First Fed had a problem with raising the long term rates, which they didn't succeed in (the yield curve turned inverted), Fed got annoyed by that in 2005 - 2006 and NY Fed said "we will do something about that soon", well what?
And now they face the opposite problem, the long term rates are not following federal funds target rate downside either. Those treasury investors must be having some fun out there.
Curious: in these situations might it make sense for some aggressively-paying borrowers to take an ARM for the lower interest rate anyway, and aggressively pay it down before the rate resets and do better financially than a fixed rate would have been?
I think all this talk of inflation is spooking T-bill investors, who will demand more from their T-bills to compensate for inflation.
Yet another reason why it's going to be hard to hyperinflate out of this: any move in that direction is going to spike Treasury yields and crush what is left of the housing market.
Also, the more he cuts the more U.S. dollar is punished in foreign markets.
Good luck Ben domestic interest rates have far less meaning in our global world.
Could we outsource the Fed?
As I said yesterday, as long as delinquencies and foreclosures keep going up, mortgage rates will keep going up, no matter what the Fed does to the FFR.
I refinanced a piddling $30,000 remaining mortgage on a property appraised for $300,000 last November. The advertised rates were around %6.0 and the best I could do was 6.5%... was told it's because I'm "self-employed"
never mind that, annually, I make almost 3 times what I owe.
Don't believe the advertised rates... even the ones which today continue to rise. By the time you sign the bottom line you'll be paying significantly more.
And that's just what Ben and the money lenders want.
Since the financial sector is in a Mexican Standoff, interest rates have to go up. They don't trust each others ASSets, they know what they have, and know the other guy was up to the same thing.
Further, they can't unload the mortgage. They don't want a 30 yr loan on the balance sheet.
Forget they rates have gone up - I still cannot understand why mortgage rates went down in the first place. Rates went down significantly; who was suddenly buying mortgages? Sure, they went down in conjunction with the 10yr t-bill, but it's not like the two are fungible. Was it the effects of the TAF? Lending by the FHLB?
The Bernanke conundrum: In the short term, the more he cuts short rates, the more certain long rates may rise.
Yes. It seems an obvious consequence. You can't open the floodgates to avoid recession at any cost and at the same time insist that the slowdown will be in itself enough to slow inflation.
Rates are still artificially low. They will go up as losses rise. In a market where home prices are falling the risks exponentially greater for default, and the defaults cost more.
I want to know how Bernanke justifies cutting still, since he admits that his cuts are not lowering long term rates, yet they are causing the dollar to sink and therefore inflation, including fuel prices to rise.
Just because the Fed has a dual mandate doesn't mean it's effective at both goals. The Fed has no power to avert a housing crash, but it's sacrificing what it has power over (inflation) to try.
Curious: in these situations might it make sense for some aggressively-paying borrowers to take an ARM for the lower interest rate anyway, and aggressively pay it down before the rate resets and do better financially than a fixed rate would have been?
Nah. Better off getting a fixed rate and aggressively paying that off than risking a rise in ARMs. My opinion, of course.
Sparhawk writes:
Curious: in these situations might it make sense for some aggressively-paying borrowers to take an ARM for the lower interest rate anyway, and aggressively pay it down before the rate resets and do better financially than a fixed rate would have been?
The spreads are nothing like they were in 2003. Plus you have all the refinancing costs...
To take an ARM now, you have to truely believe the helicopters will not only be flying this year, but for years to come. As soon as they land, whatch out.
ya....the conundrum around 40 years ago was: why would foreigners prefer gold from Fort Knox rather than the US dollar when they were interchangeable at $35.00 an ounce?
Well Soros predicted this some time ago. He pointed out that if the short term rates are lowered to the extent that they risk rampant inflation the long term rates will go up. The Fed can't control long term rates. So Bernanke is powerless. He probably knows it but is cornered and has to make happy talk, or at least semi-happy talk, when he speaks.
Bernanke is forcasting a recession by what he is doing.
He is cutting and implying he will continue only because he believes that inflation will be held in check by a slowing economy.
If he really thought we would avert a recession with slow first half growth, accelerating into the second half, does it really make sense that he would make cuts today that won't take effect until growth is scheduled to begin accelerating? Especially when his current cuts are having little or no effect on the problem he's trying to avoid, but appears to be very effective at increasing the very problem he thinks will self-correct.
I think Bernanke has no choice but to cut. But that is because I too believe we are headed for a protracted and relatively severe recession. The market have more impact on rates than Bernanke however, so his cuts will be reactions already implied by the market.
My point is that you cannot trust what Bernanke says when it comes to forcasting a recession is unlikely.
His actions say that he is absolutely 100% certain that a recession is coming if not already here.
Birdbrain Bush and Ben and his Band of Boneheads are telling you everything is fine because they need time to dump all their stocks first. Once all the big boys are out, then they can let the market tank so that the rest of us get nothing but scraps. If you don't believe this, take a look at what happened before October 1929. The big boys were exiting the market long before then, and were sitting on piles of cash when the roof caved in. They laughed all the way to the bank as the rest of the country collapsed around them.
I will be very surprised if the Dow doesn't revisit 10K within the next year or so. Above that, there is very little long-term support.
Ditto what outsider and Bob said. Run the numbers on an excel spreadsheet and you'll see that the risk outweighs the potential reward. We've been paying our 30yr fixed on a 21yr schedule, and so far total interest saved by refinancing with ARMs does not justify the risk of rising IR and the closing costs. It becomes even more of a no brainer for us considering that my wife will start working again in a couple of years and we can apply most of her salary to the mortgage.
Well, listening distractedly to the Bernanke testimony before the Senate, I caught one of the Senators (Schumer? by the voice, if he's even a member of that committee)actually coming out and asking if BB could find a way to force prices of these financial instruments to stay at "mark to model" because they would fall too low if they were left right now to the buyers to determine prices.
Maybe I heard that wrong, but I found it so striking - isn't this price-fixing? A five-year plan to set prices - yes that's the answer!
I've lost faith in the US system that the fed is trying so hard to protect. I'm a citizen who is now open to other ideas. Maybe democratic socialism will serve the general public better than this really stinking corpse. Is there any other conclusion to be drawn nowdays than that the business powers are systematically extracting all wealth above a subsistence level from the majority of people around them?
So far we're missing a key element from the 70s -- rising incomes.
There seems to be ample evidence suggesting that much of the current rise in prices is coming from leverage.
We know how that ended up with tech stocks and houses.
Until the Fed finds away to get more money directly in the hands of consumers, nothing has fundamentally changed. It's just commodities we're dealing with now instead of stocks or RE.
From Chairman Bernanke yesterday: Bernanke says 'we have a problem' controlling long-term mortgage rates
Since when is it's the Fed's job to "control long-term mortgage rates"? Come to think of it, I don't recall seeing "reinflating asset bubbles", or "preventing losses for Wall Street" in their stated mandate either.
How about trying this approach?: leave short rates alone and let the market sort this out. Or, is that too "capitalistic" for our "always socialize losses" Fed?
Mortgage and long-term rates too high? No problem. Just look for a "mystery buyer" to wade into the bond market in size.
From the helicopter speech:
"One relatively straightforward extension of current procedures would be to try to stimulate spending by lowering rates further out along the Treasury term structure--that is, rates on government bonds of longer maturities. There are at least two ways of bringing down longer-term rates, which are complementary and could be employed separately or in combination. One approach, similar to an action taken in the past couple of years by the Bank of Japan, would be for the Fed to commit to holding the overnight rate at zero for some specified period. Because long-term interest rates represent averages of current and expected future short-term rates, plus a term premium, a commitment to keep short-term rates at zero for some time--if it were credible--would induce a decline in longer-term rates. A more direct method, which I personally prefer, would be for the Fed to begin announcing explicit ceilings for yields on longer-maturity Treasury debt (say, bonds maturing within the next two years). The Fed could enforce these interest-rate ceilings by committing to make unlimited purchases of securities up to two years from maturity at prices consistent with the targeted yields. If this program were successful, not only would yields on medium-term Treasury securities fall, but (because of links operating through expectations of future interest rates) yields on longer-term public and private debt (such as mortgages) would likely fall as well.
...
Of course, if operating in relatively short-dated Treasury debt proved insufficient, the Fed could also attempt to cap yields of Treasury securities at still longer maturities, say three to six years. Yet another option would be for the Fed to use its existing authority to operate in the markets for agency debt (for example, mortgage-backed securities issued by Ginnie Mae, the Government National Mortgage Association)."
"I've lost faith in the US system that the fed is trying so hard to protect."
Are you sure that is what the fed is REALLY trying to do? It seems to me that the real role of the fed is the destruction of the middle class. Mission accomplished.
Next up, GD2. Like Borkafatty said, the pigmen are busy cashing out of the stock market and will be sitting on piles of cash when the market implodes. They played their inflation and fictitious capital games as long as they possibly could and now the game's up so it's time for them to make some REAL money by doing the vulture capital bit and buying up every asset on the cheap after the crash.
