Fix this, or it's a depression?
September 30, 2008
– Comments (13)
I'm really not so happy to see this bit of turgid copy running at the top of Fool.com. I'm not happy to have to pick apart the work of two of my favorite colleagues, but I wouldn't be much of a Fool if I just looked the other way from a piece that I think is below our usual standards.
I know the panicked call to political action is popular on our pages these days, but I think there's little to be added to the debate by overwrought fear-mongering, and unfortunately, I think that's precisely what this headline is about.
The fact that LIBOR is diverging from treasuries isn't really that surprising, as we're in crazy times and banks are, quite rightly, scared silly that loans won't work out. Therefore, they demand a pretty hefty premium to lend dough. That's not ideal. But to attempt to represent this as a prelude to a depression? That's too much.
What else we got? Media-bashing? Hey, I do that too, but let's be fair here, the media are covering a TON more than the "raw meat" issues of executive pay. We "won't hear" about small entrepeneus denid credit? I saw 2-3 news stories on EXACTLY this topic today alone. And I watched the news for about an hour. I'm actually surprised at the sophistication the usual news has brought to this story -- aside from conflating the economy and the stock market more or less continuously.
Ok, so we've torched some straw men. We all do that from time to time.
What's more disappointing to me are some of the simplistic arguments -- aiming to paint this as the root of many evils -- that follow. The problem is that these turn out to be a sort of Mr. Subliminal, chronologically-challenged mishmash masquerading as evidence. Let's take a look at a few:
...General Motors (NYSE: GM) needing to raise billions just to cover basic operating expenses?
They just got guarantees from the taxpayers, didn't they? Probably don't deserve them either. GM, which is in very real danger of bleeding to death, is a pretty bad example of a poster child for an enterprise that's being unfairly denied access credit. It's been bleeding cash for years, and once its only reliable source of "earnings" (the lending arm) quit performing, that was it.
Retailers like Home Depot (NYSE: HD) are closing stores, and apparel retailers like Macy's (NYSE: M) face their toughest holiday season in years. And airlines like Southwest (NYSE: LUV) and American Airlines parent AMR (NYSE: AMR) are cutting flights.
All true, but all true long before the credit markets "seized" up this month. Home Depot overbuilt like crazy during the housing bubble and Macy's, along with nearly every other retailer, which got a ton of HELOC money out of the housing bubble that's no longer here, has been sucking wind for a while. Southwest has been planning to cut flights since August, before the TED spread went nuts. (See the chart here.)
A colleague of mine with an excellent credit rating made the attempt and was quoted 11% for a 30-year fixed mortgage with a 20% down payment. That's the equivalent of the "open" sign being left on, but the doors being locked.
That sure sounds bad, but without a few more relevant facts, we can't know if this bank's offer is reasonable or robbery. What was the price of the property in question. (Me suspects it's a jumbo, and those are going for about 7.25% these days anyway...) Where is the property located? (Important to know, because there are areas around here where home prices could conceivably take another 15-20% kick in the slats before this is all said and done.)
What's this person's ability to service the monthly payment? Down payment-aside, if the monthly tab comes to too high a portion of take-home pay, you can bet bankers are going to ask for blood. Without this information, it's not possible for us to draw the conclusion that the lender is being overly miserly here, though i grant that this situation will appear especially "abnormal" looking backward through the easy-money lens of the past few years.
Finally, one anecdote about an expensive loan is pretty thin evidence on which to hang a "depression's on the way" thesis.
To conclude, I actually think raising the FDIC insurance limit is a low-cost, big benefit solution for a lot of problems, 99% of them mental (for both bankers' and depositors'). And the big bailout, which I suspect will pass soon, will do a lot more to restore confidence by putting the last few years' worth of lousy loans onto the taxpayer balance sheet, and minting fresh cash for the banks.
This too shall pass. In the mean time, let's try and ratchet down the fear-mongering.
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