Ilargi: After many winters living in Montréal, you get a sense of bewildered amusement when you visit Europe in winter and see entire societies come to a grinding halt because of a few inches of snow. Montréal shakes off a foot, or even two, of snow, within hours. In countries like Britain, one tenth of that is sufficient to slow down just about everything to a grinding halt.
It all makes it that much funnier to see those few inches of snow being blamed for the British economic meltdown in Q4 2010. Besides, Stoneleigh and I were actually in Britain doing a lectures tour in the last week of November 2010, and the bad weather didn’t start till the day we left, November 30 (got out just in time). In other words, the UK economy shrank by a “shocking” 0.5% over the quarter, but during the first two-thirds of that quarter there was nothing that even the Brits could name “extreme weather”. Ergo, the UK economy is simply in real bad shape, rain or shine. Here’s Graeme Wearden reporting for the Guardian:
The UK economy shrank by a shock 0.5% in the last quarter of 2010 as Britain’s recovery from recession faltered. Most of the unexpected contraction was caused by the wintry weather that gripped Britain last month, the Office for National Statistics said. Without it, GDP would probably have been flat – suggesting that the UK economy had already run out of steam before the snow hit. Economists said the first estimate of GDP for the last quarter was much worse than expected, and meant that Britain could now suffer a double-dip recession.[..]
George Buckley of Deutsche Bank said today’s 0.5% decline was “quite shocking”, and questioned whether the snow could really be blamed for the drop in economic activity. Hetal Mehta at Daiwa Capital Markets said it was “an absolute disaster for the economy”. “It seems that the economy is incredibly vulnerable, and with the fiscal tightening yet to fully bite, we will have to brace ourselves for a bumpy ride,” Mehta said.
Charles Davis, managing economist at CEBR, was concerned that the UK economy experienced a “complete loss of momentum” at the end of last year. “Few of us could have expected such a sharp contraction in output and the United Kingdom economy now faces the prospect of returning to recession [..]
Ilargi: Oh, my, even the “experts” can’t seem to agree. What to do? What does it all mean?
Households face the most dramatic squeeze in living standards since the 1920s, the Governor of the Bank of England warned, as he reacted to the shock disclosure that the economy was shrinking again. Families will see their disposable income eaten up as they “pay the inevitable price” for the financial crisis, Mervyn King warned. [..]
Mr King said he was unable to offer any imminent hope of a rise in interest rates in coming months because of the poor economic outlook. Savers and “those who behaved prudently” would be among the biggest losers in the squeeze, he admitted.
Disposable household income has been hit by sharp increases in the cost of food, fuel and tax, coupled with restricted wage rises for most workers. Last year, take-home pay fell by about 12 per cent, official figures showed, and the trend was expected to continue in 2011. The governor warned that the Bank “neither can, nor should try to, prevent the squeeze in living standards”. [..]
He added: “Monetary policy cannot be based on wishful thinking. So, unpleasant though it is, the Monetary Policy Committee neither can, nor should try to, prevent the squeeze in living standards, half of which is coming in the form of higher prices and half in earnings rising at a rate lower than normal.” “The Bank of England cannot prevent the squeeze on real take-home pay that so many families are now beginning to realise is the legacy of the banking crisis and the need to rebalance our economy.”
Ilargi: I’d like to feel able to praise Mr. King for his honesty, if only because I can’t see The Bernank following his example -yet-, but I can’t. “The King”, like “The Bernank”, has bailed out his banks with taxpayers’ money, and now tells those very same taxpayers that the “squeeze” in their pay is inevitable, while at the same time the City of London has gotten carte blanche from both Mervyn King and 10 Downing Street to hand out whatever bonuses to their bankers they see fit.
The major UK banks, just like those in Lower Manhattan, only continue to exist today because trillions of dollars were transferred from Main Street to Wall Street. That’s the whole story, even if it’s not distributed in print. And now Mr. King claims he cannot “prevent the squeeze” for everyday people, while London traders go home with multi-million dollar bonuses. The main take-away from that is not even that the “standard of living is plunging” at its fastest rate in almost a century, it’s that the standards of honesty and dignity, of how to build a society, are plunging. Corruption and fraud have free rein. King’s right when it comes to the end result, though, of course: the British future comes dressed as misery.
Yes, your future looks bad, and Mervyn King is telling you it would have been worse if you hadn’t bailed out the bankers and made sure they got their X-mas bonuses. Come to think of it all that way, how is it possible that Britain doesn’t yet look like Tunisia, Yemen or Egypt, why are there no people in the streets, no riots, no nothing of the kind? It’s not as if the Brits have rosier futures ahead of them then the Egyptians. But then they likely missed that part. All parties are still stuck squabbling over the right path to -resumed- growth. But real economic growth will not return anytime soon, if ever, in the western world, no matter what numbers anyone comes up with.
The European markets are up again, one day after the plunge in UK GDP was announced and Mervyn King gave out his “this is a Depression era” warning. It’s like reality doesn’t matter anymore.
