Ralph Cramdown writes:
Wallpaper now on sale:

"[Treasury Department] Officials announced on Friday that starting next month, individuals will be able to buy Treasury securities in amounts as small as $100, down from the current minimum of $1,000."
Ralph Cramdown | 03.22.08 - 5:09 pm | #

MiTurn writes:
Obviously DeLong doesn't know what he is taking about. Marketwatch is predicting a run of the bulls Monday! So things must be up and up. . . right. . . right?
http://www.marketwatch.com/news/...D19FB1B4032B% 7D
MiTurn | 03.22.08 - 5:12 pm | #

transient writes:
If the government is going to intervene, then I want all benefits "sterilized" over time.

If the banks are getting bailed out, then they should have to repay the government out of profits & bonus money in the years ahead.

If homeowners are going to be bailed out, they should forfeit their interest rate deduction until they have payed the government back.

If investors are going to be bailed out, they should be required to pay the money back in the future as well, although I have a harder time figuring out how they could do something like that, since they might be overseas.

These are just general ideas for the "bailout penalty", and I'm open to other suggestions. I have no problems with "bailouts" if absolutely necessary, but there shouldn't be any free lunch.
transient | 03.22.08 - 5:14 pm | #

Bob_in_MA writes:
I do not believe we've reached what Professor DeLong calls Stage III of a financial crisis...

No offense, CR, but one thing I feel sure of is that no one, no one, really knows where exactly we are in this mess, or how it will transpire.
Bob_in_MA | 03.22.08 - 5:15 pm | #

blowncue writes:
Reuters reporting that BoE also denying it is in d/c to coordinate mbs purchases.
blowncue | 03.22.08 - 5:17 pm | #

Average Joe writes:
So, when we are to the point where we run out of solutions...we should start thinking of some solutions.
Average Joe | 03.22.08 - 5:20 pm | #

mp writes:
Conjure Bag says, "Welcome to the dawning of a new global financial landscape."
mp | 03.22.08 - 5:24 pm | #

Jas Jain writes:
--
Time to avoid depression is long past, some 15 years ago. The build of debt, or Pushing of Debt, had to be kept in check and that meant having more frequent recessions. To postpone recessions is to make depressions more likely and more severe when they longer can be averted.

The only question is: Is it going to be fire (inflationary) or ice (deflationary)? Should savers be protected or should debtors be rescued that is the question.

Jas

PS: CR would continue to be optimistic until depression is here. He likes to be a cautious follower.
Jas Jain | 03.22.08 - 5:25 pm | #

Average Joe writes:
It scares me that so many think that the Govt buying MBS will avert a crisis.

How does this stablize house prices?

So the govt takes the loss and not the banks, it doesn't mean that the average joe can now pay 5x income for a home.

Fannie and Freddie are already willing to lend money at a loss, I doubt if you save the banks from a quick death through buying their bad debt, they will sign up for a slow death by lending money at artificially low rates on overpriced assets in a declining market.

House prices are coming down. Everyone says that the problems will persist until housing prices stabilize.
Average Joe | 03.22.08 - 5:27 pm | #

odograph writes:
As I understand it (?) the last TIPS auction yielded negative interest rates. Will the Fed offer more TIPS, more often?
odograph | Homepage | 03.22.08 - 5:27 pm | #

WhoStruckJohn writes:
We have found our own version of the ZIRP trap. The divergence of Treasury bill interest rates and mortgage rates from the Fed rate says that the flight to safety is dominating the market. Once everyone's decided that a particular security is toxic, nobody wants to be left holding the bag. And so we're gradually watching that toxicity spread through the market.

In a way we should be glad that the bagholding is so opaque: if we knew who the real bagholders were, they would have collapsed already. We have the luxury of time, if we can make use of it.
WhoStruckJohn | 03.22.08 - 5:27 pm | #

touche writes:
We need a government agency that will confiscate foreclosed properties and convert them to cheap rental stock until the market stabilizes in, say, 2012. Once the market stabilizes, the government would gradually sell off the rental housing and any profits would be paid to the former mortgage holders.
touche | 03.22.08 - 5:29 pm | #

HedgeFundAnalyst writes:
CR -

With all due respect. Nearly ever major financial institution is insolvent. If this isn't Stage III, I have no idea what would be.
HedgeFundAnalyst | 03.22.08 - 5:30 pm | #

Average Joe writes:
At least in California the problem isn't supply and demand in the traditional sense. Just eliminating the number of houses with bulldozers etc won't make them affordable. No matter how many houses there are, someone making 150 grand a year can't afford a $850,000 loan.

