On the same morning the newest Euro-can clunked along came news that American third-quarter GDP jumped 2.5 percent — not far above forecast, but the shape of the gain was a stunning surprise. The strength was in the consumer, a 2.4 percent increase in household spending. Common distortions were absent: no weird upside-downs in trade accounts, and inventories if anything understated gross domestic product. Inflation also waned.
The Euro-can got all the ink, but in any cross-weaving flow of economic data, the most important thread is always U.S. data. The report distributed concussions evenly among all of those who had bet on a new recession; and banged an especially embarrassing knot on the head of the respected Economic Cycle Research Institute. The ECRI had never in its history false-called a recession; two weeks ago it said that the U.S. was either rapidly falling into recession or was already in one.
Nouriel Roubini, the Count Dracula of economics, brushing up his Transylvania accent for Halloween, said he expects a revision all the way down to 1 percent. The strong consumer does not square with September personal income gaining a mere 0.1 percent (nor the 0.1 percent decline in August), but a 2.5 percent GDP announcement — right, wrong, temporary or revised — if you had bought 10-year T-notes down to 1.7 percent, and shorted stocks, you got caught in a huge panic running to the other side of the boat.
The 10-year soared to 2.4 percent, although it’s back now to 2.3 percent and it will take a lot of ugly news to do much better. Mortgages, near 4.375 percent, have ended the refi party altogether. Snide churls needle the Fed, saying, "So much for the Fed’s sell-short, buy-long ‘Operation Twist‘ to knock down long-term rates," but — good grief — nobody stops an avalanche.
Economic data is always ambiguous, if only because it is instantly superseded by guesses at the next reports. Policymaking, on the other hand, tends to turn corners and stay turned. This week brought a turn in housing policy for the first time since meltdown six years ago. On Monday, Oct. 24, Larry Summers wrote for the Financial Times the most compelling policy piece yet, noting among other things that Fannie Mae and Freddie Mac were created as countercyclical agencies, but during the "bubble" aftermath have acted to make the cycle worse. Only antigovernment diehards now fight remobilizing the GSEs (government-sponsored entities). Sadly, there are a lot of those.
A mass-refi proposal for underwaters, "HARP2" (the Housing Assistance and Recovery Program) rolled out this week over the objection of the GSEs’ regulator, the Federal Housing Finance Agency, and its director, Edward DeMarco. We’ll see. Borrower qualification requirements will not appear for three more weeks, and DeMarco has not been the champion of several previous initiatives. President Obama jumped on the bandwagon at the last instant, having offered not one single housing idea in the last 18 months. He does deserve great credit for this week’s student-loan proposal; please, more like that, sir.
Back to Europe, and a scorecard for colonials to follow the action. On Thursday, July 21, the European Union announced a modified European Financial Stability Facility (EFSF), including a private-sector, 21 percent haircut of Greek debt. Markets had a splendid day, with no follow-through the Friday following, and on the next Monday began an eight-week free fall.
The breakthrough deal announced Thursday has no market follow-through Friday. Monday may be as entertaining as July 25, or may take a while; whichever, this new can-kick will have a short roll. It has not one new pfennig (a coin like the U.S. penny in Germany’s former currency) in cash or guarantee. The private-sector write-down of Greek debt (voluntary: "You, you, you and you") will be 50 percent, but limited to the 210 billion euros in private/bank hands, leaving at full-phony market value of 140 billion euros held by the European Central Bank. Thus, the net debt relief to Greece leaves 67 percent outstanding, which on the market is worth 40 percent, and the Greeks can’t pay even that.
The EFSF is to lever up from 440 billion euros to 1 trillion euros, with a method not specified, but aided by new private and foreign capital. European ministers are off to China, expecting it to throw in 100 billion euros — a deal so good that the Germans have passed on it.
