From Contained To Global Infusions Of Liquidity
Readers suggested a topic on recent developments. “Perhaps we could recap and discuss this historic week. How did we get from ‘it’s largely contained’ to ‘global infusions of liquidity?’”
One said, “If Fannie Mae and Freddie Mac do raise the cap on mortgage portfolios what are some potential resulting scnearios? After all the public could scream loud enough that Congress could force the hand of the ‘piper.’ There is no easy exit from this mess.”
A reply, “And there shouldn’t be… It’s time to pay the piper but our financial engineers are burning the midnight oil trying to come up with a painless exit. However they really have few options, raising the mortgage cap is only putting a band-aid on a bullet wound.”
A skeptic, “I believe that it’s all talk from Congress and the presidential candidates. They know it can’t be done. Imagine the field day that the alternative media will have with Fannie and Freddies reporting record. They are a mess already.”
“Bailing out FBs will effectively shut a much larger number of people out of the market due to propped up prices bolstered by undeserved interest rates for FBs according to some of the proposals I’ve seen proposed on CNBC.” “Can you imagine people who have defaulted on their mortgages being given a 1% interest rate even if it’s just an extended teaser period? They are still stuck with a house no one will buy at these prices.”
And another, “I still contend that at least in Cali, Fannie and Freddy can not come in and save the day, even with raised caps…the only thing that can save the day is a 3.5% (or lower) interest rate and no income documentation required or no ‘debt to income’ ratio.”
“Otherwise, by requiring people to actually QUALIFY for loans using ACTUAL INCOME, and ABSURDLY LOW TEASER RATES FOREVER, Fannie and Freddy have very lessened power in Cali.”
Another points to the central banks, “Central Bankss are ‘injecting liquidity’ all over the place. What does that mean exactly? Handing out money? Who’s money are they handing out? Can I have some? I promise I’ll go out and stimulate the economy.”
“Who are the recipients and what do they do with it? How does that work? Does it work? What are it’s limitations? How unusual is this?”
One suggests calm. “Ya know, if we just all think positive thoughts, this could all turn out ok.”
The LA Times. “Americans are learning a painful lesson from the financial market turmoil: One of the qualities that make the modern U.S. system so powerful, its ability to spread the risk of funding loans across millions of investors around the world, turns out to have a damaging weakness built into it.”
“And this uncertainty, brought to the surface by trouble in the sub-prime home mortgage market, is now setting off exactly the sort of panic that the new system of spreading risk was supposed to prevent.”
“‘We supposed that if we atomized the risk of loan, it wouldn’t come back to bite us,’ said Robert Litan, a senior economist with the Brookings Institution in Washington. ‘What we’re learning is that no matter how widely you spread the risk, it doesn’t go away. You can divide and divide and divide and divide it, and the risk is still there.’”
The Wall Street Journal. “Fallout from the intensifying credit crisis stretched from a French bank to the largest home-mortgage lender in the U.S., triggering unusual central-bank interventions.”
“The troubles demonstrated both the global reach of the crisis and its impact on a widening circle of markets and companies. The first jolt came from French bank BNP Paribas, which said early in the day that it was freezing three investment funds once worth a combined $2.17 billion because of losses related to U.S. housing loans. That prompted the U.S. and European central banks to inject cash into money markets to keep interest rates down.”
“The unease accelerated in the U.S. with news that several hedge funds were in the red and selling off assets. Apartment and condominium builder Tarragon Corp. raised doubts about its ability to remain in business amid weak demand and an inability to raise new financing. After markets closed, mortgage-lender Countrywide Financial Corp. said ‘unprecedented disruptions’ in credit markets could affect its financial condition.”
“What started late last year as worry over a sharp rise in defaults on subprime mortgages has mushroomed into a crisis for the entire home-loan industry and investors world-wide.”
“Rattled by a constant stream of bad news, investors in recent days have been shunning nearly all mortgages except for those that can be sold to Fannie Mae and Freddie Mac. That has prompted lenders to boost rates on prime ‘jumbo’ loans — those totaling $417,000 or more, too big to be guaranteed by Fannie or Freddie — to as much as 7.25% or 8%.”
“‘The market for the assets has just disappeared,’ said Alain Papiasse, head of BNP Paribas’s asset-management-services division. ‘Since the start of this week, there are no prices for instruments that carry, directly or indirectly, some types of U.S. assets.’”
The New York Times. “Fannie Mae, the nation’s biggest buyer of home loans, was blocked yesterday from expanding its mortgage holdings by 10 percent in what it called an effort to ease concerns about credit and shore up the struggling housing market.”
“The regulator overseeing Fannie Mae, the Office of Federal Housing Enterprise Oversight, or Ofheo, rejected the request, saying the company’s principal market for mortgages was ‘liquid and working.’”
“Josh Rosner, a managing director at Graham Fisher & Company, said that it was unclear whether Fannie would be using the portfolio to generate profits for shareholders by buying illiquid secondary market securities or help potential homeowners.”
“‘They don’t need the portfolios to do business,’ Mr. Rosner said. Besides, he said, it would be absurd to increase the size of their holdings until the extent of their exposure to subprime loans and other exotic mortgage products, like interest-only and negative-amortization loans, was better known.”
“‘We don’t know the true condition of their books, because they still aren’t current in their filings; they still have internal- control weaknesses,’ Mr. Rosner said. ‘They are sort of saying: raise our cap. Trust us. It wasn’t too long ago, frankly a couple of years ago, that we had them say trust us only to find out they were untrustworthy.’”
The Washington Post. “The Office of Federal Housing Enterprise Oversight has capped Fannie Mae’s portfolio at $727.2 billion (the level of Dec. 31, 2005), while Freddie Mac’s $712.1 billion portfolio may grow only by 2 percent annually.”
“The regulators imposed these conditions because of accounting scandals at Fannie and Freddie, and it seems unwise to tap them for a bailout now, especially when such an action would leave them holding billions of dollars in new assets of ambiguous value.”
The Dallas Morning News. “A running-scared Wall Street is impacting business in North Texas, as Dallas investment banker David Mahmood saw this week when he tried to complete $90 million in private financing for a California client.”
“‘The lender backed out yesterday, so now we’re scrambling,’ Mr. Mahmood said Friday. ‘If we can’t raise enough money, [the company] will lose tens of millions of orders.’”
“In today’s hyper-connected economy, things can unravel quickly. No-money-down mortgages and low interest rates fueled a borrowing binge over the past six years, as consumers used easy money to buy homes, cars and other goods. Buoyed by rapidly rising housing prices, banks bundled the loans and sold the debt to hedge funds across the globe.”
“But Bill Carter, a certified financial planner in Dallas who specializes in helping small business, saw some upside in the shifting lending landscape.”
“‘It’s going to be more difficult – and frankly, it should be more difficult – to get a loan,’ he said. ‘It just got out of hand.’”
seems to be a lot of confusion in these comments between raising the portfolio cap and raising the conforming loan limit. The portfolio cap is set by the regulator, and limits the total amount they can hold for themselves. It doesn’t limit how much they can guarantee in securities sold to other investors. The conforming loan limit applies to each loan, and sets the maximum size of a loan that they can guarantee, currently $417k for single family properties in the continental US. The conforming loan limit is in law, and only Congress can change it. The portfolio cap can be changed by the regulator, OFHEO, without going to Congress.
“‘We supposed that if we atomized the risk of loan, it wouldn’t come back to bite us,’ said Robert Litan, a senior economist with the Brookings Institution in Washington. ‘What we’re learning is that no matter how widely you spread the risk, it doesn’t go away. You can divide and divide and divide and divide it, and the risk is still there.’”