Like the old Ferrari example, if there are a thousand Ferrari's or 1 Ferrari on the lot, it doesn't matter if you are selling in an area where no one can afford Ferrari's. The Point of supply is only relevant if oversupply allows the price to drop to a level to meet an able and willing buyer.

Price drops are what the Fed fears...Price drops are the only solution.

This is why a bubble must be avoided.
Average Joe | 03.22.08 - 5:34 pm | #

sam writes:
Bank of America may write down $6.5 billion.

http://www.marketwatch.com/news/...& siteid=yahoomy
sam | 03.22.08 - 5:35 pm | #

smallfryallcash writes:
"figure out what kind of government action we want to see, and how we can set in in motion quickly if it becomes necessary."
I think we've seen most of the action already. Between the FHLB 50 billion in loans to Countrywide, and the hundreds of billions on offer to be lent out on problem paper through the alphabet soup of new "facilities", and the Fed soaking up 30 billion of BS's risky, what else is necessary?
Rolling loans gather no loss...let it roll! None of this will work in the long run, it's only postponing the unthinkable stage III.
smallfryallcash | 03.22.08 - 5:36 pm | #

NC Jim writes:
In the theme of sounding the alarm, I believe Doug Noland at PruBear should be given a great deal of credit (no pun intended) for his analysis of the credit bubble in a weekly column titled "Credit Bubble Bulletin". Doug has correctly (IMO) analyzed the broad problems although very early in calling for the collapse now occuring (who could have known the system could levitate for so long?).

This weeks analysis is especially interesting and I highly recommend a read. The first part for his bulletin is a bunch of cut and paste factoids which can be skipped by non-data junkies. Skip down to the heading of "Nationalization" for commentary. As the title suggests, Doug believes that Fannie and Freddie (and by extension the mortgage industry) have now been effectively nationalized.

http://www.prudentbear.com/ index...bleBulletinHome

Jim
NC Jim | 03.22.08 - 5:38 pm | #

poszi writes:
Can anybody explain to me why these 3 scenarios are alternatives? All of them can happen at the same time. Especially "depression" and "inflation". There were dozens of such depressions in the history and Great Depression is an exception, not the rule. Is the memory of Great Depression so implanted in American economists' brains that they cannot imagine anything else? I thought that 1970s proved Phillips curve wrong.
poszi | 03.22.08 - 5:39 pm | #

sam writes:
Brad DeLong's Morning Coffee: NAFTA

http://www.youtube.com/watch?v=H...h?v=HX8An- jSfFU
sam | 03.22.08 - 5:41 pm | #

Sebastian writes:
Bad luck on my part. My post on the previous thread took so long to assemble that a better topic-thread appeared. Here it is, and CR or Tanta, you're welcome to delete it from the "Predation" thread.

Here's my line of thought, along with data sources to recreate the chart I'm looking at.

Premise: When the economy is strong (low unemployment rate) and mortgage interest rates are relatively high in comparison (indicating restrictive credit conditions), that's a sign that the economic expansion is nearing its end and recession will soon begin.

Premise Two: When the economy is in recession (high unemployment) and mortgage rates are relatively low (indicating stimulative credit policy), the recession is nearly over and/or the expansion has begun.

For this exercise you'll need a spreadsheet program and some data. Here are the sources for the data:

http://www.federalreserve.gov/ RE...15_MORTG_NA.txt

http://www.nber.org/cycles.html

http://data.bls.gov/cgi-bin/surveymost

(The mortgage rate data goes back to 1971, so you'll need to adjust the "output options" on the BLS data-page to get unemployment rate data back to 1971.)

What you'll need to do first is get the unemployment rate data and conventional mortgage rate data into your spreadsheet, line up the dates, then adjust/format the two pieces so they both properly reflect % rates in the cells of your spreadsheet.

Now, divide the unemployment rate by the mortgage rate for the same month(s), all the way through the array (February, 2008 is the most-recent data available).

Chart this result.

Now you'll need to use the NBER recession dates to create the recession bars, like CR does with a lot of his charts.

Here's what you should see when you're finished.

First, that extremely low ratios indicate an economy nearing/in recession, with extremely high ratios indicating economic expansion.

