Investors, leave hope for dead

By Jon Markman

Americans, sunny and outgoing, are about to hit the skids in their love affair with hope.

Normally, of course, hope is a wonderful thing. Barack Obama ran his presidential campaign last year on a theme of hope. Bill Clinton liked to refer to himself as the man from Hope. One of the most popular comedians in U.S. history was named Bob Hope. The Hope Diamond is one of the crown jewels of the Smithsonian collection.

Yet hope is a silent killer when it comes to investments. It is the masked destroyer of capital and dreams, the ironic opposite of its definition. And that is why government officials and corporate executives have learned to exploit hope when their backs are against the wall and they see the guns of fate pressed to their temples, as they do now.

For every worry, a plan

If you think about it, every tall tale about the adequacy of banks and the state of the economy that the past two administrations have foisted on the public has depended on our natural hopefulness for its success.

Concerned that the banks' books contain so many permanently impaired loans that their solvency is in question? Create something called the Troubled Asset Relief Program that leads investors to hope, at least for a while, that the government will buy the bad loans.

Concerned, a few months later, that the effects of that effort are wearing off? Create a Public-Private Investment Program that makes investors hope, at least for a while, that private fund managers will buy the "toxic" assets.

Concerned that toxic loans and bonds that remain on banks' books will sink them if normal accounting standards are applied? Eliminate the standard called mark to market, which forces banks to accept current low values as their real values, so that investors can hope, at least for a while, that the loans are worth more than the paper they're printed on.

Concerned that emerging economies have so overextended themselves with credit that they can't pay back European banks? Create the illusion of a trillion-dollar International Monetary Fund contribution at a Group of 20 summit that leads investors to hope, at least for a while, that the problem is solved and that Eastern Europe can roll over its debts.

Concerned that investors think banks are losing money faster than their executives are losing hair? Let them call their first quarters profitable as long as losses are not counted, so that investors can hope, at least for a while, that these fictions will come true.

• Talk back: Do you agree or disagree?  How far out is recovery?

Concerned that investors are catching on to this scam? Turn loose an official such as Federal Reserve Vice Chairman Donald Kohn, who tried this week to give investors hope that steadier consumer spending and home sales, together with those dolled-up earnings results at banks, indicate the U.S. economy is poised to stage a gradual recovery later this year.

A crushing dose of reality

If none of that works, let White House chief economist Larry Summers spread the hope that the recession is easing by telling reporters the economy has presented a "more balanced picture" in recent weeks. Or let Fed chief Ben Bernanke wax lyrically about "green shoots." Or even have the president open the window on "glimmers of hope."

Enough already. I'm all for hope, shoots and glimmers -- that sounds like a New Age law firm -- but let's let some reality shine in. The data are balanced only if you put a thumb on one side of the scale.

In their influential letter to clients, economists at ISI Group in New York listed 13 reasons to be optimistic this week, including a surge in mortgage refinancing, rapid money growth, a surge in tax refunds, fiscal stimuli, lower mortgage rates, a positive yield curve, a boost in Social Security payments and a global tsunami of central bank initiatives.

But you can't put their letter aside halfway, because they follow up with a cascade of catastrophe, including continuing constrictions in credit, a crushing of consumer net worth, an acceleration of home price declines, a rise in the savings rate toward 8%, private-sector deleveraging that's likely to persist for years and a negative-feedback loop entwining a decline in profits with declines in capital expenditures, employment, retail sales, state and local budgets, ad spending and export-oriented foreign economies. The economists finish with a conclusion that the Obama administration's efforts to raise taxes, rewrite contracts and add carbon taxes will discourage investment for years.

Continued: Hope vs. what's really happening

 1 | 2 | next >