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Five Things You Need to Know: How It's Gonna End


As economic tide recedes, insecurities grow? That's backwards. As insecurities grow, economic tide recedes.


Kevin Depew's daily Five Things You Need to Know to stay ahead of the pack on Wall Street:

1. Deep Down PBGC Knows How It's Gonna End

If bourbon were dollars his pocket would be full; drunk full and loaded, a pocket full of bills. Sober pockets. The phrase swam by and he stifled a snort. Involuntarily he shifted his weight from his right foot to his left, almost a sway, as if in self defense, one side of his body trying to separate from the other side, the losing side with the near empty pocket. He straightened his Daily Racing Form with one hand and looked harder at the numbers.

Two minutes to post. Decision time. The odds spun around in his head; the three at 8-5, the one at 5-2, seven at 3-1, five at 4-1, $68 in his pocket, 34 times the payoff, anything less than 8-1, $18, pointless. The nine at eight-to-one, 34 times 18, 612; four at 10-1, 34 times 22, 748. Just numbers. What difference does it make?

He walked to the windows and chose the one with the longest line. One minute to post. Maybe I'll get shut out, he thought, and the act made him realize the inside of his head felt stuffed with steel wool, metallic and dull, the early whisper of the hangover he knew was coming.

And then, there he was at the window, the line now vanished, his money being handed to the clerk, all of it, in exchange for a single ticket. Transaction complete, he turned away from the window and made his way toward the door. No need to watch. He crumpled the ticket in his hand and let it slip through his fingers. He knew how it was going to end.

And that is how good money gets thrown after bad. We know how it's going to end, but that's not good enough, not for the Pension Benefit Guaranty Corporation. What, you thought we were talking about the track? We're talking about both. After all, the track is simply a microcosm of the larger market ecosystem, with its own species of predators and prey playing their necessary roles.

Charles Millard, director of the PBGC, the government-sponsored body that insures the pensions of 44,000,000 Americans, said over the weekend it will nearly double its investment in riskier assets to try and catch up to its $14 billion deficit.

According to the Financial Times, Millard said the plan offered a much higher chance that the insurance fund would be able to earn enough on the riskier investment to meet all its commitments without having to ask employers for higher contributions or taxpayers for a bailout.

Millard made no mention of the fact that the plan would, by definition, also offer a much higher chance that PBGC would ultimately be forced to ask employers for even higher contributions or taxpayers for an even larger bailout, but that's just the downside of risk. The PBGC is focused on the upside. Two minutes post.

2. Speaking of the Race Track...

The problem with the shutdown in the Auction Rate Securities market is not only that it's not yet going away, but that it is spreading from deep inside the bowels of Wall Street to Main Street.

The University of Pittsburgh Medical Center is the latest example of a Main Street institution forced to find a way out of the $330 billion Auction Rate Securities market due to soaring borrowing costs as a result of the failed auctions.

Tal Heppenstall, UPMC's treasurer, told Bloomberg, "It's outrageous. We're a AA-rated
credit. We don't need to get financing from loan sharks.''

3. Why Aren't Rates Lower?

Since the Federal Reserve began cutting the Federal Funds rate back on September 18, credit spreads have widened virtually across the board, the net result being rates for "regular borrowers," both corporate and private, that are simply not coming down in response.

But wait, banks in the U.S. have been borrowing massive amounts of money from the Fed using the Term Auction Facility (TAF), a mechanism that essentially replicates the Fed's Discount Window, but without the stigma. The TAF saw borrowing of almost $50 billion of one-month funds from the Fed as of mid-February, the Financial Times reported. So why is that money not making it into the economy?

Two words: Risk Aversion. Banks need the money to protect their liquidity.

Or, to answer the question another way, as Federal Reserve Bank of Minneapolis President Gary Stern did in a speech this morning, the problem is an ongoing credit crunch. What is a credit crunch? According to Stern, "an environment in which quality borrowers find credit either unavailable or available only on very expensive terms."

More accurately, a "credit crunch" is a general decline in the the supply of, and demand for, credit.

Under ordinary circumstances, the market (and sometimes the Federal Reserve) can induce a decline in the supply of credit by raising interest rates. This makes money more expensive for borrowers, and as a result slows the growth and demand for available credit.

But a "credit crunch" occurs when banks become more risk averse - less willing to lend - even though interest rates may remain the same, and in extreme cases, even though interest rates may go lower.

This risk aversion on the part of lenders makes it more difficult for even the most credit-worthy borrowers to obtain money at reasonable terms. In effect, interest rates - the cost of money - can become infinitely high for many borrowers. As a result, it becomes difficult to fund projects and investments, which can slow economic growth, which can make lenders even more unwilling to lend.

4. But Isn't Government the One Growth Industry We Have Left?

Thanks to Minyan Stephen for noting this in a post on The Exchange: "Due to budgetary constraints, the Economic Indicators service ( will be discontinued effective March 1, 2008."

What was Just the U.S. Department of Commerce's web site designed "to provide timely access to the daily releases of key economic indicators from the Bureau of Economic Analysis and the U.S. Census Bureau."

How bad have things gotten when government undergoes its own Dot.Com crash?

5. Social Mood Darkens, Right On Cue

Minyan Scott sent us the following link from an Associated Press article on the growing wave of insecurity and dissatisfaction among Americans. "As economic tide recedes, insecurities grow," the articles headline ominously intones:

"Now the economic tide is receding, and the undertow that was there all along is getting stronger. Take away the easy credit and consumers are left with paychecks that, for most, haven't nearly kept pace with their need and propensity to spend."

According to the article the undertow of dissatisfaction was there already, and now that cheap money is being taken away, it's getting worse; a deep paradox the article cannot unpack by relying on conventional cause and effect.

"Americans' declining confidence in their economy is triggered by a storm of very recent pressures, including plunging home prices, tightening credit, and heavy debt. But it is compounded by anxiety that was there all along, the result of a long, slow drip of worries and vulnerabilities."

It would be nice if the world worked in such a linear fashion, but it does not. Social mood drives social action, not the other way around as the article wants to claim. Cautious people cause home prices to plunge. Cautious businessmen cause credit to tighten. Fearful people suddenly view debt as harmful, not helpful.

"What does the economic future hold? Many Americans feel increasingly unable to answer that question with assurance, and they appraise it with a sense that they are less in control of the outcome."

True enough. The future is uncertain. That certainly sounds reasonable at first blush, but think about whether that statement is really true. Do Americans feel less certain and "in control" now than they did in, say 1880? Or 1940? Or 1980? Why are our feelings of lack of control so much more heightened now? The reality is that never before in the history of mankind have humans had more control over their environment, their lives, their economics, their lifestyles. The difference is how that control is perceived.

During periods of positive social mood, uncertainty is exciting, embraced. During periods where negative social mood is the governing factor, that same degree of uncertainty is feared. The article claims, "As economic tide recedes, insecurities grow." That's backwards. As insecurities grow, economic tide recedes.

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