Guest Post: The Boom Before The Bust

Tyler Durden's picture

Submitted by The Pragmatic Capitalist

We're at a truly fascinating crossroads in modern economic times.  Financial theory as we have come to know it will be changed forever based the recent actions of Ben Bernanke and global central bankers.  Millions of textbooks will be rewritten in the coming 10 years and careers will either flourish or die on the back of the actions of these bankers.  Those in favor of Bernanke's legendary helicopter drop are celebrating a 6 month rally in equities, but a vital piece of the recovery puzzle remains missing.  While Bernanke and Co. fire up the printing presses, and the banks sell the recovery hook line and sinker to the investing public, we continue to see very weak consumer trends.

As we sit on the one year anniversary of the demise of Lehman Brothers it's most appropriate to ask what we have achieved over the last few months and years in regards to policy action.  Many say we avoided the second great depression and praise Bernanke for his innovative and swift actions.  Others (myself included) believe we have simply kicked the can down the road and foresee an end to Bernanke's career that very much mirrors Mr. Greenspan's.  As we noted back in August, Bernanke's real report card is less than impressive:

  • 4 million lost jobs
  • 4.6 percentage point surge in the unemployment rate
  • 20% decline in the S&P 500
  • 30% plunge in house values
  • A 3.5% reduction in real GDP per capita
  • 11% decline in the trade-weighed dollar
  • 109 failed banks (almost matching the total from the prior 13 years combined)

If you think about the cause of the credit crisis (excessive debt, excessive leverage and a banking sector that is too large and too powerful) and what we have solved in the last year it's actually quite apparent that we haven't solved any of the structural problems that actually caused the crisis.  The debt in this country is still extraordinary, leverage is making a comeback and the banks have grown larger in what has to be the most incredible power grab in modern economic times.  Meanwhile, Bernanke is like the doctor who keeps the cancer patient on life support, but can't for the life of him, figure out how to extract the cancer and create a healthy self sustaining life.  The system still has the cancer, but the recent shot of Demerol has the patient feeling better.  50% better. 

At the heart of this problem is the consumer.  The bankers will tell you that our long-term structural problems reside in the banks (which is why they needed our help in the first place, remember?), but in reality this is a consumer driven problem.  And the problems confronting the consumer are many.  Unfortunately for Bernanke these are long-term structural problems that can’t be fixed with a printing press and a helicopter.  The consumer continues to struggle under the weight of high debts, stagnant wages and massive job losses. The latest consumer credit report, however, showed that the deleveraging in the private sector is actually picking up steam:

Meanwhile, for the bankers, it is business as usual. We can be certain that Christmas 2009 will be disappointing for everyone's children in the United States except for those whose parents are employees of Goldman Sachs and JP Morgan - record bonuses are coming.

Unfortunately for the Fed and Bernanke you can lead a horse to water but you can't make it drink. Lending is a two sided coin and as consumers continue to tighten their purse strings they simply aren't borrowing at a rate that the government would like to see. This throws quite a wrench in Bernanke’s reflation plans. Much to Ben Bernanke's dismay the velocity of money simply isn't budging. You can drop money from a helicopter, but if there is no one to borrow it then your hopes for a credit driven recovery become very dim.

Even the incentives such as the cash for clunkers program prove to be having little positive impact on borrowing and overall retail sales as investors simply reallocate spending money.  It will be interesting to see what sort of impact this program has on long-term spending.  The early signs from the back to school season are nothing to cheer about.  It looks like mom and dad bought a new car, but decided junior didn’t need the textbooks for school.  The near-term positives of the government stimulus appear fine in theory, but are only compounding our long-term problems.  The U.S. government is borrowing money to help debt-laden consumers borrow money to purchase an asset they likely don't need.  The sheer stupidity behind such a government program is literally mindboggling.   Meanwhile, in return for their generous bailout money, the bankers continue to jam taxpayers with higher credit card rates and more stringent lending standards.  BNP elaborates:

One reason consumers may not be responding expansionary Fed policy is that lending standards continue to tighten and terms are expensive. Spreads between the rates charged on auto loans and Treasuries remain elevated, although it is worth noting that auto loan rates are available only through May. However that is not likely the whole story, consumers have lost tremendous amounts of wealth and income and face continued uncertainty about job security. It is worth noting that amongst all of the green shoots in housing and manufacturing, consumer spending overall has remained very subdued. Unlike the labor market, consumer spending does not tend to lag the cycle, but help lead it so we continue to believe a subdued recovery seems likely.

