Interest Rate Roundup

Wednesday, January 07, 2009

Job cuts surge ... an investor dives into the distressed mortgage pool .. and more on the deficit

Not much positive to report on the employment front this morning. The latest update from ADP showed a massive 693,000-job drop in U.S. payrolls in the month of December. That was up from a revised 476,000 in November and far worse than the 495,000 job losses economists were forecasting. A lot of people are going to be looking to start digging as part of President-Elect Barack Obama's plan to fund "shovel ready" infrastructure projects.

Meanwhile, the FDIC and Private National Mortgage Acceptance Co. (Pennymac for short) have signed a deal whereby Pennymac is buying $558 million in residential mortgages from the banking agency. The loans come from First National Bank of Nevada, which the FDIC took over after it failed in July. Pennymac is buying the loans on the cheap, and hoping to increase their longer-term value by working out and modifying as many as possible.

Also, that trillion-dollar deficit issue I talked about yesterday is big news in the morning papers. The New York Times tackles it in this piece, which adds the following context on just how big a deficit we're talking about, historically speaking (my emphasis added):

"Mr. Obama was not specific about the size of the deficit he expects, beyond his reference to “a trillion-dollar deficit or close to a trillion-dollar deficit” for the fiscal year that ends Sept. 30. Aides said later that the estimate — in line with what economists have been anticipating given the economy’s rapid deterioration — did not include the costs of the proposed stimulus package, which could add hundreds of billions of dollars more to the red ink.

"At $1 trillion, the deficit would not only shatter the largest previous shortfall in dollar terms — $455 billion last year — but it could also exceed the post-World War II-era record by the measure more meaningful in economic terms, the deficit as a percentage of total economic activity.

"Diane Rogers, chief economist at the Concord Coalition, a nonpartisan organization that supports fiscal discipline, estimated that the deficit this year would hit 7 percent of the gross domestic product. The largest previous record in those terms was in 1983, when it hit 6 percent."

One thing I'll add: Keynesian stimulus, massive deficit spending, and so on is all the rage these days. And most economists seem to think it will work. I would just point out that after Japan suffered twin busts in stocks and real estate, it spent money out the wazoo trying to bring the good old days back.

Specifically, it launched a stimulus package of 10.7 trillion yen in August 1992 ... another for 13.2 trillion in April 1993 ... 6.2 trillion in September 1993 … 15.3 trillion in February 1994 ... 14.2 trillion in September 1995 ... 16.7 trillion in April 1998 ... 23.9 trillion in November 1998 ... and 18 trillion in November 1999. Grand total: 118.2 trillion yen (That's about $1.27 trillion U.S. at current exchange rates). The result: Japan STILL suffered a “Lost Decade” of deflation, lackluster growth and declining stock prices.

Or as the Wall Street Journal recently explained: “Keynesian ‘pump-priming’ in a recession has often been tried, and as an economic stimulus, it is overrated. The money that the government spends has to come from somewhere, which means from the private economy in higher taxes or borrowing. The public works are usually less productive than the foregone private investment.”

Nothing wrong with hoping for the best. But my confidence in a strong recovery is low. The only way to prevent painful busts is to avoid stupid bubbles from inflating in the first place -- a lesson officials at the Fed are hopefully starting to learn.


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