Economic Fears Persist Despite Government Reassurances

by: Michael Panzner

For the realists/cynics among us, it's not hard to figure out the game being played in Washington and on Wall Street.

To begin with, the powers-that-be are trying to keep the sinking ship afloat until a) the economy somehow manages to turn around of its own volition; b) the vast array of ailing businesses figures out some other way of plugging the holes in their balance sheets and overcoming the breakdowns in their business models; or, b) the whole mess can be dumped into somebody else's (e.g., the next Administration's) lap.

Those pulling -- yanking? -- the strings are also trying to make use of programming techniques that have long been advocated and employed by "personal development" gurus and neuro-linguistic programming (NLP) experts -- that is, get people feeling better about themselves and believing in the vision of good times ahead, and they will act in such a way as to make it happen.

The problem, of course, is if things don't work out according to plan, and all that time, money, and energy turns out to have been for nought. In "What Keeps Me Awake At Night: Economy Edition," Information Arbitrage addresses this very issue.

The stress tests are done. All is well. Green shoots are popping up all over the place. The worst is behind us. Everything is cool, right? Well...

This is how my nightmare goes. The US Government has adopted the following mantra: BUY TIME. Buy time for:

  • the stock market to recover;

  • sentiment to improve;

  • retail demand to pick up;

  • credit markets to open up;

  • bank balance sheets to be rebuilt;

  • banks to lend to both consumers and small businesses;

  • businesses to begin hiring again;

  • homeowners who were once on the edge to be able to pay their mortgages;

  • real estate prices to rise;

  • residential and commercial mortgage-backed security prices to rise; and

  • TOXIC ASSETS TO BECOME DE-TOXIFIED.

The US Government has done everything in its power to avoid the perception that it has lost control. Statements such as "None of the largest banks will be left insolvent," providing both direct capital injections and indirect support through the FDIC debt issuance guarantees, the AIG payouts that were funneled to Wall Street counterparties, TALF, etc. Further, the SEC and Congress were silent when FAS 157 was relaxed, providing further support to bank and insurance company balance sheets "as is." Buying time. Congress could have forced transparency, could have let the largest banks get restructured, could have facilitated a comprehensive plan against the illiquid asset problem. But this was not the path taken. And if the stock and bond markets continue to go straight up and if risk premia fall, then the "Big Brother" approach taken could be vindicated.