In the Throes of a Drawn Out Crisis

by: Roger Nusbaum

A friend newly interested in the capital markets, interest rates, government debt and so on emailed me to ask whether I thought we were now at a tipping point. Perhaps she was prompted to ask that because of the noticeable back up in the ten year treasury yield last week.

My initial answer was simply to note belief that whatever the consequences of the financial crisis and the attempts to "fix it" will be, they will play out over a longer period of time than people like Mish (a must read) and Peter Schiff call for.

Right or wrong, the reason I feel this way is the extent to which the US is enmeshed in the world economy. Additionally I noted that reasonably speaking, interest rates should have been much higher than they are now and part of the reason is the foreign interest in US paper, but of course the debt that has been bought by the Fed has hurt both.

Weakly supporting the idea above about consequences happening slowly is the speed at which Iceland, Greece and Ireland ran into trouble. I use the word weakly because those countries are different than the US - but still.

Then a couple of other things occurred, some anecdotal, that I think can also contribute to the slow motion wreck theory.

A fraternity brother of mine (actually my roommate during my junior year) and his wife are both teachers in California (but not in a big city) and if I am following his posts on Facebook correctly, they have both been given pink slips and are looking for jobs in another state. California as we all know has a slew of problems both of its own doing and as a result of the financial crisis.

What date would you put as the start of the financial crisis? While there may not be any single answer, most would agree it has been at least a couple of years. So a couple of years in, or more, and California is just now getting around to trimming payrolls (or they have laid people off previously and are still going)? I don't know the numbers of the layoffs but it would be reasonable to conclude that some folks effected will miss mortgage payments maybe with a little delay or maybe not.

My sister in law is a teacher here in Arizona and her job will be lost unless a one cent sales tax gets passed by voters. Again some portion of the teachers effected will miss mortgage payments with a little bit of a delay or no delay.

California and Arizona have been two states effected more than most but many states have problems with various taxes collected, pension obligations and budget deficits. More states will have to make painful cuts, this is clear. What is not clear, to me anyway, is the magnitude of the impact or the timeline. This could easily be in slow dribs and drabs, indeed it is starting now, a couple of years or more after the start of the crisis, in the states that are the worst off. Most states are better off than California and Arizona but in trouble nonetheless. I imagine some will avert desperate measures but some will not, but I don't think we will know for several more years.

Karl Denninger noted some of the immediate aftermath of the passage of the health care bill. He detailed announced writedowns due to increased costs resulting from the rules of the bill by Deere (NYSE:DE), AT&T (NYSE:T) and client holding Caterpillar (NYSE:CAT). Denninger noted that most of the effects aren't supposed to occur for several more years but are starting now. But even proponents have to concede that there will be more impacts later, playing out over time.

Barron's noted another consequence related to job creation. Whatever the magic number of employees is for offering health care coverage, why would a company, to use Barron's example, with 48 employees go to 51 employees? The expense incurred for health care compliance would be a deathblow for some, obviously not all, and maybe not even half, companies effected.

This outlines one source of jobs for displaced state workers that will either not be there or will have fewer jobs for displaced workers.

In working through this I am not trying to predict a magnitude because I don't know. What seems clearer is that this plays out slowly with successive dominoes falling. If the crisis was as bad as we were told (worst in 80 years) then it should, as I have been saying all along, take a long time to play out. Additionally the fixes will have consequences of their own, like encouraging people to stop paying their mortgages in order to qualify for a new program; that will take a long time to play out.

I have been consistent from the start that this would not feel like the Great Depression, not even close, but I do believe we will look back on the totality of the event and refer to it as a depression. There were several depressions before the Great one, I believe the early 1920s, there was a bad bank panic in 1907, another depression in the 1870s and I am quite certain there were others - so if the current period is labeled as such it will not be the end of the world and we are already a long way into it.