Second, at some point before each of the last 5 recessions (typically within a few months, with the notable exception of the 1990-91 recession with a lead-time of a couple of years) the ratio of unemployment rate/30-year conventional mortgage rate drops down into the mid-50% area or lower.

The third thing you should see is that either near the tail-end of a recession or at the beginning of the post-recession expansion, the ratio rises at least into the mid- to high-70% area.

Finally, you should see that the most-recent lows in this ratio (approx. July, 2006-July 2007) didn't get any lower than about the 69% before it bounced up into the +80% area, a favorable level indicating an expanding economy.

The unemployment rate never got so low as to cause the economy to grow at an unsustainable, inflationary rate that would cause the Fed to slam-down hard on the brakes and sharply restrict credit. Just the opposite, actually.

So, no recession, only slower growth, and be skeptical of prophets who are making assumptions about recession based on data from a single economic sector, ignoring all other variables regardless of their importance.


Sebastian
Sebastian | 03.22.08 - 5:42 pm | #

wsf writes:
They may be underestimating the "dumb" money. If the GSE's or FHA or FHLB or a new agency becomes the dumping ground, who's going to buy their paper, even with an explicit government guarantee? At that point, everyone will know that the US govt is hopelessly bankrupt.
wsf | 03.22.08 - 5:42 pm | #

sk writes:
While there is nothing in this morning coffee post to alarm me, that bugger is in Wall St.'s and the present elite's pocket - a true running dog of capitalism.. His post yesterday where he wanted punishment for the CDS "speculators" totally gave it away. He has camps of "good" capitalists and "bad" speculators and surprise.. the good capitalists are the shits in power at the moment and the bad speculators the ones outside looking in.

Interestingly, GM had a column on bad CDS speculators in tomorrow's New York TImes, today. Cue Tanta.

-K
sk | 03.22.08 - 5:45 pm | #

rich writes:
It should be clear to all that drastic Fed actions have impacts to be felt and costs to be paid later.

We are now feeling impacts and paying costs for drastic Fed actions 6-7 years ago.

This time, the lag will probably be much shorter. I mean, we still don't know that part of the cause of Bear's demise wasn't the surprise Fed rate cut in January.

Yet, so many MSM writers have been giddy at the Fed's "brilliant" moves, as if they were creating prosperity out of thin air. The amount of short-sightedness is just mind-boggling.

The stock market has clearly lost its role as as a leading indicator. It's become a knee-jerk indicator to the winds of daily rumor, sentiment, leverage and manipulation. It's the worst possible environment for traders and timers, and I'll bet some hedge funds are getting slaughtered.

It wouldn't surprise me if major hedge fund blow-ups weren't the next leg of the story.
rich | 03.22.08 - 5:55 pm | #

Arthur Cutten writes:
I'm struggling with the notion that there is a choice between inflation and government action. Unless that government is non-US whatever the government does is likely to result in more inflation. (TANSTAAFL Brad).

Its becoming painfully obvious that merely printing money won't work, because it changes nothing with regard to the mechanisms that brought us where we are today.

Unless goverment action also involves systemic reform, all we are doing is the same as printing more money: shifting the risk to those who did not cause the problem in order to prolong the same bubble-bust imbalances that brought us to this current phase of what is nothing more than a protracted credit bubble.

Federal Reserve governors reach for the printing press, and statists reach for the government. Its time we took some serious action and stopped this trend of bubble and bust, although it may already be too late to do it neatly.
http://jessescrossroadscafe.blog...ral- hazard.html
Arthur Cutten | 03.22.08 - 5:57 pm | #

wsf writes:
I tend to agree. Seems we have two choices ... deflation or currency destruction.
wsf | 03.22.08 - 6:01 pm | #

Average Joe writes:
If we nationalize the GSE's, and we send out checks in the mail, why not just sent everyone with a mortgage the exact amount of money it would take to pay it off?

We would increase homeownership...not homeloanership. We would increase the amount of equity homeowners have. We would increase everyone's spending money since they wouldn't have a mortgage. Landlords could lower rent since they have no mortgage. Renters would have lower rent and thus more spending money. Banks would be solvent since all loans would be paid off. House prices would crash since rents would crash...but who cares? Banks are solvent, home owners are solvent, everyone wins!!!!
Average Joe | 03.22.08 - 6:04 pm | #

Ray writes:
T-bills rate may be predictive of what to come in stock market. Here is a scary chart and some thoughts:

http://interestrateroundup.blogs...em-t- bills.html

-Ray
Ray | 03.22.08 - 6:06 pm | #

AllenM writes:
Brad DL,

How about an apology?
You pooh poohed my comments about the housing bubble years ago, remember?