Back in the USSA, there was a report that should be as alarming as the UK GDP report was: US home prices fell 1.0% in November. Yes, that’s a 12% annualized rate.
There’s quite a bit of confusion over the exact numbers, but hey, that keeps people in a job, doesn’t it? The S&P Case/Shiller Index says prices were off 1.0% for the month, and 1.6% YOY. The FHFA, however, says that November 2010 prices were down 4.3% (or even 4.42%) from a year ago.
Our roving reporter VK has a good one on this: “The Case-Shiller index is only 3.3% above the low it reached in April 2009. Yet stocks are 80% higher…” Things like that are possible only when reality doesn’t matter anymore.
Still, shocking as these numbers may be to some, a far more interesting battle takes place behind the Washington curtains. The Obama administration has again postponed the deadline for its “grand” report/scheme on what’s going to be done with Fannie Mae and Freddie Mac. What else is new? They’ll have to come with something, though, and soon.
There is no perfect solution to the conundrum. Not even close. There are only terribly bad “solutions” on the table. And the one that will be picked is sure to benefit Wall Street and screw over Main Street yet again. Only, you’re going to be screwed on this one an order of magnitude greater than anything you’ve seen so far.
And that’s what you should take away from the rising stock markets. They’re not signs of a recovery. They’re signs of an ongoing and accelerating wealth transfer behind the scenes. And Fannie and Freddie provide a great example of just that.
On Monday, Fannie and Freddie’s stock both went up some 20%. On Tuesday, when the home prices indices were known, both rose around 30%. The total price increase in the past month has been about 100%. Note that Fannie Mae and Freddie Mac were delisted from the NYSE on June 16, 2010, and are presently traded on the Over-the-Counter Bulletin Board “as long as there is trader interest”. Well, there’s plenty of that, apparently: trading volumes are high.
Photo: The Automatic Earth
Photo: The Automatic Earth
Note also that it’s, frankly, insane to allow commercial trade in shares of companies which have received hundreds of billions of dollars in bail-outs, and which have further potential losses on their books that run into the trillions of dollars. That is perhaps best described by a term like Moral Hazard Squared: the recent uptick in Fannie and Freddie shares has a whole lot to do with expectations and/or insider information about the imminent White House decisions on the future of the GSEs.
It’s unsure whether the option of handing their “golden status” of operating with implicit 100% government guarantee to Wall Street will be fully implemented. But the very fact that it’s even considered should tell you enough. What is indeed certain is that the only option that makes sense, namely to mark to market everything on Fannie and Freddie’s books, distribute haircuts in a fair manner and get it all over with, is off the table (if it were ever on). What Geithner et al are doing, and having a hard time with, is trying to find a way to assure that the toxic paper inside Fannie and Freddie doesn’t contaminate Wall Street any more than it already has.
I have many times called Fannie Mae and Freddie Mac (plus the FHA, FHFA, Ginnie Mae, the whole quasi-governmental criminal enterprise), the greatest perversity and the biggest crime ever perpetrated on the American people. There have always been, and always will be, voices that claim the GSEs have been beneficial to the people, that they make homes more affordable for Jack and Jill. And you know what, maybe that’s been true once, many, many, years ago. But the very idea behind them has also always been the ideal tool for Wall Street to squeeze every last drop out of homebuyers, turn them into debt slaves, and throw them out of their homes when the last drop has evaporated.
That this is so should be clear to everyone now. But it’s too late to solve the issue in a way that will not bring a world of pain to Americans. The banks control Washington, cue: JPMorgan icon Bill Daley as Obama’s new chief of staff, and the banks stand to lose their shirts and then some if Fannie and Freddie are dissolved in any possible way that is aimed at minimising the suffering of the herd of US citizens.
Who are not rising up in protest anyway like the Tunisians and Egyptians do, no more than the British, since they’re not aware that it’s moments like these that seal their fates. Our people are watching the stock markets, listening to pundits and politicians, and telling themselves things are looking up and prosperity is just around the corner.
One headline after yesterday’s State of the Union said: “Obama sees global fight for US jobs”. Mother of God, how cynical is that? Who are you going to fight for those jobs? The Chinese, who make $1 or $2 an hour? You, with your $300,000 mortgage?
Mervyn King, the Governor of the Bank of England, is damned right that the standard of living will plunge at the fastest rate since the 1920s. And it won’t just be in England. The same thing will happen in North America. As we at The Automatic Earth have long since maintained, we think it will be worse than the 1920s, because the relative levels are much worse, and corruption on the one hand and complacency on the other are much further evolved.
Mervyn King is not right when he says there’s nothing that can be done, though. And that has to do with the fact that we are not -only- in a financial crisis. We are in a political crisis, in which politicians elect to pursue not the interests of their constituents, but of those that donate most to their campaigns. Voting out incumbents doesn’t solve this: 99% of all parties and politicians at all levels proceed along these same lines.
The only thing that could possibly work is to get money out of politics. Alas, money IS politics today. 1920s it is, then. Might as well get ready.
This post originally appeared at The Automatic Earth.
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