I disagree that the market will be 10K by the end of the year though. I'm thinking much, much lower.
I don't know if stagflation will arrive since I am unclear as to its exact definition. I would not be surprised to have a recession but have oil, food, and gold etc to remain high for several reasons: Increased worldwide demand vs supply contraints, flight to quality/safety etc. I don't doubt that something that would appear to the average joe to be stagflation (increased job losses with $4 gas), increased long rates due to high loss risks (as opposed to low money supply) etc.
I don't pretend to be an economist (since most of my predictions have been relatively accurate).
I tend to read Mish and what he is saying makes more sense to me that say Schiff. Both have been right on about predicting where we are, I just am not sure who is right about why and where we go from here.
"the widening of the spreads, which are associated with signs of illiquidity"
Since BB's speciality is/was studying the Depression I can almost see his pov. Lets hear from an economist who knows about hyper-inflation and debtor nations - the view might be that the spread is nothing but a risk premium to hold a declining currency in a market w/ inflation expectations.
I'm not following some trains of thought here. It must be me."
It is just you. Even if the dollar winds up being toast from a global perspective (very likely) there will still be massive asset deflation locally and those "worthless" dollars will be able to buy a lot of home-grown stuff.
Crucial imports like oil and less important crap from China will be prohibitively expensive. A big problem, to be sure, but nevertheless, the pigmen will play vulture capitalism to the full extent when massive asset deflation comes home to roost.
This is exactly what has to happen, and what Bernanke wants to happen. He is only giving lip service to "the people" and their plights.
The Fed is here to protect banks and the financial system. Higher long rates mean more spread and more earnings for banks(which tend to borrow short and lend long)....which I think you've all noticed could use some extra capital.
"Yet another option would be for the Fed to use its existing authority to operate in the markets for agency debt (for example, mortgage-backed securities issued by Ginnie Mae, the Government National Mortgage Association)."(bernanke)
So he's saying the Fed could be the bagholder of last resort? Is that what this means?
Bush says the US is not headed for a recession. What is incredible about this is that since we already are in one, or soon will be, that the fool has stuck his neck out to make a statement that will prove him a repeat liar before long. If he had any brains he would have kept his mouth shut. But not having any....well, why go on...
Well Outsider ...you think all the cash these multi millionaire folks have are in US dollars? well if you do then your correct about your train it still is sitting at the station idling. Dick Cheney has been diversifying since 05/06 Google it ...this is not rocket science...And besides that dollars (US) might be worthless but here in the mainland it still will be the currency to buy goods....Most sheep dont even know what is about to hit them.
According to Roger Wiegand (financial analyst), the reason for the sudden spiking of gold/silver is the speech that Greenspan delivered in Saudi Arabia advising them to drop their dollar peg.
The Arabs are suffering high inflation rates because of the peg, but if they drop it, their inflation will richochet back to the US. We've been exporting our inflation for years, and other countries are getting sick of it.
Precious metals are being driven right now by speculation, but that doesn't necessarily mean they're in a bubble that will pop. If speculators are correct, inflation will soon rage in the US, and personally I have no expectation that it will slow before the US invents a new currency based on something real.
O/T but it seem like more debt to meet short term needs - CA needs money.
The state has largely addressed current year budget and cash flow concerns through issuance of $3.3 billion in economic recovery bonds (ERBs), earlier this month"
From the Bernanke article: He also said some small U.S. banks might go under due to the financial stress prompted by the housing market's woes, although the U.S. banking system overall remained solid.
The new containment: Small banks. Wonder how long small morphs into medium/regional and then into large/national.
Bush's Speech - A period of "Slowness"
U.S. Department of Labor
11:41 A.M. EST
THE PRESIDENT: I want to thank Madam Secretary for hosting this meeting with my economic team. We just had a briefing on what has become very obvious to the American people -- that we're in a period of slowness. And it's also a period of uncertainty.
We're optimistic about the long-term economic future of the country, but right now a lot of Americans are facing uncertain times. And we're acting on it.
I want to thank the members of Congress for quickly passing an economic growth package. And that means there will be $150 billion -- or more -- sent out to American consumers and incentives inherent in that for American businesses to invest.
Now, the Secretary briefed us -- Secretary Paulson -- that we anticipate that the checks will start being sent in the second week of May. And that's going to be very positive news for our consumers. And it's a part of our active plan to help deal with these uncertain times.
One way Congress, if they really want to make a substantial difference in creating certainty during uncertain times, is to make the tax cuts we passed permanent. You see, if you're somebody worried about $3 gasoline and you think your taxes may be going up in two years, then it -- the uncertain price of gasoline creates more uncertainty for you as you plan your future. And Congress needs to make these tax cuts permanent and needs to think about the American consumer and the American family and the American small business owner during these times of difficulty and make the tax cuts permanent -- send a clear signal to the American people.
Secondly, obviously the housing issue is one that we're deeply concerned about. We want people being able to stay in their homes. We don't support legislation that will reward lenders -- you know, that will bail out lenders, and we don't support legislation that will cause interest rates to go up -- like the legislation in the Senate. What we do support is an aggressive plan, led by Secretary Paulson and Secretary Jackson, to help people stay in their homes; to help them refinance their mortgages; to help them make the financial adjustments necessary to help us through this difficult period of time.
And so I want to thank you all for your briefing. I appreciate your concern about our fellow citizens. We share concerns about it. We want them doing well. And we believe that in the long-term we're going to do just fine. This is a resilient economy. We've got good, hardworking people in America. The entrepreneurial spirit is strong. And we'll make it through this period, just like we've made it through other periods of uncertainty during my presidency -- and each time we came out stronger and better, and that's what's going to happen this time, too.
They cannot control long rates, and they can no longer expect "beneficial" asset inflation. From here on in, it mostly goes into the price of core, essential goods (food, energy, raw materials).
Non-essential goods & services will suffer price declines despite (attempts at) monetary inflation. Whatever inflation there is will go directly into consumer essentials as well as input costs of businesses. As consumers retrench under rising costs and crushing debt loads, businesses earnings will decline and they too will be unable to service their debts. Then come defaults and bankruptcies and job losses.
Pretty soon even food, energy and raw materials will get cheaper.
That's the kicker. They have to quit trying to stall the asset price declines. Supply and demand suggests that as prices fall demand will increase.
If rates go to the moon...ARMs could actually be a heck of a smart idea and maybe even the savor of the mortgage industry....however grossly absurd/weird/ironic that might be.
Better than the 30's happening all over again. Honestly folks, that is Ben's choice, risk a systemic collapse with all the counter party problems, or jack the yield curve real steep so people who borrow short and lend long make great gobs of money on any new loans they make. Increasing risk spreads also helps in this regard. This is the best available way to boost bank capital. In this regard, rising LT rates are a good thing. Doesnt help Main St much, but it does help with bank profitability, and thus internal generation of capital. Of course, banks could boost their capital (retained earnigns) by focusing a bit more on the retained part of retained earnings. The major banks are being almost criminally irresponsible by continueing to pay dividends/buyback stock.
Who's gonna be financing anything long in the next three or four years? Unless they have to, "rational" shoppers will wait until housing prices stabilize before they jump back in. Higher mortgage rates just keep pressing that day further into the future.
I think housing will provide deflationary pressure for the next half-decade or more. Whether other sectors of the CPI do so as well, remains to be seen, but I'm guessing fuel demand will in fact drop if we get into (even) a shallow recession; it will fall significantly more if the recession is as bad as some are saying.
The 'thirties might yet be what we see in the '10s. At that I shudder...
I live in an area untouched by both the engorgement and popping of this real-estate bubble. My house has appreciated steadily and slowly over 13 years, so my mortgage is about 50% of present value.
Might it be a good idea to refinance (fixed) at 80% of value, and stash the proceeds in a basket of inflation-resistant investments?
In what is likely to be a precedent-setting decision in New York, state Supreme Court Justice Joseph J. Maltese agreed with the Shearons, recently telling the bank that it could not foreclose on the couple's New Springville townhouse and that it may have to pay them damages for their troubles and void the $355,000 mortgage on their Westport Lane home.
James Tierney, director of the National Attorneys General program at Columbia Law School, said trial judges across the country are beginning to question banks seeking to foreclose on homeowners in similar situations.
"What I am seeing is a number of trial judges saying, 'Enough is enough, fraud is fraud.' They are kind of taking a stand," said Tierney.
I agree with you completely, however since he is in effect trying to disperse the impact of current losses from being concentrated, in terms of both time and location, in the banks, to being spread among the masses in the form of higher borrowing costs, inflation, etc., he risks two things: One, he plays into the hands of those who think he is trying to save his buddies (which is he is but not because they are his buddies but because he doesn't want a 1930's redo), Two, increasing risks from moral hazard by saving those who took the risk. Three, causing the housing crisis to be more severe than otherwise due to high rates, which will damage both the bank's current assets and future earnings power regardless.