The lending industry nullified the effects of spreading out the risks, by massively increasing the total amount of risk. The number of bad loans is now so big, that they simply put a lot more institutions at risk. They spread out the risks alright, an absurd amount of risk to a large pool of suckers.
Right… Who cares if I’m 100% exposed to $100 billion, or 10% exposed to $1 trillion. When the underlying assets fall by 30+%, which now seems to be pricing into the ABX index, I’m out a huge chunk of my money.
Latest by Marc Faber:
http://www.bloomberg.com/avp/avp.htm?clipSRC=mms://media2.bloomberg.com/cache/vINDOL2pjWeI.asf
Faber rules! He has been right all the way along. He and Jim Rogers are smart guys; ignore them at your peril. Got gold??
Listen to the end again. He’s predicting falling comodity prices. Excess liquidity inflated bubbles of ALL assets. As the liquidity is extracted from the system, it will result in a sell off of all assets, including comodities.
He’s predicting deflation.
If he’s right, gold is doomed.
Of course he also said the central banks should stop pumping liquidity to delay real repricing of assets. For the repricing. Force the booking of losses. Force several brokerages out of business.
Get the liquidity out of the system so that all bubbles can drop back to fundament levels so we can return to doing something other than just manufacturing debt instraments and collecting comissions from moving them around.
To clarify, look what happened to gold on Thur and Fri. On Thur, the central banks injected cash, but gold still went down. It simply wasn’t enough cash injected to cover needs so gold continues to sell off as the system needed cash.
The injects on Friday seemed to have been enough since it stopped golds retreat ad casued it to go up on inflation fears.
So, the $100 trillion question. With the banks print enough money to cause inflation, or will the de-leverging melt-down suck money out of the system faster, casuing deflation?
I guess that depends on whether they do a full bailout or not. 3 day loans that just delay the inevitable.
Wait… I guess it goes back to my question below. Are they making the loans to the banks directly, meaning the Fed won’t take the MBSs until the banks are out of business? Or, are they making loans to the hedge funds, so the Fed could get stuck with the MBSs wihout the big boys going down?
I think the answer to this question will significantly determine the direction gold goes. If we bail out the banks, by making them hole on their loans to hedge funds, I think we get inflation. If he make the banks take the losses on the money they loaned to hedgies, the I think we ger deflation.
Maybe the Fed’s very targeted loan amounts are designed to hit the fine line!!!!
Cramers ranting… people are losing their jobs!!!!
Me thinks the Fed has that in mind!!!! We’re not going to get a sane economy until there are a lot less people on Wall Street, and the few left are making WAY less!
The normal course would be deflation, but do you really think the government would let that happen? Deflation is worse than inflation because sales of all non-staple goods will be destroyed by the expectation that prices will be lower in the future. The correct thing to do is inflation while tightening the RE lending standards that caused most of this crazy credit bubble. The banks need to be reigned in and regulators need to enforce the laws on the books.
Inflation only works if wages also inflate. That will not happen thanks to outsourcing and insourcing (illegals). The end result will probably be either deflation with a Depression or hyperinflation with a permanent crash in living standards in this nation along with social unrest. Neither result is good, and I doubt the “powers that be” can come up with anything better considering how badly they mucked things up thus far.
The Dow was circa 7000 in 2001. So it’s essentially doubled in 6 years. It was up another .04 % for the week. Why are we saving (liquidity infusion) anyone? Talk to me when it drops 30%.
Spain has been selling ten to twenty tons per week on and off this year which is what is keeping a lid on gold. History shows that central bankers would rather inflate their way out of a mess than deflate. The question now is can deflation be avoided? It has been for several decades now.
As far as gold goes, I think that it is wise to own some and if you never need it, pass it down to your children or other heirs. It may attain some safe-haven status, even in a major deflation.
I have to disagree with Faber somewhat. August doomed LTCM due to low liquidity. The bubble market is an abnormal market, but so is the August market. By injecting money into the system, it does what the Washington Post suggests:
“A short-term cash infusion can help keep financial institutions going while they gather the information needed to reach calmer, more economically rational assessments of the risks they face.”
I think that’s right. I think it gives people time to digest and an opportunity to come to an epiphany. The healthier players will realize that “you can’t fix stupid,” and the weak can be culled from the herd without the whole herd starving. I disagree with the WaPo on the next sentence, however.
“If all goes well, the credit crunch will stop spreading into the ranks of better-qualified borrowers, thus containing what has so far been minimal damage to the “real” economy from the subprime mess.”
Credit has been too loose for EVERYBODY. The screws will tighten on the good borrowers, too. That’s why I have done my bottom-buying planning with an assumed mortgage rate of 8%, even though we will buy with a conforming loan within our means.
I’m not sure whether it’s worse than the bagholders say or worse than they think, but either way it’s worse. And it’s a snowball headed for hell. Every time a downward mark is entered, like at a hedge fund, it spurs redemptions, which effectively drops demand, which causes further drops, etc.
We’re not giving time for them to figure out what the MBSs are worth. At best, the MBSs from the last 3 years are worth $.70 on the $1. That includes prime.
The mortgages and HELOCS that were issued in the last 2-3 years are going to face greater than 50% foreclosure (75+% for sub-prime and Alt-A) and greater than 50% loss on the underlying asset.
What we are doing is allowing the banks to borrow against those MBSs at current market, transferring the loss to the Fed when it implodes.
Good post, thanks. I especially like (and agree with):
“I think that’s right. I think it gives people time to digest and an opportunity to come to an epiphany. The healthier players will realize that “you can’t fix stupid,” and the weak can be culled from the herd without the whole herd starving. I disagree with the WaPo on the next sentence, however.”
This is THE huge benefit of what the Fed did Thursday and Friday. The weaklings - and hopefully, many of the criminally-minded chased out and identified, later to be dealt with - are getting chased out of the market.
A lot of the high risk gamblers (flippers, margined hedge players, etc.) are getting creamed, which is precisely what is needed. Too bad for them if they can’t manage their losses.
In any event, it’s a very good, health-restoring development. The goal for the Fed now should be to continue to boost the little guy and the general economy to the extent possible.
And not by screwing with interest rates either way, dammit. (Hey, let’s roil a nervous market further by cutting rates in an *emergency* session. Brilliant!)
If an economic boost is needed now, cut taxes. Put more money in the pockets of the consumer. Don’t put spend any public money bailing out the high risk gamers who once again have proven stellar in their ability to piss away both real and paper wealth.
The sooner prices come down to a level where people can afford to buy them with a “traditional” 30 yr mortgage the better for everyone. In L.A. I’d say at least 30% needs to be shaved off the prices (I’m actually being conservative).
30% is conservative.
My company did an estimate and to get attrition down to an ok level, we need to let people with ~10 years seniority buy a house. That would require a 70% increase in pay! (With out profit margins? Not going to happen.) So… 100%/170%=59%. Until we see a 40% drop, people will be leaving LA. Now… that can be a price drop or wage inflation; but I really doubt we won’t undershoot. I’m actually counting on it.
Got popcorn?
Neil
Actually I was being ultra conservative for all those “Westsiders” where things are “Different here”.
different NOT!
There was a nice person by person series of stories today in the LA Times, on how the decline is affecting a day laborer, an appraiser, an escrow office owner, a realtor, and a loan processor.
My favorate quote was from the escrow owner, advising her employees to have less debt: “If you buy that $700 purse, it really cuts into your budget.” Yeah, ‘at a way to teach ‘em, cut their costs down to a $400 Coach bag, LOL.
LOL - And the worst part is I can barely wrap my head around that kind of thinking. Why is that spending anything over $40 on a purse is not labeled just plain stupid? When did “glamour” and “stupidity” merge? I understand starbucks and cigarette addictions better than the Coach purse thing.
I’m forced to use the women’s bathroom and I gave birth to 2 mini-me’s but some days I feel like I’m on the outside of the women’s club looking in.
