Notice how differently Benanke and Mervyn King talk about the same problems. The front page of today's Financial Times is reporting King saying basically "It's gonna be horrible, we can't control it, and inflation will prevent rate cuts". He even said the British have to prepare themselves for a lower standard of living.
Just for the record the Feds Mandate per Donald L. Kohn April 22, 2005
The Federal Reserve's mandate is to keep inflation low and stable and to promote full resource utilization, with the economy expanding at its maximum sustainable rate.
...downside risks to growth remain, including the possibilities that the housing market or the labor market may deteriorate to an extent beyond that currently anticipated, or that credit conditions may tighten substantially further.
Gee Ben. Ya think? every single datum in the housing and credit market has broken to the downside every model the Fed uses and continue to defy attempts by the Fed to contain the events.
I'm thinking the next set of inflation numbers will be bond killers. Overseas inflation is accelerating, and we are likely to see that in import prices, particularly from China. There are also more frequent company comments on passing through cost pressures to their customers. The wildcard in the CPI is always the non-number of owner's equivalent rent -- that one is caught in the opposing crossfire of higher rental demand from foreclosures and the higher supply of vacant homes.
Bottom-line: Bernanke may see his credibility questioned next week, while King, Trichet and other Central Bankers have done a better job of setting up the inflation risks.
If you like inflation now, wait until the next round of grain price increases works its way through the food chain. Chicken, and especially beef, are going to be increasingly expensive. Expect food to spike much higher very rapidly.
SC, house prices are not measured only OER "Owner Equivalent Rents". That is one of the reasons we did not see huge inflation numbers over the last few years.
Greenspan and Bernanke have taken a hands-off approach for two consecutive great bubbles, first in TMT -- telecommunications, media and technology -- and second, in housing. A hands-off approach is a polite way of saying they facilitated this. And what is the point of a 125-basis-point rate reduction, other than to provide reinforcement for the people who borrow short and lend long? From bankers who have committed every crime you could possibly accuse a banker of, to hedge funds who borrow short, leverage, and invest long in the stock market -- that's who really benefits from the interest-rate reduction. The economy, broadly defined, does not.
I have an exhibit that shows the 30 years prior to 1982 when the debt-to-gross domestic product ratio was completely flat at 1.2 times. Total debt is defined as government debt, personal debt, corporate debt and financial debt. Then in the 25 years after 1982, the flat line goes up at a 45 degrees angle from 1.2 times to 3.1 times GDP. Massive. In the first 30 years, when debt is flat, annual GDP growth is its usual battleship, growing at 3.5% and hardly twitching. After the massive increase in debt, GDP, far from accelerating, grew at 3%. So debt in the aggregate does not drive the economy. The economy is driven by education, man-hours worked, capital investment and technology. It is not driven by what I owe you and you owe me.
Yeah it's all terrible, but then really not so terrible because we have it all in hand and can make the economy well even if it gets sick, and anyway it isn't going to get so VERY sick as far as we can see....and....and ....and just trust us; we work miracles at the drop of an interest rate. That cures everything.
SC writes:
Paulson is weak. How the hell did that guy run Goldman?
Expertly. But as CEO of a private company (as opposed to head of government cabinet department), he had the ability to command and control the activites of those around him.
His path wasn't immpeded by intellectuals like Dodd, Shelby et al
It is a false put. We already have four insurance systems in this country that are facing cascading failures:
Monolines
Credit default swaps
FDIC
PBGC
It wouldn't shock me if life insurance companies became a fifth.
So, Bernanke wants to turn Fed policy into a new kind of insurance??
The man is a one-termer. The federal government doesn't have the resources to backstop all the insurance that has been written. It's too big to insure.
The federal government doesn't have the resources to backstop all the insurance that has been written.
Hee hee! When has "we don't have the money" ever served as an impediment to the government promising to do anything? Uncle Sam didn't have half a trillion lying around in the late '80s to bail out the S&L's, either, but whaddyaknow, it happened anyway.
If this is the only trick in his bag, his bag is getting a bit light. Is it safe to assume that Mr. Bernanke, having considerable knowledge of economics, is aware that lowering the Fed Funds rate below zero is problematic?
My Comment:There are two thoughts that come to mind with this story.
First, we could probably take the money we are spending on (unsuccessfully) conquering the Mideast oil fields and build a system of space "tankers" to haul all those hydrocarbons from Titan to Earth (probably cheaper). Of course, we could also develop fusion power with some of that money, but both of these solutions require foresight and imagination; two qualities in short supply in our government.
Second, I am pretty certain that Titan never had any dinosaurs, which raises the possibility that if Titan's hydrocarbons are not created by life forms, then neither are Earth's.
So debt in the aggregate does not drive the economy. The economy is driven by education, man-hours worked, capital investment and technology. It is not driven by what I owe you and you owe me.
That is half true.
The not-true part of that half truth is we can borrow to invest in machines, education & technology and that will (if done wisely & with prudence) drive the economy.
