There’s a very old joke about the scariest words in the English language being “We’re from the government, and we’re here to help.” In other words, the government is not to be trusted and big government is to be feared. In 2009, we find that the markets, banks, consumers, and businesses have lined the paths to their doors with rose petals to welcome and hail the arrival of the all-powerful, all-knowing savior—the U.S. government. Consumers want the government to pay for the mortgage debt they recklessly piled up, businesses want help in funding operations that they overbuilt or mismanaged, banks want the government to participate in losses on ill-considered loans and assets they acquired with too much leverage, and the markets just want the government to guarantee anything that moves. The government seems more than happy to oblige.
The numbers are staggering. The Fed is on the hook for $8.5 trillion in various loan facilities, asset purchase programs, and a variety of guarantees. The Treasury has committed more than $1 trillion through TARP, AIG, Citibank, Fannie/Freddie bailouts, etc. The next $1 trillion will be going to various fiscal stimulus programs. Oh and don’t forget, we’ll also have roughly a $500-$600 billion “business as usual” deficit to fund. Rather than rely on time and the markets to eventually unwind leverage and set appropriate credit spreads, the Fed has taken on the private leveraged positions while also trying to force credit spreads lower through purchasing of assets. The markets are happy to oblige the Fed by shifting leverage to the Fed, but the effort to force credit spreads lower will ultimately fail. Credit spreads will tighten and more credit will become available on a sustainable basis only when economic conditions improve. With all this money to throw at the various problems, the markets are betting the sheer size of the government will turn things around. Bet against this.
On the fiscal side of the government, Congress is eager to get its hands on the pork barrel of all pork barrels. We can always hope the new Administration will resist wasteful “stimulus” efforts such as multiple bridges-to-nowhere. President Obama is certainly saying all the right things at this point, but Congress hasn’t tested him yet. At this time, market pundits are on the side of Congress, with many saying “spend now, ask questions later.” Whatever the fiscal stimulus package turns out to be, it will work to cushion the economic blow still yet to come; but it can’t prevent the natural unwinding of excessive consumerism and debt accumulation. Consumers simply must and will eventually slash spending and start saving. The process is needed, but the short-term impact will be painful. The fiscal stimulus program will be a success if it merely eases this pain.
The one thing you won’t have to worry about this year is what the Fed will do with interest rates. The Fed can’t push the funds rate lower, and Fed Chairman Bernanke has pledged to keep that 0 percent funds rate for a considerable period of time. But this is no comfort to financial institutions. I’m wondering if there is a book titled “Managing in a Zero Interest Rate Environment for Dummies.” We’re all going to need it.
If you’re looking for 2009 to mark the beginning of a new wave of prosperity, you’re likely to be extremely disappointed. If you’re hoping that 2009 will mark big strides in the long-term restructuring process of the balance sheets of businesses and consumers, you should be in luck.