Tweet
Outstanding piece this week from Noland.
http://www.prudentbear.com/index.php...n?art_id=10184
http://www.prudentbear.com/index.php...n?art_id=10184
I’ve never liked (or used) the terminology “shadow banking system.” And while there have been notable highs and lows throughout the hundreds of years of industry history, when done well banking is a legitimate – as well as invaluable – business. Banking is always a critical facet of Capitalism. The effective pricing and distribution of finance throughout an economy are fundamental to the long-term success of Capitalistic systems. For years now, I’ve referred to our expansive mechanism of non-bank Credit creation as “Wall Street finance,” and the proliferation of players operating in this space the “leveraged speculating community.” Unfettered Credit creation, endemic asset inflation, speculative excess and an unmatched concentration of financial wealth and power was the thrust of this historic Bubble. In stark contrast to sound banking, Wall Street finance was a destructive force imperiling our Capitalistic system through the distortion of market pricing, spending patterns and resource allocation. Unsound non-traditional finance fostered both a Bubble and Financial Mania of Historic Proportions.
I have been a somewhat reluctant supporter of recent policymaking. Fearing systemic collapse, it’s been my view that there has been no real alternative other than our government taking a major role in our post-Bubble financial and economic lives. I have also tried to limit criticism of our present team of policymakers, with the view that the great policy mistakes were made during the Bubble years. Post-Bubble policy mishaps are inevitable – and today’s backdrop explains why our “regulators” made catastrophic errors in accommodating the long Wall Street boom.
I find it somewhat puzzling that our Federal Reserve Chairman is not held more accountable for his flawed theories and critical role in accommodating precarious late-cycle financial excesses. James Lockhart, chairman of the Office of Federal Housing Enterprise Oversight that morphed into the Federal Housing Finance Agency, today enjoys a similar Teflon coating. But, candidly, I have to admit to being bewildered that my “analytical nemeses” over at Pimco have seemingly never been held in higher regard. I’m just waiting for the announcement that Mr. McCulley will be joining the Fed. He’s worked hard for it.
Over the years, Pimco and others have consistently trumpeted policy views that they label “Keynesian.” I've tried to offer counter arguments – and referred to their flawed framework as “Inflationism.” Pimco, after all, was the leading public voice espousing massive fiscal and monetary stimulus to ward off the horrible evil of “deflation” after the bursting of the tech Bubble. It apparently didn’t matter that mortgage debt was at the time expanding at double-digit rates, or that a strong inflationary bias was taking hold in our nation’s housing markets, or that “Wall Street finance” was clearly on course for runaway excess.
Not unexpectedly, employing so-called “Keynesian” stimulus to sustain an unwieldy Credit boom ended with disastrous results. The idea may have been for the system to compensate for financial stress and lost output attendant with the bursting of the technology Bubble, but the much greater effect was to stimulate already overheated financial mechanisms and asset markets. The end result was spiking the punchbowl right when the party was getting out of hand – ensuring terminal late-stage excesses wreaked absolute bloody havoc on system stability. And, you know, back then the “Inflationists” conveniently avoided discussing the myriad downside risks to artificially stimulating the Credit system. Apparently, it was a moot point because the risks associated with “deflation” were so much greater. They were completely wrong on this.
So, fast forward to January 2009. There you go again - Mr. McCulley and Mr. Gross are right out there (the kings of all media) espousing Inflationism (a.k.a. “Keynesianism”). I’m the first to admit that circumstances today are altogether different than 2002. For one, and in contrast to 2002, the Credit and economic systems are today actually in a post-Bubble environment. And most regrettably - and specifically because of the extreme excesses that emanated from an artificially extended boom – unprecedented government support has been necessary to thwart system implosion. The collapse of Wall Street finance and myriad asset Bubbles has significantly broadened the scope of asset price declines, attendant debt problems and economic disruption. No doubt about any of that. Yet at the same time, and as it was in 2002, I find it regrettable that pundits paint deflation risks as so catastrophic as to not even discuss the risks associated with a full-fledged bout of Inflationism.
I think it’s nuts to advise our policymakers to target asset prices. I think it’s nuts to focus policy on stoking a quick economic recovery. I think its nuts to even ponder the resurrection of the “shadow banks.” I disagree with the notion of trying to support prices in the debt securitization marketplace. Wall Street finance – all the sophisticated securities, the trillion of derivatives, myriad forms of Credit insurance, all the leveraged speculation, and all the nonsense – is bust and its not coming back as a force for directing finance to – and inflating prices of – the asset markets. There is no quick fix here.
The financial sector is a black hole right now. With myriad assets Bubbles having burst, there is an enormous amount of debt today insufficiently backed by asset values. At the same time, there is a tremendous amount of debt backed by households, businesses, municipalities and our federal government. In terminology I have used in the past, the Credit Bubble has left both the Financial Sphere and the Economic Sphere grossly inflated. Total system debt has been severely impaired.
