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Source link: http://archive.mises.org/10627/the-inorganic-recovery/

The Inorganic Recovery

September 9, 2009 by

There is something affected, something not believable, something agitpropish, about all the cheers for the glorious economic recovery we are supposed to be experiencing. Even some of the recovery’s biggest boosters don’t quite believe it.

I’m thinking of the reporter on National Public Radio a few days ago who, at the end of a segment, offered a passing warning that the bust did not come to an “organic” end, but rather was artificially stopped by government intervention. FULL ARTICLE


Walt D. September 9, 2009 at 2:51 pm

I took Inorganic Chemistry in school. I never took Inorganic Economics. I can’t seem to find a reference! :-)

Bogart September 9, 2009 at 10:02 pm

Obama campaigned on it. His supporters have it. That thing is “hope” or more accurately faith. These enlightened folk actually believe that the “change” proposed or in the works by this bunch of hippies, newspaper writers, TV news anchors, political hacks and academics will bring back the economy to where it was before, establish peace on Earth and repair the climate.

The most amusing part is that their Dear Leader is very similar in what they are doing to the last Dear Leader.

K Ackermann September 9, 2009 at 10:08 pm

Great article. I like the request to clip the article and read it again in 18 months. The people who have a grasp on the reality of the situation have already experienced a Cassandra complex. At some point, you just have to throw up your hands.

The way Leaman played out was curious enough, but when the rule against shorting financials went in effect shortly after, it became crystal clear the government was actively trying to thwart price discovery of the toxic assets.

It was all too easy to initiate pressure on the institutions to flush out their true worth. If they were worth a lick, they could have sold assets and defended by squeezing the short sellers. Any resistance would have sent the shorts scurrying.

The entire game was to protect the bond holders. Something tells me Obama did not think that up himself. That was Bob Rubin, the Phone Whisperer. And many others, too, but Rubin had Obama’s ear, and just his former students had $500b under management, and it wasn’t stocks they were managing. Real investors don’t do stocks; they do bonds, and they insure them with threats.

All the action toward reflation of the housing bubble is to get those assets trading, because the government cannot buy them all. It’s a big problem.

To help that, the government has:
1) Instituted mark-to-myth accounting.
2) Gave banks incentive to adjust mortgages, but the banks would take a hit, and the banks think they can still get the government to do it.
3) The Fed has kept interest rates low through open QE.
4) The Fed has provided huge pools of liquidity to Failie and Fraudie by purchising up to $2T of agency paper. The Fed is the market for agency paper.
5) Announced the PPIP – the most blatant plan to defraud the public ever conceived. Perversely, the banks mark-to-myth accounting rule makes PPIP unlikely to accomplish anything, and that’s great.

And a bunch of stuff I am forgetting.

In the meantime, to help the banks repair their balance sheets, the government has looked the other way while the banks:

1) Punish customers with usury rates on revolving credit – the same stuff they filled my mailbox with every day for years.
2) Sell shares to get their debt to equity ratios in line to lever up again (whatever debt means). For a while, different news outlets were reporting wildly different numbers for Citi’s float. It’s odd when it doesn’t seem to matter how many shares a company has issued. I wonder how they came up with a price for a share.
3) Issued brazenly conflicting analysis such as a Merrill analyst flipping a REIT from strong underperform to a conviction buy 24 hours before another BofA units underwrote a new issue for the REIT. That’s just one example.
4) Ramped up high frequency trading that by all accounts front-runs orders.
5) Golden Sacks put together strings of $100m+ profit trading days with only $40m at-risk trading. Nobody is that good. Not for 45 days in a quarter with only 3 days of losses. Maybe Bernie Madoff was.
6) Somehow found the money to lift the stock market to huge gains is such a way that it does not have any relation to the real economy. The volume tape looks like it came out of an EKG, with sharp spikes at around 4:00pm every day. The cynic in me wonders what happens to all that money the primary dealers get from the Fed every time they sell the Fed a treasury – which they do quite often these days.
7) Enjoy hoarding cash since the Fed now pays interest on it. The banks really don’t want to loan it, we don’t want to borrow it, but it would be a shame for it to sit idle. Now it can sit idle, and work!
8) And then the biggie is the interest rate spread. What they do loan out sure has a nice return on it.

Even if they were provably solvent, this would all be nuts. The fact that we are zombifying the banks at the expense of the real economy makes me want a run on the banks to force the issue.

John Hoffman January 6, 2010 at 4:35 pm

The last thing to recover in an economic crisis is the unemployment rate. Right now we need a higher GDP rate to bring down unemployment(okun’s law).

Housing prices may remain depressed a little bit longer,but I expect them to bottom out soon.

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