Many have already crowned Bernanke as the next "Maestro" (sounds familiar, right?), but we will not know whether Bernanke succeeded for many years.  Ignore the talking heads who tell you that Bernanke saved the global economy.  The same mistake was made by many back in the 90's when Greenspan tried to print his way out of trouble. Thus far, all we know is that Bernanke has whipped out the same exact cheap money playbook that Mr. Greenspan always turned to.  The curse of cheap money has been felt by everyone over the course of the last 30 years as we promote an unstable and deeply harmful boom bust cycle:

David Rosenberg of Gluskin Sheff said it best:

All the growth we are seeing globally this year is due to fiscal stimulus; not just here in Canada and the U.S., but also in Korea, China, the U.K., and Continental Europe too. For 2010, the government’s share of global growth, by our estimates, will be 80%. In other words, there are still very few signs that organic private sector activity is stirring. For a Keynesian, government stimulus is necessary, but the question for an investor is the multiple one attaches to a global economy that is still relying on a defibrillator. The problem is that governments do not create income or wealth, and today’s stimulus is really a future tax liability. Curiously, that future tax liability is likely going to pose a roadblock for the return to a “normalized” $80 operating EPS estimate that strategists are now starting to pen in for 2011.

Albert Edwards of SocGen foresees a continuation of the deleveraging cycle that will be carried on the back of consumers:

The problem is that after the boom there will be a bust. The issue now is one of deleveraging and the deflation that is starting to unfold. The problem is that Bernanke is a slave to Milton Friedman’s view of the Great Depression (at Friedman’s 90th birthday Bernanke promised that the Fed would never allow another Great Depression to occur). The Australian economist Steve Keen’s observation that “Bernanke’s dilemma is that he is living in a Minskian world while perceiving it though Friedmanite eyes explains his actions to date. It also explains why he will fail.

Will Bernanke succeed using the same cheap money game plan that Greenspan used?  Perhaps in the short-term, but in the long-term it's likely that Edwards is indeed correct.  We are simply promoting a boom bust cycle that is built on no real organic strength as is evidenced in recent consumer trends.  As Anna Schwartz said, we are fighting "the last war" and she is deeply concerned that we have lost it.  The Fed has vowed to print our way out of this mess while allowing mistakes to go unpunished.  The long-term bulls are dancing in the streets in recent weeks despite stock prices that are still 20% off their highs, 10% unemployment, a dead consumer and housing prices that are 30% off their highs.  Don’t lose sight of the forest for the trees here.  This isn’t a sprint we’re experiencing; it is likely to be a marathon.   They say history has a way of repeating itself and this movie looks like one I’ve seen one too many times during the Greenspan era….The best thing that might result from all of this is that Ben and company actually are fighting the “last war”.  Rather, the “last war” we allow them to so foolishly start….Unfortunately for the rest of us, that likely means we have more booms and more busts ahead of us. 

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straightershooter's picture

A dead Consumer

That's why Bernanke cannot succeed.

Consumer, as a whole, hit the ceiling of debt limit and broke. A dead consumer implies a dead business ( consumers are the final payer of all business activities) and a dead government ( consumers are the ultimate payer of all taxes). Unless Bernanke can figure out a way to revive the consumer, all his printing efforts can only window dressing the balance sheet side of financial institutuions and capital market, but not repairing the income side of consumers which ultimately dictate that the income side of financial institutions and businesses must suffer and face inevitable collapse via bankruptcy.

Bernanke will become the FED chairman presiding the greatest second great depression and prove that his PH D thesis is nothing more than nothing, a failed Friedmanism ( or that Fried Man).

chumbawamba's picture

I definitely hit the debt limit.  I purposely maxed out my credit cards into the Summer and then stopped paying my bills when I got cut off.  I call it the Private Citizen Bailout Facility, or the Obama Bailout for short. You should try it, too!  Be sure to change your telephone number on all your accounts so when the banks start calling they'll have some bogus number to dial.  I have my auto-attendant running interference for me.

Debtor's Revolt!

I am Chumbawamba.