You and me both. The last purse I bought cost $12.00 from Kohl’s.
I’m not defending the practice, but at least designer bags have some resale value on ebay, unlike the cheap junk from China. Friends with the bags say they are treated better when they carry them and it helps with confidence. Sort of like men and sports cars, only (usually) a lot cheaper.
Very sad that someone’s confidence can be bolstered by a purse (or the behavior of others who are impressed by said purse).
This is what’s wrong with this country, IMHO. The stuff that really matters (integrity, character, intelligence, kindness, etc.) doesn’t count in this society. Tragic…
Wow Neil. I didn’t realize that wages were THAT far off. I knew they hadn’t kept pace but 70%? Wow.
I know it will differ from area to area but that’s huge.
Neil, and the average salary of that pool of employees is how much?
60-70%
Just curious, is that a private or publicly owned company?
Neil…curtsey.
I respect and admire your post…and no…this is not a…BUT.
I realise LA is HOT!! And, yes, I lived in LA way back then.
Seriously, LA is not the center of the universe (I say this respectfully, as my cat, is trying to type with me…pardon for the typos).
California actually proprosed draining the Great Lakes as a solution to their water foes. WTF.
Again, curtsey…I am harmless and ignorant to the housing market in CA, looks good in many areas. (LOVE THE SHOPING!!!)
I’ll take no popcorn as I must floss all toooooooo much!
Respectfully,
Leigh
In San Luis County during 90-96, prices retreated 34.9%, least we forget. I rest my case.
Irvine lost 35% in home prices from 1989 to 1997. I know as I live here and owned a home during that time.
Our home in a better part of the San Fernando Valley lost around 40% the last time — a time when people actually had 20% down payments & **qualified** for a loan.
Can’t even begin to imagine what will happen this time.
Here’s my tinfoil thought of the day– What if a lot of this liquidity injection is ending up with hedge funds?
My feeling has always been that BB’s attitude toward avoiding the Great Depression was as much about steering public panic as about monetary policy. As in– it wasn’t the failure of the banks but the panic following the failure that really kicked off the massive failures and deflation.
But today, there’s no real fear about that anymore. Sure, people have CDs and MMs and savings accounts, but they’re not running to the bank. And they’re not going to. What we do have are lots of hedge funds that are being run on– hedge funds today are like banks in 1929. And we’ve all witnessed the very public and violent failure of the Big Ugly Lotsa Leverage Structured Housing Investment Trust at Bear Stearns.
Now imagine if you were invested in one– Where’s your money? What are you going to do? So they’re getting run on like crazy, and BB’s 1930 solution to bank runs was the Fed juicing them with liquidity… when everyone knows they can get money out, they stop wanting it. One problem solved. Now some hedgies are majorly invested in CDOs, and the Fed is taking MBS as collateral for these loans. Who is this bailout really for? Makes you wonder, at least.
‘avoiding the Great Depression was as much about steering public panic as about monetary policy.’
- I think that the only monetary policy that Juan Six Pack can understand is his weekly paycheck and what TV commercials tell him that he ‘deserves, has earned & needs NOW.’ The consumer has funded the last 5 years and party is over now. Juans next focus will be that he is being treated unfairly and needs special consideration.
By 3Q the pain will be on Main St. Back-to-school season off to a slow start, retail looking wobbly. Still they cook the “consumer confidence” numbers - and that’s getting annoying. Really, who bases any serious decision on how their neighbors and coworkers “feel” about the economy?
SoBay, I mean that investors in hedge funds now are like the people who made the bank runs in the 1930s, and maybe that’s where the Fed’s attention is now.
As for J6P… what’s he going to demand? Tax cuts? hahahahahah!
Tinfoil Hat Alert:
Consider, also, that this “injection” may have been precipitated by mal-intent. Does anyone really know that BNP Parabis didn’t issue its hold to shake out the IMF?
Interesting timing as M. Sarkozy visits Kennebunk, no?
The Fed provided liquidity with repurchase agreements. The banks have to pay them back within a short period of time, e.g., 3-15 days with a little interest added in. The Fed provided temporary liquidity and took collateral from the banks. The Fed is doing this to provide temporary liquidity, (but not capital), but also so that the Fed can defend the interest rate that they want to maintain in the market. This last concept of defending an interest rate is hard for me to explain. Also the repurchase agreements have to be looked at over a period of time because the Fed can buy and sell in the same day. The total amount that the Fed bought and sold over the last 6 months is more important. Right now the total is unremarkable.
I like how some of this is explained at this Winter’s site (see comments too), for example:
“Again, be careful how you characterize this, as I would hesitate to call it “printing money” just yet. This is a temporary repo injection, NOT PERMANENT (which they still haven’t engaged in since May3) , and could disappear next week. The total weekly injections were $87.5 billion, but $32.5 billion already expired, leaving $55 billion outstanding. That’s large yes, but $38 billion of this expires Monday.”
http://wallstreetexaminer.com/blogs/winter/
http://en.wikipedia.org/wiki/Federal_Reserve_System#Control_of_the_money_supply
Even said, I still think the wheels are coming off. I just think there are better indicators of the economy than Fed repurchase agreements, imo.
Do not like your moniker, love your logic. Thank you.
As a tinfoil wearing, gold-hoarding seditionist I feel very borne out by the past week. In fact, things are going exactly according to script. Helicopter drops are in full effect and the bailouts are swinging into high gear. Cash is trash in this inflationary environment.
I agree. None of the money will go where it is intended, and will instead end up in precious metals. Once these start to take off, they will get a life of their own. Right now, we need to pay the piper for past transgressions. Controlled inflation will be the tool of choice. We are not going to see Argentine style inflation here, but could well see a repeat of the 1970’s.
I don’t understand were this cash, i.e.”Helicopter drops are in full effect and the bailouts are swinging into high gear.” you talk about is coming from.
The Fed bought RMBS from member banks under 3 day repo agreements. I assume these can be rolled over for a period of time but I believe the banks have to buy them back at some point in time when the banks are able to determine the value when the markets are more liquid. Unless the Fed directly absorbs some of the loss on these RMBS’s how is this inflationary?
“Those that forget the 1970’s are doomed to repeat them”
OH MY GOD –bad fashion & hair!!!
As much as I despite Cocaine Larry Kudblow, he had Wayne Angell, Larry Lindsay and another buffoon on Friday afternoon at it seems Larry is holding these guys feet to the fire and getting them to explain exactly what this repo agreement is. According to them, it is in fact what cfoofmomo indicated.
I never thought I would cheer on Lyin’ Larry.
The “private” federal reserve “prints money out of thin air” and as long as it is accepted there is no problem. No one knows the balance sheets of the Enron federal reserve and there is no law at present that says they must reveal what they are doing as far as putting any quantity of money into the markets. All records are “top secret”. Any doubt by anyone, just try as the walls of silence will appear. No problems unless the printed dollar will no longer be accepted as is slowely happening now the “smart” players are now doing. The Wall st. boys and their private money bank the federal reserve phony scam is now unfolding. The only question remains; does it come apart over a short period of time or all of a sudden in a few short weeks of a big crash. Only history books will tell.
Gold is actually cheaper today relative to oil than it was when it was artifically capped at $35 an ounce (at which time oil traded mostly in the 1.50-2.00/barrel level). And today looks a lot like the early 1970s in terms of the business cycle/inflationary environment. This is why gold looks attractive to me. If gold breaks out above $720 and quickly moves toward $800, what will it look like from a relative valuation standpoint? A: Cheap. What other asset could so easily gain 20% from here and not look overvalued?
historically, an ounce of gold tends to be worth the price of a good suit.. and will very likely continue to be.
