Greenspan: ‘I Really Didn’t Get It’
Readers looked at a topic on next weeks Fed meeting and the former chairmans interview on 60 minutes this weekend. “I think the Greenspan article is veerrry interesting. It will relieve some of the rate-cutting pressure on Bernanke, as more people realize that he shouldn’t cut as low as AG did. Perhaps they may go so far as to realize that causing some pain by leaving interest rates (relatively) high is in their long-term best interest.”
“From that interview: “Former Federal Reserve Chairman Alan Greenspan said he was late to see the storm gathering around mortgage lending practices and commended his successor Ben Bernanke’s handling of the crisis, saying he would likely be responding in a similar fashion.”
“‘I think he is doing an excellent job,’ Greenspan said of Bernanke in a television interview scheduled to air on Sunday.”
“Greenspan was asked if he would lower interest rates as dramatically and quickly now as he did just ahead of, during and in the wake of the 2001 recession, according to excerpts of the CBS ‘60 Minutes’ interview released on Thursday.”
“‘I’m not sure that’s true,’ he said. ‘We were dealing with an environment back then when inflation was easing. We could have acted without the fear of stoking inflationary pressures.’”
“‘You can’t do that anymore. … I’m not sure I would have done anything different (if chairman today),’ he added.”
“Bernanke’s Fed has come under fire from some quarters for not acknowledging quickly enough how deeply the current crisis could harm the economy or responding aggressively enough to keep the U.S. expansion on track. Some analysts have speculated that Greenspan would have acted more swiftly.”
“Bernanke and his colleagues meet on Tuesday. They are widely expected to lower benchmark overnight interest rates, which the Fed has held at 5.25 percent since June 2006, by at least a quarter-percentage point.”
“Greenspan…said that as Fed chief he knew about questionable lending practices that were leaving subprime borrowers with adjustable rate loans vulnerable to harm from rising interest rates, but did not recognize those loans would trigger broader problems until fairly recently, CBS said.”
“‘While I was aware a lot of these practices were going on, I had no notion of how significant they had become until very late,’ Greenspan said. ‘I really didn’t get it until very late in 2005 and 2006.’”
One said, “To me, the most interesting question of all is whether AG’s candid admission of ignorance on the severe problems which would result from the lending industry’s abandoning traditional lending standards and making Jumbo loans for McMansion purchases to anyone who could breath should be taken at face value, or if they represent a calculated dilution of Greenspan Fed culpability.”
“It would look much worse if he was perceived as having cognizantly watched the seeds of a future banking crisis get planted under his nose.”
“Now that AG is openly lamenting the folly of giving loans to help low income buyers purchase houses they cannot afford, will Fannie Mae, Freddie Mac and HUD (not to mention certain high-profile members of Congress) stop encouraging the practice?”
“At any rate, it is about time that AG stepped up and took some of the weight of blame for the current crisis (the root causes of which predate AG’s retirement) off of BB’s shoulders.”
Another added, “There is no way we can avoid Fed-talk under current circumstances. It’s the moment of truth. ABCP credit is deflating, the stock market looks wobbly, banks are approaching the discount window, and consumers are grasping for their last line. Add to that, rising inflation and the falling dollar. It looks like we are at sixes and sevens.”
One imagined, “I can just see the headlines now: ‘Greenspan: I really didn’t get it.’”
One looked at the public perception, “Most regular J6p’s dont think about, dont know about, and cant understand the situation that is staring the central banks’s directly in the face.”
“Why is the common theme of restoring confidence centering around a rate cut? I think it may be probable that confidence can only be returned through the pain of failure. All the kool-aid drinkers need a slap in the face.”
“A rate cut for this bloggger does not restore confidence, a rate cut increases the fear of more ’shoe-dropping’ going forward. Confidence can only be restored by allowing failure of market participnants who gambled and LOST coupled with significant risk repricing and an S&P 500 of around 1100.”
‘The Federal Reserve is widely expected to cut its benchmark interest rate Tuesday for the first change since June last year. Given what’s roiling Wall Street, however, it might prove akin to offering a Band-Aid to stop a stomachache.’
‘Monetary policy is unlikely to have much effect this time around - even if the Fed reduces interest rates by 50 basis points [half a percentage point] - because the problem is that there is so much risk out there that is unknown,’ said Robert B. Reich, a former economic adviser and labor secretary to President Bill Clinton. ‘Credit markets and financial intermediaries are fearful of making much money available or engaging in new loans because they simply don’t know how much risk they’ve taken on.’
‘The main conduit through which monetary policy affects the economy, the housing market, is in disarray, and 25 basis points just isn’t going to matter,’ said David Wyss, chief economist for Standard & Poor’s, the New York rating agency. ‘It’s going to make very little difference. That’s an argument for a 50 basis-points cut.’
‘I think [Bernanke] believes that there are moral-hazard issues, and he does not want to fan more risk-taking in the future,’ said Mark Zandi, chief economist for Moody’s Economy.com. He expects a 25 basis-point cut Tuesday. ‘[Bernanke] wants to extract a pound of financial flesh now.
‘Current Fed chair Ben Bernanke has to make the tough call here, about whether the US economy is faltering sufficiently to justify lowering interest rates when they are already actually pretty low. Adjusted for inflation, there hasn’t been any time in the last 30 years when the Fed has started on a rate-cutting cycle when interest rates adjusted for inflation were as low as they are today.’
‘Sure, there are people who imagine that housing prices are going to fall 20%, and that wouldn’t be pretty. But that’s just a possibility for the future. In reality, the economy appears to be doing quite well by almost all indicators.’
‘As I wrote in this column last week, Bernanke isn’t free to cut interest rates the way Greenspan did, because inflation is suddenly very much coming back to life. In the last several weeks, while the credit crisis has caused the market to expect a Fed rate cut, all the classic indicators of inflation have gone into the red zone.’
‘Look at the price of oil. Last week I said it will be headed for $200 a barrel if Bernanke follows through on a series of rate cuts. And last week, I said gold would go to $2000 an ounce. Not quite there yet, but we’ve now blown through $700, and are flirting with new 27-year highs.’
‘Last week I didn’t give a price target for the US dollar, but it’s now moved to all-time lows against the euro, and against a trade-weighted basket of foreign currencies.
‘ ‘So do you see what’s happening here? The fact that the Fed kept interest rates too low for too long got us into this mess. At this point, I just hope that Ben Bernanke learns from Greenspan’s mistakes, whether or not he has confessed them. Here’s hoping that next week the FOMC holds itself to just a 25 basis point cut, not the 50 basis point cut many people expect. And here’s hoping that the Fed doesn’t promise more to come.’
‘If Bernanke can keep that discipline, the markets will continue to sort out the mess they’re in right now. The healing has already begun. Let’s not add an inflationary blow-out to our problems.
Meanwhile, the independent Swiss CB plans to hike interest rates. I wonder what effect that might have on the CHF exchange rate?
It has been Swiss policy to have the Franc closely track the Euro (and German Mark before it) since every one of their neighbors uses the Euro. I don’t see this changing unless the ECB decides to trash the Euro.
“Smart” money says…
Sure, there are people who imagine that housing prices are going to fall 20%, and that wouldn’t be pretty. But that’s just a possibility for the future.