But the true part is that we haven't done a lot of that - we've taken on debt to support consumption on both the public and private side instead.
Gov't side: military & entitlement payouts & subsidies - all wile running a deficit.
Consumer private side: McMansions, consumer debt, vacations, etc.
Corporate private side: stock buy backs & dividend payouts & LBOs... attaching debt to the balance sheet whenever possible.
Rate cuts can't fix that -- people have to consciously change behavior.
Why would anybody invest capital in banks that pay out enormous bonuses on ficticious and unsustainable profits?
The current rate for capital to Citi, BAC, Morgan Stanley, Bear Sterns, UBS, et al is north of 11% with seniority and convertability. These are "junk" rates and are rising.
Given the cost of capital to banks, it is unrealistic to think that the cost of credit is not going to rise for private enterprise.
Bork - to avoid going further off-topic -the long answers to your thoughts/questions can be found in the comments at slashdot.org
Short answers: 1. its ridiculously unfeasible; 2. Methane, not oil, is on Titan. No long-chain hydro's (oil) are known to exist without ancient organic matter as their basis.
The pain of going from overpriced Housing to underpriced housing is so enormous that they are willing to solve the problem by spreading the pain over years and years, allowing home buyers to continue to overpay for assets as housing prices drop like a feather v.s. an anvil.
The real pain will be a severe underperformance of our finance sector who will bear the brunt of the pain of accepting to little money for too much risk.
How anyone can say, as Bernanke said today, that the problems was a "mispricing of risk" when the price of a conforming home loan is the same or less as on the way up! He is admitting Fannie and Freddie are taking on too much risk. They had similar rates when housing prices were RISING in an economy thought to be GROWING.....here we are in a world were housing prices are DROPPING and economic growth is SLOWING...(i.e job losses rather than income gains) and yet loan rates are the same or lower! If we were mispricing risk on the upside, what are we doing now!?
Anyone buying a house now is buying an overpriced asset with underpriced money....the exact situation that started this mess.
I hear congress asking what we should do to prevent the drop in house prices....that is the solution....they should be asking how we can get the prices of home dropping quicker.
"Corporate private side: stock buy backs & dividend payouts & LBOs... attaching debt to the balance sheet whenever possible."
To expand on that, much of the money spent is for lawyers, beancounters and the like. They might (might) add some value to the deal, but at the macro level, contribute little.
At this point, its clear a lot of money expects bank failures. 2 year treasuries are a typical safe harbor to weather financial storms. Duration is not too short and not too long.
As of this morning, 2 year treasuries are yielding 1.88%. This is pure fear. Inflation in 2007 was 4.1% yoy. In the 4th qtr of 2007, inflation increased at a 5.6% pace. Oil and most other major commodities are higher today than their 2007 average prices.
Nothing is improving. Arguably, things are deteriorating and will get much worse.
Of couse I think it does too...It certainly scares me that few on the hill think this way. It scares me because either I'm a total idiot or they are either stupid, liars, or crooks.
Initially I would have concluded that I am obviously stupid or missing something.
The fact that I and others saw this coming at least a year before they even started talking about it (ironically by denying it's a big problem) means that they no longer get the benefit of the doubt.
I am not alone.
(Of course CR and Tanta and others were way ahead of me...but my guess is that they knew from the beginning they knew more than anyone on the hill or at the Fed...it's the loss of confidence by the average american that will have a reverberating political and social impact).
If they don't know how much the homes are worth so they can't mark them to market, and if they don't know who owns them because the securities are distributed all over the world, then HOW CAN AN INDIVIDUAL WHO WANTS TO BUY A HOUSE HAVE CONFIDENCE THAT THE PERSON SELLING THE HOUSE REALLY OWNS IT ESPECIALLY IF THEY BUY A SHORT SALE?
I THINK IT IS A VERY SCARY TIME TO BUY HOMES IF BANKS CAN'T EVEN VALUE THE SECURITIES. IS IT POSSIBLE THAT NEXT WE WILL FIND THAT THE TITLE COMPANY THAT GAVE US TITLE WAS WRONG? AND WHAT IF THAT TITLE COMPANY GOES BUST AND LIKE EVERY OTHER INSURANCE ENTITY TODAY THEY TELL US THAT THEY CAN'T PAY FOR THE LOSSES FOR INCORRECTLY GIVING TITLE TO HOMES?
But if the Fed Chairman also says the economy will turn around in the second half... then that means interest rate INCREASES are right around the corner, right?
I'm sure Dennis Kneale, Larry Kudlow et al will be mentioning that along with their recommendation to load up on equities, won't they?
It just amazes me how much all of you react negatively from Bernanke's rate cuts. Bush, Paulson, and Bernanke are doing a superb job in keeping our economy strong and structurally sound.
America would be better if we had 4 more years of the same!
To keep the econmy healthy in the long run it is important for the down part of the cycle to complete it's course.....within reason. Otherwise the risk of a permanant bull market is extremely obvious.
What would inflation look like with sharp wage growth?
