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January 9, 2008
Would Be Bailout Master Now Focused on “Excesses”
After President Bush rounded up the PPT for the first time last week and Treasury Secretary Paulson conceded that the housing meltdown was ‘inevitable and necessary’ earlier this week, the investor can not help but wonder what it is U.S. policy makers do all day. After all, in an economic system grounded by a delicate balance between asset bubbles and consumer confidence, now doesn’t seem like the best time for policy makers to start planning more stimulus packages. Rather, if recession is to avoided action was likely required yesterday.
If you are not convinced that U.S. policy makers lack a loaded gun much less the magic bullet to combat the coming/current recession, consider that one of the most powerful policy makers in the U.S. spent nearly 5-months last year to accomplish the following:
“In its first two months, the HOPE NOW alliance sent over 450,000 letters to at-risk borrowers who had not previously contacted their servicers. Servicers estimate that, as a result of this effort, approximately 10 percent, or 45,000 homeowners, have called their servicers to see if foreclosure can be avoided.” Paulson
While Paulson should be embarrassed by the ‘45,000’ figure, he tried to stay optimistic, noting that more mortgage help is on the way and that President Bush will unveil more stimulus plans later this month. What he did not do was take a moment to comment why his SIV rescue fund failed to materialize last year.
Embedded in Paulson’s speech was a one line that should prove of critical important in 2008:
“…we are also seeking to better understand the causes of current credit market turmoil. We are still learning but we recognize some clear lessons already. We know that contributing factors included an abundant supply of easy credit, and a decline in lending standards in mortgage origination and other areas.”
As recession fears rekindle and the price of gold races to all-time highs, Mr. Paulson’s words beg a serious question: how can the Fed remedy a credit mania with more ‘easy credit’? The answer, of course, is that they can not. However, what the Fed can and may try to do is delay the ‘inevitable and necessary’ period of creative destruction (an effort that could quickly become dicey given that gold is at record highs and aggressive rate cuts could, potentially, hurt the U.S. dollar).
“…let me be clear that no single policy or action will undo the excesses of the last few years.”
While it is obvious that more stimulation efforts are around the corner, that Mr. Paulson is displaying less urgency today than 5-months ago is surprising, especially since the recession alarm bells have started to ring more loudly. Is Mr. Paulson deaf, playing coy, or simply fresh out of ideas?
Whatever the answer, remember that Paulson, Bush, and Fed members keep telling us that more help for the U.S. economy and financial markets is coming. They keep telling us this because they realize more stimulus is required to stop today’s recession from becoming something considerably worse.
Inevitable: Unable to be avoided, evaded, or escaped; certain.
Necessary: Being essential, indispensable, or requisite.
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