My copy of the new book “Feynman”, written by Jim Ottaviani and illustrated by Leland Myrick, arrived last week and does not disappoint. I discussed it earlier on Reuters.com, “Steady state or dream state?” On the second page of this comic narrative led by one of the most remarkable personalities of the 20th century, Feynman asks:
Different theories of physics are very similar. Maybe that’s just because of our limited imagination … We try fitting every new phenomenon in the framework we already have! … Maybe it’s because we physicists have only been able to think of the same damn thing over and over again. Of course another possibility is that it is the same damn thing over and over again.
I read the words of the great American physicist last night as President Barack Obama was proposing yet another fiscal stimulus plan to a joint session of Congress. Basically Obama gave the same speech as last time and, again, largely avoided discussion of housing or banks. Indeed, the Obama Administration has been fighting against change since the President took the baton from George W. Bush. Witness Dodd-Frank, TARP, HARP, HAMP and various other deliberately ineffective policy initiatives from Washington supposedly focused on the banking and housing sectors.
A decade after the 9/11 attacks and the subsequent boom and bust in the housing sector, Americans remain unwilling and unable to embrace economic change – or to respond affirmatively to this change. Perhaps the biggest change facing us is the ongoing deflation of the bubble economy, which is manifested in stark terms by the reduction in both demand for and the supply of credit. Until we break the cycle of deflation, employment and economic activity will not rebound.
Both Washington and Wall Street remain defiant in their refusal to accept that there are probably still as many losses to be taken on housing and related securities as have already been recognized to date. And there is no concession among America’s political oligarchy that existing banks must be restructured in order to fix housing, restart credit creation and avoid economic catastrophe.
Pollock’s first law, named after American Enterprise Institute resident scholar Alex Pollock, states that debts which cannot be paid must default. In an upcoming article in Mortgage Banking Magazine, he notes that the political class resists real change in existing structures and debt:
Because this iron law and its implications are highly unpleasant, financial actors and politicians strive mightily to escape them, in spite of the fact that they cannot, with scheme after scheme. All to no avail, of course. The massive losses must ultimately be taken. So the questions are not: Will the loans default? They will. Or: Will the losses be huge? They will be. The only real questions are: What form will the defaults take? Who will take the losses? And when will the losses be recognized by those who are going to take them?
Notice that there was barely any mention of broad mortgage refinancing in President Obama’s speech last night, merely a comment about more emphasis on helping profoundly under-water borrowers via the HARP program. But without relief for the millions of home owners that cannot refinance their homes, the economy will not recover and many of these borrowers are likely to turn into future defaults. More defaults mean more deflation, fewer jobs and social instability.
The real world impact of the studied inaction by President Obama can be seen in the increasingly desperate situation at Bank of America. The bank has been selling assets willy-nilly and now has threatened to start closing branches and laying off 42,000 people, Reuters reports. Yet as I discussed in a previous post on Reuters.com, “Housing, debt ceilings & zombie banks,” Bank of America’s parent company needs to be restructured. See my discussion with Aaron Task and Henry Blodget on The Daily Ticker about how a BAC restructuring ought to proceed.
If President Obama was really concerned about jobs, he would pick up the phone and order Treasury Secretary Tim Geithner to start discussions with BAC about a voluntary restructuring with government and industry support. With Geithner, Fed Chairman Ben Bernanke and FDIC Chairman Martin Gruenberg standing around, the President would tell the American people that the bank subsidiaries of BAC are sound, that there will be no layoffs, and that the White House and Congress are directing Fannie Mae and Freddie Mac to move aggressively to refinance every performing American borrower who wishes to do so.
But of course this would require Barack Obama to get some new advisers, grow a set of cojones and start channeling President Teddy Roosevelt — and that is probably not going to happen. Just remember, Mr. President, that inaction does have a cost.