Cannot happen anymore. Capital flight is too easy for even the proles to move their pennies out of the US. The same would happen to labor, a large US wage price increase would drive outsourcing.
As of this morning, 2 year treasuries are yielding 1.88%.
Now I'm flashing on Letterman. Not David, but from The Electric Company.
"And so Letterman ripped the 'f' from his varsity sweater, and changed the investor's concern about 'return on capital' to concern about 'return of capital.
We ain't gonna bounce back Ben - it's gonna get worse. That stimulus will look good for the elections, but then it's downhill from there. No more houses or stocks to sell each other, and the retail market is all shopped out, too.
Educate my kids already and create some real jobs for them. They don't want to work at Taco Bell, thanks anyway. How about some nice programming jobs instead of sending them all to India? How about some real engineering in this country? How about some support for the biotech field instead of fussing over stem cells?
How about real pay for workers instead of wall street bonuses for the financial "geniuses" who don't look so smart anymore?
The US economy is too globalized (IMO) for much in the way of wage growth. We have not seen it in the last 8 years and wage growth will not come about simply because "we need it." Also, there is clearly no way to inflate the wages of only those with difficult mortgages or even those in "hot markets." My expectation is "deflation" except for ag commodities. Perhaps we will see inflation in metals, especially GLD and SLV, but I'm not confident in that. We owe the rest of the world so much, that the cost of inflation would be a further and much stronger loss in the strength of the dollar. For now, I expect deflation, with home prices leading the way.
There are many homeowners who have paid off their mortgage. There are many homeowners who have little in mortage debt. There are many who have mortage debt that is quite reasonable considering their income. And other responsible homeowners are included, hopefully. America was built on foundations such as this. Let the market sink naturally to these strong levels.
Anerica was not built on a long list of bullshit mortgage and lending practises that were designed to implode. I can hear the Founding Fathers rolling in their graves.
Just saw Dennis Kneale on CNBC say that nobody saw this housing and mortgage problem coming.
Dennis Kneale is as dumb as a box of rocks. This is prerequisite to selling wall street crap.
As for Kudlow, I think he actually knows better, but will say anything just to promote wall street. He knows where his bread is buttered. Borrowing from Kudlow, here's the greatest story never told: treasuries have outperformed stocks over the last decade.
Ben will become a consultant to Goldman Sachs and write a book with a $5 million advance. He will be remembered in financial history text books. The damage he and Mr. Greenspan leave behind will be many families with a much lower standard of living. That is for sure.
Actually, BB was a Fed Governor and member of the President's Council of Economic Advisers, so he's not an "outsider", and not entirely blame-free --though of course, Greedspan earned the lion's share of blame for this mess.
It's like blaming President Obama for the Iraq quagmire.
Some internet investment site posted a chart a few months back showing that NYSE margin debt was looking peak-ish, ala 2000. I've been following the data ever since at NYSE's site, and that seems to be the case. Time will tell.
If your smart you'll do as I have done and write off the words of Bernanke, Paulson, Cox, The SEC and OTS and the rest of the "bought and paid for" shills. Expect nothing truthful from any of the above, understand they're owned by Wall Street and answer to whoever has the most money. As we can see the citizens obviously don't have the money which is why we're being sold down the river.
Oil is currently trading at 94.67/bbl. Gas in NY metro area is 3.10/Gal. Wheat is trading at record highs. A typical private college tuition (w/ room & board) is over $40,000/yr. 2007 yoy inflation was 4.1%.
In 2006, only 51.6% of national income went to wages and salaries, the lowest percentage since 1929, the year such record keeping started.
...
Angry Saver
And in the long run, mean reversion ALWAYS occurs - and just as on the downside the drop of their share corresponded with a huge increase in the corporate profits share of income , then the reverse will occur on the upside trend in labour income - corporate profits will decrease - with the concomitant impact on equity prices - a prospect that is not currently factored in, IMO.
All the above refers to real values not nominal values.
I would hazard the guess that over time more and more income will be earned by non wage earners. The leverage of technology is what is causing this. Ideas are what generate income not sweat. This is playing out all over the world in countless ways. I doubt the next 20 years is going to look even remotely like the last.
Maybe, maybe not. There are billions of people around the globe willing to work for far less than Americans. I'm not optimistic on wages keeping up with inflation going forward.
To wit, government employees are entitled to cola wage increases as well as actual benefit cost increases. Hence, if government employment is excluded from the above the situation looks even more grim.
One solution is that we abandon our policy of government sponsored inflation.
Won't house deflation offset grain and gas?
SC | 02.14.08 - 11:11 am |
Nope cuz house prices are not in the CPI, housing is measured by owners equivelent rent(OER), effectively the gov't assumes that if you own a house, you rent it to yourself each month. If actual hosuing prices were included int he numbers, then inflation durring the boom would probably averaged about 5% higher than it actually was recorded at. Then again if headline CPI was being quoted at 8%, mtg rates would have been much higher and maybe the bubble would have been popped before it really started.