Now the question can be reworded. Is the price of a good suit likely to rise or fall in the near future?
Whether that is true or not does not make the price of a good suit the single best indicator of the price of gold. There is no one best estimator; if one can keep in one’s mind a rough 30-35 years’ time series of gold, commodities, interest rates, currencies, and stocks, along with corresponding economic conditions, one may be able to draw some conclusions and make some predictions.
But, for snicks: When I was working in NYC in the early 80s, a good suit at Brooks Brothers was about $300 (I used to buy top quality suits at the discount warehouses on Fifth Ave for maybe $200.) Gold was on its way from $800 to $400, eventually getting into the low 2s. So gold was more expensive than a good suit at the end of the last inflationary cycle and even into the beginning of the deflationary cycle. That changed sometime during the mid-80s. Today I daresay a good suit is a good bit more than $650, although frankly I wouldn’t know.
Aside from the specific values, if gold is a hedge against inflation and inflation happens, the price of a good suit (and most everything else) will rise and gold will follow the rise.
But i foresee a fall in prices.. well, it’s not much of a prediction since it’s already happening with the largest things first.. homes.
As the economy absorbs this huge shock and then shivers from it’s repercussions, I see no reason that automobiles, clothing, food, energy etc. will not be dragged along in the wake, but instead follow the Law of Wishful Thinking upward.
Gold, being disconnected from the currency, is just another commodity, like a suit.
So your argument is that nothing is ever at a relative over- or under-valuation, and that we should expect all prices to move in lockstep at all times? This seems to be a common theme the last couple of days. . .
im not saying lockstep.. maybe the gold price will rise while other things fall..
Gold may rise some just because so many people are, and more will, be scared sh!tless, seeing very troubled times ahead, and will instinctively reach for gold as protection against it.
But all the panic buying may prove to produce nothing more than an unsupportable short-lived gold-bubble.
i see prices falling.. a recession.. i think things will cost less tomorrow than than they do today.
Should i buy gold now? That depends on my priorities. I must buy food and gasoline and i should not buy gold unless i’ve got extra cash to speculate with.
If i already have gold but lose my Realtor job, i must sell gold to buy food and gasoline and pay rent or a mortgage.
Massive selling of gold to get cash to pay debts and buy necessities, (which will happen if things get tough) whether governmental or private, will force the price of gold downward.
It’s not just houses either. We are seeing incentives on new cars way up - effectively spreading deflation to the auto sector along with falling unit sales (15.3 mil annualized for July). Deflation also in almost all big-ticket items - accelerating price drops in flat panel TVs, boats and RVs.
The main areas of remaining inflation are food and industrial commodities. With weakening end demand, industrial commodities are headed for a big fall. Food inflation is partly the result of dumb energy policies and partly increasing consumption and demand from poor nations becoming less poor. That one looks more sustainable unless we stop the food —> energy conversion subsidies.
You’re right Paul. Euro countries have been dumping 400-500 tons of gold since Sep 99. However, fye 9/06 may have only resulted in about 375 tons being sold to prop up the Euro. Gold is on sale today thanks to the Euro. But maybe not for long. First GATA agreement was 9/99-8/04, 9/04-8/09 is the second limiting 500 tons max sold per year. After that??? 500 tons is about 20% of annual production, and could vanish after 09. Price up at least 20% based solely on supply cut.
Got diversified assets?
Soviet gold sales during the mid-80s also played a significant role in damping down the price. I discovered this when I wrote a (published) paper (Virginia Economic Review - either 1987 or 1988) about Gorbachev’s restructuring (perestroika) and one of my conclusions was that the CIA was overestimating Soviet GDP growth because “income” was being propped up by reduction in gold reserves.
I don’t have data, but I believe that central bank holdings as percentage of total gold demand has declined over the past 20 years - will try to work on it.
One of the big problems for silver up until recently was overcoming a loss of ~30% of total demand over the course of about a decade as cameras changed over to digital imaging. That has virtually been completed, as economic conditions in Rochester, N.Y. will attest.
Oil is wildly overvalued and headed for a serious decline. In the short-term there are huge speculative long positions in crude oil futures. Any decline will force a serious unwinding, putting further downward pressure on oil. This same scenario has already played out with respect to the Euro/Dollar cross rate. A partial unwinding of large speculative positions has brought the Euro down, but far more is possible. Crowded trades are dangerous trades.
Over the longer term, oil demand and therefore price will be tied to industrial demand and the relative strength of the dollar. Right now, consumer demand is collapsing in the US, which will kill export growth in China and other Asian nations. Early indications of this are showing up in India and Japan. China’s trade surplus fell in July but we’ll have to see if that is a trend or just a distortion caused by export tax changes. But there is no question that overall growth in Asia is slowing significantly so the market’s current expectations for oil demand are too high.
In a crisis, the dollar should also strengthen unless the Fed panics. So the path of least resistance for oil is down, not up. I expect to see $30 oil again in the next 3-5 years.
Sounds like we’re all on the same page as far as relative prices - but I’ve become a bit more of an inflationist the past six months or so. Although politics plays little role on a day-to-day basis, in the long run it is huge. I expect Hillary to win and European-style socialism to follow in the U.S. If Bernanke won’t spike the punch bowl (I think he will, to some extent, because the pain on Main St. is going to come fast and furious beginning, oh, about next week) she’ll throw him out and find someone who will. I think a new round of inflation is likely (although, I agree, not inevitable), and I don’t think there will even be any serious deflation before it takes hold. Perhaps a slight tick down in CPI over the next 12-18 months, but not deflation, and at every turn, new indications that short-term politics will overwhelm long-run common sense, and thus increasing worries of serious inflation.
Oil is wildly overvalued and headed for a serious decline.
Deron, you’re pretty sharp overall, but on this you’re dead wrong.
tj & the bear wrote Deron, you’re pretty sharp overall, but on this you’re dead wrong. [about oil]
I’ll agree with Deron. The credit based bubble affected not just real estate but also stocks and commodities. As all “assets” deflate, usual suspects like real estate, stocks and commodities will all come down in price. Why should oil and/or gold be any different from other bubble assets?
Or is oil different this time around?
[As someone who owns few shares of oil exploration companies, I'd love to see oil keep going up but I still believe oil (or corn or gold) is like any other commodity.]
my comment started with I’ll agree with Deron. Sorry for the missed up italics.
Please…Please world investors….take my (wife - substitute any MBS) so we can maintain our high housing prices, SUV’s, borrow/spend, borrow/ spend……Boo hoo….Boo hoo! Please help the US.
Great minds…
When Fools Rush In, The Joke’s on Them
Dissecting the Henny Youngman Economy.
“An idea for a morality play: Capture the madness of an era when investors—entranced by new technology, a novel set of economic assumptions, and an all-powerful Federal Reserve—lost their heads, blew an exuberant bubble, and suffered a painful bust.
“Sure, it may be late for a chronicle of the zany dot-com 1990s. But this template can be adapted easily to the financial trend that has defined this decade—and that may have come to a close this week. It is, in a way, the Henny Youngman Economy. Lenders pleaded: “Take my money … please!”"
I believe also that the Fed injections are temporary - they are 3 day loans, it’s not “permanent” money that stays in the system. And what are they going to do, drop money every time a hedge fund goes belly up?
Everyone on this blog knows that if lenders really can’t sell off crap mortgages anymore, then only qualified buyers will be able to purchase. And most people can’t qualify for these prices.
And let’s not forget Japan. Their interest rates went to zero, and it didn’t save their RE market.
Interest rates (well, the Fed rate) could go to 0 here, and I don’t think it would fix this mess anyway. Honestly, the problem is affordability, even with a 0% Fed rate, the payment will be higher on the homes then with a teaser rate loan, potentially alot higher.