After 25 years of Japanese style performance, we may look back and wish we could have got it over with in a 30's style crash and burn.
I think the important point is that Bernanke has discussed all these issues in previous speeches. All the items below are in his "helicopter" speech. Don't be shocked to see any of them implemented to "rescue" the economy. His speech is a clear blueprint to what he will do if he feels it is necessary.
Lower rates to zero if required.
Commit to hold rates at 0 for a specific time period to lower longer rates.
Buy short term bonds to lower rates.
Buy long term bonds to lower rates.
Buy agency debt.
Enforce treasury bond "pegs".
Funnel money to banks for extended periods since the fed cannot directly buy private securities.*
Buy foreign securities.
You are right -- but the banks have a top line, a gross margin, and a balance sheet problem all at the same time.
Steepening the yield curve and widening of spreads helps gross margin, but banks are seeing sources of revenue dry up. Hard to say that profits (ex-writedowns) and cash flows are maintained.
The other problem is the steeper yield curve and wider spreads could further accelerate losses in the housing sector, in turn further eroding bank balance sheets.
Ben is going with the best option, but he is certainly forced to manage in a box.
Might it be a good idea to refinance (fixed) at 80% of value, and stash the proceeds in a basket of inflation-resistant investments?
That's why I'm so suspicious of commodities right now -- land is kind of the ultimate in limited commodities (and where other commodities tend to come from).
And shouldn't real estate be providing inflation protection?
That's what makes me think maybe this isn't fundamentally an inflationary scenario -- IMO we're just witnessing the effects of speculative leverage being shifted away from real estate on to commodities.
ac,
Doesn't that look like the right play with land and housing spiking down and commodities spiking higher with the general public still not getting it?
It is just about impossible for the U.S. to mirror the Japan experience. The Japansese were (are still) savers. There is very little saving in the U.S. to fall back on. How can a slow economy be sustained without any cash in the bank?
What is with all of the talk about BB not wanting another GD?!?! The Fed made out great last time it happened and they'll do even better this time around.
A lot of you Pollyannas think that BB was hired to stave off a depression (laff.) He was hired to manage the depression to the liking of the Federal Reserve, other pigmen, and various apparatchiks. The Fed has no interest in preventing GD2, as this is the bountiful harvest.
"period of slowness" = severe recession
"uncertainty" = "it will get worse"
"uncertain times" = "no solution"
"worried about $3 gasoline" = "worried about $5 gasoline"
"stay in their homes" = "stay in their foreclosed homes"
"we're going do just fine" = "we will need your prayers and sacrifice"
"good, hardworking people" = "unemployed good, hardworking people"
"entrepreneurial spirit" = "willingness of people earn a good income"
I can't think of any true "safe" inflation resistent investment that would yield more than your new mortgage rate.
I agree. I'm in a similar situation. I have a choice of paying off my 4.375% mortgage or putting the money in a CD yielding around 4%. I'm paying off my mortgage. While I can see long term bond rates going up, I don't see treasuries or anything FDIC insured going up for several years.
Plus, I'm worried about my mortgage company going under and my escrow money disappearing.
Plus, I'll sleep better at night knowing that as long as I pay my property taxes, I'll have a place for me and my family to sleep.
Paying off debt is always better than retaining debt and investing the cash for an individual. The effective return realized by eliminating interest payments on debt is high compared to any return on an investment.
Wednesday's paper featured a front page article giving a rosy picture of the local (Wilmington NC) market. This morning the article was re-reported with an editor's note concerning bad data from their source.
"Editor's note: Because of incorrect information supplied by a source, the number of pending home sales in the Wilmington area reported in Tuesday's Star-News was incorrect. As a result, the thrust of the story was miscast. We have opted to run the correct information here, in a similar location to the original story.
The number of Wilmington-area pending home sales fell to 386 in January from 575 in January 2007, a drop of nearly 33 percent, according to data supplied Wednesday by the Wilmington Regional Association of Realtors.
The 386 total for January, however, was up more than 28 percent from 301 in December 2007, the Wilmington Realtors group reported.
So far in February, there are 392 pending sales, down from 669 for all of February 2007, the Realtors said."
I might add that Wednesday's paper had a major RE magazine insert.
One of Londons most successful hedge funds imploded Thursday when Peloton Partners put the assets of its $2bn flagship fund up for sale and froze its remaining fund after geared mortgage bets left it unable to meet lenders demands.
Rumours of the crisis at Pelotons ABS fund, named best new fixed-income hedge fund last month
Avg. Joe and John D,
Yeah BB sure is in a heck of a box. As for the moral hazard issue, that is one of the reasons I keep harping on the dividend issue (and also the exec pay issue) at banks. Common shareholders should be the ones who take the first hit on this, not the gov't. Is there a way for the Fed to legally compell dividend cuts? I'm not sure. I understandd the point about forcing mtg rates up and making the housing situation worse, and there is a very good chance that because of that factor the current approach might not work. However the strategy of first dealing with the heart attack (credit cruch) and then later dealing with the cancer (inflation) makes sense. The bad part is that the cardiac medicine (cut FF, pump in the cash) tends to make the cancer metastize (sp?). Right now the tumor is mostly localized (energy) but has already shown serious signs of spreading (food, import prices, weak . However, as serious as the cancer is, you don't want to have the "operation was a success, but unfortunately, the patient died" syndrome.
Net net, invest in areas that would tend to benefit from high inflation, reasonable world growth (but slower than last few years) and weak U.S. growth. If that means putting money overseas directly, do it. If that means doing it indirectly via U.S. firms that have big overseas ops or exports, do that as well, if that means investing in commodity producers (oil, base & precious metals, the ag complex) do that to. Avoid anything that is highly discretionary (travel, big ticket items, including the biggest ticket of them all, houses, general retail etc.) or the financials.
Amazing how many people even on this (mildly bearish) site agree with the PTB that a little deflation (coupled with some fiscal responsibility) is some kind of evil Boogeyman that must be avoided at all costs.
Im sick and tired of hearing the same old recycled "Be Careful What You Wish For", "Deflation = GD2" canard. Our Dear Leaders keep repeating their "inflate or die" mantra, and others just parrot it as though it were the Holy Gospel.
Why is "deflation" necessarily such a bad thing for me, when it raises --not lowers-- the purchasing power of my cash? Some people (esp. in housing, finance & retail) will lose their jobs in this recession, just like all the other recessions. Were not going to avoid that, no matter what the Fed/PPT does. So why does this unavoidable and necessary recession "have" to be an inflationary one?
Re: Bernanke says 'we have a problem' controlling long-term mortgage rates
Hello my fellow Americans, yes, ben actually spouted some truth there IMHO, as I believe rates and yields can not be controlled, but stock prices can be manipulated. I also think bond prices can be manipulated, but on the whole, you can not control the yield of an investment that is linked to earnings growth or sustainable cash flow. In other words, you can pump up stocks by tossing money into the stock market, but you cant pump money into thousands of corporation to offset earnings/growth declines. The result of this Bush era will be synthetically subsidized stock market prices and run away inflation which will result in the explosion of P/E ratios, as price stability disconnects from earnings reality, and thus stocks which cost more and more while they yield less and less value.
hiker - "The new containment: Small banks. Wonder how long small morphs into medium/regional and then into large/national."
I was thinking exactly the very same thing. I guess there's a magic hard containment line around the blurred banking size continuum. A year ago Ben was nervously saying credit problems are neatly contained to SubPrime. Expect the same outcome for this prediction.
Sure they can -- the Fed can just monetize long bonds. Other central banks have done this in the past (Japan).
Because Japan is an exporter of capital to the rest of the world, i.e. a nation of savers, they could do this.
How hard is it to understand that a country that borrows $2bn a day from the rest of the world (i.e. the US) is going to have its interest rates determined by its foreign lenders, not the Fed?
The Fed can create all the funny money it wants, but it cannot create the 6% of GDP that the US falls short of every year.
I think folks are making this much too complicated. The Fed has one mandate - to ensure that banks make money. When the economy is on the exuberant side the banks are able to skim money from a wide variety of improvident transactions, and spreads can go down. When the desire to participate in improvident transactions subsides, the Fed's job is to increase the spread so the banks can make more money from each transaction.
I swear I saw a Wachovia ad to re-finance with "pick a payment" as an option.
You are not nuts (at least not about this). I saw the same ad a few days ago. It boasted an "interest-only" payment and a "minimum" payment which by very strong implication was less than interest-only.
US still has plenty of savings. It is just in the hands of some. The process of inflation is stealing the hoard of some and distributing out the back door to those who have not saved. The scary thing about deferred compensation plans is that one becomes a self accessory to the crime.
'Why is "deflation" necessarily such a bad thing for me'
Been there, done that, in Japan. Believe me. Deflation is painful.
Think about your own wage going down. Just like inflation, deflation affects everyone. If the wages are sticky downward, deflation will lead to layoffs, or smaller bonus/benefit. Then, you have a recession on top of that.