SC writes:
I expect a lot of smaller banks to fail.
SC | 02.14.08 - 11:54 am | #
That happens when the next shoe falls, not this one. Banks between $1-10 billion in assets have over 100% of their Tier 1 capital in Construction and Development loans. When CRE turns down those loans start turning sour and the smaller banks start to go belly up.
But why stop at 0% rates? Savings is a path to freedom, and individual freedom cannot be allowed - that leads to things like independent thought, trusting blogs more than the Newspeak writers at the local newspayer, and other terrible things. No, no - freedom in the form of savings must be confiscated by inflation so that more people can be dependent upon government. That way future votes are assured.
So, we'll get to ZIPR or lower and inflation will drown us all. Such fun!
If your smart you'll do as I have done and write off the words of Bernanke, Paulson, Cox, The SEC and OTS and the rest of the "bought and paid for" shills.
How much is this write off going to subtract from my bottom line?
"provide adequate insurance against downside risks"
Is that not a PUT?
Notice how differently Benanke and Mervyn King talk about the same problems. The front page of today's Financial Times is reporting King saying basically "It's gonna be horrible, we can't control it, and inflation will prevent rate cuts". He even said the British have to prepare themselves for a lower standard of living.
"downside risk to growth remain...may deteriorate to an extent beyond that currently anticipated."
It is currently anticipated that the mission is accomplished.
Just for the record the Feds Mandate per Donald L. Kohn April 22, 2005
The Federal Reserve's mandate is to keep inflation low and stable and to promote full resource utilization, with the economy expanding at its maximum sustainable rate.
CDOs! Bernake is talking about the CDOs.
CDOs are the new cigarettes.
Wait till Dinallo takes the mic today.
...downside risks to growth remain, including the possibilities that the housing market or the labor market may deteriorate to an extent beyond that currently anticipated, or that credit conditions may tighten substantially further.
Gee Ben. Ya think? every single datum in the housing and credit market has broken to the downside every model the Fed uses and continue to defy attempts by the Fed to contain the events.
It is hard to listen to Paulson. His and Bernanke's answer to why is this spreading are shallow.
Paulson is weak. How the hell did that guy run Goldman?
C'mon banks, recapitalize and keep on lending!
I'm thinking the next set of inflation numbers will be bond killers. Overseas inflation is accelerating, and we are likely to see that in import prices, particularly from China. There are also more frequent company comments on passing through cost pressures to their customers. The wildcard in the CPI is always the non-number of owner's equivalent rent -- that one is caught in the opposing crossfire of higher rental demand from foreclosures and the higher supply of vacant homes.
Bottom-line: Bernanke may see his credibility questioned next week, while King, Trichet and other Central Bankers have done a better job of setting up the inflation risks.
If you like inflation now, wait until the next round of grain price increases works its way through the food chain. Chicken, and especially beef, are going to be increasingly expensive. Expect food to spike much higher very rapidly.
He just said '... government supported mortgages." Supported? Well the cat is out of the bag now.
Rob Dawg, so good to know that somebody else still remembers that 'data' is plural, of which 'datum' is singular!
More rate cuts? When are these guys going to learn that it takes more than pales of water to build mud huts?
dd
Won't house deflation offset grain and gas?
Senator: 'Do you think any banks could fail, like Northern Rock in the UK?'
BB: 'We don't see any imminent risks of insolvency.'
But ask me in a week...
SC, house prices are not measured only OER "Owner Equivalent Rents". That is one of the reasons we did not see huge inflation numbers over the last few years.
MoT. Thanks. Going to buy some gold now.
SC,
That is stagflation - so yeah, we can offset inflation in the things we need with deflation in the assets that we keep - sweet!
Here's a relevant quote from Jeremy Grantham:
Greenspan and Bernanke have taken a hands-off approach for two consecutive great bubbles, first in TMT -- telecommunications, media and technology -- and second, in housing. A hands-off approach is a polite way of saying they facilitated this. And what is the point of a 125-basis-point rate reduction, other than to provide reinforcement for the people who borrow short and lend long? From bankers who have committed every crime you could possibly accuse a banker of, to hedge funds who borrow short, leverage, and invest long in the stock market -- that's who really benefits from the interest-rate reduction. The economy, broadly defined, does not.
I have an exhibit that shows the 30 years prior to 1982 when the debt-to-gross domestic product ratio was completely flat at 1.2 times. Total debt is defined as government debt, personal debt, corporate debt and financial debt. Then in the 25 years after 1982, the flat line goes up at a 45 degrees angle from 1.2 times to 3.1 times GDP. Massive. In the first 30 years, when debt is flat, annual GDP growth is its usual battleship, growing at 3.5% and hardly twitching. After the massive increase in debt, GDP, far from accelerating, grew at 3%. So debt in the aggregate does not drive the economy. The economy is driven by education, man-hours worked, capital investment and technology. It is not driven by what I owe you and you owe me.
More OT,
BTW are we seeing selling in equities AND Treasury bonds atm?
