Our Increasingly Dangerous Asymmetric Economy
The policy response to the banking crisis aided the "haves" while the "have nots" still wait for their recovery.
A few minutes ago, the flight attendant completed her pre-flight monologue, including the federally mandated, albeit frequently ignored phrase, “In case of a sudden change in cabin pressure, oxygen masks will fall from the bins above your head. Put your mask on first and then put the masks on children traveling with you.”
While I'm sure the line was clearly intended for the mother of twins sitting in front of me, it struck me as the perfect analogy for the government response to the 2008 banking crisis. Monetary and fiscal policy would target the biggest banks and corporations along with the wealthiest in America, with the hope that once safe, they in turn would quickly breathe life into middle market and small businesses, as well as middle- and lower-class Americans.
And Federal Reserve Chairman Ben Bernanke all but confirmed this strategy in his November op-ed in the Washington Post in which he offered:
Easier financial conditions will promote economic growth. For example, lower mortgage rates will make housing more affordable and allow more homeowners to refinance. Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.
For the biggest and the best -- whether they be consumers, corporations, or even countries -- life, as we close 2010, appears to be returning to a pre-2008 normal.
Or at least that's how it's supposed to work.
But is it?
Without question, there has been an economic rebound for those closest to the oxygen mask. Affluent Americans have taken advantage of lower mortgage rates to refinance their homes in droves and they have seen their stock and bond portfolios rebound strongly from their early 2009 lows. In the same way, multinational corporations have benefited from unprecedented flows into bond funds, enabling them to all but compete to see who can issue the lowest yielding 10-year corporate bond in US history. At the same time, our biggest banks have benefited from the price rebound in their mark-to-market securities portfolios and improvements in their credit card businesses. And then, of course there are all of the luxury goods retailers who seem to be upping their 2010 holiday sales estimates now almost daily.
Unfortunately, as I look at the other end of the economic spectrum, it appears that most are still waiting for the oxygen mask to be passed to them.
So why hasn’t the well-oxygenated “wealth effect” translated into a stronger virtuous economic cycle?
As I look at the data, there appear to be several reasons.
At the consumer level, the wealthy seem to be using the benefits of lower mortgage rates to accelerate both revolving and non-revolving debt repayment. Thirty-year mortgages, for example, are being converted to 15 years while keeping monthly debt service flat and mortgage lenders are seeing “cash in” not “cash out” refis. And for savers (arguably the group perceived to be the most resilient going into the crisis), they have found themselves having to restructure their daily lives to reflect the impact of quantitative easing on their monthly incomes. As they will attest, living off of 1% interest is considerably more difficult than living off of 5%.
At a corporate level, the benefits of lower US interest rates appear to have been transformed into a multinational carry trade, where cheap dollars have been translated into capital expenditures and jobs in higher-growth countries abroad. And as we saw last week, what little job growth we've seen stateside has been restricted largely to temporary/part-time positions as any number of uncertainties linger. Finally, given the experience of 2008, where both the bank and money markets froze up, corporations are today taking a much more conservative approach to cash management, choosing to bring on board their previously off-balance/contingent liquidity.
And then there are the small community and regional banks, whose small business customers continue to struggle while their deposit costs continue to widen versus the Treasury curve. For them, QE2 is not an oxygen mask, but rather a pillow being placed over their mouths.
The net result of it all is that, despite the abundant oxygen, the masks aren’t getting to where they were supposed to. And to these eyes, rather than creating a virtuous economic cycle, I am increasingly afraid that all the Federal Reserve and other global policymakers have accomplished is to create a potentially dangerous asymmetric recovery, in which “the haves” now have even much more and the "have nots" are slowly suffocating to death.
Or, as cartoonist Adam Zyglis put it recently in The Buffalo News:
And unfortunately we're not alone in this asymmetric outcome experience. As Olli Rehn, the European commissioner for economic and monetary affairs, put it last week, “It has to be admitted, there is a certain dualism in Europe,” with Germany moving forward while the weak countries on the periphery battle stagnation.
But as we are witnessing in Europe, the longer the asymmetry continues, and the wider the divide grows between the weak and strong, the greater the resentment and animosity. To believe the latest headlines from Europe, in the eyes of the strong, the weak were “reckless;” while to the weak, the strong are now “vultures,” or even worse, to borrow a particularly disturbing word from Sunday’s New York Times, they are “overlords.”
As we witnessed with the introduction of “fat cat bankers,” politically charged rhetoric is highly explosive when laid on an asymmetric economy. Worse, I'm afraid that it may be lethal to the still very-necessary transfer of the oxygen masks to those who need them most if we are to see any kind of virtuous cycle develop from here.
As I look ahead, the greatest challenge policymakers face both here and in Europe is closing the widening divide and reducing the economic asymmetry without alienating either side in the process, particularly as both sides believe the other must blink first.
But if we have any chance of righting our asymmetric economy, we have to move the mask, and sooner rather than later. And, candidly, as I survey the world, I am increasingly afraid that if that doesn’t start to happen voluntarily pretty soon, someone without a mask is just going to reach over and rip it off the face of someone who has it.
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