BM's picture

I think everyone who disagrees with the idiocy that's currently happening in the banking industry - the bailouts, outright lying about losses via mark-to-fantasy accounting, record bonuses..., should stop paying for mortgages, max out credit cards, and withdraw all deposits. instead of whining about how the life is unfair to poor me.
it is your money in their bonuses. from your deeply underwater mortgages, and from your usurious rate credit cards.
while the bankers enjoy their record bonuses, you'll be saddled in debt for decades. brace yourselves.

chumbawamba's picture

Exactly.  I also closed my bank accounts.  Well, truth be told, my bank closed them (after 15 years of being with those fuckers!)  But I guess they didn't like the negative balance for over a month.  Stupid bastards.


I am Chumbawamba.

molecool's picture

"I call it the Private Citizen Bailout Facility"

LMAO - snort!!!

I'm cracking up over here... sniff...

Anonymous's picture

What can they do to you? Didn't they change the law so they can garnish wages if you don't pay all your maxed out cards?

Spartacus's picture

Goldman’s O’Neill Sees ‘Silly September’ as Yen Appreciates Look at this arsehole's arrogance. Scant regard for Japanese, I would say.
Pizza Delivery Man's picture

"The bankers will tell you that our long-term structural problems reside in the banks (which is why they needed our help in the first place, remember?), but in reality this is a consumer driven problem."

Actually, in reality the real problem is the government. The relationship between the consumer and the banker were brought together by the government. This is understandble. There were people who wanted votes, they offered people things they couldn't afford, and the politicians influenced GSE's to provide what (the politicians) promised. That behavior cascaded through every facet of our economy and as such we were ushered into the age of irresponsibility.

This problem in it's origin began with politicians promising things to people they couldn't afford...The very first dominos that fell didn't begin with investment banks, it began with GSE's (FNM/FRE). As unpopular as this might sound WS banks were a victim, just like the consumer.

Business is based on trust. When the trust is gone, it's time to move on...

Anonymous's picture

WS banks were a victim? Just like the consumer (was a victim?)

I thought I'd heard everything, but, there YOU are.

The only victims here are those who saved their money, consumed frugally, and paid their bills on time.

We have gone thru looking glass, Alice.

SlimeyLimey's picture

... and people believing them.

"This problem in it's origin began with politicians promising things to people they couldn't afford..."

Anonymous's picture

"There were people who wanted votes, they offered people things they couldn't afford, and the politicians influenced GSE's to provide what (the politicians) promised."

Actually the problem lies with people who believed the promises that politicians made but should have rejected as untenable.

cougar_w's picture

OK, self-serving pols are a huge part of the problem.

However, they have been bought by the financial industry (remember the repeal of G/S?) therefore much of what they do that is wrong is at the behest of their masters.

The fact that a few large financial institutions were allowed to implode (Lehman) or be absorbed (Merrill) is meaningless as it works in favor of certain other financial giants, who had it in for Lehman for sure.

The fact that regional banks are going belly up is likewise meaningless for the same reason.

That shareholders are being punished is meaningless because the playerz pulling the strings are making off with the loot, and will create new enterprises with their winnings or just sit back and watch Rome burn.

Let's not confuse the financials industry with key playerz; the playerz have no more loyalty to their industry than they do to the taxpayers, and see businesses as hosts to be bled dry. This has been going on for 30 years, and is a large part of the reason that America has lost such a huge portion of its manufacturing base to offshoring and outsourcing. Shareholders will be burned, but most of the participants in the industry itself are now playing the end game and just want to maximise their individual wealth until the wheels come off.

At all turns in this drama the taxpayers will pay. Bailing out failed banks looted into bankruptcy, paying bonuses, rescuing depositors and shareholders. Bled until there is nothing left. And after that, the taxpayers get the ashes.

Maybe it had to be this way. Maybe it always would end like this. But it's a sad commentary, and probably the idea of free-market capitalism at the global scale will die as a result. I don't know what comes after, but you might have to look back 600 years to recognize it.

Anonymous's picture

there is a great article by barry eichengreen

in the sept oct issue of foreign affairs about the dollar's stance as international reserve currency and the likely future of the SDR, the renminbi and the yen.

i'm no expert and i defer to barry's expertise in his claim that the tremendous inertia behind the system impedes any sudden changes to the status quo, but I think he doesn't give enough treatment to changes in political/military developements that could result in various nations rapidly changing their policies vis vis reserve currrencies and the imf.

furthermore, he doesn't mention russia and opec's push to sell oil in non-dollar currencies. And i believe that is relevant to the discussion.

i really feel that someone from zerohedge should post the article, or call barry and at least put up some discussion or a posting on it.