The growth and decline of the monetary base strongly influence the economy. The deflationary pressure on its own has powerful recessionary impacts.
Deflation is like running on a treadmill while your blood is being drained.
US still has plenty of savings. It is just in the hands of some
No it doesn't. What you described was true in the 1930's when the US was a creditor to the world. The US is now the world's biggest debtor and no internal redistribution of wealth or income can change this.
Right now the goal of the Fed is to counteract the risk aversion that has been the predominant sentiment for the past several months. They want to make holding "safe" investments (treasuries, CDs) painful. They are well on the road to succeeding. Holding a CD or a T-bond paying 3.5% makes no sense at all when inflation is running above that. After taxes you have some serious negative yields. I prefer to look for stocks that have a fighting chance of going up (EWC is up 1% today). Even non-financial stocks that are treading water but paying good divis make more sense than holding fixed incomes paying < inflation with no upside potential.
I also recommend the Brazilian real CD at 7% through Everbank.
Re: Deflation is like running on a treadmill while your blood is being drained.
That is the case here and The Fed is planning on having a nurse bring in an IV to add with some fluid retention, but that will just cause edema and stress on the heart, as the blood continues to thin...... we need some serious Rx here!
I appreciate what you are stating, but I would prefer that to having the purchasing power of my hard earned savings evaporate. Oh...and then we have to pay taxes on the evaporation.
Absolutely correct. The idea that you can monetize T-bonds to hold down long rates is ludicrous when you're the worlds largest debtor nation and critically dependent on imports (i.e., oil).
Agreed that Ben is trying like hell to save the banks. Not a whole lot of good options there. IOW, zugzwang!
It's simple. The Fed is cutting because Wall Street wants them to. When Wall Street wants them to raise rates they will start raising rates.
It's pointless to try to analyse their rationale. They don't really care about controlling inflation or stimulating growth or anything else except doing what their corporate masters want them to do.
albrt, bravo! Excellent comment about the yield curve and the Fed's true motivations during credit boom and bust periods. One thing that could be added is that the Fed doesn't really care to protect ALL of the banks, just some of the banks.
I refer back to GD1 when the Fed was able to essentially bankrupt many of the "non-member" banks, thus solidifying its illegal monopoly. The depression didn't hurt the Fed at all, far from. It dramatically strengthened the Fed. But I suppose this time is different?
smokey:
"Might it be a good idea to refinance (fixed) at 80% of value, and stash the proceeds in a basket of inflation-resistant investments?"
So what you are saying is that you would like to take some decent portion of your net worth and speculate in commodities because of course that is the inflation hedge you will probably pick, be it gold or the gsci or some etf.
Please, please do not do anything remotely close to this. Ask yourself why you didn't think of this in 2001 when you could have bought any commodity stock for nothing?
You are just being drawn into the current excitement like a moth to a flame. No different than real estate flippers, dot.com chasers and any other investment fad du jour. In investing the easier to understand the story and the more your 'buddies' think its a good idea the more is the risk. I am in no position to tell you where the absolute top in commodity prices cause that would just be hubris but the risks now are fantastic.
You are fortunate not to be in the cross-hairs of the real estate debacle. Keep safe.
smokey
inflation linked treasuries yield less than your mortgage so that is a guaranteed loss. oil stocks better, but again 5 years too late. If you are going to make a major investment of capital it should be across a few things and hopefully some that are hated, where the fundamentals could actually be changing and no one is really noticing.
Maybe US car part manufacturers ....
Maybe General Motors debt
How about Jet Blue, AMR (ok I'm talking my book here I bought them late today after I cashed a lot of my copper stock position)
There is much hated today outside of financial ground zero which is hated for very good reason so leave it alone.
best of luck
d
This market is frankly the toughest to figure out in a LOONG time. By comparison, 2000-02 was a piece of cake. You could pick any dot.com or tech stock and short them and just watch the money roll in. They were obscenly over-valued and could really only go 1 way.
With all due respect to the bears here, this is not in any way the same. Here the market is very close to the historical mean P/E. You have both deflationary and inflationary pressures, credit issues, 2 billion or more folks in BRIC coming into the world economy. Betting the house in either direction here is just folly, IMO. Small steps only, until things are MUCH clearer.
I'm looking for some crystal balls here (or brass, or maybe made of glod): I went through a bad patch a few years ago and had to refi with an ARM due to reset in 5-6 years. I currently can pay slightly more than the monthly payments.
I'm in NY, and the house is only 50% LTV. Current interest is competitive with what is being offered fixed today. I expect to get a windfall of about 25%+ of my outstanding mortgage in a couple of months, at which time I was planning to refi fixed.
Question: should I instead hold and pray that rates will go down sometimes before 2012, or refi in the near future?
First Fed had a problem with raising the long term rates, which they didn't succeed in (the yield curve turned inverted), Fed got annoyed by that in 2005 - 2006 and NY Fed said "we will do something about that soon", well what?
And now they face the opposite problem, the long term rates are not following federal funds target rate downside either. Those treasury investors must be having some fun out there.
Curious: in these situations might it make sense for some aggressively-paying borrowers to take an ARM for the lower interest rate anyway, and aggressively pay it down before the rate resets and do better financially than a fixed rate would have been?
I think all this talk of inflation is spooking T-bill investors, who will demand more from their T-bills to compensate for inflation.
Yet another reason why it's going to be hard to hyperinflate out of this: any move in that direction is going to spike Treasury yields and crush what is left of the housing market.
Also, the more he cuts the more U.S. dollar is punished in foreign markets.
Good luck Ben domestic interest rates have far less meaning in our global world.
Could we outsource the Fed?
With all this bad news I dont understand why the markets are down.
As I said yesterday, as long as delinquencies and foreclosures keep going up, mortgage rates will keep going up, no matter what the Fed does to the FFR.
It's called risk premium. The perceived difference in risk between treasuries and mortgage backed securities is greater now than in the past.
It's not a conundrum. It should be clear to the FED.
I refinanced a piddling $30,000 remaining mortgage on a property appraised for $300,000 last November. The advertised rates were around %6.0 and the best I could do was 6.5%... was told it's because I'm "self-employed"
never mind that, annually, I make almost 3 times what I owe.
Don't believe the advertised rates... even the ones which today continue to rise. By the time you sign the bottom line you'll be paying significantly more.
And that's just what Ben and the money lenders want.
Rates are actually down today due in part in lifting caps on GSE's yesterday and equities selling off this am. 30yr fixed at 6.0% no points.
Never Before Have so Few Lost so Much For So Many.
will,
LOL.
Since the financial sector is in a Mexican Standoff, interest rates have to go up. They don't trust each others ASSets, they know what they have, and know the other guy was up to the same thing.
Further, they can't unload the mortgage. They don't want a 30 yr loan on the balance sheet.
Cheers,
Gold leads......inflation follows...... then interest rates
check your history charts
Forget they rates have gone up - I still cannot understand why mortgage rates went down in the first place. Rates went down significantly; who was suddenly buying mortgages? Sure, they went down in conjunction with the 10yr t-bill, but it's not like the two are fungible. Was it the effects of the TAF? Lending by the FHLB?
The Bernanke conundrum: In the short term, the more he cuts short rates, the more certain long rates may rise.
Yes. It seems an obvious consequence. You can't open the floodgates to avoid recession at any cost and at the same time insist that the slowdown will be in itself enough to slow inflation.
Rates are still artificially low. They will go up as losses rise. In a market where home prices are falling the risks exponentially greater for default, and the defaults cost more.
I want to know how Bernanke justifies cutting still, since he admits that his cuts are not lowering long term rates, yet they are causing the dollar to sink and therefore inflation, including fuel prices to rise.
Just because the Fed has a dual mandate doesn't mean it's effective at both goals. The Fed has no power to avert a housing crash, but it's sacrificing what it has power over (inflation) to try.
Curious: in these situations might it make sense for some aggressively-paying borrowers to take an ARM for the lower interest rate anyway, and aggressively pay it down before the rate resets and do better financially than a fixed rate would have been?
Nah. Better off getting a fixed rate and aggressively paying that off than risking a rise in ARMs. My opinion, of course.
Sparhawk writes:
Curious: in these situations might it make sense for some aggressively-paying borrowers to take an ARM for the lower interest rate anyway, and aggressively pay it down before the rate resets and do better financially than a fixed rate would have been?
The spreads are nothing like they were in 2003. Plus you have all the refinancing costs...
To take an ARM now, you have to truely believe the helicopters will not only be flying this year, but for years to come. As soon as they land, whatch out.
ya....the conundrum around 40 years ago was: why would foreigners prefer gold from Fort Knox rather than the US dollar when they were interchangeable at $35.00 an ounce?
Well Soros predicted this some time ago. He pointed out that if the short term rates are lowered to the extent that they risk rampant inflation the long term rates will go up. The Fed can't control long term rates. So Bernanke is powerless. He probably knows it but is cornered and has to make happy talk, or at least semi-happy talk, when he speaks.
looks like 70's might happen again.