It’s already happened, you moron. Don’t these clowns know when to stop?
Thanks for the quote Ben. I actually feel pretty damn special.
Back to confidence:
Internal struggles in the ECB are getting headline coverage.
Publications in the UK read “Panic in the Streets” front page.
Secondary commercial paper markets are in lock-down.
What happens when the “Primary” paper markets go into lock down?
Get ready for the pain.
I am somewhat confused of how one can have bank runs when a govt printing press enables printing unlimited quantities of fiat currency. Can someone please explain if you understand?
Between Rock and a hard place - savers besiege bank
· Fears of property crash as lending squeezed
· Northern Rock shares drop 30% after rescue
· Bank websites down as customers panic
Larry Elliott and Ashley Seager
Saturday September 15, 2007
The Guardian
Branches of Northern Rock were besieged by savers yesterday as fears grew in the City that the Bank of England rescue package for Britain’s fifth-biggest mortgage lender could herald a slide in house prices and further financial collapses.
Amid news that property prices were already falling sharply before the Bank’s first use of its lender-of-last-resort facility in more than 30 years, the Newcastle-based Northern Rock was forced to keep branches open late to allow savers access to their money. By last night it was reported a total of £1bn had been withdrawn.
http://business.guardian.co.uk/markets/story/0,,2169786,00.html
PB,
I’m not sure if your question was rhetorical or not. From your comments on this board, I presume you know well what I’m about to explain, but I thought the question could be a good opportunity to talk about how our money and banking system actually works. Too few people really understand it. Hell, I was an undergraduate econ major, and I was never taught this. It took me a while to focus on the forest instead of the trees, and I’m constantly amazed at the number of incredibly well-paid and well-credentialed leaders I’ve worked with at major financial institutions who don’t really understand what money is. I think a great deal of the problem is the general direction of economics as an academic subject at top universities. (E.g., econ professors seem to understand a great deal more about mathematics than they do about money and banking.)
I find it helpful to walk money through the system to see what’s really going on. Suppose you deposit $100 in your local bank. That bank has to keep, say, 10% in reserves (I don’t know the actual percentage, and it varies depending on the nature of the bank’s liabilities. Also, in this example, I consider “Cash” to be equal to reserves.)
When you deposit the funds, the bank credits your account $100. This is a liability for the bank (it owes you the money. So the BS is as folows:
Assets=Cash@$100
Liabilities=Deposits@$100.
The bank can now lend just a bit more than $90 out to customers, since the $10 left will meet the reserve requirement. ($10/$90~11%) The bank debits an asset (loans receivable) for $90 and credits the account of the customer taking the loan for $90. Now the balance sheet is as folows:
Assets=Cash@$100 + Loans@$90 = $190
Liabilities=Deposits@$190.
This is the step at which money is created. It was created simply by making the loan.
Almost immediately, the customer taking the loan will probably take out the cash. Now the banks balance sheet is as folows:
Asset=Cash@$10 + Loans@$90 =$100 Liabilities=Deposits@$100.
But the money lent will still end up somewhere in the aggregate banking system. For example, if the $90 was used to purchase something at a local store, the store might make a deposit that night. So it’s bank to the following:
Assets=Cash@$100 + Loans@$90 = $190
Liabilities=Deposits@$190.
And then the bank looks at its balance sheet (Cash=$100, Liabilities=$190) and sees that it can now make more loans and still meet the reserve requirement. In fact, it can loan approximately $74. It will debit loans receivable to create an asset and credit the customer’s account (deposits).
Assets=Cash@$100 + Loans@$164
Liabilities=Deposits@$264
This continues, but each time, because of the reserve requirement, the magnitude decreases. This is what is referred to as the multiplier effect.
So what causes an increase in the money supply? Usually, a decrease in the cost of borrowing will do the trick because it enourages people to take more loans. But a shift in risk appetite can also do it (crazy lending, low underwriting standards). Japan is having a hard time doing it through the usual low interest rate mechanism because people learned their lesson after tking on excessive debt in the 80’s.
Notice that under this system, liabilities to customers (deposits) are generally a great deal more than cash on hand (reserves). That’s by design. After all, the bank can’t make money by simply guarding your money for you. But the system only works if people have confidence that the loans the bank makes will be paid back. Mortgage lending can be especially difficult since with traditional lending the long-duration assets (mortgage loans) were financed with short-duration debt (deposits from customers). That’s one reason lenders thought securitizaton was such a great thing.
Thank you, Coward! I have learned so much on this blog…thank you fellow HBBers and most of all thank you, Ben
immediate gratification wrapped in the illusion of protecting ones self-interest.
I think that people forget (as I do) that one is supposed to sit back and relax as the Patriarch (Government) will step up and save the day in the most precarious of situations.
As you well know GS, power to the printing presses was cut off by the ABCP market. Although CBs around the globe have attempted to ‘jump start’ the ABCP market with extraordinary amounts of powerful liquid surge, the patient remains unresponsive. Consequently, Sheeple manipulators and their flock are at sixes and sevens. Expect additional spikes of liquid energy on Tuesday. It should be a jolting.
Are there any stats on how many ARMS are set to LIBOR? IMHO it seems that fed rate cut will do nothing for the majority of them. A few potential buyers may benefit from Fed rate cut, if they have down & good credit, but certainly not enough to make a significant difference.
Another mildstone in the housing bubble with AG this week.
Oddly the shift in focus has been lately in the subprime and poor borrowers…very little is now talked about regarding the overall housing/dept bubble. All the layers of “froth” as AG put it still is rather being overlooked in the media. With all the “froth” still built in, its rather odd we still have folks buying in California RE. Yes a 10% decline is still penuts compare to the triple digit increases we have seen. Guess some folks dont get it!
mildstone - adj. state of being one attains if one “doesn’t inhale”
‘Monetary policy is unlikely to have much effect this time around - even if the Fed reduces interest rates by 50 basis points [half a percentage point] - because the problem is that there is so much risk out there that is unknown,’ said Robert B. Reich, a former economic adviser and labor secretary to President Bill Clinton. ‘Credit markets and financial intermediaries are fearful of making much money available or engaging in new loans because they simply don’t know how much risk they’ve taken on.’
In Fed parlance, they are “pushing on a string” now.
‘[Bernanke] wants to extract a pound of financial flesh now.’
Sounds like Zandi is arguing for standing pat? Because a rate cut to bail out fools would have the opposite effect from extracting a pound of flesh.
I’m simply amazed that the Chairman of the Fed and the Fed itself cannot calculate inflation.. You want to put your finger on a big part of the cause of the current problem we have, well, you need to look no further than the fact that the Fed lowered rates during one of the most inflationary periods in our country’s history and ignored the painfully obvious data on asset prices and mortgage markets right along with it..
‘Look at the price of oil. Last week I said it will be headed for $200 a barrel if Bernanke follows through on a series of rate cuts. And last week, I said gold would go to $2000 an ounce. Not quite there yet, but we’ve now blown through $700, and are flirting with new 27-year highs.’
It seems as though the oil and gold markets are betting on an easing Tuesday, which would likely be perceived as inflationary and lead to further declines of the U.S. dollar.
