After complaining bitterly about the bail-out of Bear Stearns (a "bail-out" that was entirely a figment of his own imagination), Gross now complains that Bernake is not doing enough about the sub-prime lending mess. Of course, the only things that Bernake can do, would, in fact, be a true bail-out.

There is now doubt that the there have been some ripples from the sup-prime fiasco. Most notably, that it is now more difficult to fund LBOs (because lenders now want more reward for taking risk) That may hurt the earnings of Blackstone and KKR and it may hurt the stock market, but that it won't cause the economy to collapse.

Gross states that any business that relies on "cheap and easy availability of credit" will suffer. Why is that bad? Strong business do not need cheap and easy credit. Indeed, most American businesses are flush with cash (which is why you see so many share buyback these days). So some speculative business return to reality and some investors get spanked for being a bit delusional. That is all a normal part of the business cycle.

For a more rational take on what's happening, read this weeks Economist. And, please, ignore Gross -- he has never shown any sign of understandinge even basic economics.

SFBurke:

I agree that the LBO craze is finally going to come to an end, which I think in many ways I think needed a breather so we can see where the current crop of LBO's end-up before more wealthy investors delve into these types of transactions.

However, you are assuming a few things:

(a) that only poor performing companies require cheap and easy credit. Strong companies looking to expand, especially strong middle-cap or smaller privately-held companies. These are in many cases the main growth engines in terms of private employment, not the Ford's of the world. Take for example a regional auto parts dealer which is privately held. It is growing, and would like to expand, but does not want to have to chase after new investors. Guess what expansion plans were just put off?

(b) The Effects of the Foreclosures on the Overall Econony: Do you not see the effects that foreclosures will have on the overall economy? This coupled with the slowing housing market means huge declines in employment in housing and real estate related industries. Since so much of our economic growth was predicated on the housing boom, I see no way that the decline of the housing market as well as the rows and rows of unsold homes in these suburban developments could not cause a recession. Seriously, how many construction workers, loan agents, real estate agents, home improvement personnel, interior designers, and local small contractors are going to be out of work? And what will these decline in employed workers have on the overall economy.

(c) The Economist's article was not so much focused on these aspects as it was on the impact on LBO's and business expansion.

If I could only get through the initial gasping I would prove it.

It is impossible to evaluate what our economy might look like without cheap/easy credit (at all levels, defined broadly, including regulatory laxness) since that has been the single pervasive and dominant feature of it for nearly two decades.

Starting early/mid 90s, the Fed, Congress, and Treasury poured gasoline on a fire and it duly and predictably blew up. Everytime it threatened to go out, more gasoline was poured on, then kerosene when gasoline wasn't hot enough.

Some argue that this process is unsustainable. Others argued that it never has to end - there is an unlimited supply of jet fuel. The internet stock collapse didn't do it, so why should the mortgage collpase? There is always more vaporware to sell.

So, whether there is any actual fuel left underneath the pyre is anybody's guess. But after buring so long in a manipulated/manufactured inferno, it is reasonable to assume that major structural changes have occured in the underlying fuel supply, and that a period of major adjustment will eventually result, should the Fed run out of forms of accellerant to add.

The old saying goes: bad money drives out good. As such, what "strong" companies can do is completely irrelevant, since there are no companies, organizations, or individuals I can think of that didn't get sucked into the blaze and who won;t find themselves out on a limb should it roll back.

The subprime contagion will be contained only so long as two factors are contained:

(1) the greedheads who created this mess don't go canibalistic and start trying to be the first to the exit (saw hints of that last week).

(2) the sheeple who are relied on to hold the bag don't get wise to how they are being screwed with their own money and robbed blind in countless ways.

No one went broke underestimating the greed of Wall Stret or the dimness of the sheeple, so my money is on #1 breaking first. Hence the likelihood of a rate decrease and FNMA bailout.

