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Fix this, or it's a depression?

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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.

13 Comments – Post Your Own

#1) On September 30, 2008 at 10:19 PM, awallejr (83.92) wrote:

Let's be realistic.  What percentage of the public even cares if the FDIC raises limits?  I suspect the vast majority don't even have $100,000.  I do, however, think it is about time they did raise it simply because of inflation over the decades that limit was kept in place.

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#2) On September 30, 2008 at 11:01 PM, outoffocus (22.83) wrote:

"I suspect the vast majority don't even have $100,000."

I sure as heck dont and probably won't have $100,000 for years to come if ever.

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#3) On September 30, 2008 at 11:07 PM, EverydayInvestor (< 20) wrote:

Temporarily raising the FDIC is a good idea. While most don't have over $100k, businesses and rich people do. And guess who has the most money? People with uninsured (>$100k) deposits left Wachovia over the last couple weeks, dooming it. Increasing insurance limits will prevent uninsured depositors from engaging in bank runs. Those runs are a big risk now because the government is insuring money market funds.

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#4) On September 30, 2008 at 11:09 PM, devoish (98.57) wrote:

My first home loan in 1989 was at 12 and 7/8ths %. Seven years later I was able to refinance at a lower rate for 15 years and lower my payments.

Dwot recently reminded me why high interest rates and lower basis was a good thing. ( It gives you the opportunity to do just what I did if rates come down).

Of course then my wife needed a bigger house with rooms we don't use, but that is a seperate issue.

PS. I admire the Fool for its ability to speak its many minds.

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#5) On September 30, 2008 at 11:11 PM, HKendrick (< 20) wrote:

Word up, Sj.

It seems like there are many ways to skin this cat, if we think there is a problem:

Change FASB rules; loan money directly to creditworthy businesses in need of credit; http://www.reason.com/news/show/129107.html; etc.

But to paraphrase Stephen Colbert: by all means, let's make one of the most important fiscal/economic decisions of our lifetimes....IN A PANIC!!!! 

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#6) On October 01, 2008 at 12:56 AM, DemonDoug (81.58) wrote:

seth, i'm with you.  I always felt that, while the Fool offered good advice for beginners, and it wasn't going to delve deep into macroeconomics, there was always a solid sensibility with the management and reporters.  This past week has been real bad, starting with Tom's email to support the horrendous bailout bill, and now with the newer articles, all I can do is shake my head.

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#7) On October 01, 2008 at 2:20 AM, Donnernv (< 20) wrote:

Bent:

You have all of the right in the world to hold an opposite opinion to one expressed by another.  And you have all the right in the world to express your opinion backed by the best set of facts and logic you can muster.

But to do so in the way you did is an insult to the intelligence and sensibilities of your more perceptive readers.  And to me, it is distasteful.

Attacking an article, twisting it starting at the title, and continuing with "turgid", "panicked", "overwrought", "simplistic arguments", "chronologically-challenged mishmash", "one antecdote is...pretty thin evidence", is false bravado.

I have no dog in this fight.  I am on the fence about the $700 billion package.  But if I were to choose to argue for one side or the other, I sure as hell would not take the "trivialize it and beat it down" approach where the author cannot answer back.

If you've got a problem with the authors' thesis, take it up with them, in private, or state your own thesis without attempting to piss on someone else along the way.

And to this borderline intelligent observer, your arguments are orthogonal, trivial or sophistic.  David was more convincing. 

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#8) On October 01, 2008 at 8:09 AM, TMFBent (99.82) wrote:

Donnernv... It's not my goal to beat down the bailaout package with these remarks. In fact, if you read the original article, it isn't even made in support of that bill.

It is my point to show that this particular article, the conclusion does not follow from the arguments given. I actually agree with the conclusion, as I note.

I do not agree that it's OK to twist facts in order to make a point, and that's what this article manages to do, regretably. As a quick review of the chronology shows, you can't blame the TED spread for the particular troubles at the companies mentioned above.

Nor does a single story about a colleague's mortgage shopping experience prove that lending standards are out of whack.

That doesn't mean it's not a problem. It does mean that we should bring better supporting arguments.

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#9) On October 01, 2008 at 8:29 AM, devoish (98.57) wrote:

Donnerv,

Bent represented the contents of the article he referred to accurately.

To threaten a "depression" is coming is fearmongering. Especially in light of the fact that a depression/recession is coming anyway, and this bill will not help. It will actually hurt our ability to work through it by reducing the amount of money available to correct the root causes.