Well you can kiss your dollar goodbye folks it is toast. I am so glad I invested in silver...I just hope they accept it at the supermarket.
Bernanke is forcasting a recession by what he is doing.
He is cutting and implying he will continue only because he believes that inflation will be held in check by a slowing economy.
If he really thought we would avert a recession with slow first half growth, accelerating into the second half, does it really make sense that he would make cuts today that won't take effect until growth is scheduled to begin accelerating? Especially when his current cuts are having little or no effect on the problem he's trying to avoid, but appears to be very effective at increasing the very problem he thinks will self-correct.
Irvine Renter,PLEASE,NO LEISURE SUITS!
For the record,
I think Bernanke has no choice but to cut. But that is because I too believe we are headed for a protracted and relatively severe recession. The market have more impact on rates than Bernanke however, so his cuts will be reactions already implied by the market.
My point is that you cannot trust what Bernanke says when it comes to forcasting a recession is unlikely.
His actions say that he is absolutely 100% certain that a recession is coming if not already here.
But that is because I too believe we are headed for a protracted and relatively severe recession.
How does inflation figure into that scenario? Are you saying actually stagflation?
Birdbrain Bush and Ben and his Band of Boneheads are telling you everything is fine because they need time to dump all their stocks first. Once all the big boys are out, then they can let the market tank so that the rest of us get nothing but scraps. If you don't believe this, take a look at what happened before October 1929. The big boys were exiting the market long before then, and were sitting on piles of cash when the roof caved in. They laughed all the way to the bank as the rest of the country collapsed around them.
I will be very surprised if the Dow doesn't revisit 10K within the next year or so. Above that, there is very little long-term support.
Time to start monetizing the ten year.
sparhawk,
Ditto what outsider and Bob said. Run the numbers on an excel spreadsheet and you'll see that the risk outweighs the potential reward. We've been paying our 30yr fixed on a 21yr schedule, and so far total interest saved by refinancing with ARMs does not justify the risk of rising IR and the closing costs. It becomes even more of a no brainer for us considering that my wife will start working again in a couple of years and we can apply most of her salary to the mortgage.
Best,
Well, listening distractedly to the Bernanke testimony before the Senate, I caught one of the Senators (Schumer? by the voice, if he's even a member of that committee)actually coming out and asking if BB could find a way to force prices of these financial instruments to stay at "mark to model" because they would fall too low if they were left right now to the buyers to determine prices.
Maybe I heard that wrong, but I found it so striking - isn't this price-fixing? A five-year plan to set prices - yes that's the answer!
I've lost faith in the US system that the fed is trying so hard to protect. I'm a citizen who is now open to other ideas. Maybe democratic socialism will serve the general public better than this really stinking corpse. Is there any other conclusion to be drawn nowdays than that the business powers are systematically extracting all wealth above a subsistence level from the majority of people around them?
Sometimes you have to rant.
looks like 70's might happen again.
So far we're missing a key element from the 70s -- rising incomes.
There seems to be ample evidence suggesting that much of the current rise in prices is coming from leverage.
We know how that ended up with tech stocks and houses.
Until the Fed finds away to get more money directly in the hands of consumers, nothing has fundamentally changed. It's just commodities we're dealing with now instead of stocks or RE.
From Chairman Bernanke yesterday: Bernanke says 'we have a problem' controlling long-term mortgage rates
Since when is it's the Fed's job to "control long-term mortgage rates"? Come to think of it, I don't recall seeing "reinflating asset bubbles", or "preventing losses for Wall Street" in their stated mandate either.
How about trying this approach?: leave short rates alone and let the market sort this out. Or, is that too "capitalistic" for our "always socialize losses" Fed?
Mortgage and long-term rates too high? No problem. Just look for a "mystery buyer" to wade into the bond market in size.
From the helicopter speech:
"One relatively straightforward extension of current procedures would be to try to stimulate spending by lowering rates further out along the Treasury term structure--that is, rates on government bonds of longer maturities. There are at least two ways of bringing down longer-term rates, which are complementary and could be employed separately or in combination. One approach, similar to an action taken in the past couple of years by the Bank of Japan, would be for the Fed to commit to holding the overnight rate at zero for some specified period. Because long-term interest rates represent averages of current and expected future short-term rates, plus a term premium, a commitment to keep short-term rates at zero for some time--if it were credible--would induce a decline in longer-term rates. A more direct method, which I personally prefer, would be for the Fed to begin announcing explicit ceilings for yields on longer-maturity Treasury debt (say, bonds maturing within the next two years). The Fed could enforce these interest-rate ceilings by committing to make unlimited purchases of securities up to two years from maturity at prices consistent with the targeted yields. If this program were successful, not only would yields on medium-term Treasury securities fall, but (because of links operating through expectations of future interest rates) yields on longer-term public and private debt (such as mortgages) would likely fall as well.
...
Of course, if operating in relatively short-dated Treasury debt proved insufficient, the Fed could also attempt to cap yields of Treasury securities at still longer maturities, say three to six years. Yet another option would be for the Fed to use its existing authority to operate in the markets for agency debt (for example, mortgage-backed securities issued by Ginnie Mae, the Government National Mortgage Association)."
The big boys were exiting the market long before then, and were sitting on piles of cash when the roof caved in.
What good is that if the dollar is worthless?
I'm not following some trains of thought here. It must be me.
"I've lost faith in the US system that the fed is trying so hard to protect."
Are you sure that is what the fed is REALLY trying to do? It seems to me that the real role of the fed is the destruction of the middle class. Mission accomplished.
Next up, GD2. Like Borkafatty said, the pigmen are busy cashing out of the stock market and will be sitting on piles of cash when the market implodes. They played their inflation and fictitious capital games as long as they possibly could and now the game's up so it's time for them to make some REAL money by doing the vulture capital bit and buying up every asset on the cheap after the crash.
I disagree that the market will be 10K by the end of the year though. I'm thinking much, much lower.
Here's the "Bernanke Drill":
-cut rates to prop up the economy
-see inflation rise
-pray that wages lag
-see real wages fall
-see consumer spending drop
-repeat
"ARMs are becoming more compelling each week" - so I am not the only one who think rates will rise....
The Fed can't control long term rates.
Sure they can -- the Fed can just monetize long bonds. Other central banks have done this in the past (Japan).
The US Federal reserve has chosen not to do this so far for whatever reason, and if they did it would probably drive the dollar down further.
But with the elastic nature of a fiat currency, you can trade changes in interest rates for other things (like riots in the street).
Outsider:
I don't know if stagflation will arrive since I am unclear as to its exact definition. I would not be surprised to have a recession but have oil, food, and gold etc to remain high for several reasons: Increased worldwide demand vs supply contraints, flight to quality/safety etc. I don't doubt that something that would appear to the average joe to be stagflation (increased job losses with $4 gas), increased long rates due to high loss risks (as opposed to low money supply) etc.
I don't pretend to be an economist (since most of my predictions have been relatively accurate).
I tend to read Mish and what he is saying makes more sense to me that say Schiff. Both have been right on about predicting where we are, I just am not sure who is right about why and where we go from here.
"the widening of the spreads, which are associated with signs of illiquidity"
Since BB's speciality is/was studying the Depression I can almost see his pov. Lets hear from an economist who knows about hyper-inflation and debtor nations - the view might be that the spread is nothing but a risk premium to hold a declining currency in a market w/ inflation expectations.
I love the juxtaposition of headlines today. "Economy grinds to halt" and "Bush sees no recession."
tj
technicians guestimate turning pts. not always right. gary dorsch thought there was a resistance level at 12750. he may be right.
you have to be ready to move when the tide turns. theres been enough bad news out there for that to happen.
"The Fed can't control long term rates"
My understanding is that the Fed could affect (maybe not control) long term rates if they started buying the 10 year as an example.
isn't this part of a possible world of "monetization"?
I'm always confused about the Fed's open market functions and the how's and why's though...
"What good is that if the dollar is worthless?
I'm not following some trains of thought here. It must be me."
It is just you. Even if the dollar winds up being toast from a global perspective (very likely) there will still be massive asset deflation locally and those "worthless" dollars will be able to buy a lot of home-grown stuff.
Crucial imports like oil and less important crap from China will be prohibitively expensive. A big problem, to be sure, but nevertheless, the pigmen will play vulture capitalism to the full extent when massive asset deflation comes home to roost.
This is exactly what has to happen, and what Bernanke wants to happen. He is only giving lip service to "the people" and their plights.
The Fed is here to protect banks and the financial system. Higher long rates mean more spread and more earnings for banks(which tend to borrow short and lend long)....which I think you've all noticed could use some extra capital.
"Yet another option would be for the Fed to use its existing authority to operate in the markets for agency debt (for example, mortgage-backed securities issued by Ginnie Mae, the Government National Mortgage Association)."(bernanke)
So he's saying the Fed could be the bagholder of last resort? Is that what this means?