Who was right?

Inflation?
Check.
Housing crisis with tons of foreclosures?
Check.
Federal Reserve unable to affect the crisis with more than band-aids?
Check.

This is the equivalent of the Great Depression with a fiat currency- otherwise known as an Argentine style meltdown.

Now, go hoist my comments from the archives if you dare.

But you won't,
because the time to raise the cry was 2005, and everyone in power was content to let this keep going, until now it is *broken*.

Someday this war's gonna end...
AllenM | 03.22.08 - 6:07 pm | #

wsf writes:
Average Joe, you forgot that tax revenues would go up too since no one would have a mortgage interest deduction.
wsf | 03.22.08 - 6:07 pm | #

transient writes:
Sebastian,

What led you to use the unemployment rate/mortgate rate ratio to try to predict recessions? Do you think that using something with only 5 "data points" provides accurate forecasting ability?

Do you think the artificial distortion of mortgage rates due to the explosion of securitization and underpricing of risk affects the outcome recently at all, and if so, how would you compensate for it?

Do you think that the distortion of the unemployment rate due to more self-employed and undocumented workers should affect the outcome at all? And if so, how would you compensate?
transient | 03.22.08 - 6:07 pm | #

Journeyman writes:
BDL seems to have little or no concern for moral hazard and the creation of bubbles. Perhaps he believes the Great Greenspan that they can only be treated.
Journeyman | 03.22.08 - 6:09 pm | #

Average Joe writes:
wsf: Brilliant!!! There really is no downside..unless you are a homebuilder to new buyers...but you can extend the program to them...or better yet, let the HB's fail...."afterall they are only 5% of the economy".
Average Joe | 03.22.08 - 6:09 pm | #

republicans are traitors writes:
Garbage in, garbage out. This guy concludes that there are only three possible outcomes. There are many outcomes including a recession, a deep recession, stagflation, hyperinflation... to name a few. The only thing we really know is that tinkering with the laws of economics is what got us into this mess. We also know the world will not end, even with a depression (The U.S. still exists, Japan still exists). Let capitalism work and within our lifetime, our country will be the place to invest and do business again. All DeLong wants to do is privatize profits and publicize losses. That policy will destroy our taxpayers and allow the criminal CEO's like Angelo Mozilo and Henry Paulson to continue to make fees off worthless transactions like CDOs, SIVs and derivatives.
republicans are traitors | 03.22.08 - 6:10 pm | #

transient writes:
In Washington, a Split Over Regulation of Wall Street

http://www.nytimes.com/2008/03/ 2...23regulate.html

As Congress and the Bush administration struggle to contain the housing and credit crises — and prevent more Wall Street firms from collapsing as Bear Stearns did — a split is forming over how to strengthen oversight of financial institutions after decades of deregulation.
transient | 03.22.08 - 6:14 pm | #

Average Joe writes:
"We also know the world will not end, even with a depression (The U.S. still exists, Japan still exists)"

Great point....bubbleheads or whatever we're called...are often derided and said to be proven wrong when the world doesn't end as we all "have been predicting for years."

As if when we all don't starve to death, or live in tent cities, then somehow we were wrong to point out the dangers of a housing bubble.
Average Joe | 03.22.08 - 6:15 pm | #

Bob_in_MA writes:
I do not believe we've reached what Professor DeLong calls Stage III of a financial crisis...

No offense, CR, but one thing I feel sure of is that no one, no one, really knows where exactly we are in this mess, or how it will transpire.
Bob_in_MA | 03.22.08 - 6:22 pm | #

Bob_in_MA writes:
Sorry, I have no idea how I posted that twice...
Bob_in_MA | 03.22.08 - 6:23 pm | #

jus me writes:
Delong's "3 stages" seem rather ad hoc.

His first two stages fit the last couple years of this financial crisis. His third stage is no more than his guess of what happens next.
He seems to imply that his three stages are some kind of law of economic history, but they don't describe financial crises generally.
For example, Argentina didn't go through his three stages.
jus me | 03.22.08 - 6:23 pm | #

Allen C writes:
The public action is to quit pretending these securities are worth their current marks. It's laughable for the government to essentially state along with the financial institutions that the marketplace has it wrong.