That is the problem, a .25 cut will start the ball rolling. The fed will have to be clear about how much it will ease or the dollar will crash.
‘The healing has already begun. Let’s not add an inflationary blow-out to our problems.’
I concur with this. One recent piece of evidence is recent news that homebuilders are beginning to build housing in size and prices more suitable to household incomes available to purchase them. Either a substantially lower FFR or a Congressional bailout (through higher conforming loan limits) could potentially have the effect of encourage further speculative McMansion construction (adding to the extant glut of unneeded unwanted McMansions) and exacerbating the affordability crisis.
Phantom Bids
http://www.thestar.com/News/GTA/article/256968
I think this practice has been going on for more than 10 years in California.
This seems like a blatant case of fraud. Any chance the rule of law might come into play to stamp out this practice?
In Florida a licensed Realtor is bound by ethics and the law to be truthful.
The Florida Real Estate Commission can at the minimum take your license and the DBPR, of which FREC is the Real Estate Division can fine and jail you.
The laws are in place but Realtors have many tricks up their sleeve where no blames would stick to them.
Like with immigration and gun laws. We don’t need more legislation, we need to enforce what we already have.
I’ve been flipping house for years and have had Realtors try to pull that s**t on me a number of times. The level of unethical and outright illegal practices in the RE wrold are about equal to any other profession. Because of the problems in the RE market, the spotlight is on them. Realtors are the Used Car Salesman of the 21st Century.
I totally agree. Been in and out of flipping myself (just the contract) about 5 years now, and I wouldn’t trust most realtors to feed my pets, much less look out for my best interests in a transaction where they profit.
You’ve been in and out of flipping yourself? You must be sore!
You have to be a real sick SOB to be an agent and play the phantom bids game.
We on this blog have posted years ago that the realtors were driving up prices by this fake phantom bidding game . Not only is it fraud ,its points to all the other fraud games that were used during the boom ,such as double-escrowing and cash back fraud .I believe that telling the sheep that real estate always goes up and that they can’t afford not to buy is a form of investment misrepresentation that is questionable .
Withholding facts about comps in a area as well as pressuring appraisers to hit the mark on appraisers isn’t exactly what the
realtors job should be.
It can not be underestimated that the real estate sales agent is the set up man or women for the sale . Realtors tout that they pre-qualify buyers and will only bring qualified buyers to listings ,(how does a realtors know what houses to show a buyer if they don’t know what they qualify for )? If RE agents brought unqualified buyers to lenders it is because they knew the liar loan and appraisal would fly. The whole group that made commissions and fees off the transactions ,including the borrower, was in on the lending fraud ,based on the ponzi scheme and real estate always goes up ,and you can’t afford not to buy ,so refinance out of your liar loan when you gain equity .
Only under circumstances of the mania of mass fraud in lending can you get the price increase such as we saw on a National level ,and the builders were right there in the mix.
Sorry , I have been a realtor and I have been a lender and I know what takes place during a real estate transaction ,and you have to have all parties in on it .You can’t fool me ,so don’t even try .
Fake Bids creates
Fake Appraisals which in turn
is used to Fake Loans.
Three legged AXIS of Evil in RE…
Yes this is indeed rampant in California… Do a search on Australia markets and you will find lots of this…
I was a near victim of this back in 2001. I backed out after winning the bid 10% over asking yet the home sold for 1% above asking.
Yes this has been really bad in California. Your totally blind sided.
I made low ball offer on a lot this week and the builder holding the lot responded saying “wouldn’t you know it, someone else just expressed interest in this lot and I told them you had first dibs.”
Yeah, Right.
This guy has two spec homes on that street that have been sitting since spring. Three lots sitting empty since last year. Five more lots from this subdivision just popped back on the MLS as pending sales didn’t go through. I could count the total number of lot sales in Pullman over the past two months on one hand. But suddenly, this builder has two bidders for his lot.
Lots used to be a valuable asset for builders in Pullman. Now they are a financial anchor for builders with debt and carrying costs eating up their bottom line.
“One looked at the public perception, “Most regular J6p’s dont think about, dont know about, and cant understand the situation that is staring the central banks’s directly in the face.”
I’d like to think that given a simple explanation *most* people would understand what the problem is and why we can’t just lower rates. If *I* can understand it then why can’t others ?
If *I* can understand it then why can’t others ?
Because YOU have chosen to educate yourself and understand lowing interest rates has a cost (higher oil, inflation, weaker dollar, etc.). J6P never did figure out the VCR.
Got popcorn?
Neil
Joe understands simple mathematics … he can figure out the odds on the weekend Raider’s football game.
It’s the beer ‘on sale’ price that trips him up. If the ‘20 pack’ is 20% off versus the 12 pack at 15% off if you buy two … that will flumex him.
I am not sure a short answer even exists regarding “the problem.”
The point I was trying to make was:
Given the level of financial education in the US, the FED policy “answer” does not make sense because J6P does not even understand the situation. The reason they dont understand is due to a “generational gap” in learning through pain.
Let us not forget that it is not always the less educated person that doesn’t understand this stuff. I know plenty of people that are high school graduates, at most, that have a ton of common sense. Put them up against an entire ocean of people with master’s degrees and PHDs that couldn’t poor pi$$ out of a boot if the instructions were on the heel.
It’s not always Joe Six Pack that is the problem. Ivory Tower Tony is much more frightening to me. He’s the moron that is really calling for a rate cut. And Ivory Tower Tony and Head-Up-My-A$$ Helen, professor of Modern Man, have much more voice than Sally Soccer Mom.
Agreed. Some of the dumbest people I know whave initials: CPA, MBA, etc. These should be the ones who know most about personal finance and they generally don’t know squat.
whave = have, of course I can’t even spell, so who am I to talk. LOL
Yep, I know one with a title called “Mr. President”.
Chris - I resemble that remark!
My husband claims to be the walking, breathing, example of the hazards of educating a redneck. An MBA that can calculate compound interest in his head and still field dress a deer.
The PhD’s and MBA’s had as much of a hand in this shitpie as J6P. Home prices in Boston are ridiculous. The SF Bay area has the highest number of pay option ARMs. These are supposedly two of the most highly educated parts of the country.
degrees do not equal common sense. period. great that one is educated - book smart, but better to have your wits about you. imho.
-mba
I know I’m nitpicking again, but let’s not group MBAs together with PhDs. One is a master’s that you do after work and online, the other is a doctorate that requires years of toil in order to contribute something of signifcance to your field.
dude - the PhDs of my acquaintance are some of the most out there (removed from reality) people (not that there’s anything wrong with altered reality)
Agreed, and this all has to do with the education system abandoning the principle of teaching people how to actually think and reason. You can get a PhD by toeing the line of “party” doctrine and riding the coattails of people before you, without ever having a clue how to reason out a real problem.
I know this intimately: I have a B.A., M.A., and M.S. in three different subjects, and have seen enough PhDs who simply kow-towed to the most influential person they could get connected with, never learning how to reason out several possible outcomes of a problem and determine which one was most likely to occur and why.
J6P is me, you, uncle Earl, and little suzie…..all together.