Anonymous's picture

I don't see any miraculous new productivity gains (like debt securitization of the '80s, or the PC of the '90s, or real estate flipping of the '00s, etc.) coming along anytime soon to drag us out of this great recession... I think many Americans are taking this opportunity to permanently stop adding more crap made in China to their overflowing houses. Consuming is so yesterday! Let's instead take this opportunity to improve our world by picking-up some trash or coaching little league or putting burning bags of dog shit on bank execs doorsteps or something more life-enriching like that.

Anonymous's picture

I like all those suggestions ;-))

KeyserSöze's picture

Chapter 2  is called "The Name of the Game is Bailout" Creature from Jekyl Island  -1998  (Surmized from previous books see ZH for links on Mullins)

I am getting kinda sick of people thinking that Ben is stupid.  ...STOP!

They have managed to convince many of us that debt is good as if it is noble to have debt and credit much like a crack addict who needs a fix. 

I am not trying to be insulting just rather pissed at what we as country have allowed ourselves to become, stupid -mindless  collective drones who accept the status quo and believe that these people are stupid.  Seriously...


At some point there will be a very rude awakening. Very rude awakening! 

We (as a country) will either shrivel in the corner like the meager politically correct sheep we have become or they will be thrown out on their ass like Andrew Jackson did....judging by our fat uneducated population I think we are in BIG BIG trouble....

Anonymous's picture

When the music stops, some people are going to find out that there are more angry people with weapons than the giant piles of cash can stop.

Some of those pulling the levers have lost sight of the simple fact that when push comes to shove, they're vastly outnumbered. If the pitchforks come out, no government, police force, or military can save them.

This is a simple military fact.

chumbawamba's picture

That's why they have Blackwater.  Er, I'm sorry, Xe.

I am Chumbawamba.

Anonymous's picture

That's very true. I don't think the powers that be realize that if the general population reaches a breaking point they will full on kill them. I think our corporate overlords can only comprehend the consequences in terms of finance or lawsuits. They need to realize that their lives could be at risk.

Right now my fear isn't the people at large but one or two completely broken disillusioned folks gradually morphing into the next McVeigh with Wall St. in the cross hairs.

Anonymous's picture

What are these angry mobs even waiting for if it's such a forgone conclusion? Lack of balls?

cougar_w's picture

There will be no revolution. The spirit of forging one's own destiny was lost 3 generations ago.

And we are 3 generations away from getting that spirit back. but 60 years of deprivations will certainly do the job.


Anonymous's picture

I can tell you that I was in DC on Saturday for the march. I'd say there were enough pissed off (Taxpayers) people to pack about 8-9 Rose Bowls.

cougar_w's picture

That many people could be rounded up and sent to Wyoming within 3 hours.

When we get to 40 million people at the barricades, I'll be impressed.


MinnesotaNice's picture

Very well written paper...

"As Anna Schwartz said, we are fighting "the last war" and she is deeply concerned that we have lost it."

I am with Anna on this one... that is what I feel everyday...

MinnesotaNice's picture

It is referenced in the article referring to the 'boom-bust' economic cycles that we keep creating... we will eventually loose the 'war' and it will be one big 'bust'.

ZerOhead's picture

Speaking of busts... the one shining thing about these high unemployment levels is that the quality of strippers in the clubs has never been better!

Hephasteus's picture

I can't agree with ya. This "thing" is getting it's butt kicked. Harder and harder day after day.

MinnesotaNice's picture

Anna is referring to the futility of the boom-bust cycles we keep creating... the jig will be up and it will just be a big 'bust'.

cougar_w's picture

Seems like TPTB assume the occilations are self-damping. They don't have to been. The system may have no stable equilibrium toward which it swings. If not, it may eventually swing far enough to one extreme to break.

A broken system does not come back. It is replaced. Replacement is a very ugly and long-term prospect from which nothing now present will emerge intact.


lynnybee's picture

You can lead a customer to the store, but, you cannot make him open his wallet.



alien-IQ's picture

Slightly off topic but I thought I'd mention something that was brought to my attention

Sept. 11, 2001 Dow closed @ 9605

Sept. 11, 2009 Dow closed @ 9605

What are the odds of this? Is this mere coincidence?