Well guess what, we just got a mark on Bear's net assets and it's less than $2 considering the Fed support.

What we seem to have now is that no private entity is willing to step up and pay anything near par for paper backed by wildly overvalued real estate and horrible lending terms. And we have a mass of folks that refuse to believe it! I guess they're still groggy coming down from the huge dose of Kool-Aid.
Allen C | 03.22.08 - 6:24 pm | #

Sniglet writes:
What flabergasts me is the implicit belief so many experts have in the need of policy makers to "DO" anything at all. They may vehemently disagree on what forms of intervention central banks or governments need to take to avert financial crisis, but the talking heads seem to almost universally agree that we do need SOME form of policy intervention.

On the left, we hear talk about the government buying up toxic assets and bringing in a new era of tighter regulation. On the right, we hear people talk about just providing liquidity to investment banks, or guaranteeing re-financed mortgages (such as the BofA proposal being shopped on Capitol Hill).

Why isn't there anyone standing up saying that enough is enough, and it's about time we let the chips fall where they may, rather than embarking on some new massive bail-out attempt, leading to all sorts of unintended consequences later downn the road?

What's so terrible about a depression anyway? Wouldn't it be better to go through the gut wrenching collapse of asset prices, and morally bankrupt financiers, for a few years rather than saddle future generations with sub-standard growth, and a precarious financial system that continues to mis-direct investment?
Sniglet | 03.22.08 - 6:26 pm | #

ac writes:

So if Depression is unthinkable, and inflation is best avoided, this leaves public action.

That may be harder these days in part because people and businesses with wealth, seeing this wealth about to be appropriated for public use, might decide to relocate it to foreign countries (i.e. invest there instead of here) in an effect similar to what we're seeing with wage arbitrage.

Public action might need to occur on a more global scale to be effective.

ac | 03.22.08 - 6:32 pm | #

Sebastian writes:
transient said: "What led you to use the unemployment rate/mortgate rate ratio to try to predict recessions? Do you think that using something with only 5 "data points" provides accurate forecasting ability?"

This is *another* indicator for predicting recessions. The fact that unrelated indicators confirm this one lends credibility to it (and the others), even though there are only 5 data points. Like multiple witnesses to a crime that all tell essentially the same story is stronger evidence that the accounts are true.

"Do you think the artificial distortion of mortgage rates due to the explosion of securitization and underpricing of risk affects the outcome recently at all, and if so, how would you compensate for it?"

I wouldn't. In looking at mortgage rates, especially on the monthly period I chose, they are much less "noisy" and much less prone to short-run manipulation than other rates, like Fed funds rates, T-bill rates, T-bond rates, etc.

"Do you think that the distortion of the unemployment rate due to more self-employed and undocumented workers should affect the outcome at all? And if so, how would you compensate?"

Also, I wouldn't compensate. I don't have any way of knowing for certain what, if any, distortion there is. Self-employed and/or undocumented workers are nothing new in the employment picture.

JMO, but I think the reason so many people are so far wrong on these issues is because they're trying to put too fine a point on indicators that are blunt to begin with.

Also, they're trying to do the same thing they claim the U.S. government is doing: Doctor the numbers so that they fit a certain predetermined point of view.

JMO.


Sebastian
Sebastian | 03.22.08 - 6:33 pm | #

Average Joe writes:
"What's so terrible about a depression anyway?"

Epiphony.

Who said there was a problem? Why is everyone trying so hard to save us from something we aren't gonna have?

Like Sebastian, Kudlow, and others said....no recession, let alone a depression.

You'd think the bulls would be up in arms at the money and effort spent to solve a problem that isn't one.
Average Joe | 03.22.08 - 6:34 pm | #

ac writes:

Oh, and 2003 called asking about it's alarm back...

ac | 03.22.08 - 6:34 pm | #

Barley writes:
Scary graph, CR!

A rush to (pervieved) quality.

Perhaps the Fed should launch 5 day floatable notables that can be swapped in the market to prevent cascading, insolventt institutions at the end of every Q. At least it might help.
Barley | 03.22.08 - 6:35 pm | #

BA writes:
MONEY WILL BE PRINTED PLAIN AND SIMPLE. THE FED HAS 3 CHOICES:

1) Guarantee the bad debt

2) Inject equity into troubled institutions such as FNM, FRE, BAC, C, JPM, LEH , MS.

