Back on July 12th in the Union Tribune comments I wrote:
“My guess of the order in which they’ll pop:
1) Fannie/Freddie (Bailout which will crush the $ and raise interest rates) – I give them a week.
2) Lehman – within two months
3) Wachovia – ??
4) WaMu — Gone by summer ’09 “
Fannie went down on September 7th so I was a bit early on that call.
Lehman went down on September 15th so my window missed by 3 days.
Wachovia is still alive, bouncing around at $15 a share
WaMu went down today. I was a bit optimistic on this one.
Here’s my best explanation of what’s going on…
This debate boils down to inflation vs. deflation. But of course it’s not that simple. We owe China a mountain of money. Consumers are indebted. We have automation permanently changing the structure of the job market. We have a nervous populous making bad decisions due to the resulting uncertainty. We have new financial products so complex that regulation has become impossible. We have accelerating change affecting a financial system that can’t adapt fast enough. We have accelerating change affecting a job market that can’t adapt fast enough.
We have accelerating technological change which is by nature a deflationary force. This force, in my opinion, is overpowering the Fed’s ability to prop up the economy using credit. This economy is completely addicted to a phenomenon which was only possible during an era when middle class jobs were plentiful. Middle class jobs didn’t allow credit creation. The lack of job crushing deflationary productivity did. That era ended five years ago. The housing bubble made it tolerable. The next few years will seem intolerable.
Inflation is not an option. If we try to pay China back with monopoly money they’ll pull the plug on our romance with cheap credit and Jumbo APRs will go to 20%. That will decimate home prices and the banks that made loans to people who bought them. Inflation wipes out the US economy thanks to China.
That leaves us with deflation. We can have a total meltdown or we can bail out the banks and imitate Japan’s lost decade. The analogy I’m currently using is this:
Would you rather get punched in the nose hard once or would you prefer a good slap in the face every morning for a year?
The nose punch could lead to complications but at least the worst would be behind us on day two. My guess is that we’ll opt for the series of face slaps but some time later this year, in the dead of winter, we’re still going to get punched in the face.
We’re going to have to embrace deflation, real growth not driven by brainy men with printing presses, creative destruction, wealth divide mitigation, real capitalism. I say bring on the meltdown, it’s time for a fresh start.
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