More rate cuts? From the helicopter man?? hucoodanode ....
SC, me too, I'm gonna buy some GLD, has anybody here bought SLV?
Yeah it's all terrible, but then really not so terrible because we have it all in hand and can make the economy well even if it gets sick, and anyway it isn't going to get so VERY sick as far as we can see....and....and ....and just trust us; we work miracles at the drop of an interest rate. That cures everything.
Sen. Jack Reed: "Let the markets work it out? We need to take more action. The American people will demand it!" We are doomed.
SC writes:
Paulson is weak. How the hell did that guy run Goldman?
Expertly. But as CEO of a private company (as opposed to head of government cabinet department), he had the ability to command and control the activites of those around him.
His path wasn't immpeded by intellectuals like Dodd, Shelby et al
Just wait until the government changes the formulation of the CPI to include house prices. We won't have any inflation for years!
It is a false put. We already have four insurance systems in this country that are facing cascading failures:
Monolines
Credit default swaps
FDIC
PBGC
It wouldn't shock me if life insurance companies became a fifth.
So, Bernanke wants to turn Fed policy into a new kind of insurance??
The man is a one-termer. The federal government doesn't have the resources to backstop all the insurance that has been written. It's too big to insure.
Chicken, and especially beef, are going to be increasingly expensive. Expect food to spike much higher very rapidly.
But that's OK, because according to the Fed, headline inflation doesn't matter.
Oh, him. Master of ambivalence.
The federal government doesn't have the resources to backstop all the insurance that has been written.
Hee hee! When has "we don't have the money" ever served as an impediment to the government promising to do anything? Uncle Sam didn't have half a trillion lying around in the late '80s to bail out the S&L's, either, but whaddyaknow, it happened anyway.
We have met the bagholders, and they are us.
If this is the only trick in his bag, his bag is getting a bit light. Is it safe to assume that Mr. Bernanke, having considerable knowledge of economics, is aware that lowering the Fed Funds rate below zero is problematic?
Don't worry, Ben knows what he's doing. Nevermind that emergency rate cut of 75bps last summer.
The Dollar tanked / commodities (DJP) exploded up as BB testified. The Fed has no credibility on inflation in the market.
Core rate below 10% my ass. Only a moron would believe raw inputs don't find their way to consumers eventually and systemically.
Is WSJ calling for Bernanke's head?
Bernanke's Fate May Hang on Economy - WSJ.com
Menendez taking them to the wood shed!
Menendez asking for "honest assessments".
Sorry way off topic but very interesting non the less:
ESA - Space Science - Titan’s surface organics surpass oil reserves on Earth
My Comment:There are two thoughts that come to mind with this story.
First, we could probably take the money we are spending on (unsuccessfully) conquering the Mideast oil fields and build a system of space "tankers" to haul all those hydrocarbons from Titan to Earth (probably cheaper). Of course, we could also develop fusion power with some of that money, but both of these solutions require foresight and imagination; two qualities in short supply in our government.
Second, I am pretty certain that Titan never had any dinosaurs, which raises the possibility that if Titan's hydrocarbons are not created by life forms, then neither are Earth's.
Menendez to Paulson: "economists from your old firm, Goldman, say we're going into recession"
the housing market or the labor market may deteriorate to an extent beyond that currently anticipated
As far as I can tell, when these guys say "currently anticipated", they generally mean, "what has already happened".
"dropping rebate checks from an airplane..."
Idiot, it was from a helicopter!
So debt in the aggregate does not drive the economy. The economy is driven by education, man-hours worked, capital investment and technology. It is not driven by what I owe you and you owe me.
That is half true.
The not-true part of that half truth is we can borrow to invest in machines, education & technology and that will (if done wisely & with prudence) drive the economy.
But the true part is that we haven't done a lot of that - we've taken on debt to support consumption on both the public and private side instead.
Gov't side: military & entitlement payouts & subsidies - all wile running a deficit.
Consumer private side: McMansions, consumer debt, vacations, etc.
Corporate private side: stock buy backs & dividend payouts & LBOs... attaching debt to the balance sheet whenever possible.
Rate cuts can't fix that -- people have to consciously change behavior.
But while he envisions "an improving picture" on the economy
Yeah, and I envision myself and Adriana Lima.
Bond insurer hearing, if anyone cares:
Committee on Financial Services
borkafatty,
Hydrocarbons occur more frequently than water. Most planetary atmosphere in Solaris 1 have methane.
Now, if I have a methane-powered percolator, cooking ramen wouldn't take more than 2 hours...
On Paulson and capital raising:
Why would anybody invest capital in banks that pay out enormous bonuses on ficticious and unsustainable profits?
The current rate for capital to Citi, BAC, Morgan Stanley, Bear Sterns, UBS, et al is north of 11% with seniority and convertability. These are "junk" rates and are rising.
Given the cost of capital to banks, it is unrealistic to think that the cost of credit is not going to rise for private enterprise.
