The Fed and Treasury propped up the banking sector fearing that a collapse would choke the life out of the economy.  Credit had to keep flowing, or the economy would grind to a halt, and this was particularly true in the housing market.

Today, the banks are indeed making mortgage loans again, but not quite the way the government intended.  As the Wall Street Journal reports, “Banks Load Up on Mortgages, in New Way.”

Rather than use TARP funds to make mortgage loans, the newly risk-averse banks are instead using the funds to buy government-guaranteed Ginnie Mae bonds.  And they’ve been buying them by the truckload.  Read the rest of this entry »

We’ve written in past posts about Lord Keynes’s “Paradox of Thrift”  and how we are, in fact, experiencing it today.  In a nutshell, the paradox is this: saving money is beneficial to the individuals who do it but negative for society as a whole, as our modern economy requires consumer spending to function.  We were interested to see Dennis Gartman picking up on this theme in today’s Gartman Letter.  Gartman wrote,

“Keynes’ ‘Paradox of Savings” is taking centre stage these days here in the US for the once haunted US savings rate…which had fallen to less than zero only a few years ago…is rising swiftly and will continue to rise even more swiftly in the coming years as ‘Boomers’ face retirement and as net worths have collapsed over the course of the past three years.”

Well said, Mr. Gartman.   We’re glad to see Gartman following this theme, as it’s nice to know we’re not the only voices out there who deem it important.  

Gartman believes that the savings rate will eventually surpass the unemployment rate—which is a moving target!  We expect both numbers to remain stubbornly high for several years to come.  And every attempt by the government to “stimulate” the economy are not likely to make much of a difference.

We read in this morning’s FT that “US prices drop for first time since 1955.”  It’s official:  deflation is here.   While this may be a temporary relief to those who had feared a resurgence in inflation due to aggressive government stimulus, the news is far from good.   As we have written in these pages and elsewhere, deflation can be far, far more damaging to an economy than inflation.  

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New York Times columnist David Leonhardt recently echoed our own comments on John Maynard Keynes and the Paradox of Thrift.

Tongue in cheek,  Leonhardt writes, “You, the American consumer, spent too much money.  You bought too much house, took on too much debt and generally lived beyond your means.  Your free spending ways helped cause the worst financial crisis since the Great Depression.  And now you’re going to have to do your part to end the crisis.  How?  By spending.” Read the rest of this entry »

TheNew York Times confirmed last week what we’ve all known was true by observation:

“Consumers Are Saving More and Spending Less”

American consumers and businesses are embarking on an era of thrift as the recession deepens, saving more money as they cut spending on purchases…. That was the picture painted by two government reports released on Monday. One showed that Americans cut their spending for a sixth month in December as they worried about losing their jobs and earning less in a deteriorating economy. The personal saving rate in the last three months of 2008 rose to its highest level in six years….

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