Tangled Webs, Money Printing and a Gordian Knot

Charles Payne
Posted: Mar 11, 2012 12:01 AM
On one hand the argument our economy has turned the corner will be carried by the main stream media but would it spark a stampede to own stocks? The answer is an emphatic "no." Individual investors are paying attention to the market and at some point might be seduced into making a leap of faith sworn off years ago. But these would-be investors are also homeowners and buy gas, so it's going to take more than upbeat headlines and dubious signs of economic improvement to get them to take the bait.

Yesterday, a report from CoreLogic noted home prices fell for the 6th straight month in January. Nationally, home prices were off 3.1% year over year and 1.0% from December. Excluding distressed sales, home prices slipped 0.9% year over year and edged up 0.7% from December. Some would call that stabilization, but on the ground and away from the hype, people know it's just more bad news about the most valuable asset most possess. Also late yesterday, we got the latest on consumer credit. The headline seemed like great news. Consumer credit surged more than expected in January growing by $17.776 billion, or $10.0 billion more than expected.

Credit is the lifeblood of the economy and it has to flow. There has to be legitimate demand for it and of course it can't be abused. Sure, household debt played a major role in triggering the Great Recession, but authentic demand for credit will be a welcomed relief. The thing is despite cheap interest rates, demand isn't there.

What drove the January number was the US government and its new role as sugar daddy to niches of society it deems worthy - auto unions and college universities and professors. But the administration is engaging in a dangerous game with your hard earned money by seducing borrowers to take very risky loans for college and automobiles. Some would even call it reckless.

Data continues to flow that suggests college can be overrated considering the cost and job prospects. The Chronicle of Higher Education published a report that 17 million college grads are doing jobs that distinctively do not require a degree of higher learning. Consider highlights in the report, such as 317,759 college grads working as waiters and waitresses and 18,749 as parking lot attendants. I'm a big believer in education, although I think it's more about the lost love of learning rather than the need for a formal degree. Of course when you are wooing the union and youth vote, pumping billions into autos and college loans is pretty smart, even if it eventually becomes a tangled web.

(On Fox Business today at 2PM I'm interviewing Mary Peloquin-Dodd, S&P Credit Analyst, on the dilemma of losing the higher education battle in the face of tuition costs that never stop rocketing higher. Is it worth putting the American taxpayer at risk to back so many risky loans? Will this come back to haunt the nation? Is it reckless behavior or responsible and necessary? Watch the show and take the poll… I'll give a few shout outs of the better replies).

"Oh, the tangled webs we weave when we practice to deceive." Sir Walter Scott

In January, households wisely resumed paring debt by lowering revolving credit (credit cards) by $2.947 billion, but non-revolving (auto and student) surged $20.723 billion. That was the largest increase in dollar terms since November 2001! Subprime auto loans are surging, and it's obvious so many of those student loans are not going to be repaid. I'm sure some great organization will get around to adding up all the taxpayer money that's gone into trying to spark the auto industry from cash for clunkers to billions to foist the Volt on the public. It just seems in the end to be another web of deceit.

The nudging of an industry in order to score political points, even if in the end American taxpayers take it on the chin, just isn't worth bragging about. If this recovery falters, I wonder how many people with new rides bought with subprime loans will regret it and how many will simply stop paying.

Dreamweaver, I believe you can get me through the night
Dreamweaver, I believe we can reach the morning light

Of course when it comes to tangled webs, the master is Ben Bernanke, but perhaps we haven't seen his masterpiece yet. Part of yesterday's bounce came from a piece from John Hilsenrath on the Fed considering a new type of bond-buying program designed to subdue worries about future inflation. Somehow, the Fed will be able to print (more) money and it will not result in an additional inflation threat. It's odd the Fed would still be in the business of creative money printing with the economy doing so well. One thing is for sure; all these newfangled weaving programs are going to result in a Gordian knot that can't be cut.