Ben seems to be giving the markets a lot of good reassurance today. One headline on MarketWatch is something like this:
Ben: "no imminent collapse of large banks is expected."
Bork - to avoid going further off-topic -the long answers to your thoughts/questions can be found in the comments at slashdot.org
Short answers: 1. its ridiculously unfeasible; 2. Methane, not oil, is on Titan. No long-chain hydro's (oil) are known to exist without ancient organic matter as their basis.
"no imminent collapse of large banks is expected."
What about those that are not 'large'?
The solution to Nasdaq 5000 was Nasdaq 2000.
The pain of going from overpriced Housing to underpriced housing is so enormous that they are willing to solve the problem by spreading the pain over years and years, allowing home buyers to continue to overpay for assets as housing prices drop like a feather v.s. an anvil.
The real pain will be a severe underperformance of our finance sector who will bear the brunt of the pain of accepting to little money for too much risk.
How anyone can say, as Bernanke said today, that the problems was a "mispricing of risk" when the price of a conforming home loan is the same or less as on the way up! He is admitting Fannie and Freddie are taking on too much risk. They had similar rates when housing prices were RISING in an economy thought to be GROWING.....here we are in a world were housing prices are DROPPING and economic growth is SLOWING...(i.e job losses rather than income gains) and yet loan rates are the same or lower! If we were mispricing risk on the upside, what are we doing now!?
Anyone buying a house now is buying an overpriced asset with underpriced money....the exact situation that started this mess.
I hear congress asking what we should do to prevent the drop in house prices....that is the solution....they should be asking how we can get the prices of home dropping quicker.
I expect a lot of smaller banks to fail.
"Corporate private side: stock buy backs & dividend payouts & LBOs... attaching debt to the balance sheet whenever possible."
To expand on that, much of the money spent is for lawyers, beancounters and the like. They might (might) add some value to the deal, but at the macro level, contribute little.
Thanks ddavis!
Average Joe, What you said makes good sense...
At this point, its clear a lot of money expects bank failures. 2 year treasuries are a typical safe harbor to weather financial storms. Duration is not too short and not too long.
As of this morning, 2 year treasuries are yielding 1.88%. This is pure fear. Inflation in 2007 was 4.1% yoy. In the 4th qtr of 2007, inflation increased at a 5.6% pace. Oil and most other major commodities are higher today than their 2007 average prices.
Nothing is improving. Arguably, things are deteriorating and will get much worse.
Thanks Dan,
Of couse I think it does too...It certainly scares me that few on the hill think this way. It scares me because either I'm a total idiot or they are either stupid, liars, or crooks.
Initially I would have concluded that I am obviously stupid or missing something.
The fact that I and others saw this coming at least a year before they even started talking about it (ironically by denying it's a big problem) means that they no longer get the benefit of the doubt.
I am not alone.
(Of course CR and Tanta and others were way ahead of me...but my guess is that they knew from the beginning they knew more than anyone on the hill or at the Fed...it's the loss of confidence by the average american that will have a reverberating political and social impact).
Why didn't Ben Shalom Bernanke's rate cut comment give the market a boner? It has in the past. He's losing his touch.
Bernanke said the Fed's new forecast out next week will "show lower projections of growth ....growth looks to be weak, but still positive."
Isn't this the same guy who said the subprime problem is contained?
He has no credibility.
The bond insurer hearing is getting fun... "legal extortion"
The good news from the Telegraph is that "City bonuses weather the credit crisis"
City bonuses weather the credit crisis - Telegraph
Thank god for that!
If they don't know how much the homes are worth so they can't mark them to market, and if they don't know who owns them because the securities are distributed all over the world, then HOW CAN AN INDIVIDUAL WHO WANTS TO BUY A HOUSE HAVE CONFIDENCE THAT THE PERSON SELLING THE HOUSE REALLY OWNS IT ESPECIALLY IF THEY BUY A SHORT SALE?
I THINK IT IS A VERY SCARY TIME TO BUY HOMES IF BANKS CAN'T EVEN VALUE THE SECURITIES. IS IT POSSIBLE THAT NEXT WE WILL FIND THAT THE TITLE COMPANY THAT GAVE US TITLE WAS WRONG? AND WHAT IF THAT TITLE COMPANY GOES BUST AND LIKE EVERY OTHER INSURANCE ENTITY TODAY THEY TELL US THAT THEY CAN'T PAY FOR THE LOSSES FOR INCORRECTLY GIVING TITLE TO HOMES?
It must be scary if you feel compelled to use all CAPS LIKE THAT!!!1!
Bad etiquette, amigo.
But if the Fed Chairman also says the economy will turn around in the second half... then that means interest rate INCREASES are right around the corner, right?
I'm sure Dennis Kneale, Larry Kudlow et al will be mentioning that along with their recommendation to load up on equities, won't they?
It just amazes me how much all of you react negatively from Bernanke's rate cuts. Bush, Paulson, and Bernanke are doing a superb job in keeping our economy strong and structurally sound.