Ask the individual who J6P is, and its never themsleves.
I never said that J6P is the problem. I said, J6P does not understand the situation. Not only is the lack of understanding a function of not learning through pain, but also, its a function of NOT GIVING A SH*T!
When I mention mortgage backed securities or CDOs people look at me like I’m speaking a foreign language and these aren’t dummies. Most of the public has no idea what’s going on except the soundbites they see on their local news.
you guys supposedly know a lot about bubbles and you claim that intelligent people should see them. however, you guys also should know that bubbles aren’t about common sense. they are by their very nature a psychological event. they don’t have much to do with intelligence. the fear and greed brought on by rising prices trumps intelligence most of the time. if it didn’t, bubble would not exist.
Yeah, Duke. I think that’s what’s being said here.
J6P = Most People.
Most people are flummoxed by bubbles.
Yes. Bubble aren’t likely to exist if there isn’t some supposed “fundamental reason” for the price movements. In California, prices always go up because **everybody** wants to live here. The bubble-meisters will pull out population growth charts and house price history over time (always goes up, you know), take you to tight urban areas, etc. to convince you that you had better get in before it’s too late.
Like gold…there are reasons to expect a rise in the price of gold, but are we sure the reasons are true and factual — and that they will withstand certain events?
OT…There seems to be a change of attitude in the neighborhood where I reside. Don’t see people walking the dogs as much and people just seem different. Some of them who used to be very social seem to have become recluses. Maybe they are stressed about the economy or housing prices going down or some of the other things people talk about on this blog.
Just wondering if anyone is noticing any difference in the attitudes of folks in their neighborhoods.
I’m renting in santa clarita and I can tell you the neighborhood has gone south fast in the last six months. Kids are more shiftless (are parents working more?). I’m serious, there is less parental attention.
As to the dogs… I love dogs. I really hope FB’s haven’t eaten them.
But as you mention it… fewer dog walkers and most seem to be the visiting grandma with her pug or terrier.
In general I’m noticing people are less gregarious.
Speaking of which, click on my name. I’m organizing a South bay (LA) dinner on Sunday 9/30/2007, 6pm at the Redondo Cheesecake factory. All housing bears and their dates/sig o’s/friends are invited.
Got popcorn?
Neil
Thanks Neil, very similar to what I am seeing.
I’ve noticed that there seems to be fewer people using cell phones (could it be that people can no longer afford their cell phone bills?) and that there seems to be more cars sporting minor body damage from fender benders (could it be that people can no longer afford to have their cars fixed?), and that people aren’t near as friendly as they used to be.
“and that people aren’t near as friendly as they used to be.”
That’s what I am noticing Doug.
I see the minor car damage. Ummm… I’m now one of them… one ding too many. I was anal about fixing them, but for some reason after 150k miles, I just stopped caring.
Less friendly? Definately. Except… for my renter neighbors. Diner invites, etc.
As to cell phones, I wish I was seeing less. If anything I’m seeing more cell use.
The main thing I’m seeing is less crowded bars, at family restaurants, than I did two years ago. Fewer bartenders on Fridays and Saturdays, so its more than my imagination. However, sparse samples (we eat out twice a week at most).
Today is my day to cook.
But my wife is a great cook! 
Got popcorn?
Neil
Not that I normally feel the need to, but a Big Shout Out to the Governator for creating a law banning teens from texting and using non-hands-off cellphones in cars yesterday.
Now, if only he could ban the adult a$$clowns from doing the same thing….
Not particularly in my neighbor hood but my Banker, my professional friends, ect. seem to be in a funk. My lawyer friends are happy.
I talked with a Broker in Orlando last week and he was visably shaken. He called and we met for lunch. He was looking for any suggestions. He had shrunk from 20 agents to 2 and was thinking about closing his office and doing business from the house.
Hi big problem was his own RE portfolio. He’s upside down in 9 properties. His ulterior motive was to see if I was interested in his over prices RE. He is definitly f**ked. There are a lot like him.
A lot of RE offices have closed in Central Florida, along with Mortgage and Title companies. There is definitly a shift in attitude in the RE industry here. It’s not in a recession, it’s in a depression.
I don’t list homes or do any residential, except for my own investments, but I do here from alot of people who are leaving Florida. In the past two years I lost two employees who simply left. One got foreclosed on and moved to Tennessee.
I maintain that Florida is going to get hit the hardest.
“ His ulterior motive was to see if I was interested in his over prices RE. ”
Are you really certain he is a friend? Its pretty slimy to try to make a friend the greatest fool…
I’m not sure if Florida or Michigan is going to get hit the hardest… but its not a competition. I hate to say it, but Florida and Michigan will see depression like economic conditions. Both have economies that out of balance; they cannot do well during a national recession.
If I misinterpreted your friends intentions, mea culpa. Do support your friends during this downturn. I try to avoid thinking about how much trouble some of my friends are going to be in. I won’t help them with debts, but I will make sure they eat.
Got popcorn?
Neil
Neil,
Michigan has been in it’s own 1-state recession for a couple years now, if not longer. Plus, I posted here some days back a report in one of the local rags that in 2006 67 percent of mortgages originated in Wayne County (Detroit and some of the ‘burbs) were subprime. I assume surrounding counties were similar. It’s not a competition, for sure, but when I see someone say their area is ground zero for the housing mess, I think large swaths of the country are or will soon be ground zero.
I’m seeing a lot more now of those 80/20 loans going into foreclosure. People around here wonder if it can get worse. With 2/3 of our recent mortgages subprime, I’d say yes.
“I won’t help them with debts, but I will make sure they eat.”
Yeah, my general rule is i cant pay your rent, but i can feed you and let you sleep on the couch. If youre there more than a month, you need to kick in something towards rent. I think its fair.
I know the Michigan area pretty well. They are dealing with dislocations of the auto industry; some due to big three incompetence and some due to union greed levels.
The normal cycle for the industry will be government bailouts in a couple of years and gradual rcovry. The UAW really needs to make a lot of concessions on benifits and retirement plans.
Anyhow, Michigna went under first and will probably emerge first. They claim there are shortages of engineers (mechanicals) not sparkies.
Yes.
In my neighborhood, a lot of renters are now moving in, since silly homeowners who have to move for some reason are foolish enough to think they can “rent the place out until things turn back up”. Just as I predicted, this gentrified neighborhood is very quickly reverting to a slummy state.
Also, some of my neighboors suddenly started to be friendly with me a few months ago, even though they have been pure snobs for like 1.75 years. Guess what? I snubbed ‘em. Now we have an understanding.
“‘While I was aware a lot of these practices were going on, I had no notion of how significant they had become until very late,’ Greenspan said. ‘I really didn’t get it until very late in 2005 and 2006.’”
He still doesn’t get it. In the WSJ article, he blames the bubble on the end of communism, missing the role of loose (subprime) lending, which let strawberry pickers earning $20,000/year buy $700,000 Central Valley houses, in driving a massive gulf between incomes and home prices in local markets that got a bit frothy.
No doubt. This mess had nothing to do with communism, global markets or interest rates. It had to do with lending people money they could not and would not repay. Had traditional credit standards remained in place, the lower interest rates would have stoked the real estate markets to a degree, but nothing like the mess we are in today.