Giving additional authority over our finances to the individuals who brought us here, caused it, or at best failed to see it coming is idiotic.

United States citizens are catching on, and learning to ask simple questions like explaining how availability of credit repairs indebtedness, especially of the people who profited from that indebtedness, and will continue to do so. To me it seems it keeps us stuck in debt forever, and Bent does us a favor to question the hyperbole.

Thanks for the new words though.

orthogonal: at right angles to. sophistic: of the nature of sophistry, fallacious. sophistry: a false argument, sophism. sophism: a specious argument for displaying ingenuity in reasoning or for deceiving someone

Sophism. example. Your reponse to my answer to your post.

Regards,

Devoish 

Who is still waiting for you to comment/argue/defend your assumptions on nuclear costs in light of the difference to actual and much higher costs being requested for building nuclear power plants. And concerned that you would repost your original inaccurate cost basis without accounting for those current higher costs, or the increased expenses your solutions to the waste problem creates.

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#10) On October 01, 2008 at 11:18 AM, HKendrick (< 20) wrote:

Ah, yes, Donnerv.  An article entitled "No Depression?  Really?" that mentions "Rome is burning" in the first paragraph probably is calm, dispassionate and well-reasoned.  By the way, if the article does happen to be all those things (which, as Seth points out, it ain't), all the hysteria is not only unnecessary, it's detrimental.

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#11) On October 01, 2008 at 11:23 AM, bostoncelitcs (43.82) wrote:

This is what I think of the bailout.

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#12) On October 01, 2008 at 1:36 PM, Sydder (< 20) wrote:

TMFBent

I don’t know if stating what you believe will be the outcome of this mess, and it happens to be, NOT GOOD is fear mongering, if so, then so be it.

To me, it’s like  Physical and Mental...........................

The MENTAL is the bailout..............it’s no more than something to stop me having a mental Breakdown.  It in itself won’t solve much.  But it will prevent (at least initially) paralysis from occurring.

If some form of bailout is not forthcoming in I would say the next week .....two max,  the tight money today, the financial institutions not trading with each other will get worse,  payrolls will not be met, people laid off and on and on and on. The economy will grind to a halt and a severe financial crisis (what we have now is a tea party) will follow. 

There will be a meltdown the likes of which you and I, have not seen.

The PHYSICAL, is what will(is) going to happen regardless of the bailout. Institutions will go out of business, people will lose their jobs, lose their homes, cars etc........The fact is, we have lived way beyond our means for years, so has the Government, and I am afraid it is now come home to roost.

We must pay for our over indulgence, our greed and our stupidity,  it’s a cycle that has to be cleansed after every round.

I don’t see any way out of a recession...........how severe, is anyone’s  guess.

I hope I am dead wrong on this, but from where I sit, I don’t see any way out. 

Whether the financial system ultimately collapses anyway, because of all this debt, is anyone’s guess.

I didn’t want to get tooooo political here, but, I have to say, if the surplus left by the Clinton administration had continued, or at the very least, stayed neutral and not gone into a deficit, the Government today, could easily throw a few Trillion at this problem and make it go away..........but, alas, they have overspent like the rest of us, and the piggy bank is empty.....................

I have stated my opinion on many of the other threads and I would say again here.

IF the worst happens, there is Nothing you or I can do about it.............if everything melts down, it won’t matter where your money is, it won’t be worth anything.   

And for those that think Gold is the safe haven, you can’t eat gold.................So, I will continue to invest, expecting that this will eventually be resolved, it might be 5 years from now, it could be a major recession like Japan had in the 90’s, don’t know, don’t care.

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#13) On October 01, 2008 at 4:34 PM, HKendrick (< 20) wrote:

As long as we're dealing in anecdotes:

I was just talking to a commercial banker (renewing a line of credit for the small business I run - hey, it is going to be renewed, at the same rate as the expiring one!!  would have thought that would not be possible).  I suggested that maybe all we need to do is suspend the mark-to-market rules. 

He suggested that doing that, coupled with insuring ALL bank deposits to quell any possible (but very unlikely) bank runs and charging premiums for this insurance, would get us 95+% of the way home.  His idea is at that point the government wouldn't have to buy these assets; the institutions could borrow against them - and we could require warrants in these deals as well.  

 Anyhoo...got my line of credit renewed.  

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