Pizza Delivery Man's picture

No...Goldman Sachs planned it


Anonymous's picture

there is absolutely no chance of that happening
as a random act of kindness but certainly as a
planned act of cruelty....

that was a signal from the oligarchy to other
oligarchists that they are in control and
that some traumatic event is imminent....

shit is going to fly by the guess
is that 20 days from now or on 9/20 we will see a dramatic
catastrophe either in the states or overseas....

this is not a joke....the rockefellers, bundys,
harrimans, bushes, and windsors have something
evil in store for us....

Anonymous's picture

after looking at the calendar i say that we are 20 business
days from a mess....

Lionhead's picture

Here's some real time proof of lack of consumer green shoots. As an ex Customs broker, this time of year should be the busiest for imports. Not this time; watch Dry Ships stock zoom tomorrow. Extremely bullish...


Anonymous's picture

I happened to drive the length of the Long Beach (California) port 10 days. Hardly saw a ship. Having never been there before I thought 'Maybe it's because it's Sunday....'

Anonymous's picture

And acres upon acres of U-P locos and train cars are being parked on the storage rails in San Bernardino, CA.

Even the hobos are complaining about transportation problems.

Nuthin' like a good old fashioned post-recession inventory ramp up.

YeeHaw !!!

Anonymous's picture

What happens with simultanneous asset deflation and currency implosion...our houses and all the crap we buy is getting cheaper, but the dollar is cratering at the same time...

What would things look like with a strong would be horrific...

TumblingDice's picture

"We can be certain that Christmas 2009 will be disappointing for everyone's children in the United States except for those whose parents are employees of Goldman Sachs and JP Morgan - record bonuses are coming."

A hopeless optimist might interpret this as a good trend. Maybe will see the decoupling of happiness from money. (indeed this could lead to a decoupling of our society from this dirty money that we know as the federal reserve note... *fingers crossed*)

They might get a Lexus for Christmas but they'll have to wonder why everyone hates their daddy. Children of The Salt of the Earth will hopefully find that family and friends are the true measures of wealth.

Pizza Delivery Man's picture

Goldman Sachs/JPM didn't steal from the taxpayer.

Government officials GAVE them the money.

If traders at GS/JPM are driving nice cars on your dime don't blame them...

Look at the politicians who handed it to them on a silver platter.

If someone gave me a million dollars...I'd take it.

Anonymous's picture

The reason the government gave them the money is because GS/JPM gave politicians substantial campaign contributions. If GS/JPM is buying influence so that politicians act on their behalf at the expense of the general interest, then I will go ahead and blame them as well.

PS: I love this site.

Anonymous's picture

it takes two to tango.

Anonymous's picture

Good grief !!

Who was it who gave all that stolen money to
Goldman Sux & JP Mendacious PDM???
Would it have been Hanky Panky.
His former employer being???
Who does BBernanke work for??
Either you are very dry with your sense of humour or a GS troll.

JohnKing's picture

Not to worry about the holidays, Obama will be rolling out "Cash for Christmas".

kujo's picture

Falling tax reciepts will be the next crisis; beyond what we are already seeing on state levels, especially in small towns and rural counties. The scourge of rural America, meth, is comsuming all available resourses in terms of law enforcement and health care and family services and the very soul of many of these communties. We have to figure some way to deal with this or we risk the very backbone of our country. I think we start by becoming active on a local level economocally and politically. Get to know your neighbors, start co-ops, neighborhood watches, whatever.  It's really the only way to build any type of political power.  This may be our only hope for a peaceful resolution. People are pissed, those who are paying attention anyway.

Anonymous's picture

As a muni analyst, I can assure the dear readers that the above post is true. Municipalities mostly rely on property taxes to fund operations. Furthermore, in almost all states the local govt. receives its share of property taxes based on the prior years' valuations. I.e. The City of Cleveland, OH, is right now receiving tax receipts based on Jan. 1, 2008 valuations. Assuming that the county assessors do their job correctly, and reflect the devaluation of real estate from 1/1/08 to 1/1/09, we could see revenue drops of 10-30% from today's already reduced levels.

ZerOhead's picture

I thought the mil rates were derived from the municipal budget divided by total assessed value base. Property value drop would not affect net municipal receipts. The revenue drop would be  primarily due to those who could not pay the taxes... they'll get that back when they foreclose... maybe.