We have the dubious honor of living in times that are not merely ‘interesting’, as the Chinese curse has it, or even ‘dramatic’, as suggested here last week, but truly historic — and not in the positive sense of that term. So weird, so utterly extraordinary is the state of the global economy, that there can be no doubt that some major upheavals are imminent.
This is not surprising – the coming shocks are a continuation of the process that began in 2000/2002 and continued, after an artificial, government-intervention-induced hiatus of pseudo-prosperity, in 2007/2009. The last 20 months have seen another, even more artificial and even more overtly government-generated hiatus, but this one has not generated prosperity for most people, or even a mere job for many. It, too, will end in an almighty crash which, although its timing is indeterminate, will most assuredly be more severe in every respect than the previous one, let alone the one that got this century off to such a jolly start.
This conclusion is reinforced daily by considering the vast and steadily-widening gulf between la-la-land, where most of the citizenry of the ‘developed economies’ dwell, and the harsh reality that surrounds them. A few simple examples from the last few days illustrate the point:
- In Paris, three million people took to the streets to protest at, and attempt to thwart, the very belated attempt of their government to extract the French people from their delusionary existence. Specifically, they were defending their ‘right’ to a) retire at 62, or earlier in many cases; b) receive a full and very generous pension; c) enjoy a longer life, as modern medicine extends life expectancy; d) utilise all the said benefits of modern medicine via a universal and efficient health service. Who will pay for all this and how, when the ratio of workers to pensioners is set to erode for decades to come, is of no concern to these demonstrators. Aux barricades!
- The entire financial world is convinced that the Federal Reserve will announce a second round of ‘quantitative easing’ (universally referred to as ‘QE2’) at its next meeting on November 3. This impending flood of liquidity has driven the dollar steadily lower and virtually all financial assets steadily higher. However, a large group of economists, including even those from ultra-mainstream institutions such as Bank of America and JP Morgan, have written analyses that convincingly rubbish the idea that QE2 could achieve its proclaimed goal of stimulating the American economy.
This theme has been further developed in a detailed research paper from the St Louis Fed – one of at least four regional Federal Reserve banks (the others are Philadelphia, Dallas and Atlanta) that have declared their opposition to Bernanke’s ultra-loose monetary policy. The main problem is that whilst the Fed can pump endless amounts of money into the economy by buying Treasury bonds, the banks that receive this money are not interested in lending it out and will simply redeposit it at the Fed, so that nothing is achieved.
Mention of banks and lending brings us back to square one of the original crisis, namely the mortgage/ sub-prime disaster. Hard to believe, maybe, but mortgages have returned to center stage via the exploding scandal termed (by the Zero Hedge blog) ‘foreclosure-gate’. This can be made as complex as you like, but it’s actually extremely simple.
When the bank gives you a mortgage loan it takes a lien on your house. If you don’t pay, then the bank forecloses on the loan, throws you out of the house and takes possession – on the basis of the terms of the mortgage loan. But if the bank didn’t do its paperwork properly – whether because it was stupid, inefficient or so snowed under from shoveling out masses of loans during the boom that it just didn’t get round to it – then it has no legal claim to the house. You default on the loan, but the bank doesn’t get the property.
If it was just you, you’d be very lucky. But suppose it was tens of thousands of loans, from hundreds of banks, all across the country? We now know for certain that that is the case – this is a mega-screw-up within the overall mortgage crisis, containing all the old favorites: greed, stupidity, with a fair smattering of criminality and corruption thrown in. That is causing the entire mortgage business to seize up. No foreclosures (hooray – if you are a borrower). No sanction on default (hooray – if you are an underwater borrower). No more lending, certainly not in the mortgage area. No forced sales, no cheap houses and, pretty soon, no house sales of any sort, because no-one knows what the real price of anything is, and anyway, the buyers can’t get mortgages (probably no hoorays, except from North Korea and Iran).
It is conceivable, just barely possible, that there is a connection between the rapidly-developing foreclosure-gate scandal and the fact that the banking sector has not participated in any way in the surge in the stock market over the last two months. On Wednesday, when virtually every financial asset in the world rose in price, banking stocks fell.
But, as Michelle Meyer of Bank of America pointed out in her latest research note on the subject, there is a “heightened risk of a more dismal scenario. If negative momentum in the housing market kicks in, and feeds into the banking system and broader economy, it will be hard to fight”. Yes, indeed – but tell it not in la-la-land.