The Myth of Deleveraging

It’s pretty much an accepted article of faith that the world — governments, business and individuals collectively — must deleverage (God I will be glad when that word along with systemic and second derivative are no longer in vogue). Any day now it’s going to happen, there will be hell to pay and we will all be much better off despite the pain.

I’m rather rapidly beginning to believe that it ain’t going to happen. Not because it’s not necessary, but simply because no one wants it to happen. Not governments, not business and not individuals.

Let’s take a look at a couple of things that have transpired lately.

As I noted here FHA is bringing back the 100% no downpayment mortgage. We know this makes houses sell like hot cakes and hot cakes tend to lead to bubbles, but, hey, the bubble was a lot more fun. It’s sure a lot better than having all of those homes sitting around in the burbs with weeds growing in the yard.

And as long as we’re talking about housing, don’t forget the mortgage modification business. Got a home that is under water, no problem. The government is going to help you get back to a healthy no equity position. Now that might seem risky, but note the FHA program to inflate things all over again and you might, at least for a few years, see that simple abode put you back in the black and finance a flat screen or new bathroom. You didn’t want to walk away and get out of a mortgage that’s going to tie you down for the next thirty years did you?

And credit cards. Now there’s a lot of gas from Capitol Hill about how unfair the terms are and must be made more consumer friendly. Pass it out of the House and over to the Senate where the fix is in. Yeah, make the type bigger on the disclosures and maybe take out a few of the gotcha’s but the consumer still needs that access to credit. Why, as one senator remarked Tuesday, “… so long as the interest rates are under 36% I don’t see a problem.”

Auto loans, well don’t worry. It might be a bit tough for a few months while the car companies clear Chapter 11 but the good times are right around the corner. With government ownership of the companies and GMAC under their thumb the days of 0% interest and no money down are just around the corner. Hell, there’s probably going to be an incentive to get you to trade in that old gas guzzler and they might even throw in a tax credit.

The guardian of our currency, the Fed. Well they’re busy trying to get the “shadow banking system” up and running. Free money and lots of it just as long as you show up with some student loans, credit cards, commercial real estate loans, small business loans … have I forgotten anything. Just find borrowers and the Fed will find a way to take it off your balance sheet and make you rich.

Now surely the banks aren’t in on this con game. Fat chance. They may no better than to lend money right now but they’re like Paul Newman in “Cool Hand Luke.” Remember when he had to go off the side of the road to relieve himself and had to keep yelling out “Shakin down here, boss.” Pandit, Dimon, Lewis and the rest are just like that. Every time someone in Washington says what are you guys up to you the answer is making loans — “Shakin down here boss.”

And then there is the bid daddy of all borrowers, Uncle Sam. If no one else is going to borrow then damn he’ll show them how a man does it. No prospect of generating the revenues to pay off the debt, no problem, it will all work out.

China may have all of this figured out and that may be why they’re as nervous as a nun in a whorehouse. They’ve seen this movie before and know the outcome. The problem is they got greedy and went all in too early so all they can do is nag and hope some window lets them out before it’s too late.

In the end, politics is driving all of this. Those in power know that you don’t get elected by delivering austerity to the constituents and nothing will deliver austerity like real deleveraging. So they dance around the edges, make sure that nothing drastic really happens while they artificially keep the ship afloat and wait for everyone to forget about prudence and return to the punch bowl.

They’re craven individuals but they know human nature and they’ll probably prevail.

Comments

[Buy and Hol...:]

The banks aren't being stupid. They're cutting back credit limits and closing accounts and that is definitely going to cause deleveraging.

It's also going to slow consumer spending. According to Meredith Whitney, B of A cut $200 billion in credit lines by itself in the first quarter. That's $200 billion that won't be spent by consumers. To put that in perspective, if B of A keeps up this pace, they will remove more money from the economy than the stimulus package put in.

May 13 09:23 AM

[conceptwizard:]

Organized Chaos! Bandaid attempts to circumvent the eniviitable. The best of Obama. Lets not get the car towed and fix it so it works, we'll push it to the pump and put some more gas in it. These pathetic attempts to revive he economy are wasting money and solving nothing. They dont even know that the light they see at the end of the tunnel is a train coming.

