost its way or perhaps its nerve. Like his Road Runner nemesis, Wile E. Coyote must now extend some infrequently used figurative wings to avoid the deflationary precipice below. Support asset prices. Beep Beep!

here is ozeki.

Lesson 1: There are limits to the government’s ability to halt asset deflation.

The only cures for asset deflation (mainly in real estate assets) are a recovery in property demand via expectations of economic growth and improvement in asset operating profitability. This may sound like a simple tautology, but in a situation where the economy continues to retreat amid a financial crisis, demand for real estate will not recover until a severe enough drop in prices significantly reduces the downside risk of holding property. In Japan’s case, it took 15 years for real estate prices to hit bottom, and it is unlikely that earlier government action might have halted the slide at a higher price level. Even if it could have shortened the process and duration of the crisis, the government probably could not have prevented the drop in prices. That is, while government and central bank initiatives, such as liquidity provisions and outright purchases of securitized products, can help temper the disarray in financial markets, there are limits to government’s ability to prevent deterioration in the real estate market.

these two visions are basically incompatible. the former concentrates on what must be done without the constraint of what can be done; the latter concentrates on what can be done without indulging the fantasy of what must be done. if ozeki is right -- and i certainly think he is, as asset prices must finally return to levels where ordinary income and ordinary or even tight financing terms can support property with positive carry for the owner -- then the collapse of the economy is about to drive a bad general debt problem that outsizes the extant bad housing debt we have been dealing with heretofore.

UPDATE: steve ballmer understands.

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from perrone: you know, here's the real, lasting way to support asset prices -- put more money in peoples' pockets. in the short run and the long run, start moving a large(r) portion of the tremendous bounty capital has reaped from the increased productivity of its employees/debt slaves BACK TO WAGES AND SALARIES. jesus, is it so hard to understand? that way, you get _real_ purchasing power, a _sustainable_ engine for moderate growth and a _durable_ foundation for asset values. in the end, it isn't really rocket science. quit looking for more and more ways to steal from folks, and pay them instead.

there's a chance our new president understands this, btw. I hope to god he does. let's not give up on him just yet.

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problem is that moving back to an income-fueled (as opposed to debt-fueled) model of economic growth entails coming to grips with the retracement to a smaller (and more equitable and stable) american economy. asset prices, moreover, would have to decline to a level where the real income they produce would support their valuation, with free cash flow generation to boot -- instead of, as we have seen, cover bare-minimum ponzi negative-amortization financing of the debt incurred to own them.

doesn't seem like anyone in washington or new york really wants to believe that yet. hard to get off the gravy train, even when you're being thrown off.

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from perrone: well, thrown off they must be. and if they're smart they'll let go before they wind up losing more than a percentage of their net worth. I'm serious, eh, this is bound to get ugly indeed. it's hard to understand sometimes why capitalists become their own worst enemies so readily.

why the fuck do you need a billion bucks, for instance, or 4 billion, when a lousy 55 million would more than do you. do you really need to spend all that time and energy trying to dream up ways to spend all that extra dough? you could still be elite with so much less, with virtually all your whims and caprices seen to -- even as you helped give poor shmucks the chance to enjoy a modicum of security and stability, in return for which they'd basically guarantee your wildly-privileged lot forever. but no.

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