“Had traditional credit standards remained in place, the lower interest rates would have stoked the real estate markets to a degree, but nothing like the mess we are in today.”
Amen. They still don’t want to call a spade a spade. Banks made a lot of bad loans. Period. Low interest rates alone weren’t the problem.
Think where we’d be today if traditional standards had stayed in place…we’d have people in homes they could afford over the long haul…secure with a mortgage locked in at historically low rates…and probably extra money to spend being good U.S. consumers…
The lending industry has eaten its seed corn.
Nah ! Neil placed it into the microwave.
Low interest rates alone weren’t the problem.
——————-
True, but low interest rates sparked the search for higher yield and forced lenders to go where they never wanted to go before (sub-subprime, NINJA-type loans just to earn rates that meet or beat **real** inflation).
I know. Been tempted myself to look for something…anything to boost yield on these sickly fixed-income products.
We don’t need lower rates, we need HIGHER rates that encourage saving and allow investors to avoid making risky loans to foolish borrowers.
The WSJ article is in need of editing. He is first quoted as:
“We wanted to shut down the possibility of corrosive deflation,” he writes. “We were willing to chance that by cutting rates we might foster a bubble, an inflationary boom of some sort, which we would subsequently have to address….It was a decision done right.”
The next paragraph then says:
He attributes the housing boom to the end of communism, which he says unleashed hundreds of millions of workers on global markets, putting downward pressure on wages and prices, and thus on long-term interest rates.
Huh? You get it right in the first paragraph, but then go off into the weeds on the second. Very strange.
What’s more, if it was a ‘decision done right,’ we would not be in this debacle. At a minimum, he should have followed Gramlich’s lead and called for, if he didn’t have regulatory authority, and enforced tighter regulation. Instead, he did the opposite. He cheered the suprime industry for its innovative lending practices while simultaneously declaring there was no housing bubble. Froth my arse, he is full of you know what.
Deflation is a bulls–t myth, especially in economies where gains in technology and productivity should be able to shrink prices. My Peter Schiff reading is paying off. Eat that Greenspan.
For any of you that missed it yesterday the question raised by Palmetto was, “what would you get if Alan Greenspan and Andrea Mitchell ever reproduced?” The answer is:
http://tinyurl.com/22jjaa
Sorry NYC, I ordinarily agree with you on most subjects, but you are wrong about Deflation. Deflation occurs when there has been a credit bubble in asset prices. It is in direct response to the destruction of credit (M3) which is precisely what is happening now.
Okay, I missed getting my point across. My point is that deflation is not the awful bugaboo they make it out to be. Things are getting less expensive. So what? People will still buy things. The myth is that deflation is the worst thing in the world and that 15% inflation is a better trade-off. Sorry about the confusion. Our cat was sitting on my foot at the time.
People will still buy things.
History says differently.
In the depression, prices would drop next to nothing, and still nobody would buy. Either
1. they had no money to buy, or
2. had money, but would would not buy because prices would be cheaper tomorrow.
Breaking out of that spiral was quite difficult. People who lived through it still horde money/things to this day.
I’ve been goin over my Schiff material and I think you got him quoted half right. Peter makes a big distinction in his interviews and book that across the board defaltion is bull hockey but our big problem is deflating US assets and inflating US liabilities. Deflation is the worst thing in the world for the US because people with stuff to sell can sell it to the whole world. In the previous depression a merchant in an American town couldn’t sell anything because none of his customer base had money to buy it with. Today he can sell to the world. And the world is hungry for all that we hoard.
“1. they had no money to buy, or
2. had money, but would would not buy because prices would be cheaper tomorrow.”
US GDP did not go away. as for Japan, it went through a long time of falling prices and they are still the 2nd largest economy. just like housing prices must come down to reasonable levels, the economic conditions of a depression or recession must happen to bring the economy into balance.
“People who lived through it still horde money/things to this day.”
these people are heros and are living their life the correct way. if we had more of these people we would not be in this mess. instead we have an inflationary Fed that basically encourages people to go into debt and they will bring on a serious recession or even maybe a depresion.
things getting cheaper is a markets way of working.
Greenspam’s senior moment eventually became a senior decade.
that’s cute
Greenspan said. ‘I really didn’t get it until very late in 2005 and 2006.’”
PB,
You can’t really expect Greenspin to tell the truth, and fess up to the fact that he knew exactly what he was doing can you? If he told the truth, all the FBs would be calling for his hide, or at least for him to do some serious jail time.
No way, he’s too old. He was probably suffering from some mental decline during his last years in office.
don’t trust central bankers with your money. dollar keeps falling - rate cut might cause a temporary rally because everyone expects dollar to fall but that should be used to get out of / short dollar. inflation and loss in purchasing power of dollar is much more than what treasury yields and I wouldn’t keep my money in dollars for the current 4 to 5% when its falling by much more than that.
Can somebody explain why we need a rate cut? I just can’t see the rational. Call me a dolt
Basic reason is J6P is so deep in debt that he’ll stop spending unless he can borrow more. That’s only possible with a severe rate cut. The proposed moderate rate cuts are to slow the bleeding.
I’m hoping for a 25 basis point cut. (Actually wishing for no cut, but I’ve given up hope on that…). Its time to cut the various deficits. The only way to ensure that is keep the rates up. Force people to change habits (including congress) Sigh… It won’t happen.
Got popcorn?
Neil
So they cut the rate, the dollar falls and everything costs more. J6P spends any potential pay increase or interest savings on food, gas, etc. It sounds like a self propagating loop.
It is a self propagating loop. However, if the problem is localized, resources can be redirected to grow the economy fast enough to mitigate the pain. J6P still loses his house, but the idea is someone else is “brought up” ready to buy it. Small flaw in that thinking this time… It only works when enough industries are strong enough to pull up the others.
I’m still utterly amazed how we went to a salespeople economy. Come on! I buy half my stuff on the web. (I’m not a “shopper” and our mailman is really cool. Besides, its books, replacement running shoes, and other stuff one already knows what one wants.)
Got popcorn?
Neil
I have the same problem of seeing how the cut is going to help the little guy..if you are upside down..well you still will be and no bank will give you a loan..if you want to refi hope you have comps in your area to support you..if you can’t sell because of high inventory..well..inventory isn’t going to go down especially with so many loan programs cut out…so who is the cut really going to help????
Oh and it is, but “why face today what we can put off facing until tomorrow” has become the last vestige of any form of accountability we have left.
Besides, I am still waiting for a good case for why anyone has reason to expect wage inflation this time around? Wages will continue to face downward pressure regardless of any FED cuts. The boss man has J6P on the run.
“The boss man has J6P on the run.”
Agreed, at least only if you are still lucky enough to have a boss man…
“So they cut the rate, the dollar falls and everything costs more. J6P spends any potential pay increase or interest savings on food, gas, etc. It sounds like a self propagating loop.”
And that dinosaur Greenspan gets to continue racking up $100,000 speaking fees. Personally, I would rather listen to a water buffalo fart old disco tunes than listen to anything this destructive a$$hole has to say.
Sod, Greenspan - bring on the Water Buffalos!
