Oh boy

I saw two things this weekend that proved to me that this country has both macro and micro economic problems and kind of freaked me out. On the micro side, I saw for the first time in my memory, a run on gas stations. The family was in Greensboro, NC this weekend when rumor got out that Hurricane Ike was going to cause a gasoline shortage. As we pulled into town Friday evening, every gas station we saw (at least a dozen) had lines out the parking lot and into the streets. Gas was a dollar more expensive there than it was at noon in Norfolk. By the time we left this morning, every station on the way out of town was dry. That problem was not limited to Greensboro either. A few stations in South Hill, VA, (the crossroads of I-85 and US-58) were out as well.

I am sure that in a few days most of those stations will be up and running but even that disruption is going to be tough on owners, consumers, etc. The larger issue is that those runs were caused merely by fears that there would be a shortage. By most accounts, the damage to the oil extraction and refining infrastructure is not terribly severe and the likelihood of a disruption in gasoline distribution small. But faced with the possibility of a disruption, our energy supply system proved totally incapable of dealing with it. That should scare the hell out of you if you consider what the situation would have been had Ike done some real damage. Put another way, what would happen if no one could get gas for a week, two weeks, etc.? Scary.

On the macro side of the equation, the imminent demise of Lehman Bros. has the potential to start a run on all sorts of other financial institutions. Much of our banking system operates on faith; faith that a high enough percentage of loans will be repaid and thus lending will be profitable, faith that asset values are knowable and realistic, and finally, faith that when you try to withdrawal money from your bank, the bank can make good. Due to rising foreclosures, the proliferation and securitization of questionable mortgages, and the lack of regulation of non-bank financial institutions (like Bear, Lehman, Goldman Sachs, Merrill Lynch, etc.) respectively, that faith is no longer well founded. Indeed, this whole house of cards is looking shaky as hell, prompting the Feds to step in and act as the lender (and guarantor) of last resort.

When the Fed bailed out Bears Sterns in the spring and Fannie Mae and Freddie Mac last week, the theory was that each of these institutions was too large to fail and that their collapse would cause wider, systemic problems throughout the economy. So in various ways, the Socialists that run Treasury put you and me on the hook for the underperforming assets at each company. That intervention forestalled a more severe crisis but created a condition of moral hazard (the idea that if the government subsidizes failure or irresponsible investment, investors are incentivized to behave even more irresponsibly). Facing the prospect of Lehman going down, Treasury has decided, at least for now anyway, that the moral hazard outweighs the risk of the bank’s collapse. As such, and unless something changes, Lehman is done come Monday, doomed to be liquidated by its creditors. If that happens, the Feds are sending an unmistakable signal to Wall Street, namely that Wall Street is on its own from here on out. Without Treasury backstopping these institutions, the faith that greases the system is all but gone and anyone with liquidity issues (that includes most of the big non-bank financials and even some like Citi with big commercial presences) is going to face some tough questions from shareholders and creditors. If you thought mortgage markets are tight now, just wait. Lehman might be the first in a series of dominoes to fall and if we drop into worst case scenario territory, even the commercial banks that hold your checking accounts could get caught short. Not to say it is likely but the US now faces the real possibility of the first straight up bank run since the Great Depression.