What you said is exactly correct; if the crap cannot be sold anymore the game is over. It almost does not matter what the Fed does; if investors in MBS products forsee a long period of deflationary pressures on home prices (which, they would have to be blind not to see) then the securities are not at all attractive.
The “BS” in “MBS” is “backed securities”. Well, frankly, as homes continue to fall in price, these securites are backed by nothing. They are just a revolving credit line extended to people to purchase a home, no different then a credit card. And, as we all know, credit cards, even for perfect credit scores, do not charge 5% interest.
The more I watch this unfold, the more I think there is really no way to save it. I commented on an earlier thread about the proposed Fannie/Freddie changes. At first I felt cold fear when I heard about those changes, as that is truly smething that could forever inflate home prices. However, Fannie and Freddie only buy CONFORMING loans. How many people do you know putting 100K down on a 500K home with a debt to income of less then 33% and a 720+ FICO (and no, you may not use yourself or any other HBB contributer!).
When I heard about the Fannie/Freddie proposal, my fear was not so much inflating prices again, but shifting the eventual carnage onto the taxpayer.
These GSE’s do not even know the risk in their current portfolios. I strongly believe that the regulators and congress will not allow them to buy additonal RMBS outside their current requirements and caps that they know to be of questionable value.
This was paraphrased from a regulator yesterday who also said that to do so would be “ABSURD.”
“if investors in MBS products foresee a long period of deflationary pressures on home prices (which, they would have to be blind not to see) then the securities are not at all attractive”
That’s exactly what’s happened. Bond investors know that these bond’s are backed by depreciating assets and large numbers of defaults, to come. Nobody wants the bonds and institutions holding them can’t find buyers and don’t want to mark down their values. Until the institutions are forced to take their hits, the log jam will continue. We should see a lot of hedge fund blow ups in the next couple month’s. Homebuilder stock may continue to rally, as hedge funds are forced to cover short and long positions to meet margin calls. Homebuilder stocks have been a popular short for hedge funds. A short squeeze may provide another opportunity for shorting the homebuilders.
I believe also that the Fed injections are temporary - they are 3 day loans
Not all of it. On friday, the fed bought $19B worth of mortgage securities. That is a direct injection into the money supply.
No, they didn’t permanently “buy” these securities. As was explained previously, they accepted the MBS for 3-day repo agreements… so the banks have to buy them back in three days. Effectively, the Fed accepted MBS as collateral on 3-day loans.
Don’t get me wrong, it is a BIG deal that the Fed would accept this sort of collateral (and a very dangerous precedent in my view), but they didn’t really buy the MBS in the sense that we would normally use the word “buy”.
“Fallout from the intensifying credit crisis stretched from a French bank to the largest home-mortgage lender in the U.S., triggering unusual central-bank interventions.”
I guess we won’t be hearing the word “contained” very often anymore. In about six months someone will do a Google Popular Word Search and will find that the useage of the word “contained” peaked in July/August of 2007.
The head of Inman News was just interviewed on CNN (In the Money). He said it’s all fine and good for the President to come on TV now and talk about predatory lending and financial literacy — but where were all the warnings two years ago? I’ve been boring friends and relatives to tears with talk of this for that long and I know almost nothing about economics. Now all of a sudden every talking head on TV is spouting stuff I read here back in 2005 — stuff they all pooh-poohed 6 months ago.
” ‘You can divide and divide and divide and divide it, and the risk is still there.’ ”
Waiter: Into how many slices do you want me to cut your pizza: six or eight?
Customer: I’m especially hungry tonight, so make it ten slices!
Keep slicing till you get to the free one.
Can I just have the slices with the extra safe pepperoni on them ?
Can you imagine a mom and pop business asking the gov’t for infusion money because they bought to many washer and dryers and sold them to people who can’t afford to make the payments.
The reply letter would be, we are a capitalist society and you make or break with your decisions, the gov’t can’t bail out your mistakes?
Where is the “free market” solutioin to all of this? Why not just let the “market decide”. I mean we have to listen to the transnational companies and Wallstreet crow ad nauseum about this….but when push comes to shove and their cronies in banking are facing the wrath of “market forces”….all of a sudden we turn socialistic? Or worse…
Capitalism has degraded into a facade for elitism/cronyism. And all the “rhetoric” about democracy, freedom, liberty…..is just that.
The corporate, financial, and governmental structure of this country is so rotten that the only true solution is to knock the whole teetering stinking abomination down and start over.
That being said, the root cause, as has always been so, is that the seeds of our own destruction are built into each of us. Hence, it is always a roller coaster if measured over a long enough period.
Every “empire” goes thru cycles of turmoil, organization, growth, plateau, and decay. The U.S. in this last stage.
The system has become unstable and the decision for everything boils down to profit. A society based on purely selfish pursuits and “gaming the system to retire by 30″ loses the vision of a “common good” and eventually destroys itself. The educational system, infrastructure, and economy all start to collapse. That is what is happening now. And those at the top and who have the most to lose, deny it until they have established a “safe harbor” for themselves.
If you look at other “empires” that have reached the “decay” stage…the outcome has never been good.
How can the same “leaders” (govt, business, FED, etc.) who have led us to the brink of economic disaster…lead us out of the very mess that they led us into?
Interestingly enough…
It will be exactly one generation between the fall of communism and the fall of consumerism, 18 years~
Amen buddy. Most of these aholes slam anyone that challenges the government and are the first to look for a handout or bailout. They hate taxes (i.e. contributing) and they hardly ever serve in the military.
Some patriots! These people are full of shit. The sight of them disgusts me.
What is the popular addage? Privatize profits, socialize risks? The current talk of bailouts reeks of this mentality.
Welcome to the real America.
Shirt sleeves to shirt sleeves in three generations!
but we’re not talking about a a mom ‘n pop large appliance business who’s disappearance would hardly be noticed..
OT: isnt it so funny to go back to 05-06 and remember all the crap people use to tell us? We just were being realist.
“I believe also that the Fed injections are temporary - they are 3 day loans, it’s not “permanent” money that stays in the system. And what are they going to do, drop money every time a hedge fund goes belly up?”
This is right on. There is NOTHING anyone can do without destroying housing or the US economy. I think both are toast for the next few years.
And just for good measure, OFHEO refused to raise the portfolio caps for Fannie and Freddie.
Reins Kept on Fannie, Freddie
Weathermen scoff at their prediction accuracy.
Mort Zuckerman was on CNBC this week…said no way should Fannie & Freddie increase the limit for conforming loans…said that buying an expensive home in an expensive market is a choice, not a necessity, and that the American taxpayer should not be on the hook for someone’s choice to mortgage themselves to the gills. Amen.
Thank God for a little sanity on that channel! Seems that there is not much “rational” thinking on CNBC, but every now and then they get Shiller, Shilling, or Zandi on there telling it how it is.
Mark Zandi is great!
Let’s not forget Peter Schiff. He has been making all of the right projections and has been literally scoffed at in disbelief, until now.
http://www.europac.net/video.asp
Why hasn’t anyone in our wonderful MSM called Bernanke or Paulson out on their ridiculous claims of subprime being “contained” and “housing has bottomed”?
Paulson has to say it is contained. Imagine what would happen if he came out and said it was not contained and he had no idea what was going to happen. Well after the markets melted down the talking heads would blame Paulson for causing the melt down. Really he has two choices either lie or say nothing. If he says nothing then that sort of confirms the fears so he has to lie. That is my take on it.
There are other things that can be said than it is contained when he knew it wasn’t. This administration has lost enough credibility around the world and doesn’t need more damage in a time of crisis.
“Why hasn”t anyone in our wonderful MSM called Bernanke or Paulson out on their ridiculous claims of subprime being “contained”?”
