Archive for February 2, 2010

Don’t Ask, Or We’ll Tell

February 2, 2010 1 comment

Yesterday, I raised the grim specter of the possibility that the US government might at some point be unable to roll its debt. Today, the Treasury auctioned $17bln of 1-month bills at a sporty yield of 0.04%.

[An aside: Treasury Bill yields can in fact be negative, and have in fact been negative from time to time in the last year or two. This is not a violation of theory, in which negative yields make no sense because currency itself always yields zero. In the real world, no one holds their wealth in physical currency, and while hopefully your wealth is protected in the bank by the FDIC if you are an individual, if you are an institution with millions to invest there is no FDIC program. It may make sense in such a case to earn a negative yield on your “cash” even if there is only a very little, but measurable, chance of your alternative investments losing principal. If, over a 1-month horizon, your investment has a 1% chance of losing 20%, your expected credit loss is 20bps and you would gladly take 0% or a slight negative number over even that long shot. Moreover, we know that investors tend to overvalue the probability of extreme events, so even if there is a .01% chance of such a thing happening, investors may well treat it as if it has a 1% chance and there could still be buyers of TBills at the margin who will pay more than par.]

Any failure of the Treasury to roll its debt, when and if ┬áit comes, will probably unfold quickly…but we are not very near it yet and I have no fear of Treasury paper. I have a bigger fear of inflation.

Vehicle sales were weak. Domestic auto sales, despite all the ministrations of the Ministry of Ministrations, have not pushed domestic car sales above the levels that last prevailed in the early 1980s. This is partly due to the fact that the sales over the last decade have been exaggerated by financing deal after financing deal offered by the (now bankrupt) automakers, but of course it’s largely due to the fact that the Unemployment Rate being at 10%. This is another reason to beware of purveyors of “robust recovery” talk. If Unemployment is high, sales of all sorts of things will be low and, unless you can come up with a satisfactory substitute for employment, they will not improve much until Unemployment is actively falling.

Domestic Auto Sales Still Suck

Consumer Confidence also remains in a funk: the ABC Consumer Confidence number this afternoon declined to -49 from -48 despite expectations for a rise to -45.

We had the television on mute so that we wouldn’t have to hear reports of Geithner saying that long-term deficits are a “corrosive threat” (but apparently not so much so that they want to do anything about them; or, perhaps, the Treasury Secretary simply has no influence. Which is more frightening? Well, given the Secretary in question…). The former Treasury Secretary, however, said stuff that couldn’t be missed, or left unremarked-upon.

Paulson said, in an interview on Bloomberg Television pimping his new and categorically inappropriate book On The Brink:

“In this country, none of us like bailouts. I hated the things we had to do. But they were far better than the alternative,” which to Paulson was “unemployment of 20 per cent…millions of additional jobs lost, millions of additional homes lost, trillions more lost in savings.”

Wow, it is a good thing we had Bernanke and Paulson to save us from those things, which I guess according to Paulson were basically guaranteed if the government hadn’t spent trillions and had the Fed monetize part of the resulting debt.

I just have one question: if Paulson and company were so prescient that they knew what would happen if they failed to save the world, then why weren’t they prescient enough to stop the world from getting into that mess in the first place? These are the same guys who professed to be unable to tell when a bubble was forming in real estate (see Chart, source it wasn’t hard to see).

Seems Like Prescient People Should Have Done Something

We are not to simply take Hank’s word that a Great Depression would surely have resulted from their failure to take control of large parts of the U.S. economy and to flood those entities with borrowed money; moreover, if it is the case that the Great Depression would have resulted, then I have news for you, Hank: your actions have done nothing but delay the pain for a few years.

That isn’t to say that I believe the Fed and Treasury ought to have done nothing. Indeed, some small percentage of the programs created during the crisis actually had real (positive!) effects and one in particular (the commercial paper program) probably was the action that stopped the crisis from spinning out of control in a short period of time. But even if Hank could claim that some of those actions were warranted, it is a classically slippery-slope argument to claim that therefore all of them were warranted. Paulson is too smart not to know that; he hopes that we don’t know that.

When I heard that the Administration was planning to do away with “don’t ask, don’t tell,” I thought they were talking about the way the Fed and Treasury have managed the economy over the past year, and I was all for getting rid of that policy. It turns out that policy is about something different.

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