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Trying to Buy More Time

Central bankers provide liquidity to ailing European banks and the stock market spikes off computer trading models. But some extra liquidity really only buys time (and maybe not much) in a world where governments are uniformly underwater and financial institutions inevitably must write down boat loads of bad assets, including real estate.

By Jonathan D. Miller | Updated on December 01, 2011

Central bankers provide liquidity to ailing European banks and the stock market spikes off computer trading models. But some extra liquidity really only buys time (and maybe not much) in a world where governments are uniformly underwater and financial institutions inevitably must write down boat loads of bad assets, including real estate.

The past three years of finance maneuverings have all been about some version of “extend and pretend.” If we can hold out long enough, maybe economies will recover enough so we don’t have to recognize the extent of all our losses from bad loans and over-borrowing. But at some point pretending no longer works—especially in the face of now slowing (or at least not growing fast enough) economies. The last numbers out of China, though certainly not surprising, should give pause. The Asian powerhouse begins to sputter in the wake of the consumer washout in North American and Europe. The always hyped Black Friday numbers aside, Americans don’t have the wherewithal to sustain spending—not with 9% unemployment, stagnant to lowering wage rates, rising medical costs (did you get your new health plan numbers for 2012?), and abrogated pensions (only 14% of companies now provide defined benefit plans).   It’s even worse in Europe where the public employee sector is being savaged by government austerity programs (the UK looks like it’s headed for a double dip recession and even the strong continental players like Germany retrench). Let’s not even mention Spain, Italy, and Greece in the throes of the latest round of “hope-and-pray” fiscal gymnastics.

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