Lou Barnes.
Lou Barnes.

Boulder's Lou Barnes on the "stupid" credit market

Got iffy credit? Then don't hit up Boulder West Financial Services. In recent days, Lou Barnes, one of the firm's owners, was quoted saying this in a recent New York Times article about tight mortgage rules: "The credit pendulum is stuck at 'stupid.' I am turning down loans every day that my grandfather in his Ponca City, Oklahoma, savings and loan in 1935 would have been happy to make. And he was tough."

The younger Barnes isn't a pushover, either. The BWFS site includes regular essays about the condition of the mortgage market, and its latest, dated July 10, takes on Barack Obama, politicians on the left and the right, baby boomers, "worry campers" and pretty much everyone else. Read it below -- or else stay stuck at stupid.

Long-term interest rates plunged this week as "V" hopes gave way to "L" reality.

A 10-year Treasury auction drew three times as many bids as bonds offered, the yield to 3.30% from 4.00% last month taking mortgages under 5.25%. The best chance for a run back into the fours: a big break in stocks. Inflation bets sank with rates: oil broke $60 for the first time since April; gold is $912 versus $980 in May.

Most of this sentiment shift has been follow-through from last week's trend-breaking job news, the rest more "L" data just like it: UofM consumer confidence fell in May for the first time since February, from 71.5% expected to 64.6%. The ISM service-sector survey crept to 47 in June from 45, still short of growth-marking 50. The consumer-credit contraction slowed from a fatal minus-7.8% in April to minus-1.5% in May.

The worry-campers are well established in the fiscal trap, no-bottom housing, and credit crunch; and even those with growth hopes expect inflation interception.

Time to look outside the box. One of the oldest Wall Street lines: "It's never what you're looking for that gets you." Same for unexpected good-side outcomes.

Righties think that Lefties believe all solutions come from government, and Lefties think all Righties are stuck in rigid rules of markets and invisible hands. Both overlook the strongest force of all: consistently unpredictable human adaptation to crisis. The bigger and more unique the crisis, the faster, bigger, and more unusual our response. A global and electronic economy without referee or rules magnified this mess, but its unprecedented openness and flexibility will supercharge our reaction.

Especially in the US, the reaction to the post-Lehman financial meltdown was the soul of prudence: stop spending and borrowing and save any nickel seen rolling across the kitchen floor. Neither the authorities nor wizards of industry seemed to have any idea what had happened, why, or what to do. So, go to the bunker.

The resulting shift in national savings is without precedent anywhere in modern times. From slightly negative in early 2008, we are now socking away 8% of income. If you're drowning in immense negative numbers, try an immense positive one: we're on track to save $900 billion this year, despite income diminished by unemployment. Keep this up for another couple of years, and the scary debt-to-GDP ratio will be repaired even though GDP fell.

Those savings dollars have disappeared from consumption and current growth, but they are the capital for sound, non-inflationary, low-leverage growth in the next cycle. In the 1st quarter alone, US households and non-profits almost doubled their Treasury holdings, and more than doubled the net increase in foreign holdings.

Another Left-Right both-wrong: Lefties think government creates jobs, and Righties think kindly Daddy Warbucks does all the hiring. Reality: most jobs are created by people who want them, willing and eager to work, another form of capital. The nation's unemployed know painfully well that they can't wait for Warbucks or Washington; they are every day making hard decisions to take lesser jobs in and pay and dignity, and will be productive assets for their new employers. And soon again: taxpayers.

Then there is the tap at the door of the Baby Boomers. The most indulged, self-satisfied, overconfident, and un-challenged generation ever. 78 million of us, aged 64-44. AARP says 24% of us have deferred retirement since the crisis began -- one would hope so, young and fit as we are. The one age demographic showing job growth: over 55. If we stay in the workforce just two or three years longer than prior models, Social Security will be over-funded, and Medicare half-way fixed. Work five or six years longer... why, there's no telling what this country could amount to.

Last: leadership and morale. The authorities still seem clueless, stuck in old-time solutions. Mr. Obama is marvelous at the mike, but increasingly distant from events in the audience. Now I get some sense from civilians that they are bored with the bunker. Fear and confusion get old. If leaders won't lead, well... let's get on with it ourselves.

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