No recession - How stupid is the public? Talk about appealing to the lowest denominator.
do you think it's really possible for our entire mortgage lending industry to be nationalized?
I've been wondering if the plan is to get Fannie and Freddie to be lenders of last resort, they could take over 100% of the mortgage market.
right there you have near-nationalization.
if they implode, then they'll of course be nationalized in name truly...
just wondering if that isn't the plan.
Bush says the US is not headed for a recession. What is incredible about this is that since we already are in one, or soon will be, that the fool has stuck his neck out to make a statement that will prove him a repeat liar before long. If he had any brains he would have kept his mouth shut. But not having any....well, why go on...
Well Outsider ...you think all the cash these multi millionaire folks have are in US dollars? well if you do then your correct about your train it still is sitting at the station idling. Dick Cheney has been diversifying since 05/06 Google it ...this is not rocket science...And besides that dollars (US) might be worthless but here in the mainland it still will be the currency to buy goods....Most sheep dont even know what is about to hit them.
Bush says the US is not headed for a recession ---- and he is right you cant be headed into a recession if you are already in one.
"So he's saying the Fed could be the bagholder of last resort? Is that what this means?"
It means jo6pack holds the bag: tax and spend; tax and spend; tax and spend.
According to Roger Wiegand (financial analyst), the reason for the sudden spiking of gold/silver is the speech that Greenspan delivered in Saudi Arabia advising them to drop their dollar peg.
The Arabs are suffering high inflation rates because of the peg, but if they drop it, their inflation will richochet back to the US. We've been exporting our inflation for years, and other countries are getting sick of it.
Precious metals are being driven right now by speculation, but that doesn't necessarily mean they're in a bubble that will pop. If speculators are correct, inflation will soon rage in the US, and personally I have no expectation that it will slow before the US invents a new currency based on something real.
Higher long rates mean more spread and more earnings for banks(which tend to borrow short and lend long)
But there has to be someone to take those loans.
O/T but it seem like more debt to meet short term needs - CA needs money.
The state has largely addressed current year budget and cash flow concerns through issuance of $3.3 billion in economic recovery bonds (ERBs), earlier this month"
News
Yahoo! 404 - Page Not Found
From the Bernanke article: He also said some small U.S. banks might go under due to the financial stress prompted by the housing market's woes, although the U.S. banking system overall remained solid.
The new containment: Small banks. Wonder how long small morphs into medium/regional and then into large/national.
Bush's Speech - A period of "Slowness"
U.S. Department of Labor
11:41 A.M. EST
THE PRESIDENT: I want to thank Madam Secretary for hosting this meeting with my economic team. We just had a briefing on what has become very obvious to the American people -- that we're in a period of slowness. And it's also a period of uncertainty.
We're optimistic about the long-term economic future of the country, but right now a lot of Americans are facing uncertain times. And we're acting on it.
I want to thank the members of Congress for quickly passing an economic growth package. And that means there will be $150 billion -- or more -- sent out to American consumers and incentives inherent in that for American businesses to invest.
Now, the Secretary briefed us -- Secretary Paulson -- that we anticipate that the checks will start being sent in the second week of May. And that's going to be very positive news for our consumers. And it's a part of our active plan to help deal with these uncertain times.
One way Congress, if they really want to make a substantial difference in creating certainty during uncertain times, is to make the tax cuts we passed permanent. You see, if you're somebody worried about $3 gasoline and you think your taxes may be going up in two years, then it -- the uncertain price of gasoline creates more uncertainty for you as you plan your future. And Congress needs to make these tax cuts permanent and needs to think about the American consumer and the American family and the American small business owner during these times of difficulty and make the tax cuts permanent -- send a clear signal to the American people.
Secondly, obviously the housing issue is one that we're deeply concerned about. We want people being able to stay in their homes. We don't support legislation that will reward lenders -- you know, that will bail out lenders, and we don't support legislation that will cause interest rates to go up -- like the legislation in the Senate. What we do support is an aggressive plan, led by Secretary Paulson and Secretary Jackson, to help people stay in their homes; to help them refinance their mortgages; to help them make the financial adjustments necessary to help us through this difficult period of time.
And so I want to thank you all for your briefing. I appreciate your concern about our fellow citizens. We share concerns about it. We want them doing well. And we believe that in the long-term we're going to do just fine. This is a resilient economy. We've got good, hardworking people in America. The entrepreneurial spirit is strong. And we'll make it through this period, just like we've made it through other periods of uncertainty during my presidency -- and each time we came out stronger and better, and that's what's going to happen this time, too.
Thank you.
Wonder how long until....
Sheeesh.
This was predicted by Schiff years ago as demand for the dollar tailed off, long term rates would rise.
Gee, Ben is so deep in the trees he can't see the forest.
The Fed will never be able to control the price of loans, supply and demand does that.
Checkmate, Fed loses.
They cannot control long rates, and they can no longer expect "beneficial" asset inflation. From here on in, it mostly goes into the price of core, essential goods (food, energy, raw materials).
Non-essential goods & services will suffer price declines despite (attempts at) monetary inflation. Whatever inflation there is will go directly into consumer essentials as well as input costs of businesses. As consumers retrench under rising costs and crushing debt loads, businesses earnings will decline and they too will be unable to service their debts. Then come defaults and bankruptcies and job losses.
Pretty soon even food, energy and raw materials will get cheaper.
Then long rates will come down.
Unbelievably, most are valuing gold shares based on $700 gold...
Anotherajh
That's the kicker. They have to quit trying to stall the asset price declines. Supply and demand suggests that as prices fall demand will increase.
If rates go to the moon...ARMs could actually be a heck of a smart idea and maybe even the savor of the mortgage industry....however grossly absurd/weird/ironic that might be.
looks like 70's might happen again.
IrvineResident | 02.28.08 - 12:41 pm
Better than the 30's happening all over again. Honestly folks, that is Ben's choice, risk a systemic collapse with all the counter party problems, or jack the yield curve real steep so people who borrow short and lend long make great gobs of money on any new loans they make. Increasing risk spreads also helps in this regard. This is the best available way to boost bank capital. In this regard, rising LT rates are a good thing. Doesnt help Main St much, but it does help with bank profitability, and thus internal generation of capital. Of course, banks could boost their capital (retained earnigns) by focusing a bit more on the retained part of retained earnings. The major banks are being almost criminally irresponsible by continueing to pay dividends/buyback stock.
Outsider
Also, in the dperession cash was hard t come by. so, if youhad some, it was king. Cash wasnt worthless, it was hoarded and stashed.
I dunno, Dirk.
Who's gonna be financing anything long in the next three or four years? Unless they have to, "rational" shoppers will wait until housing prices stabilize before they jump back in. Higher mortgage rates just keep pressing that day further into the future.
I think housing will provide deflationary pressure for the next half-decade or more. Whether other sectors of the CPI do so as well, remains to be seen, but I'm guessing fuel demand will in fact drop if we get into (even) a shallow recession; it will fall significantly more if the recession is as bad as some are saying.
The 'thirties might yet be what we see in the '10s. At that I shudder...
So, why would he cut rates if it isn't working anyway?
Better start fighting inflation, Mr. "There's no stagflation" Bernanke!
To summarize, Bernanke's choices are rapidly becoming limited to pushing on String A or on String B.
This may be a stupid question, but...
I live in an area untouched by both the engorgement and popping of this real-estate bubble. My house has appreciated steadily and slowly over 13 years, so my mortgage is about 50% of present value.
Might it be a good idea to refinance (fixed) at 80% of value, and stash the proceeds in a basket of inflation-resistant investments?
from previous topic...re courts and FC's here is one where the state supreme court sided with the family...
Stuck with a bad loan, a Staten Island family fights back | Staten Island Featured Entries - Breaking News - - SILive.com
In what is likely to be a precedent-setting decision in New York, state Supreme Court Justice Joseph J. Maltese agreed with the Shearons, recently telling the bank that it could not foreclose on the couple's New Springville townhouse and that it may have to pay them damages for their troubles and void the $355,000 mortgage on their Westport Lane home.
James Tierney, director of the National Attorneys General program at Columbia Law School, said trial judges across the country are beginning to question banks seeking to foreclose on homeowners in similar situations.
"What I am seeing is a number of trial judges saying, 'Enough is enough, fraud is fraud.' They are kind of taking a stand," said Tierney.
Well long rates are sure going down today.
So whatever the Fed did today they should do more of that.
Or maybe if the Federal Reserve board members just drank a cup of STFU juice every morning that might work.
Dirk,
I agree with you completely, however since he is in effect trying to disperse the impact of current losses from being concentrated, in terms of both time and location, in the banks, to being spread among the masses in the form of higher borrowing costs, inflation, etc., he risks two things: One, he plays into the hands of those who think he is trying to save his buddies (which is he is but not because they are his buddies but because he doesn't want a 1930's redo), Two, increasing risks from moral hazard by saving those who took the risk. Three, causing the housing crisis to be more severe than otherwise due to high rates, which will damage both the bank's current assets and future earnings power regardless.