MSM knows they are only doing their job of attempting to maintain order in the financial markets– not send everyone rushing for the exits.
Come to think of it, they never called NAR out on their claims either. It’s like the incessant pumping of the dotcom bubble. I don’t think that is maintaining order, it is setting up for chaos.
The American people cannot handle the truth. We prefer fairy tales.
The print edition of the South Florida Sun Sentinel did exactly that. The headline reads: “Experts were wrong”, then goes on with pictures of both Bernanke and Paulson.
I think the key point in all this shifting of risk through derivatives is that people were allowed to assume risks that they didn’t have the wherewithal to support if the risks went bad. i.e. hedge funds writing CDS without any real assets to back them up if the CDS got called in.
As long as the entity taking the risks has the ability to pay up if the bet goes against them there is no problem with risk shifting and it’s probably a useful innovation.
“You can divide and divide and divide and divide it, and the risk is still there.’”
In the I.T. world we know what happens when your equation eventually divides by zero. The only solut#@!^###NO CARRIER
OT:
Good Debt?
“I grew up believing that some types of debt were good and necessary: namely, mortgage and student loan debt. (I’m in my mid-40s, just to provide some historical context.) The assumption, I expect, was that these debts would, in the long-run, pay off. (The house would eventually evolve into wealth to be passed to one’s kids and the education would make it possible to pay off that mortgage.) However, with recent reports of corruption in certain segments of the student loan industry, the stories of educated Americans owing more student loan debt than they can ever hope to repay, the historically high rates of home foreclosures, and the meltdown of the mortgage lending industry, I’m not so convinced that either one of these types of debts is at all good. In fact, I think that Americans should be encouraged to rethink (even reject?) these taken-for-granted pillars of the American dream.”
Good debt is any debt that increases cash flow more than the debt costs and is thus self-liquidating, regardless of what is purchased with the money.
Conversely, just because you borrow money for a house or schooling does not automatically make it good debt if it’s not self-liquidating. For example, student loan debt used to get a PhD in medieval German literature is most likely not self-liquidating.
Oh, I think it’s self-liquidating alright.;)
lol
Hear, hear. The case that supports taking on such large debts depends wholly on there being another 50 years of unprecedented political,economic, social, etc. stability. What are the chances 2000-2050 will resemble 1950-2000?
Hmmm… let me think… where’s the calculator… got it! ZERO.
I’m 37 and it wasn’t until a couple of years ago that I learned about “mortgage burning parties.” My grandfather had one when my Dad was a boy. To me the notion that neighbors would gather at a house to celebrate the burning of a piece of paper is so…alien. I just can’t fathom it. All I have ever experienced the very few times my wife and I have gotten together with neighbors is a total display of fakeness that is deep and is uniform. Plasma TVs, complaints about their own kids, stuffing themselves with crap food, two SUVs in a driveway…disgusting. I suppose there won’t be any more block parties so my wife and I won’t have to figure out new excuses to not attend. This past week has turned me into a blogging zombie. I don’t know how many times I’ve watched Pee Wee Cramer’s implosion - although short, it’s better than watching Star Wars. I even turned on CNBC just for the entertainment and I haven’t watched the MSM for entertainment value since the days of Baghdad Bob.
When the majority of Americans are in agreement with you, it is time to go all in on real estate again.
Student loan debt and real estate debt CAN be good debt, but quite often aren’t any more.
I borrowed a total of $10k to get through college and paid it off in one year when I got my first job. Of course, that meant that I worked all the way through school, lived in shared dives, didn’t have a car, and owned just enough clothes to fill a small suitcase. But these days kids want to live large even as undergrads making no money. They drive brand new SUV’s, live in a new condo, nice clothes, expensive trips, etc… Taking out student loans so that you can fly to Mexico for spring break is NOT “good debt.”
Really the same can be said for a house, taking on massive amounts of debt for granite countertops and a house twice as big as you really need is NOT “good debt.”
Well, with banks becoming less stable (they need to barrow from the Feds) I want to know if I need to have keep as much of my income as cash on hand as possible. Is it possible that banks become unstable or insolvement to the point that they cannot process our banking transactions (checks/debit cards)…. and we’ll each need to stock up on canned foods and bottled water?
Okay okay… very likely not gonna happen. But, can someone explain what protects us from such a sceanrio?
A firearm?
Sorry, couldn’t resist.
‘A free people ought _ _ _ to be armed ‘ George Washington, 1790. Nuff said!
LOL……..
Been telling my kids for years we’re gonna need bigger dogs and bigger guns.
Been thinking the same: stocking up food, water, extra cash. (There seems to be something in the air, like the bad vibes before the riots broke out in the 90s.) I went to Wally world to buy some ammo for my handgun, and they said they didn’t have any. Went across town to Big 5, they were out too. I finally found some at Cabelas, the last two boxes. Come on, is everyone out there stocking up too?
let’s just hope your ammo ain’t made in china…
Yup!
Yep! I have my trusty cap and ball pistol and my flintlock rifle. That with lead balls, caps, flint and plenty of gun powder should do the trick. It may not be rapid fire, but if this goes as long as you all suspect, then it will carry the distance.
Two words for you - hand load
Check, check.
how long is your cash gonna support you if things go south.. a couple weeks? months?
(on the other hand, If you’ve got hundreds of thousands, is it safer and wiser to try and hide it in your house?)
A job will take top priority in a depression situation, and bank safety has nothing to do with that.
That “bank holiday” that Roosevelt instituted the first week into his presidency….
“In Michigan Canadian money circulated; in the South-west, Mexican pesos; the Dow Chemical Company paid its workers in coins made of Dowmetal, a magnesium alloy..”
(How does one prepare for that? )
from The Historic “Hundred Days”
William E. Leuchtenburg
Excerpted from “Franklin D. Roosevelt and the New Deal, 1932-1940″
“Rattled by a constant stream of bad news, investors in recent days have been shunning nearly all mortgages except for those that can be sold to Fannie Mae and Freddie Mac. That has prompted lenders to boost rates on prime ‘jumbo’ loans — those totaling $417,000 or more, too big to be guaranteed by Fannie or Freddie — to as much as 7.25% or 8%.”
Checking Providentfunding.com early this morning, I see their jumbo-A worsened at the close yesterday….now it’s 8.5%. Two weeks ago it was 6.625%.
With jumbo rates at this level, I simply cannot see how Cali prices will do anything other than collapse. Or am I missing something?
You aren’t missing anything. California is toast.
another way of looking at it is that the collapse of prices caused the high interest rates ..
Lenders were on board the Happy Train along with their FBs when it wrecked.. are now applying pressure to stop the bleeding.
“nearly all mortgages except for those that can be sold to Fannie Mae and Freddie Mac.”
Fannie is already very close to the cap and Freddie just a bit below theirs. Will the “conforming” market hold up once people realize that the GSEs can only buy so much? IMO, they have to leave themselves some room to convince the market that they could step in to buy. If they actually go to the limit, there will be no buyers left.
frcp_23_b_3–that little increase translates into an immediate 15% lower financed amount==same payment. Think the market is ready for that? Since almost all of Cali is Jumbo land, I’m thinkin toast ain’t the word, more like ashes. Doesn’t even begin to address the impact of tighter requirements,etc.
Here is my take on recent events. From Bloomberg:
“The Fed and central banks generally are doing what they’re supposed to do, which is provide liquidity in times of stress,” said Woody Jay, a former head of Treasury trading at Lehman Brothers Inc. who now runs Rock Ridge Advisors LLC, a $255 million hedge fund in Greenwich, Connecticut.
The rise in money-market rates reflects investors’ reluctance to provide financing to banks for securities backed by loans after losses in subprime mortgages called into question the value of other types of collateral.
http://www.bloomberg.com/apps/news?pid=20601087&sid=a.HHMotELafM&refer=home
Addressing the liquidity issues seems simple. Addressing ‘the confidence in other types of collateral’ issue seems a bit more hairy. That is the stinker!
