Money men say it is over. The economists say it might only have begun. And the politicians are loving every minute of it. Perhaps it all depends on what the meaning of the word “it” is.
To Treasury Secretary Hank Paulson, “it” is the credit crunch. “I am encouraged …. In terms of the capital markets … the worst is likely to be behind us.” Legendary investor Warren Buffett agrees, “The worst of the crisis on Wall Street is over.”
What these money men have inmind is that the banking system is gradually de-leveraging — writing down the rotten paper on and off its balance sheets and replacing it with real capital. Some of the new money comes from sovereign wealth funds, some comes from investors who are willing to buy some of the dicey IOUs from banks at a healthy discount. The money isn’t cheap, but we end up with stronger banks.
Not all observers agree with Paulson and Buffett. Consulting firm Capital Economics advises its clients, “Far from beginning to ease … the credit crunch is spreading.” Loan officers at the Fed concur; they point to tightening loan standards that are “close to or above historical highs for nearly all loan categories.”
All of these experts are correct. Paulson and Buffett are encouraged by the fact that the difference between interest rates paid on ultrasafe government IOUs and riskier bank-to-bank loans has declined sharply, suggesting that banks now think it is less risky to lend to one another than it was a few months ago.
Others find it more impressive that the risk differential remains twice as high as during normal times. Conclusion: If the “it” is the credit market, it is on the way to a more normal condition but still not out of the woods.
The other “it” is the one that grabs the attention of economists. Many think our economic problems are only just beginning. New mortgages are hard to come by; defaults are rising, as are foreclosures and inventories of unsold houses, and prices continue to fall.
The housing industry is not the only drag on the economy, the “it” on which economists focus. High oil prices are siphoning off consumer buying power and devastating car sales, corporate bankruptcy filings are up, consumer confidence is shot, and … well, you’ve been treated to so much bad news from a generally gloomy press that it needs no repeating here.
A bit of perspective is useful. Some 75 million of America’s 80 million homeowners either have no mortgages to worry about or are meeting their mortgage payments on time. More important, with house prices down, incomes up a bit, and mortgage rates down, houses are more affordable now than in a long time. From which some conclude that we are at or near the bottom of the housing market. A bit of cheer for your morning commute, I hope.
There is more cheer available to those willing to dig into the back pages of the newspapers. Exports are up, the unemployment rate remains low, and earnings of nonfinancial companies were up more than 10 percent in the first quarter.
So there is the usual disagreement among those for whom the “it” to be watched is the economy. We will either have a severe recession, or a mild one, or none at all. Best bet: Hold your fire until we see how consumers react to the stimulus checks that are hitting mailboxes as you read this.
Neither the “it” that money men look at, credit markets, nor the “it” that economists look at, job markets and economic activity, are the “it” that has politicians excited. To them, the “it” that is relevant is the opportunity to “do something,” preferably in the full glare of publicity.
Credit markets might be improving, and the economic clouds might not be quite as dark as many expected, but there is enough turmoil to provide opportunities to posture, to regulate, to spend and, in some cases, actually to do some good.
Posturing seems the preferred route for too many. Hillary Clinton and John McCain want to suspend collection of the 18-cent federal gasoline tax — a nonsensical proposal that would increase consumption of gasoline, which in a previous incarnation they sought to reduce by raising fuel-efficiency standards.
Barack Obama lays our economic ills at the feet of shady mortgage brokers, greedy oil companies and the undertaxed rich. The lure of four years in the White House does bad things to candidates’ IQs and moral compasses.
More serious and constructive politicians, from the Democrats’ liberal Rep. Barney Frank of Massachusetts to conservative Republican Sen. Richard Shelby of Alabama, are trying to figure out how to balance the need to stave off excessive foreclosures against the need to avoid “moral hazard” by bailing out the greedy.
There you have “it.”