There are enormous risks today associated with systemic reflation. For one, the scope of problem – the various sectors that could obviously benefit from artificial government stimulus – is almost unfathomable. There is very real risk at this point that policymaking is about to set course for bankrupting the country. The pundits are out there suggesting trillion dollar economic stimulus; trillions for the banks; hundreds of billions to support the securitization markets; and hundreds of billions more for households, businesses, and municipalities. There is a current need for “Trillions” and future needs for “Trillions” more. Once the Trillions start to flow there will be no easy way to end them.
Policymakers and pundits are in dire need of a framework where some type of “stimulus” cost/benefit analysis is at least attempted. I find the Pimco inflation laundry list without a discussion of costs and risks hard to swallow. At this point, focus on the securitization marketplace is a classic example of “throwing good ‘money’ after bad.” And with mortgage borrowing costs today at historic lows, I don’t believe housing markets should be policymakers' major focus going forward. In short, a focus on rejuvenating asset markets is the wrong course. Housing prices will be in retreat until they find a floor supported by local incomes.
Unfortunately, the protracted Credit boom severely distorted incomes (along with asset prices). With the goal of avoiding national bankruptcy, I suggest that policymakers focus on incomes as opposed to both asset markets and incomes. And the key is promoting sound long-term investment in real economic wealth creation. “Money” created today to artificially inflate asset prices and incomes will simply require more inflationary fuel next year and the year after. The focus instead needs to be on real investment in real things that produce real wealth. Haven’t we seen enough of the Illusion of Financial Wealth? Have we not seen enough to understand that Inflation is the Road to Ruin? Will we allow the Treasury market to go the way of private-label MBS?
I certainly don’t like the idea of the government setting investment policy. Let’s face it: it’s repulsive to have Washington dictating the allocation of financial and real resources. But the reality of the situation is that the Bubble’s aftermath has left unworkable financial and economic structures. On the financial side, the focus should be on recapitalizing the banking system and reducing the banks’ unmanageable burden of bad assets. With the overriding goal of not bankrupting the country, the broader securitization markets should be left to their own devices. On the real economy side, stimulus should be directed toward funding businesses, capital investment and national infrastructure projects. The focus should be on stabilizing the economy as it transitions away from a “services”/asset-based economic model. “Money” should be directed toward jobs rather than home and asset prices.
The entire notion of the government and Fed manipulating market prices should have been discredited by now. Granted, in past crisis the Greenspan Fed was too successful at manipulating the cost of finance and dictating the behavior (expanding leveraging and risk-taking) of the speculating community. It may have worked miraculously more than a few times, but that entire “Monetary Process” has now collapsed. To be sure, we will not come out of today’s mess by inflating financial claims. Various forms of financial Keynesianism will do no more than create phantom recovery and the need for only greater inflation not far down the road.
Extraordinary government interventions were necessary to stabilizing the financial system. But attempts to stimulate quick economic recovery and the rejuvenation of assets prices come with great risks. There is no resurrecting the old boom. The focus should instead be on supporting the financial and economic systems toward a path of much less dependency on Credit growth and the asset markets.
I have been a somewhat reluctant supporter of recent policymaking. Fearing systemic collapse, it’s been my view that there has been no real alternative other than our government taking a major role in our post-Bubble financial and economic lives. I have also tried to limit criticism of our present team of policymakers, with the view that the great policy mistakes were made during the Bubble years. Post-Bubble policy mishaps are inevitable – and today’s backdrop explains why our “regulators” made catastrophic errors in accommodating the long Wall Street boom.
I find it somewhat puzzling that our Federal Reserve Chairman is not held more accountable for his flawed theories and critical role in accommodating precarious late-cycle financial excesses. James Lockhart, chairman of the Office of Federal Housing Enterprise Oversight that morphed into the Federal Housing Finance Agency, today enjoys a similar Teflon coating. But, candidly, I have to admit to being bewildered that my “analytical nemeses” over at Pimco have seemingly never been held in higher regard. I’m just waiting for the announcement that Mr. McCulley will be joining the Fed. He’s worked hard for it.
Over the years, Pimco and others have consistently trumpeted policy views that they label “Keynesian.” I've tried to offer counter arguments – and referred to their flawed framework as “Inflationism.” Pimco, after all, was the leading public voice espousing massive fiscal and monetary stimulus to ward off the horrible evil of “deflation” after the bursting of the tech Bubble. It apparently didn’t matter that mortgage debt was at the time expanding at double-digit rates, or that a strong inflationary bias was taking hold in our nation’s housing markets, or that “Wall Street finance” was clearly on course for runaway excess.
Not unexpectedly, employing so-called “Keynesian” stimulus to sustain an unwieldy Credit boom ended with disastrous results. The idea may have been for the system to compensate for financial stress and lost output attendant with the bursting of the technology Bubble, but the much greater effect was to stimulate already overheated financial mechanisms and asset markets. The end result was spiking the punchbowl right when the party was getting out of hand – ensuring terminal late-stage excesses wreaked absolute bloody havoc on system stability. And, you know, back then the “Inflationists” conveniently avoided discussing the myriad downside risks to artificially stimulating the Credit system. Apparently, it was a moot point because the risks associated with “deflation” were so much greater. They were completely wrong on this.
