Yesterday’s sell-off started in France, after BNP Paribas, the largest publicly traded bank there, suspended investors’ ability to remove money from three funds that had invested in American mortgage securities. The bank said it had become temporarily unable to place a value on the funds, which have turned sour as increasing numbers of homeowners have defaulted on their loans. “Trust was shaken today,” said Thomas Mayer, the chief European economist at Deutsche Bank in Frankfurt. “Credit depends on trust. If trust disappears, then credit disappears, and you have a systemic issue.” (from a 10 August article in the NY Times)
Yesterday we bought several pieces of used furniture from a small local company that specializes in “staging” homes. Homeowners can’t always get their homes sold before they have to relocate. So they move, taking all their furniture with them. But an empty house is hard to sell. Apparently buyers lack imagination: confronted with the raw physicality of the house as a container, it’s hard for most people to picture it as a home. And I suppose the empty house also implies to potential buyers that the absentee owner is eager to sell, that maybe the house can be had at a bargain price. So, for a fee, the seller can hire a staging company to decorate the empty house with tasteful and elegant furniture, reinforcing the message to house-hunters that this is indeed a high-end buy.
The staging business isn’t really needed in a red-hot market, when houses sell so fast they never get empty. In a cold market owners become reluctant to put their houses up for sale, afraid that they’ll have to settle for far less than they believe the house is worth. Our town, and apparently most of the world, constitutes a cold housing market. So, with a decline in demand for their services, the little home staging company has decided to reduce its inventory of furniture and move into a smaller warehouse. That means bargains for us: some nice used furniture that’s never actually been lived in.
For the second consecutive day, President Bush sought to soothe investors by pointing out that the American job market and the global economy were healthy. He added that deep pools of capital were available. “The fundamentals of our economy are strong,” he said at a news conference. “Another factor one has got to look at is the amount of liquidity in the system. And I am told there is enough liquidity in the system to enable markets to correct.” But his remarks appeared to have only a brief and limited impact on the stock market. Later in the day, several Democrats criticized the administration’s response to the mortgage problems as weak and shortsighted.
In response to this “crisis of trust,” the European Central Bank (ECB) lent $130 trillion at low interest rates to European mortgage banks, while the Fed pumped $24 billion into American lending institutions. The purpose behind these moves was to keep mortgage rates from jumping, which would depress the housing market even more. The immediate effect, though, is to keep the mortgage lenders from going belly-up from too many home mortgages that have gone into default. And why so many defaults? Because people were buying houses at inflated prices. And why? Because they could qualify for very big mortgages at very low interest rates. And the banks would extend these big loans why? Because housing prices kept going up up up, so banks were eager to compete for a small share of big profits. Now that the market has cooled, these heavily-morgaged houses aren’t even worth the amount of the outstanding loans. So the buyers default, and the banks can’t recoup their losses by selling the houses. Short on cash, the banks try to sell off non-liquid assets. But what do they have to sell? Bundles of home mortgage loans. But the loan consolidators are taking a hit too, for the same reason the banks are — they’re selling, not buying. Which brings the central banks into play. With their loans financed by tax dollars, and with the ability to print more money, the central banks are there to bail out the banks and their investors during this “crisis of trust.”
But the European bank’s extraordinary response — its first since Sept. 12, 2001, the day after the terrorist attacks in New York and Washington — deepened investors’ anxiety. “The E.C.B. ignited a fear that there is something really bad going on that the markets don’t yet know about,” said Jacob de Tusch-Lec, a fund manager at Artemis Investment Management in London. “It will take time until investors are sure that this is not the case.” …“It’s like popcorn in a kettle,” said James Melcher, president of Balestra Capital, a hedge fund in New York. “First you have one or two pops, then it turns into a cacophony. I think we are about halfway through.”
Macroeconomics shape our environment, and our responses to the environment, in ways that are beyond our control and for the most part outside of our conscious awareness. Economic trends emerge from collective unconscious factors like trust, anxiety and greed, which spread across the society like a virus. Economics is like a language: we are immersed in it at the macro level and it’s inside of us at the microlevel. It shapes our thoughts, attitudes and behaviors from both the outside in and the inside out. I try not to think about these things very often — a psychological defense mechanism known as dissociation. But just because I don’t make the effort to make conscious sense of the economy doesn’t mean it’s not affecting me. And these effects aren’t only psychological; they’re also tangible. After all, if it wasn’t for this crisis of trust we wouldn’t have gotten such a good deal on those three tables we bought from the home stagers.