Tuesday, March 24, 2009

Some Positive Signs

President Obama seems to be backing away from his war on Wall Street. He has even tempered his "outrage" at the AIG bonuses, which as George Will noted in his column today in the Washington Post, were "legally earned." So, maybe there is some hope after all. Other encouraging signs were Paul Volcker's remarks reported in the Wall Street Journal today disparaging the government takeover of the financial sector. Volcker's comments seemed directly contradictory to Obama policy, which is very encouraging.

There is some, albeit slim, hope that our new president will listen to reason and stick with capitalism. It would be a great historical irony if the only remaining defender of capitalism is the chief economic minister of the People's Republic of China. China's economic policies certainly make a lot more sense than those of the Obama Administration.

It is still the case that this is an ordinary recession with extreme distress in the financial sector but very little extreme distress elsewhere. The mortgage foreclosures, such as they are, are mostly in areas where extreme speculation occurred in the housing market. The cure for extreme speculation is mortgage foreclosures. When that happens, the right people pay the piper. Obama should let this happen, instead of rewarding people who made bad decisions. There is no other way for people to learn to make the right decisions.

What are the facts on the ground? Lets take housing. Last month's housing starts were 35 percent above street expectations. The street was calling for 450,000 new starts, they got 588,000 new starts. On Monday of this week, existing home sales, expected to be flat, were up by the best margin in six years -- five percent in a single month. On both counts, housing is doing far better than expectations. Most housing markets around the US are beginning to show signs of life again and, for most markets, the housing bust will bottom out in the next two to three months.

This is not the great depression. This is not even a particularly serious recession, unless you work on Wall Street. Unemployment was much, much worse in 1981 than it is now -- much worse. It is laughable to compare this recession to the situation in 1979-81. To speak of depression is to speak foolishly and ignorantly. Unemployment would have to triple to get to depression levels. Admittedly, the Obama budget might be able to pull that off. But, let's hope that is not where we are headed.

This is not the great deflation. January CPI was up an annualized four percent. February was even stronger -- an annualized five percent. These aren't remotely deflation numbers. Inflation is the real problem, not deflation. Soon the 30 year treasury bond will figure this out and our deficit problems will magnify beyond the imagination of this young neophyte in the White House. He thinks he can fund trillions of dollars of new debt at rates between zero and four percent. What a joke! Sadly the joke is on the US taxpayer. I don't think the president even thinks about these things and even if he did, I don't think he would understand the problem anyway.

So, what do we have. An economy that, if left to its own devices, would be on the mend by late summer at the latest. The recovery could come sooner. The doomsayers have this recession lasting until late 2010. We shall see. Watch the stock market. The liquidity flooding the market (from Fed activity), will create a huge rally, driven higher by short covering and panic buying by all the newly created bearish investors. They will surge back. Look for the market to scale the 11,000 mark by summer. That's right -- 11,000 by summer.

The main negative is the president and his policies. His budget could sink us. Our best hope is that middle of the road Democrats, if there is such a thing, will beat back the tremendous expansion in government that is implanted in the Obama budget. If the Obama budget passes more or less as proposed, then America will be a different place and true economic progress will be a thing that we read about in history books in the pre-Obama America. Hopefully, the Obama budget will not survive and America can resume its rightful place as the economic engine of the world. Again, we shall see.

But there are hopeful signs. One of the most hopeful is that it looks as if Goldman Sachs and possibly JP Morgan will soon repay the TARP money. That will tell us a lot, even though it will cause consternation in this White House. Obama needs to back off and let the market bring this economy back to full steam. Only free markets can do that, not government.

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