May 13 09:35 AM

[Roger Knights:]

"So they dance around the edges, make sure that nothing drastic really happens while they artificially keep the ship afloat"

They're pumping water rather than diving into the bilge and patching holes. And when the ship goes under, they'll claim, "Well, I tried my best"--and the majority will believe them.

May 13 11:09 AM

[aa44aa:]

> The fed is inflating the money supply to combat inflation, which
> is macro econ 101.

I don't know which school taught you econ 101, increasing money supply is the leading cause of inflation not a tool to beating down inflation.

May 13 12:22 PM

[nobby73:]

I think the best hope is to discover intelligent life on another planet and persuade them to buy our bonds. The reality is the US economy is run on debt and consumption. The key element is for the foreign creditors to keep supplying the money through purchasing of Treasuries. I suspect the Arab sovereign wealth funds will prove vital in this, especially if appetite from China cools but deleveraging is not going to happen because of the danger of stagflation.

May 13 12:48 PM

[nova:]

From Cetin own profile: "Cetin is a recreational stock market & economics enthusiast"

Translation: he is stupid clown and buffoon.
----------------------...
I like this passage: "China may have all of this figured out and that may be why they’re as nervous as a nun in a whorehouse. They’ve seen this movie before and know the outcome.
The problem is they got greedy and went all in too early so all they can do is nag and hope some window lets them out before it’s too late."

May 13 12:50 PM

[six:]

You are wrong, the consumer is deleveraging. The amount being charged to credit cards is falling, credit is being withdrawn and salaries are being cut. Retail sales continue to decline as evidence the consumer is through spending like a drunken sailor. All the talk about mortage modifcations is just talk. Very few are really being modified. It is a case of what the Gov wants us to think is going on and what is really going on... the ship is not righting itself, it is really taking on more water. Don't believe what you hear in the news....

May 13 12:51 PM

[Gary A:]

I advocate one simple way for the middle class to deleverage. We just need to walk away from all debt that we can. If enough of us deleverage, then the banks will have to. It is the patriotic thing for us to do. And if you don't need to deleverage, just pull your money out of the banks and put it with credit unions or under the mattress.

May 13 01:27 PM

[waf76:]

its really just managing your debt finances more effectively; its thats deleveraging then thats whats happening....

May 13 01:46 PM

[Fred Voetsch:]

WoW! Deleveraging right in front of you and you can't see it. What do you think the drop in asset prices is all about? Trillions and trillions of wealth have evaporated...no, wait, it's over there, in the debt you, I and every other taxpayer owe.

Why do you think people are saving more?

Why is the unemployment rate so high?

Why do we hear about trillions of dollars being spent/created that buy nothing?

Why are GM and Chrysler going through bankruptcy and why are most of the large banks in the country insolvent?

May 13 02:41 PM

[jadziasman:]

Tom,

Was it really necessary to use such a vulgar comparison to make your point about China?

And - shame on you Seeking Alpha editors for publishing this article as written.

May 13 05:52 PM

[Frohickey:]

Is this the same Cetin that said getting into more debt will make you richer?


On May 13 02:03 PM Cetin Hakimoglu wrote:

> I meant deflation. The only time someone can refute my argument is
> to point out a typo. Maybe because I know how economics and finance
> works better than most people.

May 13 08:39 PM

[kelm:]

Well this was a good laugh. True but a good laugh nonetheless. We will not see a next bubble as the Feds attempts to lower interest rates are failing. Their next step will be to ratchet up the degree of their QE and that I expect will drive more investors out of binds and out of the dollar. The market will eventually force the pain on us one way or another. Markets, like life, find a way.

May 14 12:23 PM

[Gregman2:]

In fact, deleveraging is happening in the same way it happens to a balloon...one side gets compressed, but it pops out elsewhere. Public debt is rising, while private debt is "deleveraging." Our single biggest problem is...systemic. Yes, the Chinese are way ahead of us, and we should take a page from their play book.

May 14 12:23 PM