An Alternate History of the US Economic Recovery
- Joshua M Brown
- November 27th, 2012
I’m not an economist by training (thank god). I’m just a street smart kid who watches (and chronicles) everything, has no political affiliations (I hate them all) and understands human nature way better than the cloistered academicians and theologians we’ve entrusted our entire business cycle to.
So with that caveat as preamble, allow me to walk you through An Alternative History of the US Economic Recovery – the recent past and present we could have gotten rather than the bullshit one we’re still muddling through now.
Keep in mind that the below is merely a simulation.
It starts, as it must, with Barack Obama’s coronation as change agent extraordinaire in January of 2009. Rather than surrounding himself with bankster cronies like Larry Summers and Bob Rubin, Obama pays closer attention to the Volcker cohort within his tent and tackles financial reform first. Rather than blow the most historic mandate that any President in modern times has ever been handed on an ill-fated healthcare fight, Barack Obama focuses on the economy and the financial system from day one – which is why he got elected to begin with.
Meaningful regulation comes to Wall Street rather than the still-being-litigated graveyard grab-bag of armpits and shinbones known as Dodd-Frankenstein. Banks are given 120 days to divest themselves of all proprietary trading activities. Insured deposits are no longer treated as casino lines of credit, bonus-inflating gambles cannot be referred to as hedges. It all ends immediately and no one on The Street in early 2009 has the balls to say a word. They take their medicine and stand down as the mess they created is cleaned up by taxpayers and the grownups spin the chore wheel.
The message that there is law and order again is heard loud and clear, far and wide. We recognize that we are once again in a constructive capitalist atmosphere in which we can build and invest with confidence, not a fucking den of thieves populated with Wall Streeters, Washingtonians and every sycophantic bloodsucker who caters to them.
Prosecutions follow this restoration of the rulebook, thus engendering a renewed trust and faith in the system. Let me explain something to you that nobody seems to to understand: This is a Judeo-Christian society and we crave symmetry as well as a righting of wrongs and a meting out of punishment for wickedness. It is ingrained in us and we cannot move forward until the bad guys get dealt with and faith is restored. Sorry, this is a fact of American life – just look at our folklore and fables and beloved Hollywood film endings and Sunday School syllabi. You will see that I am right. The people need a satisfying ending.
With the return of regulation and the reaffirmation of our values in the form of perp walks, Americans can move on psychologically. They feel as though the chapter has closed which is a prerequisite for a new chapter to be opening. This leads to a resumption of business as usual rather than the next-shoe-to-drop syndrome that currently plagues us. We start fresh and leave the recent past behind us, it fades from view like the atrocities of Bernie Ebbers (WorldCom) and Jeffrey Skilling (Enron) faded from the public consciousness a generation earlier.
This renewed confidence – real confidence, not that Wealth Effect bullshit from pumping stock and oil prices – translates into more spending and investment. Same as it always has for 5000 years. The robust recovery that corporations were crowing about in the summer or 2010 becomes self-reinforcing as small business owners and their employees buy into it. They plan vacations and have more babies, their kids move out of their houses and form households of the own. Multi-year commercial real estate leases are signed and people start investing for their future. The virtuous circle picks up where it left off, minus all the disgusting leverage in the system pre-2007. The allows the Fed to do then what would be unthinkable now – RAISE RATES.
The logic is unassailable – in 2010 we had a golden moment, Escape Velocity from low growth and the new normal was in sight! We had a chance to build on the nascent recovery’s momentum in that moment where US corporations were telling us that it was business as usual and demand was screaming back.
All we had to do at that moment was begin to shut the door on zero percent rates. People would have scrambled to run through that door before it closed. That loan to expand from one store to three, that revolving credit line to begin shipping product to Asia, that ReFi on the house to buy the two-family property next door…all of it!
When people see a wide open door – which is essentially what the Fed’s policy has been – they ignore it. “What’s the rush?” Bernanke’s out telling people no rise in rates until 2015. Guy’s brilliant but knows nothing about how people operate, the robot read books for 30 years instead of living life (please read The Poindexter Theory or why nerd economists can’t be trusted). He’s a self-proclaimed “Student of the Depression”, not a hustler or an entrepreneur. And by throwing money at the capital asset-holding upper class, he is accomplishing nothing in the way of velocity of money. There is no urgency on the part of the people he is making liquid with his bond-buying. The free-money borrowing rate for those who need not borrow does nothing to juice that money and get it going. Money supply and liquidity is meaningless if the cash don’t move.