“…THAT’S the way phtt, pftt, parp, tharp, I LIKE it…”
etc.
Sod Greenspan - bring on the Water Buffalos!
“…THAT’S the way phtt, pftt, parp, tharp, I LIKE it…”
etc.
Appols for double-post.
That’s ok : I laughed twice.
Not double post. Encore performance.
Cutting the rates helps the banks. Folks need to sift through the propaganda. They are a private bank. They are concerned with making money through the monopoly granted to them by Congress. They make money by borrowing short and lending long. If there is no lending, then a large source of their income stream dries up. When one understands the basis of our current monetary system, one can grasp why people in the money handling business want lower rates.
You are correct, sir (madam?), and despite spending lots of time on the blogs I find little such wisdom.
The Fed does not care about consumers, about Wall Street, about Republicans, about affordability, and especially not about ‘the economy.’ All that is secondary.
The Fed is a union of banks, and is the front man for the banks. Its purpose is to serve banking, not citizens and not politicians.
Whatever Greenspan says now is totally beside the point, and is just styling for the cheap seats. His words can be safely ignored, and instead his actions usefully studied.
To expect behavior other than for the benefit of the banking industry is to pick up a snake and expect it to purr and cuddle rather than to strike.
Now we’re cooking with gas–so to speak. Thomas Jefferson, George Washington, John Jay, Alexander Hamilton, James Madison, et al, all realized this concept long ago, and specifically chose not to embark on this path. It is not compatible with individual liberty and a federal republic based on the principles in the contract signed by the states (Constitution).
“Thomas Jefferson, George Washington, John Jay, Alexander Hamilton, James Madison, et al, all realized this concept long ago, and specifically chose not to embark on this path.”
But then Alexander Hamilton sold us down the river.
But wait:
You all still have not explained how the lower rate will help banks when they have no one to lend to. Even with the low rate, they will still have to charge huge interest rates to mortgage borrowers in order to compensate for the price risk, but the houses are already unaffordable and borrowers are starting to price in risk too, so that won’t help them. But it’s not just houses, it’s commercial paper too.
I guess that’s why folks on this blog tend to think the Fed will be pushing on a string if they cut the rate.
The banks borrow their money cheaply (low rates). That is, they pay you 3-5% interest. They charge higher- that is, they charge 6+%.
50 years ago they gave you over 4% in passbook savings, and they charged you 6+%. That is, their margin was 50%
Under Greenspan, they gave you 0.7%, and charged you 5%. That is, their margin was 500%.
The banks have been cleaning up while we have been told mortgages are ‘cheap.’
This is what was done during the S&L bailout. It is what is being done now by enabling the availability of funds at all when the bank has no funds.
Oh yeah, 50 years ago the banks had to maintain a cash reserve against what they loaned out. Today there is virtually nothing preventing a bank run and no cash reserve to speak of. Why would they need one? The same people the banks get to overcharge (customers) also now will be on the line to pay the bank for its losses.
Oh yea, 50 years ago there was not a myriad of ‘fees’ (read, profit generators).
The lists go on.
The rationale goes like this:
Fixing inflation is easy. It causes lots of pain and is politically unpopular, but it is fixable if you raise interest rates high enough.
Fixing deflation is hard. You can only lower interest rates to zero. If you print money, then you still don’t restore confidence in the newly printed money.
So when given the choice, choose inflation and tweak the interest rate dial to make sure it stays moderate.
To improve balance sheets, particularly lenders’, and prevent the stock market from plunging. IOWs, to help Wall Street. If ARMs are tied to Libor and Libor keeps going up and up, a FFR cut does not help Main Street. Furthermore, what lender is not going to charge a premium in the current environment? It would be suicidal not to charge a premium to cover current and future losses.
does the stock market EVER celebrate rate hikes? why doesn’t BB just give them 0% rate?
‘does the stock market EVER celebrate rate hikes? why doesn’t BB just give them 0% rate? ‘
We were effectively at zero for much of the boom, if you subtract actual inflation. Wall Street did celebrate and fund managers were bamboozled into buying CDOs.
I’m looking at a potential sale on housing puts coming after Tuesday. Any suggestions on what I should load up on?
Greenspan…said that as Fed chief he knew about questionable lending practices that were leaving subprime borrowers with adjustable rate loans vulnerable to harm from rising interest rates, but did not recognize those loans would trigger broader problems until fairly recently, CBS said.”
“‘While I was aware a lot of these practices were going on, I had no notion of how significant they had become until very late,’ Greenspan said. ‘I really didn’t get it until very late in 2005 and 2006.’”
So Greenspan didn’t “get it” until “very late in 2005 and 2006”?
I saw problems at the beginning of 2004. Most of the bloggers here saw them also. How old is this Blog?
When are “questionable lending practices that were leaving subprime borrowers with adjustable rate loans vulnerable to harm from rising interest rates” EVER a good idea. He didn’t undestand that this was a problem and it “trigger broader problems”?
This is like Lereah, when he left NAR after spewing his BS for so many years and writing two books that I’m sure he wished he could take back, owning up.
Greenspan didn’t know?? He couldn’t figure it out?? He didn’t get it until late 2005??
This is one of the most influencial men in the financial world.
Anyone on this blog would make a better Fed Chairman the Greenie
or clueless Bernake.
You would of thought that someone would of noticed that the demand for real estate exceeded affordability levels ,so how were these people getting loans ?You would of thought someone would of noticed that 40% increases in one year were not justified especially when we already had a 69% ownership rate in the United States .
The fact that the whole can of worms wasn’t called in 2005 ,right at the point of Katrina, is the question . Instead, another 2 years of bad loans , with fraud and cash back deals went on the books ,with the NAR myths not even questioned and the people in the news denying a bubble.
Well, some people did notice now didn’t they…only they don’t walk the hallowed halls of the Federal Reserve. Instead, they drive to work every day next to a myriad number of MBz and BMWs being driven by people who a.) don’t make enough in salary to really afford them, b.) know little or nothing about why their RE went up 20% year over year, c.) didn’t question b.
‘While I was aware a lot of these practices were going on, I had no notion of how significant they had become until very late,’
Lying sack of crap.
What difference would a rate cut make to LIBOR-ARMs? Bankers simply don’t trust each. As a result, they are puckered up. According to Barrons:
Libor will determine the rate on billions of dollars’ worth of American adjustable-rate mortgages. ARM resets are set to climb sharply, to over $50 billion per month starting last month through year end, reaching a crescendo over $100 billion by next March. Cumulatively, some $1.3 trillion of ARMs will reset over the two years through December 2008.
Most of those ARMs will be reset at a spread of several points over Libor, meaning some of those borrowers may face mortgage rates of close to 10%. The recent rise in Libor will exacerbate this squeeze. Indeed, a 25-basis-point cut in the funds rate would merely offset the rise in Libor, leaving actual borrowing costs unchanged for much of the economy.
http://online.barrons.com/article/SB118902781739618525.html?mod=googlenews_barrons
What difference would a rate cut make to LIBOR-ARMs?
Short term a little relief. Long term the rate spread will continue to grow. By rate spread, I’m sure all the posters here have noticed that LIBOR has broken away from the central bank rates and is now at a higher premium. Add onto that a higher premium for ARMs… I see J6P getting hit by the financial Mac truck.