America would be better if we had 4 more years of the same!
To keep the econmy healthy in the long run it is important for the down part of the cycle to complete it's course.....within reason. Otherwise the risk of a permanant bull market is extremely obvious.
Paulson just testified that in the bubble markets the solution is a drop in housing prices or an increase in the growth of the economy.....
Folks that means INFLATE their way out of this....what else can happen when you work to INCREASE the wages of those in overpriced homes NOW!
What would inflation look like with sharp wage growth?
What would inflation look like with sharp wage growth?
Cannot happen anymore. Capital flight is too easy for even the proles to move their pennies out of the US. The same would happen to labor, a large US wage price increase would drive outsourcing.
As of this morning, 2 year treasuries are yielding 1.88%.
Now I'm flashing on Letterman. Not David, but from The Electric Company.
"And so Letterman ripped the 'f' from his varsity sweater, and changed the investor's concern about 'return on capital' to concern about 'return of capital.
avg. Joe-
Can't have that....because it would actually show what we already know, that inflation is above 10%.
The Productivity myth will continue....
MS
He should just shut up already.
We ain't gonna bounce back Ben - it's gonna get worse. That stimulus will look good for the elections, but then it's downhill from there. No more houses or stocks to sell each other, and the retail market is all shopped out, too.
Educate my kids already and create some real jobs for them. They don't want to work at Taco Bell, thanks anyway. How about some nice programming jobs instead of sending them all to India? How about some real engineering in this country? How about some support for the biotech field instead of fussing over stem cells?
How about real pay for workers instead of wall street bonuses for the financial "geniuses" who don't look so smart anymore?
Oh who am I kidding, we're screwed.
Yeah, yeah, yeah. Sure Bernutty, economy will turn around in...wait for it...the mystical magical 6 months down the road.
Right when those Alt-A resets are going to really rev up.
Sure. With auction bonds not selling, insurers about to go t-up.
Big bank failure not imminent. Sure. Extremely possible, but not imminent.
Me: BS, so when WILL it be imminent.
BS: We have (wait for it) six months or so to make sure none do.
Sure. I feel so much better now. Any uptick in today's consumer spending is me buying more food, water, and booze for the bunker.
Cheers,
The US economy is too globalized (IMO) for much in the way of wage growth. We have not seen it in the last 8 years and wage growth will not come about simply because "we need it." Also, there is clearly no way to inflate the wages of only those with difficult mortgages or even those in "hot markets." My expectation is "deflation" except for ag commodities. Perhaps we will see inflation in metals, especially GLD and SLV, but I'm not confident in that. We owe the rest of the world so much, that the cost of inflation would be a further and much stronger loss in the strength of the dollar. For now, I expect deflation, with home prices leading the way.
There are many homeowners who have paid off their mortgage. There are many homeowners who have little in mortage debt. There are many who have mortage debt that is quite reasonable considering their income. And other responsible homeowners are included, hopefully. America was built on foundations such as this. Let the market sink naturally to these strong levels.
Anerica was not built on a long list of bullshit mortgage and lending practises that were designed to implode. I can hear the Founding Fathers rolling in their graves.
Just saw Dennis Kneale on CNBC say that nobody saw this housing and mortgage problem coming.
Dennis Kneale is as dumb as a box of rocks. This is prerequisite to selling wall street crap.
As for Kudlow, I think he actually knows better, but will say anything just to promote wall street. He knows where his bread is buttered. Borrowing from Kudlow, here's the greatest story never told: treasuries have outperformed stocks over the last decade.
Sooner or later, Fed will just run out of ammo... At the time when ARMs, Option ARMs, and Alt-A resets are peaking.
No one has said it yet: Leverage is equivalent to margin. Are we having a margin crash?
Paulson is explaining how to make America transparent for sale to foreign investors. Nice.
If capitalism fails, who will bail out the capitalists? I know the answer.... it will be the Communists and the Dictators.
Ben will become a consultant to Goldman Sachs and write a book with a $5 million advance. He will be remembered in financial history text books. The damage he and Mr. Greenspan leave behind will be many families with a much lower standard of living. That is for sure.
Angry Saver,
"Dennis Kneale is as dumb as a box of rocks."
That sir, is an insult! We meet on the field of honor at 7:00 AM sharp.
How dare you!
Cheers,
I can't fault BS Bernanke for the mess. It's like blaming President Obama for the Iraq quagmire.
I can't fault BS Bernanke for the mess.
Actually, BB was a Fed Governor and member of the President's Council of Economic Advisers, so he's not an "outsider", and not entirely blame-free --though of course, Greedspan earned the lion's share of blame for this mess.
It's like blaming President Obama for the Iraq quagmire.
Don't give them any ideas!
That sir, is an insult! We meet on the field of honor at 7:00 AM sharp.
Where is your chivalry? That would be MISTER Dennis 'Whocoodanode' Kneale to YOU, sir.