Yup, everyone should read Roubini’s recent blog: illiquidity versus insolvency. Pretty much sums it up. If the FED has to open the discount window again next week as these three day loans expire and new illiquidity (read insolvency) crop up, the days of reckoning will be upon us.
How can global central banks stop now if money markets are frozen? They might be at this for a while. Lenders have lost confidence in each other. It’s probably going to take something major for confidence to come back.
BTW, who is this Ryskamp dude?
Does anyone think that it is strange that one bank will not loan funds to another bank? Isn’t this why the Fed stepped in with funds?
I suspect we have a crisis among financial institutions. God, “no honor among thieves..”
“With jumbo rates at this level, I simply cannot see how Cali prices will do anything other than collapse. Or am I missing something?”
And it’s not just the rates. It’s now very hard to qualify for a jumbo loan, since no one wants to buy the paper right now.
If credit stays this tight, or gets tighter, yes, California prices will collapse.
The talking heads claim that jumbo loans have had very low defaul rates. On the other hand, historically, jumbo loans weren’t given to felons, subprime borrowers, drug addicts and illegal immigrants. Jumbo loans used to go to doctors, lawyer and other professionals. The past few years, they were handed out like hot potatoes to WalMart greeters, burger flippers and teenagers.
“The talking heads claim that jumbo loans have had very low default rates.”
Bear in mind that jumbo loans are AltA heaven, especially on the two coasts. They have longer reset periods than Subprime, most are 3, 5 and 7 years before the loan resets. So, most of those resets are yet to come from purchases made in 2003-2006.
Trust me, those nice white collar folks stretched every bit as much to get into more expensive houses. They won’t be in any better shape to absorb a dramatically higher payment. Can you imagine the reset on a $700K “starter home” in CA? Ouch.
Very true. Higher income family will just take a little longer before they are upside down. Most won’t except this fact. Reality knows “all ” doors and will not miss knocking any door that is in trouble. Credit has to be paid back. Period.
“Reality knows “all ” doors and will not miss knocking any door that is in trouble”
That sounds biblical. Maybe folks should put lamb’s blood on the outside of their front door in the hopes that the grim house repo man does not come for them!!
Foreign Investment’s Flip Side - U.S. Trade Deficit Swells Along With Consumption, Debt By Paul Blustein, Washington Post Staff Writer
February 25, 2005
——————————–
“Every other night or so, the calls start pouring in from Asia to the homes of Peter Leonard and several traders he supervises at Nomura Securities in New York, jolting them awake sometimes as often as five times a night.”
“The calls come from places such as Tokyo, Shanghai, Hong Kong and Singapore, where investors want to buy U.S. mortgage-backed securities, which are essentially giant packages of mortgages on thousands of American homes. Such sleep disturbances have roughly doubled in the past year, according to Leonard, reflecting the sizzling demand among Asian money managers for a piece of the U.S. mortgage market.”
—–
The article discusses how investments in these MBS’s (which were yielding as much as 15%) fuel consumption while investment in productive assets has declined. It concludes with “A lot of people think this is courting some sort of financial crisis at some point,” he said. “When that will happen, of course, is hard to say.”
——————
So the liquidity crisis is just a first step in a series of adjustment shocks that will be required to re-balance the US economy.
About 20 years ago I watched in amazement as Barry Minkow, really the epitome of a small game grifter…
Pulled off a ponzi game, taking down the korporations like so much tall grass~
http://www.guardian.co.uk/g2/story/0,3604,752982,00.html
enron had some Minkow-ish qualities to it, and the whole hedgefundfiasco reeks of it…
This part I never knew:
“…Minkow has been paying back his victims - mostly institutional investors - at a rate of around 95 cents to the dollar ….”
The Economist magazine clearly saw this crisis coming in 2005. I’m sure Bernanke knew this was coming too, but apparently doesn’t believe its his job to address these bubbles. Is he also an Ayn Rand devotee like Greenspan? Why doesn’t Objectivism apply now?
——————————-
Foreign investors support US housing bubble - August 2005
——————————
…a more efficient international capital market is supposed to ensure that capital is allocated to the most productive use. Yet much of the recent inflow of foreign money into America is not financing productive investment, but a housing bubble and a consumer binge.
…The inevitable correction, when it comes, is likely to be all the more painful. When financial conditions tighten, investors are sure to become more discriminating. Sooner or later, the traffic lights will turn red.
That article was my “epithany moment” when I finally decided the bubble was for real. Thanks for reposting it!
they got the wrong model. Absolutely nothing about the overall housing market is efficient.
LA-Architectsaid : “Actually I was being ultra conservative for all those “Westsiders” where things are “Different here”. Different NOT!”
Why is this attitude so pervasive in West LA? I work with a few people that live there and have homes that are paid for. They are convinced the value of nicer homes there will be “flat” for a few years, but will not suffer any serious correction. They also believe the credit tightening will only impact poorer sections of LA and the IE. They tell me “Oh, there’s plenty of money to pay the home prices in the nicer sections of LA.” Am I missing something here, or are they? I would think these homes would be experiencing significant corrections (20-30%) over the next several years.
It doesn’t really matter to me either way as my wife and I are considering moving in the next year or two.
They’re missing everything. Your thinking is correct, although your correction figures are too low by at least half.
(“The regulator overseeing Fannie Mae, the Office of Federal Housing Enterprise Oversight, or Ofheo, rejected the request, saying the company’s principal market for mortgages was ‘liquid and working.’”)
Exactly. I’ll start worrying about the mortgage market when people can’t get loans under conforming circumstances. Then maybe we’ll need an FHA for the next generation. But first, the price must adjust. Sorry seniors, but how did you think you could impoverish the next generation and then sell your house to them for big bucks.
As to Jumbos, I agree that perhaps some adjustment for the relative per capita income in different regions might be appropriate. But not in the direction they say. $417K plenty for a higher income region like NYC. But why does it have to be so high in places where the median price is $140K?
I thought occured to me about how to prevent these credit fueled bubbles from forming. What if we limited CLTV on all loans to 80% of the previous sale price. Buyers would be forced to front their own money for any appreciation.
And why would anyone want to buy a house under those conditions?
This is so Japanese. They had bad real estate loans. Left them on their bank balance sheets forever rather than face the music.
We have bad real estate loans. They are spread out to pensions, banks, hedge funds, etc. We will leave them on the balance sheet forever too.
So what comes next?
DEFLATION.
italics off
lemme see if i can do it..
I have a very detailed question that I hope someone can answer.
The Fed injected cash by making loans to banks using the MBSs as collateral. So, if the banks can’t pay back the loans, the Fed takes the loss on the MBS and basically leaves the extra cash “in the system”.
So, the question is, did they make the loans directly to the banks, or did they also make them to the Hedge funds run by the bank.
To clarify, let’s say Tuesday rolls around and Bear Stearns can’t pay back the loans….. Does that mean Bear Stearns is insolvant, and is history? Or are the loans isolated into a hedge fund that they could shut down while the core Bear Stearns remains in business.
I don’t mind the loans AS MUCH if it mean that a bank that can’t pay them back is done and all the a&&shats that ceated this problem are out of work. I DO mind if they can just shut down a hedge fund and continue to go on without additional consenquence. Companies that loaned hedge funds money should be just as at fault, and damaged by this crazy lending, as the investors.
“..The Fed injected cash by making loans to banks using the MBSs as collateral..”
Since the Fed is lending money to the bank (and simply cannot be dumb enough to be investing exclusively in their toxic MBSs) aren’t all, the banks assets being offered as collateral?
