There is new, nonrecession data here, more elegant pretending in Europe — now can-kicking at two-week intervals — and fear has left markets. For now.
September retail sales rose 1.1 percent over August, and the small-business National Federal of Independent Business survey also found conditions in September slightly improved. In direct result, 10-year Treasury notes are trading up from 1.7 percent just two weeks ago to 2.25 percent, a two-month high. Mortgage rates have risen accordingly, pressing to 4.375 percent.
Some self-correction is in play as mortgage refi demand is now shut off altogether, but the Treasury is a continuous seller of paper that the Fed’s Operation Twist is unable to offset. This last week the Treasury auctioned $66 billion in long-term notes and bonds, and everyone who bought is today underwater. Until and unless markets get more negative news, there is zero chance of rate improvement.
Pauses in the flow of news, and hence in markets, are routine.
This one … not routine:
Europe, as everyone now knows, is the most immediate and powerful market mover. Our rates would be much higher if there were any market belief that Europe will find a real solution. At its self-imposed deadline in two weeks, there will perhaps be another Band-Aid, but the Euro-chatter sounds like any other failing deal.
The wacky hope that China and other emerging nations will fund a European bailout, or that banks will self-recapitalize in some miracle of loaves and fishes … all silly. Either Germany throws in, and big, or not.
The Federal Reserve is paralyzed by internal politics. The dissenters: Dallas Fed President and CEO Richard W. Fisher; Philadelphia Fed President and CEO Charles I. Plosser; and Minneapolis Fed President Narayana R. Kocherlakota are mistaken and rigid in their demand that the Fed leave the field.
They could be overcome by the others, who are aware of peril, but they have lost the foundation for their case.
The U.S. Federal Reserve Board’s staff is the power center. The staff forecast historically is more accurate than any other, public or private, but the staff is lost. Its forecasts going back two years have been more wrong than right, repeatedly betting on accelerating recovery only to have the economy slide back.
At the Fed’s September meeting, the staff revised down its near-term forecast for the fifth straight time, and that may be a mistake.
Everybody knows that the Obama administration and Congress are frozen, and may stay so for another 18 months. Events may warm them to action, but left to themselves they’ll do nothing. A great deal of commentary from all political directions says that this state of locked and hostile partisanship is new.
It is not new. It is certainly as old as this country, and as old as democracy. In financial crises, the savings and loan disaster of the 1980s is the most recent example. Everyone connected to the thing knew by 1980 that a $3 trillion industry (in today’s dollars) was toast.
Paul Volcker, modern folk hero, pushed the savings and loan banks to the back of the sled without a shred of planning; Jimmy Carter in his last year as president did nothing; Ronald Reagan, when he took office, at first ignored the matter. His "grow-out" policies then quadrupled the damage, and the 1986 tax reform accidentally doubled the losses again.
The elder George Bush finally raised the money to pay off the depositors during his term as president, and the Resolution Trust Corp. by 1993 disposed the assets. Fourteen years total!
And the savings and loan institutions were a small problem compared to this one.
A prior problem as big as this: The run-up in inflation from 1965-81 was punctuated by two oil crises, with prices rising from $3 per barrel to $38 a barrel at the peak, and by two nasty recessions, with unemployment as high or higher than this.
From 1929-33, essentially every step taken by government either did nothing or made the Depression worse.
Today, we are six years into a blown housing bubble, 20 years into "international-competitiveness absent-mindedness," and at the end of 45 years of borrowing to cover promises to ourselves that we cannot afford.
Today’s trouble is real, but we are no different. Our institutions are intact. We are right on plan: We won’t do anything until we get a better consensus on what went wrong, what is wrong now, and what to do. Just like always.
Patience. Although for the moment it is a real pain in the ass.