3) Buy the troubled companies outright.

ALL 3 INVOLVES PRINTING MONEY. As soon as they starting doing this the decline of the dollar will accelerate which means 1) higher interest rates 2) the cost of living skyrockets 3) China will be forced to break the peg.

Investors have 2 choices: start buying commodities(not commodity stocks such as Exxon) or start buying Chinese stocks as the Yuan will skyrocket in value.
BA | 03.22.08 - 6:39 pm | #

Average Joe writes:
Sebastian...

Do you believe that the Fed will at some point buy MBS or otherwise provide an explicit guarantee to the GSE's?


If so, is this an indication that things are worse than you expect?

Or, if we nationalize this problem and escape a recession are you gonna claim you were right all along while never acknowledging the enormous steps taken to socialize this problem and avoid the recession that never was.

If we have a recession you were wrong either way.
Average Joe | 03.22.08 - 6:41 pm | #

Billy Hill writes:
Arthur Cutten: I remember you from Galbraith's 1929 book!
Billy Hill | 03.22.08 - 6:50 pm | #

julieng writes:
CA wake up, call your friends in banks,
it's a bloodbath, we are in a very deep trouble, the insolvency crisis is
in full blown, the financial domino is one step away.
julieng | 03.22.08 - 6:52 pm | #

Sebastian writes:
Average Joe asked: "Do you believe that the Fed will at some point buy MBS or otherwise provide an explicit guarantee to the GSE's?"

I don't know, or care. This is what I meant by "trying to put too fine a point on it."

The housing "bubble" hit its peak a couple of years back and has been "deflating" ever since. The first salvos of the "credit crunch" were fired a year or more ago.

CR forecast a target for job-losses in residential construction by *last summer* that hasn't been hit *yet*.

But the economy just sails along, at a slightly slower pace. That's a sign that either the bad news isn't so bad or there's good news that isn't appreciated. Both, IMO.


S.
Sebastian | 03.22.08 - 6:56 pm | #

tg writes:
Liquidity trap, Bah, have the fed buy glod.
tg | 03.22.08 - 6:57 pm | #

edhopper writes:
Except the government doesn't have the ammunition to intervene. Due to our Idiot President and his misbegotten war, his uncalled for tax cuts and his general mismanagement, the only way for the government to have the money is to print more money, thereby incurring inflation, or greatly raising taxes in a recession.
In other words we can look forward to a lot of pain brought on by the WORSE PRESIDENT EVER!
edhopper | 03.22.08 - 7:00 pm | #

Anonymous writes:
Honestly, if the US Gov explicitly started buying MBS I think our foreign creditors would go into crisis mode and the dollar would tank even more.

And what would happen if the US had to raise interest rates quickly in order to slow inflation or retain the current level of foreign inflows?

With trillions of interest rates swaps lurking in the financial system can the counter parties really pony up the funds to pay these claims? Aren’t these counter parties the same banks/hedge funds that are currently being bled dry from the subprime mortgage disaster?

Sounds like a 3d crisis in the making…..
Anonymous | Homepage | 03.22.08 - 7:01 pm | #

Milkman writes:
Professor DeLong isn't making sense here. It looks like the Depression has already begun. If the US has a severe recession while the middle class is deeply in debt, with no savings, and there are not enough manufacturing jobs to take advantage of a lower currency, we jump straight into Depression.

This is different from the last Depression, but that's a given. The world has changed too much for a second Big D to have the same details.

Futhermore, his ideas about intervention from the central government are based on the idea that the government has the power and the will to do anything. Although this may sound too extreme, I believe that Wall Street is using the Fed to drain money from the economy. The government (Fed and other institutions) are too beholden to the wealthiest people to actually change course.

Just look at Ben B. His job is to fix the mess, but he seems to be bailing out the rich. That isn't a fix at all. He's making it worse, trying to bail out Wall Street at any expense.

Folks, we are in deep, deep trouble.
Milkman | 03.22.08 - 7:03 pm | #

AZ_Cowboy writes:
Whew. The government really can save us. I was getting worried there for a minute.

I'm shocked that BDL didn't have a Starbucks cup in his hand.
AZ_Cowboy | 03.22.08 - 7:23 pm | #

Anonymous writes:
Door #2 Print money, Inflation, every government in this situation does the same damn thing.
Anonymous | 03.22.08 - 7:28 pm | #

joe shmoe writes:
I think the various plans that are floating to the top - allowing bankruptcy cramdowns, Rep Frank's FHA refi plan, the Fed's Bear Stearns action, and further such plans for the Govt to buy up some of the CDOs or backstop them - are NOT plans to sustain current price levels.