After 25 years of Japanese style performance, we may look back and wish we could have got it over with in a 30's style crash and burn.
Be careful what you wish for.
Where's an Ambac bailout rumor when you need one?
I think the important point is that Bernanke has discussed all these issues in previous speeches. All the items below are in his "helicopter" speech. Don't be shocked to see any of them implemented to "rescue" the economy. His speech is a clear blueprint to what he will do if he feels it is necessary.
Lower rates to zero if required.
Commit to hold rates at 0 for a specific time period to lower longer rates.
Buy short term bonds to lower rates.
Buy long term bonds to lower rates.
Buy agency debt.
Enforce treasury bond "pegs".
Funnel money to banks for extended periods since the fed cannot directly buy private securities.*
Buy foreign securities.
Dirk,
You are right -- but the banks have a top line, a gross margin, and a balance sheet problem all at the same time.
Steepening the yield curve and widening of spreads helps gross margin, but banks are seeing sources of revenue dry up. Hard to say that profits (ex-writedowns) and cash flows are maintained.
The other problem is the steeper yield curve and wider spreads could further accelerate losses in the housing sector, in turn further eroding bank balance sheets.
Ben is going with the best option, but he is certainly forced to manage in a box.
Commit to hold rates at 0 for a specific time period to lower longer rates
And how would that work? The longer short term rates are depressed, the more upward pressure there would be on long term rates, right?
Might it be a good idea to refinance (fixed) at 80% of value, and stash the proceeds in a basket of inflation-resistant investments?
That's why I'm so suspicious of commodities right now -- land is kind of the ultimate in limited commodities (and where other commodities tend to come from).
And shouldn't real estate be providing inflation protection?
That's what makes me think maybe this isn't fundamentally an inflationary scenario -- IMO we're just witnessing the effects of speculative leverage being shifted away from real estate on to commodities.
Where's an Ambac bailout rumor when you need one?
Is it 2:30 already?
ac,
Doesn't that look like the right play with land and housing spiking down and commodities spiking higher with the general public still not getting it?
"Commit to hold rates at 0 for a specific time period to lower longer rates
And how would that work? The longer short term rates are depressed, the more upward pressure there would be on long term rates, right?"
Well if long term rates start climbing he will just try 3 other things on the list.
Ben thinks he can put the toothpaste back in the tube.
Average Joe,
It is just about impossible for the U.S. to mirror the Japan experience. The Japansese were (are still) savers. There is very little saving in the U.S. to fall back on. How can a slow economy be sustained without any cash in the bank?
So, why would he cut rates if it isn't working anyway?
Because that's what the politicians he works for tell him to do?
What is with all of the talk about BB not wanting another GD?!?! The Fed made out great last time it happened and they'll do even better this time around.
A lot of you Pollyannas think that BB was hired to stave off a depression (laff.) He was hired to manage the depression to the liking of the Federal Reserve, other pigmen, and various apparatchiks. The Fed has no interest in preventing GD2, as this is the bountiful harvest.
Sheesh!
"period of slowness" = severe recession
"uncertainty" = "it will get worse"
"uncertain times" = "no solution"
"worried about $3 gasoline" = "worried about $5 gasoline"
"stay in their homes" = "stay in their foreclosed homes"
"we're going do just fine" = "we will need your prayers and sacrifice"
"good, hardworking people" = "unemployed good, hardworking people"
"entrepreneurial spirit" = "willingness of people earn a good income"
Great stuff fron NY Times (sorry if a repost)
- NY Times
"And shouldn't real estate be providing inflation protection?"
how can you say this after the biggest RE bubble of all time?
ordinarily I'd agree that RE can be inflation protection, but not when RE has doubled/trebled in just a few short years.
Might it be a good idea to refinance (fixed) at 80% of value, and stash the proceeds in a basket of inflation-resistant investments?
In my opinion: NO.
Don't mess with your house. In times of true economic woe it is best to have NO debt.
I can't think of any true "safe" inflation resistent investment that would yield more than your new mortgage rate.
imagine refinancing, owing more on your home, then your investments tanking for whatever reason: now you may lose your house.
not worth it IMO.
when is the next Fed meeting? when will they official announce the next 50bp cut? TIA
I can't think of any true "safe" inflation resistent investment that would yield more than your new mortgage rate.
I agree. I'm in a similar situation. I have a choice of paying off my 4.375% mortgage or putting the money in a CD yielding around 4%. I'm paying off my mortgage. While I can see long term bond rates going up, I don't see treasuries or anything FDIC insured going up for several years.
Plus, I'm worried about my mortgage company going under and my escrow money disappearing.
Plus, I'll sleep better at night knowing that as long as I pay my property taxes, I'll have a place for me and my family to sleep.
Thornburg May Sell Securities to Meet Margin Calls (Update5) - Bloomberg.com
Pedro - Thx for the link. The chart is way cool! Esp FL.
Paying off debt is always better than retaining debt and investing the cash for an individual. The effective return realized by eliminating interest payments on debt is high compared to any return on an investment.
OT: Strange saga in local RE reporting.
Wednesday's paper featured a front page article giving a rosy picture of the local (Wilmington NC) market. This morning the article was re-reported with an editor's note concerning bad data from their source.
"Editor's note: Because of incorrect information supplied by a source, the number of pending home sales in the Wilmington area reported in Tuesday's Star-News was incorrect. As a result, the thrust of the story was miscast. We have opted to run the correct information here, in a similar location to the original story.
The number of Wilmington-area pending home sales fell to 386 in January from 575 in January 2007, a drop of nearly 33 percent, according to data supplied Wednesday by the Wilmington Regional Association of Realtors.
The 386 total for January, however, was up more than 28 percent from 301 in December 2007, the Wilmington Realtors group reported.
So far in February, there are 392 pending sales, down from 669 for all of February 2007, the Realtors said."
I might add that Wednesday's paper had a major RE magazine insert.
Strange,
Jim
That sounds like a responsible newspaper. At least they own up to their mistakes.
In the short term, the more he cuts short rates, the more certain long rates may rise.
I do not understand the mechanics of this. How cut in short rates contributes to rise in long term rates?
Thanks
covered a bunch of shorts this am and waiting for the inevitable late day bounce to reshort into.
The 3:00 bounce is a little early today.
O/T - Reversal of Fortunes
One of Londons most successful hedge funds imploded Thursday when Peloton Partners put the assets of its $2bn flagship fund up for sale and froze its remaining fund after geared mortgage bets left it unable to meet lenders demands.
Rumours of the crisis at Pelotons ABS fund, named best new fixed-income hedge fund last month
FT.com / In depth - Peloton Partners in $2bn assets sale
Am I nuts?
I swear I saw a Wachovia ad to re-finance with "pick a payment" as an option.
Isn't that neg-am junk?
WTF?
idoc, charlie - yes did they trot out Charlie G with his ABK wheeze already?
Avg. Joe and John D,
. However, as serious as the cancer is, you don't want to have the "operation was a success, but unfortunately, the patient died" syndrome.
Yeah BB sure is in a heck of a box. As for the moral hazard issue, that is one of the reasons I keep harping on the dividend issue (and also the exec pay issue) at banks. Common shareholders should be the ones who take the first hit on this, not the gov't. Is there a way for the Fed to legally compell dividend cuts? I'm not sure. I understandd the point about forcing mtg rates up and making the housing situation worse, and there is a very good chance that because of that factor the current approach might not work. However the strategy of first dealing with the heart attack (credit cruch) and then later dealing with the cancer (inflation) makes sense. The bad part is that the cardiac medicine (cut FF, pump in the cash) tends to make the cancer metastize (sp?). Right now the tumor is mostly localized (energy) but has already shown serious signs of spreading (food, import prices, weak
Net net, invest in areas that would tend to benefit from high inflation, reasonable world growth (but slower than last few years) and weak U.S. growth. If that means putting money overseas directly, do it. If that means doing it indirectly via U.S. firms that have big overseas ops or exports, do that as well, if that means investing in commodity producers (oil, base & precious metals, the ag complex) do that to. Avoid anything that is highly discretionary (travel, big ticket items, including the biggest ticket of them all, houses, general retail etc.) or the financials.
Fannie and Freddie..."nationalized":
Bloomberg video
oil $102.63!!!
glod $972.30!!!
good job Ben!!!
Amazing how many people even on this (mildly bearish) site agree with the PTB that a little deflation (coupled with some fiscal responsibility) is some kind of evil Boogeyman that must be avoided at all costs.
Im sick and tired of hearing the same old recycled "Be Careful What You Wish For", "Deflation = GD2" canard. Our Dear Leaders keep repeating their "inflate or die" mantra, and others just parrot it as though it were the Holy Gospel.