So, fast forward to January 2009. There you go again - Mr. McCulley and Mr. Gross are right out there (the kings of all media) espousing Inflationism (a.k.a. “Keynesianism”). I’m the first to admit that circumstances today are altogether different than 2002. For one, and in contrast to 2002, the Credit and economic systems are today actually in a post-Bubble environment. And most regrettably - and specifically because of the extreme excesses that emanated from an artificially extended boom – unprecedented government support has been necessary to thwart system implosion. The collapse of Wall Street finance and myriad asset Bubbles has significantly broadened the scope of asset price declines, attendant debt problems and economic disruption. No doubt about any of that. Yet at the same time, and as it was in 2002, I find it regrettable that pundits paint deflation risks as so catastrophic as to not even discuss the risks associated with a full-fledged bout of Inflationism.
I think it’s nuts to advise our policymakers to target asset prices. I think it’s nuts to focus policy on stoking a quick economic recovery. I think its nuts to even ponder the resurrection of the “shadow banks.” I disagree with the notion of trying to support prices in the debt securitization marketplace. Wall Street finance – all the sophisticated securities, the trillion of derivatives, myriad forms of Credit insurance, all the leveraged speculation, and all the nonsense – is bust and its not coming back as a force for directing finance to – and inflating prices of – the asset markets. There is no quick fix here.
The financial sector is a black hole right now. With myriad assets Bubbles having burst, there is an enormous amount of debt today insufficiently backed by asset values. At the same time, there is a tremendous amount of debt backed by households, businesses, municipalities and our federal government. In terminology I have used in the past, the Credit Bubble has left both the Financial Sphere and the Economic Sphere grossly inflated. Total system debt has been severely impaired.
There are enormous risks today associated with systemic reflation. For one, the scope of problem – the various sectors that could obviously benefit from artificial government stimulus – is almost unfathomable. There is very real risk at this point that policymaking is about to set course for bankrupting the country. The pundits are out there suggesting trillion dollar economic stimulus; trillions for the banks; hundreds of billions to support the securitization markets; and hundreds of billions more for households, businesses, and municipalities. There is a current need for “Trillions” and future needs for “Trillions” more. Once the Trillions start to flow there will be no easy way to end them.
Policymakers and pundits are in dire need of a framework where some type of “stimulus” cost/benefit analysis is at least attempted. I find the Pimco inflation laundry list without a discussion of costs and risks hard to swallow. At this point, focus on the securitization marketplace is a classic example of “throwing good ‘money’ after bad.” And with mortgage borrowing costs today at historic lows, I don’t believe housing markets should be policymakers' major focus going forward. In short, a focus on rejuvenating asset markets is the wrong course. Housing prices will be in retreat until they find a floor supported by local incomes.
Unfortunately, the protracted Credit boom severely distorted incomes (along with asset prices). With the goal of avoiding national bankruptcy, I suggest that policymakers focus on incomes as opposed to both asset markets and incomes. And the key is promoting sound long-term investment in real economic wealth creation. “Money” created today to artificially inflate asset prices and incomes will simply require more inflationary fuel next year and the year after. The focus instead needs to be on real investment in real things that produce real wealth. Haven’t we seen enough of the Illusion of Financial Wealth? Have we not seen enough to understand that Inflation is the Road to Ruin? Will we allow the Treasury market to go the way of private-label MBS?
I certainly don’t like the idea of the government setting investment policy. Let’s face it: it’s repulsive to have Washington dictating the allocation of financial and real resources. But the reality of the situation is that the Bubble’s aftermath has left unworkable financial and economic structures. On the financial side, the focus should be on recapitalizing the banking system and reducing the banks’ unmanageable burden of bad assets. With the overriding goal of not bankrupting the country, the broader securitization markets should be left to their own devices. On the real economy side, stimulus should be directed toward funding businesses, capital investment and national infrastructure projects. The focus should be on stabilizing the economy as it transitions away from a “services”/asset-based economic model. “Money” should be directed toward jobs rather than home and asset prices.
The entire notion of the government and Fed manipulating market prices should have been discredited by now. Granted, in past crisis the Greenspan Fed was too successful at manipulating the cost of finance and dictating the behavior (expanding leveraging and risk-taking) of the speculating community. It may have worked miraculously more than a few times, but that entire “Monetary Process” has now collapsed. To be sure, we will not come out of today’s mess by inflating financial claims. Various forms of financial Keynesianism will do no more than create phantom recovery and the need for only greater inflation not far down the road.
Extraordinary government interventions were necessary to stabilizing the financial system. But attempts to stimulate quick economic recovery and the rejuvenation of assets prices come with great risks. There is no resurrecting the old boom. The focus should instead be on supporting the financial and economic systems toward a path of much less dependency on Credit growth and the asset markets.