Henry,
Some internet investment site posted a chart a few months back showing that NYSE margin debt was looking peak-ish, ala 2000. I've been following the data ever since at NYSE's site, and that seems to be the case. Time will tell.
dry,
LOL
Cheers,
Henry: "No one has said it yet: Leverage is equivalent to margin. Are we having a margin crash?"
Heh. The Mother of all margin calls!
"Heh. The Mother of all margin calls!
Except in this case its literally a house call.....
If your smart you'll do as I have done and write off the words of Bernanke, Paulson, Cox, The SEC and OTS and the rest of the "bought and paid for" shills. Expect nothing truthful from any of the above, understand they're owned by Wall Street and answer to whoever has the most money. As we can see the citizens obviously don't have the money which is why we're being sold down the river.
Oil is currently trading at 94.67/bbl. Gas in NY metro area is 3.10/Gal. Wheat is trading at record highs. A typical private college tuition (w/ room & board) is over $40,000/yr. 2007 yoy inflation was 4.1%.
Wage increases in 2007 trailed inflation.
Stay tuned, more cold hard facts to follow.
So debt in the aggregate does not drive the economy. The economy is driven by education, man-hours worked, capital investment and technology.
Worth repeating.
In 2006, only 51.6% of national income went to wages and salaries, the lowest percentage since 1929, the year such record keeping started.
Stay tuned, more cold hard numbers follow.
From 2002 to 2007, housing values in the U.S. increased from 14 trillion to 21 trillion.
Whoohoo, we're rich!
Or so it seemed.
In 2006, only 51.6% of national income went to wages and salaries, the lowest percentage since 1929, the year such record keeping started.
...
Angry Saver
And in the long run, mean reversion ALWAYS occurs - and just as on the downside the drop of their share corresponded with a huge increase in the corporate profits share of income , then the reverse will occur on the upside trend in labour income - corporate profits will decrease - with the concomitant impact on equity prices - a prospect that is not currently factored in, IMO.
All the above refers to real values not nominal values.
-K
I would hazard the guess that over time more and more income will be earned by non wage earners. The leverage of technology is what is causing this. Ideas are what generate income not sweat. This is playing out all over the world in countless ways. I doubt the next 20 years is going to look even remotely like the last.
sk,
Maybe, maybe not. There are billions of people around the globe willing to work for far less than Americans. I'm not optimistic on wages keeping up with inflation going forward.
To wit, government employees are entitled to cola wage increases as well as actual benefit cost increases. Hence, if government employment is excluded from the above the situation looks even more grim.
One solution is that we abandon our policy of government sponsored inflation.
From 2002 through 2007, consumer debt increased 2.4 trillion more than personal disposable income.
From 2002 to 2007, home owners equity decreased from 56% to 50%.
Stay tuned for more "good" news that you don't hear on CNBC
Corporate profits are at 77 year highs as a percentage of national income. Hmmm. 2007 minus 77 = 1930.
Nothing signifcant about that date now is there.
Corporate profits are at 77 year highs as a percentage of national income.
This is what makes me laugh at the CNBC bobbleheads who say stocks look cheap.
Angry Saver writes:
Corporate profits are at 77 year highs as a percentage of national income. Hmmm. 2007 minus 77 = 1930.
Nothing signifcant about that date now is there.
Angry Saver | 02.14.08 - 2:10 pm | #
source please.
Won't house deflation offset grain and gas?
SC | 02.14.08 - 11:11 am |
Nope cuz house prices are not in the CPI, housing is measured by owners equivelent rent(OER), effectively the gov't assumes that if you own a house, you rent it to yourself each month. If actual hosuing prices were included int he numbers, then inflation durring the boom would probably averaged about 5% higher than it actually was recorded at. Then again if headline CPI was being quoted at 8%, mtg rates would have been much higher and maybe the bubble would have been popped before it really started.
SC writes:
I expect a lot of smaller banks to fail.
SC | 02.14.08 - 11:54 am | #
That happens when the next shoe falls, not this one. Banks between $1-10 billion in assets have over 100% of their Tier 1 capital in Construction and Development loans. When CRE turns down those loans start turning sour and the smaller banks start to go belly up.
What do you think might permit him to tell the unvarnished truth? Would he have to resign before he could do that?
jim a-
Love the Letter-man reference! Hadn't thought of him in, like, forever.
"Ripping the B from his varsity jacket, Letter-Man changed the bank from too big to Fail--to too big to Bail!"
But why stop at 0% rates? Savings is a path to freedom, and individual freedom cannot be allowed - that leads to things like independent thought, trusting blogs more than the Newspeak writers at the local newspayer, and other terrible things. No, no - freedom in the form of savings must be confiscated by inflation so that more people can be dependent upon government. That way future votes are assured.
So, we'll get to ZIPR or lower and inflation will drown us all. Such fun!
If your smart you'll do as I have done and write off the words of Bernanke, Paulson, Cox, The SEC and OTS and the rest of the "bought and paid for" shills.
How much is this write off going to subtract from my bottom line?
bernanke. Proof positive that a priceton education isnt worth the money.