April 8, 2008
Looking 'Round the CornerBy Christopher Chantrill
What do you think? Is the mortgage meltdown over?
Predicting the future is like trying to look round the corner. If only you could take a quick look without getting your head blown off. If only.
Let's take a look at the faces of the pedestrians on the other side of the street. What can they see that we can't see?
First of all the inverted Treasury yield curve righted itself so that now short-term Treasury bills yield less than medium term notes and long-term bonds. Then the Libor yield curve righted itself. Last Thursday the Dow and the NASDAQ broke above their 65 day moving averages.
These portents have nothing in common with the auguries of Roman times or Chinese divination practices.
Then there is the all-important lagging indicator. Democratic politicians and the mainstream media are all over the mortgage crisis. Why, Hillary Clinton even contributed an addition to her series of award-winning "3:00 am Call" TV ads.
It just shows how ill-suited she is to be president. Everyone knows that financial crises are not handled at 3:00 am. They are handled over the weekend.
It was over a weekend in mid March that Drill Instructors Ben Bernanke and Hank Paulson plunked the stockholders of investment bank Bear Stearns down into the barber chair and proceeded to give the young recruits a haircut that will be remembered as long as there is a Wall Street.
In the future every over-leveraged Wall Streeter tempted to put off recapitalizing because he is too cheap to dilute the stock will think back to the Bear Stearns weekend when the Fed and the Treasury stripped Bear Stearns of its equity and more or less gave the firm to JP Morgan Chase.
Then and only then they opened the Fed's discount window to investment banks.
Notice what happened next. When the Swiss bank UBS announced $37.7 billion in writedowns on April 1, 2008, it simultaneously assured the world that it was seeking $16 billion in capital to improve its capital ratio.
Here's a nickel that says that all over the world bankers are busily lining up capital injections to improve their capital ratio and save their long golden hair.
Let's make a radical prediction. Let's say that the worst is over. Pretty soon it will be time to start handing out the medals and the gold stars.
Why don't we start with the man who appointed Ben Bernanke as Chairman of the Federal Reserve Board and Hank Peterson to be Secretary of the Treasury?
President Bush seems to be making a habit of sticking with questionable appointments and then finally, at the last minute, getting the right guy in there to turn things around.
President Bush could have dumped the late, unlamented Chairman of the Federal Reserve Board, Alan Greenspan, in 2004 instead of nominating him for a fifth term. For who could have forgetten the agonizing months in 2001, when the Fed, way behind the curve, slowly lowered its fed funds rate from a peak of 6.5 percent as late as January 2001 down to an eventual 1.00 percent -- or the still more agonizingly slow step-by-step increases by 0.25 points per month, starting in mid 2004, taking two years to get up to 5.25 percent, finally, in the summer of 2006.
He could have saved us from two unimpressive Treasury Secretaries, Paul H. O'Neill and John W. Snow. What a relief it was when President Bush nominated Hank Paulson, veteran CEO of Goldman Sachs, to be Secretary of the Treasury on May 30, 2006, at a time when it was already clear that trouble was brewing on the mortgage front.
The real surprise is Fed Chairman Ben Bernanke. The surprises started with his nomination on October 24, 2005. Who would have thought that this mild-mannered economist would sail through his nomination process to be sworn in on February 1, 2006 just in time to deal with the mortgage mess? Who would think that an academic and expert on the Great Depression would turn out to be a decisive leader willing to take bold action to preserve liquidity in the financial system during the difficult months that began in August 8, 2007 when the Fed and the European Central Bank first injected emergency liquidity into the money market to prevent a meltdown?
In the next few months we will get to see what's around the corner, and whether the haircut administered on the weekend of March 15-16, 2008 by ruthless Bernanke to Bear Stearns got rid of the economic lice.
The real measure of Ben Bernanke will be if he has the guts to raise interest rates as soon as the present crisis has passed. The problem he'll have is that Democrats will be running around talking about the "worst economy in the last 50 years" just as they were in 1992 a full year after the end of the mild recession from July 1990 to March 1991.
There is no problem looking around the corner and seeing that coming..