Got popcorn?
Neil
ARM’s are based on LIBOR but the “banks” can’t float new loans to the secondary market anymore. So they will fund new fixed loans directly from the Feds printing press.
Fed policy considers the big boys as holy cows and will not let them fail.
So when all these folks call the Bank to refinance, the Big-Banks-To-Big-To-Fail (BBTBTF) or BeBe’sTeTe’s as I will now christen them will save as many FB’ers they think are necessary to stave off a collapse of confidence in the US economy.
An older post on HBB noted that 57% of refi’s failed to secure funding. Ben is trying to fix that failure rate. If enough ARM resets can be scooped up by the Big Banks he can continue the dog and pony show of how wonderfull we are doing. 5 Million ARM’s are out in the wild. Ben is gonig to get as many of them as possible switched over to a 30-40-50 year fixed. He is going to take commercial paper as collateral at the discount window and print for the banks as much money as they need to keep anymore FB’ers from mailing in thier keys. This will only improve things in the flyover states but he can continue to crow about false positives for a litlle longer.
THE INFLATION/WAR OFF THE BOOKS ISSUE
Will one of the professors help me understand this issue!!!
Our war in Iraq is costing about $5 billon/month. This is an off budget expense, so where is the money coming from? Haliburton is getting paid about $1 billion/ month and I doubt they take IOUs.
Are we just printing that much money to pay for the war, and isn’t that incredibly inflationary.
Thanks for any incite.
The money is coming from China, we write them IOU they give us money.
The money is coming from China, we write them IOU they give us money.
Yeah, and I remember reading (in the LA Times, I think), that the cost was closer to 8 billion per month. At that time, it was 7 billion for Irak and another billion for Afghanistan. And that didn’t include health care costs for returning wounded veterans…
more precisely, the money is coming from China because they are printing money to keep the yuan pegged to the dollar at a constant rate so that their exports are cheaper.
The money is still coming from your taxes (now and in the future).
The off-the-books routine is behavior that would land a corporate CFO in jail. Just for fun, try keeping two sets of books: One for the government and one for yourself. Let us know how the IRS reacts.
It is coming from your grandkids. They will be saddled with it.
Old Native American saying (sic) goes “we borrow this land from our children, we do not inherit it from our ancestors”
It’s about time we do things old school.
This revelation reminds me of David Lereah’s thinking back in 2005 at an Realtor meeting in New Orleans that “at that point I knew we were in trouble”(paraphrasing) after hearing an audience member remark about how many 100% ARM’s or other toxic loans were being originated.
And yet…all through 06′ NAR was spinning.
The Fed has already lowered the effective fed funds rate and still Libor keeps going up and asset backed commercial paper volume keeps going down. What does that show? According to Barrons:
[W]here the Federal Reserve’s policy-setting panel decides to peg the rate won’t mean much if the money markets don’t respond. Despite its surprise half-point reduction in the discount rate on Aug. 17, to 5.75%, and allowing the funds rate to trade under the 5.25% target since the crisis deepened early last month, the cost of borrowing for banks and individuals has actually risen.
Three-month Libor — the London inter-bank offered rate — last week hit a high of 5.78%, about twice the normal spread from the fed-funds target, which it usually tracks, and up from 5.36% on Aug. 3, just before the credit storm hit with full ferocity. Why? Money-market traders fear being on the wrong side of a trade if some bank blows up from hidden subprime exposure (as has happened repeatedly in recent weeks), so they have been hiking this risk premium.
http://online.barrons.com/article/SB118920603419621099.html?mod=googlenews_barrons
Someone posted this remark yesterday. Can someone elaborate?
“About this fiasco being the fault of Greenspan: Do you suppose the WSJ is full of it when it says some 52% of the loans now viewed as questionable were made by state-licensed mortgage companies not subject to federal regulatory control?”
It’s probably true. However, he could have used the bully pulpit and demand regulatory authority. At a minimum, raise awareness. Admittedly, it’s not entirely Uncle Al’s fault, but he failed to deliver minimal expectations. He was chief regulator. Instead, he cheered like Lereah.
That why I think that new laws have to come about that create more regulations for a mortgage company that is not regulated by a Federal Charter .
I thought the main problem was the securitization and bundling of these mortgages for sale to third parties. Doesn’t the sale fall under the SEC, no matter who the parties are?
The WSJ is North Korea, the Editorial page of the WSJ is South Korea.
I may have missed this bit of info, but I was over at the Fort Myers, FL newspaper site http://www.news-press.com and see that a big time real estate player down there is currently missing.
The mystery deepens.
The Coast Guard has suspended the air-sea search for Frank D’Alessandro, the Fort Myers real estate magnate who was believed to have disappeared after a late-night kayaking trip Tuesday.
If you’re ever down in Fort Myers, D’Alessandro’s name is all over the place. He’s also one of the real estate “experts” the paper always quotes as well as having his own column. This guy is currently the defendant in hundreds of real estate related cases. My guess is that he’s trying to fake his own death or offed himself. The bubble claims another “victim”.
Those types of people are too selfish and greedy to kill themselves. I bet he’s in South America enjoying the fruits of his scams.
Anyone know if that pilot guy in Nevada was heavy into hedge funds????? Not making accusations but when I watch CNN lead the search story with a blurb about volunteers helping out by looking on Google Earth for the crash site, I assume the worst.
I am not kidding, they actually said that.
He’ll come back from dead disguised as a pool boy and they’ll have a steamy affair.
get an arm loan now “!
greenspin 04
Continuing saga on the Norther Rock bank run
(From Bloomberg)
http://tinyurl.com/2alt5r
Northern Rock Plc branches around the U.K. had lines of customers stretching outside their doors seeking to withdraw deposits for a second day after the Bank of England authorized emergency funding to the mortgage lender.
A line extended about 40 meters (120 feet) from the Golders Green branch in north London today, where as many as four police officers helped keep order. Clients also stood outside outlets in Kingston and Sheffield in England and Edinburgh in Scotland, images broadcast by television networks showed.
“I have been saving for years, and I don’t want to lose it,” said Jacqueline Porte, who had advanced 25 feet toward the entrance to the Golders Green branch in three hours. “I don’t want to be with a bank that hasn’t been careful.”
…
A mobile billboard advertising a suicide prevention counseling service was parked in front of the Edinburgh branch, Sky News showed.
A spokesman for the Bank of England declined to comment today on the situation. Calls to the U.K. Treasury press office for comment weren’t replied to.
Do British banks have deposit insurance (comparable to the FDIC and defunct FSLIC)?
Scramble to quit UK mortgage lender
by Peter Thal Larsen in London
Published: September 14 2007 20:40 | Last updated: September 14 2007 20:40
The turmoil in global banking hit the streets of Britain on Friday as thousands of Northern Rock customers queued up to withdraw their savings from the UK mortgage lender after it was rescued by the Bank of England.