Why is "deflation" necessarily such a bad thing for me, when it raises --not lowers-- the purchasing power of my cash? Some people (esp. in housing, finance & retail) will lose their jobs in this recession, just like all the other recessions. Were not going to avoid that, no matter what the Fed/PPT does. So why does this unavoidable and necessary recession "have" to be an inflationary one?
Re: Bernanke says 'we have a problem' controlling long-term mortgage rates
Hello my fellow Americans, yes, ben actually spouted some truth there IMHO, as I believe rates and yields can not be controlled, but stock prices can be manipulated. I also think bond prices can be manipulated, but on the whole, you can not control the yield of an investment that is linked to earnings growth or sustainable cash flow. In other words, you can pump up stocks by tossing money into the stock market, but you cant pump money into thousands of corporation to offset earnings/growth declines. The result of this Bush era will be synthetically subsidized stock market prices and run away inflation which will result in the explosion of P/E ratios, as price stability disconnects from earnings reality, and thus stocks which cost more and more while they yield less and less value.
Thank you Ben and God Bless Bush!
hiker - "The new containment: Small banks. Wonder how long small morphs into medium/regional and then into large/national."
I was thinking exactly the very same thing. I guess there's a magic hard containment line around the blurred banking size continuum. A year ago Ben was nervously saying credit problems are neatly contained to SubPrime. Expect the same outcome for this prediction.
Add your own caption:
" What me worry, I could careless "
Business & Financial News, Breaking US & International News | Reuters.com
Sure they can -- the Fed can just monetize long bonds. Other central banks have done this in the past (Japan).
Because Japan is an exporter of capital to the rest of the world, i.e. a nation of savers, they could do this.
How hard is it to understand that a country that borrows $2bn a day from the rest of the world (i.e. the US) is going to have its interest rates determined by its foreign lenders, not the Fed?
The Fed can create all the funny money it wants, but it cannot create the 6% of GDP that the US falls short of every year.
I think folks are making this much too complicated. The Fed has one mandate - to ensure that banks make money. When the economy is on the exuberant side the banks are able to skim money from a wide variety of improvident transactions, and spreads can go down. When the desire to participate in improvident transactions subsides, the Fed's job is to increase the spread so the banks can make more money from each transaction.
It's working. So far so good.
ugh writes:
Am I nuts?
I swear I saw a Wachovia ad to re-finance with "pick a payment" as an option.
You are not nuts (at least not about this). I saw the same ad a few days ago. It boasted an "interest-only" payment and a "minimum" payment which by very strong implication was less than interest-only.
Wachovia, on the other hand, is totaly crazy.
US still has plenty of savings. It is just in the hands of some. The process of inflation is stealing the hoard of some and distributing out the back door to those who have not saved. The scary thing about deferred compensation plans is that one becomes a self accessory to the crime.
idoc writes:
glod $972.30!!!
good job Ben!!!
idoc | 02.28.08 - 2:50 pm |
Is this "glod" stuff any good? I keep hearing about it
HARM:
'Why is "deflation" necessarily such a bad thing for me'
Been there, done that, in Japan. Believe me. Deflation is painful.
Think about your own wage going down. Just like inflation, deflation affects everyone. If the wages are sticky downward, deflation will lead to layoffs, or smaller bonus/benefit. Then, you have a recession on top of that.
The growth and decline of the monetary base strongly influence the economy. The deflationary pressure on its own has powerful recessionary impacts.
Deflation is like running on a treadmill while your blood is being drained.
US still has plenty of savings. It is just in the hands of some
No it doesn't. What you described was true in the 1930's when the US was a creditor to the world. The US is now the world's biggest debtor and no internal redistribution of wealth or income can change this.
We're up to $61B sloshing on top of $60B in TAFs. I highly suspect this is not economic demand.
With over $3T in money market accounts and treasuries at very low yields, it's clear that there is plenty of money. It's just not going to the banks!
What is our bank chief going to do? How long will he keep buying up paper? How much more will he have to buy to support a 50bps cut?
Right now the goal of the Fed is to counteract the risk aversion that has been the predominant sentiment for the past several months. They want to make holding "safe" investments (treasuries, CDs) painful. They are well on the road to succeeding. Holding a CD or a T-bond paying 3.5% makes no sense at all when inflation is running above that. After taxes you have some serious negative yields. I prefer to look for stocks that have a fighting chance of going up (EWC is up 1% today). Even non-financial stocks that are treading water but paying good divis make more sense than holding fixed incomes paying < inflation with no upside potential.
I also recommend the Brazilian real CD at 7% through Everbank.
Re: Deflation is like running on a treadmill while your blood is being drained.
That is the case here and The Fed is planning on having a nurse bring in an IV to add with some fluid retention, but that will just cause edema and stress on the heart, as the blood continues to thin...... we need some serious Rx here!
Watanabe-san,
I appreciate what you are stating, but I would prefer that to having the purchasing power of my hard earned savings evaporate. Oh...and then we have to pay taxes on the evaporation.
yogurt,
Absolutely correct. The idea that you can monetize T-bonds to hold down long rates is ludicrous when you're the worlds largest debtor nation and critically dependent on imports (i.e., oil).
Agreed that Ben is trying like hell to save the banks. Not a whole lot of good options there. IOW, zugzwang!
Sometimes I think we're playing a 10 trillion dollar game of Whack-a-Mole.
It's simple. The Fed is cutting because Wall Street wants them to. When Wall Street wants them to raise rates they will start raising rates.
It's pointless to try to analyse their rationale. They don't really care about controlling inflation or stimulating growth or anything else except doing what their corporate masters want them to do.
rsj, I believe taht cash during the Depression was backed by gold or silver so it had value. Not the case today.
Anonymous;
A good analogy. However much Helicopter Ben continues to pump, liquid gets trapped in edema.
Allen C;
Have you thought about how much interest your hard-earned savings may earn in a deflationary economy?
Remember "zen of negative interest rates"? People paying premium for holding T-bill equivalents?
albrt, bravo! Excellent comment about the yield curve and the Fed's true motivations during credit boom and bust periods. One thing that could be added is that the Fed doesn't really care to protect ALL of the banks, just some of the banks.
I refer back to GD1 when the Fed was able to essentially bankrupt many of the "non-member" banks, thus solidifying its illegal monopoly. The depression didn't hurt the Fed at all, far from. It dramatically strengthened the Fed. But I suppose this time is different?
smokey:
"Might it be a good idea to refinance (fixed) at 80% of value, and stash the proceeds in a basket of inflation-resistant investments?"
So what you are saying is that you would like to take some decent portion of your net worth and speculate in commodities because of course that is the inflation hedge you will probably pick, be it gold or the gsci or some etf.
Please, please do not do anything remotely close to this. Ask yourself why you didn't think of this in 2001 when you could have bought any commodity stock for nothing?
You are just being drawn into the current excitement like a moth to a flame. No different than real estate flippers, dot.com chasers and any other investment fad du jour. In investing the easier to understand the story and the more your 'buddies' think its a good idea the more is the risk. I am in no position to tell you where the absolute top in commodity prices cause that would just be hubris but the risks now are fantastic.
You are fortunate not to be in the cross-hairs of the real estate debacle. Keep safe.
smokey:
And as an addendum, why aren't you asking whether or not to refi the house and buy a basket of common stocks?
david,
Thanks for the advice. I wasn't considering gold or wheat, but things more like oil company stocks or inflation-linked Treasuries.
"...why aren't you asking whether or not to refi the house and buy a basket of common stocks?"
It seems too early in the cycle to do that.
smokey
inflation linked treasuries yield less than your mortgage so that is a guaranteed loss. oil stocks better, but again 5 years too late. If you are going to make a major investment of capital it should be across a few things and hopefully some that are hated, where the fundamentals could actually be changing and no one is really noticing.
Maybe US car part manufacturers ....
Maybe General Motors debt
How about Jet Blue, AMR (ok I'm talking my book here I bought them late today after I cashed a lot of my copper stock position)
There is much hated today outside of financial ground zero which is hated for very good reason so leave it alone.
best of luck
d
This market is frankly the toughest to figure out in a LOONG time. By comparison, 2000-02 was a piece of cake. You could pick any dot.com or tech stock and short them and just watch the money roll in. They were obscenly over-valued and could really only go 1 way.
With all due respect to the bears here, this is not in any way the same. Here the market is very close to the historical mean P/E. You have both deflationary and inflationary pressures, credit issues, 2 billion or more folks in BRIC coming into the world economy. Betting the house in either direction here is just folly, IMO. Small steps only, until things are MUCH clearer.
I'm looking for some crystal balls here (or brass, or maybe made of glod): I went through a bad patch a few years ago and had to refi with an ARM due to reset in 5-6 years. I currently can pay slightly more than the monthly payments.
I'm in NY, and the house is only 50% LTV. Current interest is competitive with what is being offered fixed today. I expect to get a windfall of about 25%+ of my outstanding mortgage in a couple of months, at which time I was planning to refi fixed.
Question: should I instead hold and pray that rates will go down sometimes before 2012, or refi in the near future?
Thanks, y'all.