Scared of the 800-lb. Gorilla?

Went to an interesting symposium on the economic crisis and the Obama policy response/spending bill yesterday. Two economists, Tom Campbell and Barry Eichengreen, gave their interpretations. What struck me was that nobody, especially nobody in politics, seems to want talk about the 800-lb. gorilla in the room. This beast is the pervasive uncertainty associated with price discovery roiling all markets and asset classes. This 800-lb. gorilla is partly psychological but also real, so perhaps we can talk about the big gorilla and his even bigger shadow.

Policymakers don't want to bring too much attention to the gorilla for fearing of scaring the public with his imposing shadow. But in so doing they seem to be pushing a form of denial that is also reflected in the proffered policies. Most of these policies seem targeted to further obscure prices or prop them up. Obama's proposal to throw another $275 BILLION at foreclosures in the housing market is a case in point.

The necessity of price discovery is crucial to clean up the banks and get credit flowing again. What do we think these toxic assets are? They're assets that nobody can agree how to value (most of them based on unrealistic housing prices). The market has depreciated these assets to 30-40 cents on the dollar, but the owners (banks) think they're worth more, but can't sell them and are hoping the government (i.e, sucker taxpayer) will buy them at par. At least that pig didn't fly. But if we don't discover prices on this toxic dump we can expect years of zombie banks in our midst. Expect some nationalizations and then break-ups.

True price discovery is also crucial to getting the housing market off the mat. Nobody is going to buy overpriced housing no matter how cheap and available credit is, and nobody is going to convince them that prices have stabilized by virtue of directives or hopeful words from Washington. What's a house worth anyway? The "bigger fool" strategy is history for now. Let's try a historical metric of cashflows off implicit rents or median incomes and we'll get an idea. A house that rents for $5000 a month is worth maybe $900K. Rents for $1500/mo. = $270K. But policymakers want to stabilize house prices based on inflated mortgages. Ain't gonna work. Just more wasted dollars...

But why? How are we helping things by encouraging people to buy or stay in overpriced homes they can't afford and then sticking them with the bill over the next 20-30 years? Are we searching for new ways to impoverish these people? How are they going to pay for the expenses of old age? Wonder how that's gonna work with our entitlement reform?

Bottom line is that nobody wants to adjust housing prices to the downside. But there's no other way out of this mess. Securitized mortgage money is gone...buying power is a fraction of what it was in 2006. Let's get real instead of throwing good money after bad. Indications are this is gonna take longer than we think.

A Failure of the Free Market Model?

It's quite heady reading the international press these days. The proclamations of the demise of free market capitalism are proliferating like kudzu. The formerly sober Nikolas Sarkozy has been one of the most vocal in pronouncing a New World Order (based on the French model, one presumes), while talk of a New New Deal is all the rage on this side of the Atlantic. This past weekend's G20 meeting in Washington DC was a lovefest of cooperation and self-congratulation, even if George Bush wasn't quite bussed on the cheek.

But perhaps we should all take a deep breath.

Exactly what do these folks from around the world think brought them together? Was it good fellowship and neighborly concern? No. It was an interdependent network of international capital and product markets. We inhabitants of earth have just rediscovered that our fates are inextricably intertwined! But it's the global capital and trade markets that have accomplished this wondrous feat.

It's market specialization and free exchange that make the candlestick maker dependent on the watchmaker dependent on the shoemaker dependent on the banker dependent on the lawyer dependent on the farmer dependent on the grocer and so on in an endless web of interdependency. Interconnected capital markets combine one woman's savings with another man's labor and both become better off - without ever even sharing a hug. Such interdependence makes cooperation more rewarding and conflict more punishing.

Oddly enough, that great altruistic theory of state socialism accomplishes the exact opposite. In socialist societies people become isolated and suspicious, business relationships become arbitrary, honesty and transparency become clouded. People and nations cease trading to become self-sufficient. And everyone becomes poorer in a dangerous downward spiral.

So, tell me now: Are we truly going to abandon free markets and embrace statism? Are we going to be governed by who we know and what favors we owe? Will we abandon accountability and responsibility to survive on the whims of politicians? Will we pretend to work, while they pretend to pay us?

Come now, ...not bloody likely.