Hmmm…. interestng.
The flapping heads were saying the Fed was taking MBSs ONLY as colatteral. Interesting. Is the Fed saying the banks can default on these laons, the fed takes the MBSs, and there’d be no recourse to go after the bank’s other assets?
Is the Fed, in effect, buying the MBSs, because they know these loans will be defaulted on???
here’s a page that explains these loans..
http://tinyurl.com/3xrahd
the way i get this is:
The rash of MBS alt-A, I/O, sub-prime defaults caused the true value of MBS to be unknown, and banks are afraid to buy / trade them to eachother. Trade stops. Business stops.
Without trading MBS (a 2 trillion dollar asset class) banks do not have enough other stuff whose value is a known, agreed upon quantity , like Treasuries or whatever, to substitute in place of MBS and to do their trading with.
So the result is that there’s a general lack of market liquidity…
“..Injecting funds into the banking system is a standard procedure that is carried out every day by central banks.”
“..the liquidity need has been extremely large given the near removal of a large piece of the collateral base — MBS.”
So, Central banks inject cash into the banking system to keep the banking business moving.
—
It does seem that MBS is the specific collateral:
“All of the lending was backed by MBS collateral — essentially filling a gap created in the market. ”
It seems that since MBS is what’s clogging the pipe, MBS must be the collateral for the blood transfusion.. and nothing else will substitute…
and likewise, if the trading value of Treasuries were unknown for some reason, and banks were afraid to give and take them, Treasuries must be the “collateral” for the central bank’s loan..
ya know.. i kinda understand this now..
Lets say i have a restaurant and serve two drinks. Half of my drink inventory is Corona beer and the other half is Koolaid.
But I, other restaurants, and my customers discover there may be a problem with the Koolaid. Some manufacturer in China may have accidentally spiked it with melamine.
I don’t have enough Corona beer to satisfy all my customers. I need more Corona. No other restaurants will take my Koolaid and lend me more Corona because they know the Koolaid might be tainted.
So i appeal to the big restaurant distributor warehouse to lend me Corona using Koolaid as collateral.
They agree, giving me a short term “loan” of some Corona, while a lab tests the Koolaid.
I cannot use my Corona as collateral because my customers are drinking it. The only thing i possess that could possibly be used as collateral is the Koolaid.
—
A remaining question is this:
Since the restaurant supplier knows my Koolaid may be tainted and worthless as collateral, how much of a collateral discount will they demand as a safety margin? Will they lend me only 50% of the Koolaid’s normal value? Less? More?
and similarly, how much, if any, discount did the central bank demand on their loans to banks’ using MBS as collateral..
“No other restaurants will take my Koolaid and lend me more Corona..”
should read:
“No other restaurants will take my Koolaid in trade for more Corona..”
“Bailing out FBs will effectively shut a much larger number of people out of the market due to propped up prices bolstered by undeserved interest rates for FBs according to some of the proposals I’ve seen proposed on CNBC.” “Can you imagine people who have defaulted on their mortgages being given a 1% interest rate even if it’s just an extended teaser period? They are still stuck with a house no one will buy at these prices.”
The bailout scenario gets even better than this:
1) FBs get to keep bleeding payments on homes they cannot afford for a longer period of time before getting foreclosed. Lenders will also benefit from the extended time until foreclosure.
2) Builders will get to keep selling homes at an unaffordable taxpayer-subsidized price, and will have plenty of incentive to keep building at a faster pace than the market can absorb the homes.
3) Those who are priced out today will also be asked to pay extra to help others keep paying for homes they cannot afford.
4) Renters will have plenty of vacant new homes and foreclosed homes coming back on the market as rental supply, which will keep rents low for the foreseeable future those of us who are priced out forever.
IN SUMMARY, IT’S ALL GOOD, BAILOUT OR NOT!
‘Since the start of this week, there are no prices for instruments that carry, directly or indirectly, some types of U.S. assets.’
What a crock. There are prices, but there is also an unwillingness to discover them.
Having a hard time reverting to your old handle, are you?
Bingo!!!! Offer a prime loan backed MBS at 70 cents on the dollar, there will be a buyer. Of course, that leaves the hedge fund underwater, the investors wiped out, huge losses for the banks that loaned the hedge fund money….
In short… there are no buyers at prices that allow us to keep our jobs.
Yep. That about sums all this up, doesn’t it?
Tho you forgot one thing: let the taxpayers pay for it all until death…and for generations afterwards.
WSJ reporting significant losses for Citi:
http://tinyurl.com/ys4w4y
Although the WSJ downplays it as only $700 million out of $20 billion annual earnings, another way to look at it is that Citi has already recognized and written down 15% of Q3 ’07’s expected earnings.
Do you anticipate more central bank activity on Monday and the week ahead?
Yes to both. The market was still reeling around on the close on Friday and more skeletons are leaving the closet this weekend and are in fact dancing in the lobby. I really liked Eudemon’s comment above. The best policy fix right now is fiscal rather than monetary - cut taxes.
Thanks.
In addition:
You gotta keep the people who are most likely/hugely to benefit from a change in interest rates OUT of this equation.
Keeping rates steady will be very beneficial in identifying what the heck is actually going on, the sources of the liquidity problem, and which lynchpins are affecting what and where.
Throw more debt into an already bloated market? Cut gubmint spending? It will only delay the inevitable.
Quite a while back I was arguing some of the central tenets of my depression forecast on Ben’s Money & Metals blog. All of them essentially revolve around mass psychology, expressed in misplaced universal faiths:
1) Faith in housing — “Housing prices always go up”.
2) Faith in credit — “AAA” debt is as good as cash.
3) Faith in fiat — King Dollar; Gold relegated to a “barbarous relic”
#1’s obviously toast in all but the last bastions of denial.
#2 just self-destructed this past week, due to the the impact of #1.
#3 will blow somewhere in the not-so-distant future, due to the impact of #2.
Once such a belief is shattered there’s no rebuilding it; instead, several generations have to come and go until all witnesses are marginalized and the cycle can renew itself. The K-Wave (or Long Wave, or E-Wave supercycle) all illustrate this propensity of human nature to keep repeating the same mistakes.
You’re watching history in the making folks. Hope you’re prepared.
You’re watching history in the making folks. Hope you’re prepared.
Yes, that is exactly what we are watching. As for being prepared, I’m about as prepared as I can be, other than making sure my alternative power, etc., facilities are in working condition. I don’t know how anyone without many millions of dollars could be totally prepared for something of this magnitude.
“‘If you do away with stated-income loans, you jeopardize an entire industry of people that are maybe getting paid in cash,’ said Julia Wei, a real estate and mortgage lawyer in Palo Alto.”
“Cash earners in Palo Alto include day laborers, migrant workers or any other undocumented, often immigrant, workforce. Wei also speculated that subprime troubles abroad could affect the local start-up venture-capital economy.”
Are you advocating theses cash earners avoiding all the payroll taxes? Who the hell do you think you are? That is why we ligitimate workers have to pay more taxes because of the underground tax cheats.
Exactly.
If they don’t want to pay taxes, then they don’t deserve to borrow money.
Want to borrow? Pay taxes like the rest of us!
ECB injects a further $65 billion into banking system
By Simon Kennedy
Last Update: 5:29 AM ET Aug 13, 2007
LONDON (MarketWatch) — The European Central Bank said Monday that it had provided around 47.5 billion euros ($65 billion) in loans as it continued to try and support liquidity in the banking system. The latest one-day tender from the central bank came on top of a 61 billion euro cash injection on Friday and the 95 billion euros it provided on Thursday as markets continued to suffer from the effects of the subprime credit crisis. The ECB said the tender had a weighted average rate of 4.07%. Earlier Monday the Japanese central bank added over $5 billion to markets.