Because that’s not how human’s operate. But they are highly motivated by desire for the things they fear may become out of reach. It is not until you begin to shut the door that people jump and get moving. This is why the Home Shopping Network displays a dwindling item countdown with a timer next to it. Salespeople in every industry call it “the takeaway” - Look, I only have three left, if you don’t want it I owe it to my other customers to call them now…
A 50 basis point hike and an announcement that “The Period of Emergency Monetary Policy is Ending” would’ve given the business community in this country exactly the jolt it needed at that time. Like a green light blasting them in the face. They’d have interpreted that announcement as “This is it, now or never” and the blueprints and business plans would’ve been unfurled across every conference room and kitchen table in America.
Escape Velocity Achieved. Mission Accomplished.
Following that, an ordinary and orderly creep back up to 1% Fed Funds rate would’ve been possible, slowly so as to maintain low enough mortgage rates to allow the housing stabilization process breathing room. With the accompanying resumption of business activity and confidence, the banks could certainly have borne the hike and their net interest margins would’ve looked better than they do now. Again, the virtuous circle.
Granted, under this scenario the Republicans probably still take back seats and influence within Congress during the 2010 midterms, predominantly because the debt levels are still scary-big and Obama really sucks at communicating his own record. Also, he’s still black and there’s a built-in percentage of voters who will never get over that.
But in the context of a real recovery, the debt ceiling debate likely does not snowball into the events of Summer 2011, even if partisan rancor is still pretty prevalent. This means that S&P doesn’t downgrade the US as issuer and bonds don’t launch into this last leg of their multi-decade rally. Because we are more greedily productive and less shell-shocked in general.
Coming into 2012, Americans are feeling good about their economic recovery and they are responding accordingly – by fueling its continuance. Income inequality begins to level off and hourly wages creep higher. The temporary and part-time workers of 2010 become full-time, in the absence of drastic healthcare cost fears, employers have little reason not to add staff in a burgeoning growth environment.
Europe remains a shit show, but it is their shit show. We giggle as Jay Leno does jokes about it and European investors plow money into US stocks and banks, anything to escape their own little Cirque du So-lame economy. Europe remains a risk for the US markets, but not one that we fret about every day for two and a half years.
Woe-is-me sad sack movies and shows like Larry Crowne and 2 Broke Girls never get greenlit and PIMCO’s ‘New Normal’ spiel becomes a trivia question in some forgotten Economic Edition of Trivial Pursuit. Bond funds do not take in a trillion dollars in net cash inflows over these years but equity funds do. This rising tide reduces the mental and financial strain on insurance companies, pension funds and other large investment pools.
The result of all of this is an unemployment rate closer to 7% with a renewed emphasis on programs like computer literacy and infrastructure refurbishments – rather than just the austerity and tax rate debate we have now. It’s not that the deficit isn’t out of control in this scenario, it’s that with building growth, trend change in the deficit is finally within sight. This eases the pressure so that we can think straight rather than scream about cliffs and slopes.
Obama probably gets reelected again but the Republicans have a more constructive message and voters reward them with large gains in both houses of Congress in November 2012. Geithner hands the reins to Dimon at Treasury, MSNBC never has the need to radicalize to the left and the Tea Party movement dissolves back into the Klan or the Civil War Reenactment Society or whatever the fuck it was before the Koch Brothers started writing checks and chartering coach buses.
And I’m not saying we fixed everything or that headwinds would disappear. But if we’d done it this way you’d probably be out doing more interesting things that reading blogs about the economic crisis. Because it would have already passed into history rather than lingering as it still does to this day.
And for those of you who are all excited to go into my comments section and say that psychology isn’t powerful enough to have changed the debt dynamics of our balance sheet recession, I would submit to you that every major turning point in world history occurred as a function of a psychological shift, economic history being no different. Greed and fear is all there is and all there ever has been. All of the major religions and geopolitical divisions since the beginning of time have come about as a result of people attempting to control or harness these two almighty forces for their own gain.
And lest you think I am Monday-Morning Quarterbacking, may I present to you the following comments I made in real-time as that moment of genuine recovery was passing us by:
But we blew it. And the Unrecovery continues. You can call it a “beautiful deleveraging” if you wish. I call it a missed opportunity. Especially when you consider how it could’ve been.
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The Reformed Broker is a blog about financial markets and the economy. Joshua Brown is a New York City-based investment advisor for high net worth individuals, charitable foundations, retirement plans and corporations... More.