As regulators and politicians called for calm, Northern Rock – Britain’s fifth-biggest mortgage lender – scrambled to contain the fallout after it became the first British bank in decades to be bailed out by regulators. One person close to the situation said customers had withdrawn about $2bn Friday but Northern Rock declined to comment on the figure, which would amount to 4 per cent of its deposit base.
http://www.ft.com/cms/s/0/5f0aa10c-62f8-11dc-b3ad-0000779fd2ac.html
What if the Fed chairman really isn’t in the driver’s seat, but is being dragged behind the car? What if the Fed funds rate simply follows the market? What if T-bill rates actually fell before the “Fed” dropped their rate in 2001? What if they fell again last month and the Fed follows them down? What if the Greed/Fear equation really controls the T-bill rates and the Fed funds rate?
Then waiting to see what the Fed will do is like waiting to hear what yesterday’s weather was.
“Bernanke’s Fed has come under fire from some quarters for not acknowledging quickly enough how deeply the current crisis could harm the economy or responding aggressively enough to keep the U.S. expansion on track. Some analysts have speculated that Greenspan would have acted more swiftly.”
If Greenspan had Cramer screaming on the boob tube from the sidelines, he may have felt pressure to not respond. Similarly, if Bernanke cuts next week, there is a risk that Dodd and Cramer may be perceived as the puppetmasters driving monetary policy decisions.
Exactly… this is watershed moment for the FED. Price stability vs political pressure, defend the dollar or 14k DOW.
Really this rate decision has little to do with resolving the so-called liquidity crises because it’s actually an insolvency crises. And cutting into this environment risks capital flight from USD assets, and sinking the USS Greenback. The ARM FBs are screwed no matter whether the FED cuts.
I remember an article several years back about how US was becoming a technocracy not in the sense that only high-tech jobs paid a living wage, but rather in the sense that only a highly technical education could prepare one to deal with the complexity of modern law, new-fangled finance, and very competitive markets. That might be true: there are apparently a lot of scientists, engineers, economists etc on this blog. Then again, salvation may lie instead in the emotional realm — the victors may just be those people who never ever believe in any Get Rich Quick scheme. Since we cannot control the Fed or any other policy-making body, we have to remain observant and figure out the most rational reaction to whatever does happen. OT I’ve been surprised to see a large number of “Ron Paul” yard signs and phone-pole stickers on my current short trip to Phila.
Ive been seeing more Ron Paul signs here in bubble central SD as well….it is somewhat surprising to me.
“A mobile billboard advertising a suicide prevention counseling service was parked in front of the Edinburgh branch, Sky News showed.”
Question: Where is Dr. Kevorkian when we really need him?
Answer: Dr. Jack Kevorkian was released from prison June 1, 2007, and is currently looking for work.
“I really didn’t get it”, Former Federal Reserve Chairman Alan Greenspan”
Unf@ckingbelievable. WTF is wrong with this country that people who supposedly are the “experts” seem TOTALLY CLUELESS?????
WE got it here on Ben’s Blog and have been talking about this bubble for YEARS already.
The same with the lenders -alleged ‘financial experts’- who didn’t really ‘get it’ either. Since when is gifting money to speculative deadbeats a financially sound move?.
The answer is, was and shall always be: Never! NOw they’re like they re-discovered gunpowder, the asshats.
The same thing with this ‘war on terrorism”; We’re attacked by Osama Bin Laden -who is based in Afganistan- and WE WIND UP IN IRAQ. Our president (or as I like to call him, our Retard-in-Chief) DOESN’T SEEM TO REALLY ‘GET IT’ EITHER.
I think the signs are VERY CLEAR; the U.S. has become a (broke, in every sense of the word) Third-World nation.
RIP.
No one should forget Greenspan’s role as head of the Social Security commission in 1982. He jacked up the payroll tax, pushed back the retirement age for my generation and those after, and promised Social Security would be saved. He probably thought all those extra payroll taxes would be used to pay off the national debt and accumulate some real assets besides.
Wrong.
According to the WSJ, Greenspan’s book includes a repudiation of Bush and the Congressional Republicans for that very reason, cutting taxes, jacking up spending, and not worrying about the future — then saying Social Security needed to be cut for those not “at or under 55.”
Now Greenspan is predicting high inflation as the goverment prints money to try to pretend to pay those bills beginning in 2014 or so, as the debt explodes.
The federal funds “bracket racket”:
The buying and selling of Treasury bills, etc., under the auspices of the Manager of the Open Market Account through the New York Federal Reserve Bank for the accounts of all Federal Reserve Banks are tied to federal funds rates (read repurchase agreement’s rate). As a guide to open market operations the rates are used as follows: a rise in the federal funds rate above the rate triggers open market selling operations. A fall below the rate, open market purchases. Open market operations of the buying type add (free gratis) legal reserves to the banking system; selling operations reduce reserves.
The technicians in charge of the hour-to-hour administration of open market operations apparently believe that there is, at any given time, a federal funds rate that is consonant with a proper rate of change in the money supply. They have in fact plugged this concept into a computer model, i.e., (a policy rule; or a “Taylor” like rule). What they have actually “plugged in” is an open ended device through which the commercial banks can decide whether or not there should be an expansion in the legal lending capacity of the banking system – the capacity to create credit (money) and to acquire additional earning assets. That this expansion in money and credit will always take place is attested to by the insignificant amount of excess reserves held at all times by the commercial banks. This has assured the bankers that no matter what lines of credit they extend, they can always honor them since the Fed assures the banks access to free legal reserves whenever the banks need to cover their expanding loans – deposits.
A clear distinction should be made between the temporary and the longer term effects of open market operations on the level of interest rates. To hold down the Fed Funds rate (and other rates through this key rate), the Manager of the Open Market Account puts through buy orders for T-Bills or other eligible securities sufficient to yield a net increase in free, commercial bank reserves and free excess reserves. The Fed acquires these earning assets by creating free, new inter-bank demand deposits in the Federal Reserve Banks—that is by creating free, new legal reserves at the disposal of the commercial banks (IBDDs).
Assume the buy order is for T-Bills. The effect is to bid up their prices, reduce their discounts (interest rates) and add to free commercial bank legal and excess reserves. The expansion of free excess reserves increases the quantity of loan able “federal” funds thereby pegging or retarding the increase in the Fed Funds rate but the longer term effects of these operations are to fuel the fires of inflation.
An understanding of these temporary and longer term effects reveals why the tight money policy initiated in February 2006 brought about a continued upsurge in interest rates until 07/20/06 (30 year mortgages).. But it had the longer term effect of bringing inflation and interest rates down, until the end of the FOMC’s tight money policy (at the beginning of the seasonally mal-adjusted time period)…
OK, now I see how lowering the rate helps banks. It intices them to sell their treasuries for cash. Like a liquidity injection, except they don’t have to pay it back.
Here’s the question: Will they lend their cash at a marketable interest rate, or is the risk too high?
“Larry Cope, director of the Gilroy Economic Development Corporation, likened the exodus to the dot-com bubble bursting in 2001. ‘The old economic rule, unfortunately, is what goes up, must come down,’ said Cope.”
We are in for a huge credit crash. Housing is but a symptom. This is going to get really bad, and I believe that we are in for a realignment of our economy and standing in the world. Things will not ever be the same. The economy is in real trouble; it just doesn’t know it yet.
Roidy