VTbiker:

Cheap and easy credit is not a normal situation; the sooner it ends the better. For healthy companies and qualified individuals, there is still plenty of credit available. The price of credit should reflect the risks involved; when it doesn't, that is what creates problems.

Obviously there are collateral effects to the sub-prime mess but it seems unlikely they are going to cause the economy to collapse. Home construction companies and real estate firms have been laying off workers for over a year now and unemployment is still at historically and globally low levels.

Again, the Economist article is really the best analysis. Yes, there is going to be some pain and dislocation as result of the sub-prime mess, but it is not going to cause the economy to collapse.

SFB

Burke:

“unemployment is still at historically and globally low levels.”

You would be correct if the comparison is made from 2001 forward about Unemployment being historically low. Previous to 2001, Unemployment was measured against a larger Civilian Labor Force as taken from the Civilian Non-Institutional Population. Participation Rate has declined since 2001 to a low of 65.8% in 2003 to a high of 66.1% this last month. In effect, a lower percentage of the Civilian Non-Institutional Population is a part of the Civilian Labor Force and Unemployment is being measured against a smaller pool of people percentage wise and the rest being thrown into “Not In Labor Force.” After the official end of the 2001 recession Participation Rate stood at 66.7% Oct/Nov 2001. This is a reversal of a growing Participation Rate since the sixties. Reason being, job growth has not exceeded Population Growth

run75441, I tried to understand your post, but am having trouble. Could you clarify.

Are you saying that the pool of potential workers was altered in 2001. To help me, could you provide to me the unemployment rate if based on the pre-2001 standards.

What is the effect of retiring baby-boomers on your conclusion?

melonhead:

From the sixties till 2001, Participation Rate increased yearly with exceptions in 2 years. 40 years of growth or increases in the percentage of the Non-Institutional Civilian Population being included in the Civilian Labor Force. Immediately after the 2001 Recession, the Participation Rate was at 66.7 or 66.8% depending upon which month you choose in 2001. It dropped to a low of 65.8% (lowest its been since 1988) in 2003. and now resides at 66.1% after reaching a high of 66.2%. This is 40+years of growth of the population in the Civilian Labor reversed starting in 2001. So the Historical Low comment is balderdash or BS. Burke is being silly.

Historically, for this starts in 2001 and not as the author implies much earlier. Unemployment is measured against a much smaller population of people in the Civilian Labor Force (percentage wise) than IMMEDIATELY AFTER THE 2001 RECESSION OR IMMEDIATELY BEFORE THE DOT.COM ECONOMIC GROWTH PERIOD. This makes it appear much lower than what it really is . . . try about 6+ percent after adjust nunbers against the 2001 Particpation Rate.

To answer your question about whether baby boomer retirement impacts this, the answer is "no" right now. I will tell you what will though . . . 18 year olds in the military. Hell, they can't find jobs so they enlist. Babyboomer explosion will not hit for a few more years and this is being offset by legal and illegal immigrants. The argument is a strawman.

<link> A-3. Employment status of the civilian noninstitutional population by sex and age, seasonally adjusted

Those who are not actively looking are now thown into "Not In Labor Force." Make sense now?

Now if you can explain the drop in real wages in simple terms, we might turn some of those zombie might-be Republican voters away from the shiny objects. Since the Chinese are clearly getting ready to cut up the $900 billion credit card issued to this administration, I think a lot of folks will be snapped out of their economic delirium in the near future. Sadly, because most folks don't understand that the Bush numbers aren't done with the same arithmetic as the pre-Bush numbers, chances are that we'll see a massive "Blame the Chinese" campaign, rather than blaming the looters.

I'm still waiting for this bunch of economic rape-victims to figure out that Wall Street guys made bankruptcy nearly impossible for the middle and lower classes, but enshrined the gigantic corporate bankruptcy laws. While Mr. and Mrs. Smith will spend the rest of their lives chained to their debt, thw Wall Street crowd will keep their personal assets and head off to make more theoretical trickle-down prosperity.