It's been a long hot summer. Employment is barely growing; residential housing prices continue to erode because of too many foreclosures and too few buyers; Commercial Real Estate headed south as delinquent mortgages reached an all time high in July; AIG has had enough with the endless stream of losses on MBS's and is now suing Bank of America. Fannie and Freddie continue to struggle. And now, two years into a supposed recovery, we just got a first-ever downgrade of the U.S. credit rating; while gold is hovering near $1700 an ounce, threatening to go even higher.
Pretty much everyone, even those of us who prefer to be eternally optimistic would have to admit that this economy is really beginning to stink. It seems as if the whole system is stagnating under a pile of bad debts that no one wants to get rid of. The FED balance sheet is emitting a definite odor.
The smell of rotting mortgage backed securities is beginning to stink up the whole economy. In a column published last March, economist Barry Ritholtz, complained about the stench of "Extend and Pretend" which is clogging the system.
Someone really should flush the toilet, and let the U.S. economy start clearing the air. Maybe we need to call an "economic janitor" to clear the lines and make this mess go away.
The last time we had a big real estate mess, back in the late 1980's to early '90's, we handled things very differently. Remember The Resolution Trust Corporation? They were the "janitors" of the last real estate crash. The RTC as it was commonly called, came in after the damage had been done, and cleaned out the giant pile of bad mortgages before they had time to rot and start stinking. The RTC went from town to town cleaning house. Blowing failed properties out the door at 10 and 20 cents on the dollar. It was painful, but the pain was short lived. And there was a tremendous sense relief as all of the bad stuff was purged from the system relatively quickly.
Flushing is a good thing. It rids the system of toxic materials. Holding on to toxic waste is simply not a good habit. But on Tuesday, the FOMC released a statement indicating that nothing has really changed. Things still stink, and actually the FOMC is realizing that things smell more than first thought. But unfortunately, the only response that Mr. Bernanke can come up with is to throw in more paper. A continuation of the same strategy of "let's cover this pile up and hope that no one smells it" is what we've been getting, and based on the FOMC statement, it's what we'll continue to get.
I would like to respectfully suggest to Mr. Bernanke that it's time for someone to boldly grasp the handle and start flushing away this whole toxic mess. It's high time we created another entity similar to the Resolution Trust Corporation and begin to get this economy cleaned up so that we can move on to more productive economic strategies.