Go Ask Alice When She's Ten Feet Tall.

Remember the great Jefferson Airplane song, "Go Ask Alice"?   

** I am an idiot. The song title is "White Rabbit"

One pill makes you larger
And one pill makes you small
And the ones that mother gives you
Don't do anything at all
Go ask Alice
When she’s ten feet tall

And if you go chasing rabbits
And you know you're going to fall
Tell them a hookah smoking caterpillar has given you the call
Call Alice 
When she was just small

When the men on the chess board 
get up and tell you where to go
And you just had some kind of mushroom
And your mind is moving slow
Go ask Alice
I think she'll know

When logic and proportion
Have fallen sloppy dead
And the white knight is talking backwards
And the Red Queen's "Off with her head!"
Remember what the dormouse said

Feed your head
Feed your head

When I think about the potential for a sustainable economic recovery and some of the "positive" data coming out of housing, bank earnings and industrial production, I keep coming back to the last lines of "Alice"

When logic and proportion
Have fallen sloppy dead
And the white knight is talking backwards
And the Red Queen's "Off with her head!"
Remember what the dormouse said

Feed your head
Feed your head

Let's take the $3 billion "Cash for Clunkers" program.  By many accounts, this program has helped with regard to clearing dealer inventories and actually increasing auto production and employment. I will leave aside for a moment the "cock-up" that is occurring between dealers and the government regarding actually getting paid the $3,500 to $4,500 owed to the dealers.  There is something going on right in front of our eyes that should be making our heads spin.  The dealers are offering fantastic financing programs to buy the new cars.  General Motors, one of the two automakers in the private equity firm known as The United States of America, is offering ZERO PERCENT FINANCING FOR 72 MONTHS! Doesn't that bother anybody?  How's the underwriting on these loans?  How much of this dealer financing is actually coming from the Fed's TALF program (the program where the Fed is lending on very generous terms to buyers of asset backed securities, backed by such things as AUTO LOANS!!)?  We are trying to stimulate ourselves out of the Grand Canyon size crater left by our consumer debt explosion with MORE consumer debt.  Moreover, there's an excellent chance that the government has their hands in every part of the transaction!  And remember, how is the government paying for this $3 billion?  It's borrowing too!

Let's think about housing now.  Last week we got some favorable numbers on existing home sales and housing starts, although for the life of me I can't understand how increasing housing stock when we are drowning in unsold inventory is a positive.  I guess for the employees putting the work in, it's a positive so I will happily concede that.  However, there are two things that again go back to the line, "When logic and proportion have fallen sloppy dead."  The existing home sale numbers included 31% forced sales. While it is certainly a good thing to at least have houses trading hands, are they necessarily moving to strong hands?  Remember a couple of weeks ago the Wall Street Journal highlighted the actions of the FHA and GNMA? The New Fannie Mae

The government has gotten into the subprime lending game!  The amount of loans the FHA now insures has grown to $560 billion and they have the blessing from the powers that be to grow to $1 trillion. The FHA is making loans to shaky borrowers at 97% loan to value.  A lot of those loans are going into the take out of foreclosed homes.  The potential for just kicking the problem down the road a year or so (if not a few months) is very high in my opinion.  Additionally, we have Freddie and Fannie guaranteeing loans that have loan to values of 125% (meaning the value of the home is 25% greater than the amount of the loan) and losing about $20 billion a quarter.  Moreover, we have attached to these deals a $8,000 first time home buyer tax credit.  Kind of sounds like the "Cash for Clunker" program on a much larger scale no?

The other thing about housing that should be scaring the hell out of everybody is the rise of prime mortgages falling into delinquency.  Job loss is now translating into housing loss.  Loan modification will hopefully help here, but to do so will mean very large hits to bank balance sheets.  Last I checked banks can't afford to take too many more losses.  Therefore, the prospect of loan modifications just transfers losses to the already battered and barely functioning banking sector.  We need a functioning banking system to recover.  Right now, with the FDIC nearly broke, the banking system is broken too. The earnings we actually see from our large banks are again, coming from the government.  If you take away the free funding and the massive Fed buying programs that are generating big trading gains what are you left with?  

The rise, and the trajectory of the rise in prime mortgage delinquencies and defaults will keep adding to the foreclosure supply.  It's like shoveling the snow on the driveway in the middle of a blizzard. Every time you think you've made progress, Mother Nature drops another six inches on you.

I hate to be a bummer here, but it seems like the vast majority of economic activity is coming from government borrowing and spending/risk taking (I assume that I don't have to get into our little fiscal mess here).  I just don't see it as being enough to spark the private sector into any real action.  Rather, I believe that all these programs are doing is putting taxpayers at even greater risk while making a already ugly fiscal picture even uglier.   

Feed you head.

Comments

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[Ron]

Obama committed to fractional reserve banking, the system, will continue unabated just upon taking office. Can't find the reference/video.

[eric]

Sorry Marty. I will correct.

[marty balin]

The song is named White Rabbit, not Go Ask Alice

[fletch]

e it's all very simple. dc's finest are doing the only thing they do competently. kick up lots of dust and bluster, then point fingers and place blame on others for their own incompetence (pocketing a few shekels out the side door for theirownselves all the while of course). in the end, stalling becomes the solution - the reality that serves itself - and before u know it another election cycle has come and gone. what continues to boggle the mind is why the american people don't see through it and why they keep sending the same morons back to hit re-set and repeat the cycle.(?).