Monday, August 2, 2010

Dual Economies & A Busted Financial System

Over the weekend Alan Greenspan was on Meet The Press.

These quotes are interesting:

Greenspan in Bold.

"I think we're in a pause in a recovery, a modest recovery. But a pause in the modest recovery feels like quasi recession. Our problem, basically, is that we have a very distorted economy in the sense that there has been a significant recovery in a limited area of the economy amongst high-income individuals who have just had $800 billion added to their 401(k)s and are spending it and are carrying what consumption there is. Large banks, who are doing much better, and large corporations, whom you point out and the--and everyone's pointing out, are in excellent shape. The rest of the economy, small business, small banks, and a very significant amount of the labor force, which is in tragic unemployment, long-term unemployment, that is pulling the economy apart. The average of those two is what we are looking at, but they are fundamentally two separate types of economy."

He got this right. There are two economies. The "Have" economy and the "Have Not" economy. What we have seen and observed is the reverse Robin Hood Scheme of massive redistribution of wealth from the Have Nots to the Haves. What Greenspan is really implying is much more sinister in my opinion. He is saying that since the extreme wealthy are carrying the economy the Bush tax cuts on the highest earners should be extended. The reason we have two economies was because the bailout created this. It created a ponzy social safety net for the uber wealthy. It reduces competition and extends the shelf life of badly managed companies at the expense of the public tax payer.

"Well, the problem there implies that the government has control over those rates, meaning the Federal Reserve and the Treasury Department, in a sense. There is no doubt that the federal funds rate, that is the rate produced by the Federal Reserve, can be fixed at whatever the Fed wants it to be, but which the government has no control over is long-term interest rates, and long-term interest rates are what make the economy move. And if this budget problem eventually merges to the point where it begins to become very toxic, it will be reflected in rising long-term interest rates, rising mortgage rates, lower housing. At the moment, there is no sign of that, basically because the financial system is broke and you cannot have inflation if financial system is not working."

Again, the system is broke for the Have Nots. Its working perfectly as designed for the Haves. Its broken and distorted beyond comprehension. The only way to repair it is to have a total market meltdown, much worse than what we saw in 2008.

On the idea of long rates coming down....

The reason long term rates have not risen is because we are in a deflationary environment and it doesn' matter how much you print you won't get inflation. This is the lesson to learn from Japan's follies the last 20 years. When there are trillions of bad loans in the system that need to be either restructured, paid off, or better/worse yet defaulted on, how do you expect to get animal spirits to erupt when people are deleveraging? The only animal spirits to erupt are the ones who screwed the system up in the first place. The Haves are the only ones to enjoy such animal spirits.

Inflation creation and Animal Spirits....

It is absurd to think that the Fed can create inflation at this moment when the entire globe is experiencing a debt hangover. Both 10 and 30 year bonds are rallying and yields plunging because the bond market is factoring in economic weakness, consumer deleveraging, and an extremely weak housing market going forward. Mortgage rates are not rising because QE 2.0 has already begun. The Fed will continue to buy Mortgage paper to keep housing from imploding. Absent the Fed propping up the housing market we would already be in a massive depression with real estate prices plummeting. The Fed has done an admirable job of saving the system, but they have done nothing in the name of repairing the system. Saving the system while not restructuring/repairing/reforming the system only delays the inevitable depression.

A Broken System?

Greenspan has this right but for all of the wrong reasons.The problem is not if we have a broken system, (WELL DUH!) but that the market is 100% rigged by the government in favor of Wall Street. Let me preface my next few comments on the fact that there really is no Free Markets persay. What we have seen and witnessed is Hyper Capitalism on steroids disguised as Free Markets. Deregulation is not Free Markets. Deregulation is Casino/Crony Capitalism personified. Real Free Markets are markets where the government is not involved in any aspect of the private sector. The private sector polices itself and punishes distortions. We would have never had an Internet Bubble, Credit Bubble, or an S&N crisis if markets were indeed free. If we did indeed have a free market, short rates long rates, and mortgage rates would be much higher.

Alan Greenspan continues to destroy himself along with his already tarnished reputation and legacy. Why can't he just go away?

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