Instead, I think they are plans to get markets unstuck or to keep them from freezing up entirely. The result will be price discovery that is quickened but also cushioned or buffered.

Look at Bear. The stock sold for $2 per share in the Fed sponsored deal.

Consider what happens if bankruptcy judges can do cramdowns. Values will be pushed down on the record as quickly as the cases can be processed.

Is it perfect? No, of course not. We shouldn't have ever gotten to this point. But none of these things is designed to sustain prices at current levels or close to current levels (Bear Stearns????), nor is that possible.

The challenges are to get markets unstuck and to prevent a crash.

Laissez-faire would leave things stuck until they crashed.
joe shmoe | 03.22.08 - 7:29 pm | #

jg writes:
OT -- on Monday, I am going to take a hard look at selling my SDS. We have a nice big market correction coming, but the counterparty risk stuff is interfering with my sleep, now.

SDS uses repurchase agreements with UBS and Credit Suisse. The collateral underlying those repurchase agreements are FNMA and FHLB bonds.

Who knows when folks will run en masse from FNMA and FHLB loans, but it could be soon. That could mean a nice margin call for UBS and CS, and a fall in confidence in SDS. Poof, my security moves to zero.

Per MarketTicker, it appears that I can replicate much of SDS via shorting SSO (it doubles the movement in the S&P 500 index).

Good Easter Vigil to all!
jg | 03.22.08 - 7:30 pm | #

FT Woods writes:
My significant other wrote to DeLong a few years ago for his insight on a minor but definitely present inverted yield curve -- and his reponse? He didn't follow yield curves. Been kinda scared of him ever since.
FT Woods | 03.22.08 - 7:31 pm | #

ac writes:

Per MarketTicker, it appears that I can replicate much of SDS via shorting SSO (it doubles the movement in the S&P 500 index).

Also you could pick up some puts on SDS (or SSO for that matter) as a hedge -- I notice they're available on most of the ProShares funds.

ac | 03.22.08 - 7:35 pm | #

JJL writes:
I am getting about as tired as I can of hearing that we have to avert a financial "Crisis" at all costs. Japan had a "Lost Decade". But I do not think the populace burnt Tokyo for fire wood or resorted to cannibalism to survive the winter. Last time I checked, Japan seemed to be ok. If the current "Crisis" goes on, will Americans have to spend some time getting by on much less, or are we going to have to live in caves and eat our pets to survive? Who knows? The point is before the reins of finance are passed on to the government (Katrina response was soooo good right?) and we accept basic communism as a national goal, somebody needs to persuade me that we are indeed trying to avoid some terrible fate and not just trying to avoid poor bank earnings for a year or two. The time is up for using a term like "Crisis" without any meaningful idea what in fact is the crisis. Here is a challenge: explain in some basic detail what is in fact the crisis being averted at any cost without using terms with no meaning like "banking failure", "systemic meltdown", "depression" and the like. Are things indeed so bad? Not so bad? Acceptable or not?
JJL | Homepage | 03.22.08 - 7:37 pm | #

NC Jim writes:
And what would happen if the US had to raise interest rates quickly in order to slow inflation or retain the current level of foreign inflows?

Not to worry IMO.

The inflation rate and USD are not in Mr Bernanke's top 20 list of problems at the moment. To use a sailing analogy, they have been thrown overboard to lighten the load and save the ship. The global financial system came within 24 hours of a systemic meltdown last weekend from my understanding of news reports.

I smell panic. Screw the dollar.

Jim
NC Jim | 03.22.08 - 7:38 pm | #

jg writes:
ac, thanks much for the thought, sir.

I think a put still exposes me to counterparty risk, doesn't it? What is the seller of the put does not have the wherewithal or inclination to honor the contract when I attempt to exercise my put?

With a short, I get the gross proceeds now, and just have to buy the subject shares before the window expires. I am good for my debts!

Since this will be my first experience with shorting (or putting), I'm all ears.
jg | 03.22.08 - 7:40 pm | #

andy in nz writes:
goldilocks
soft landing
decoupling

all are dead! What is next?

It has been exciting to watch my countries economy roll over like a sinking ship since August 2007. People here are getting very nervous.

With wall st bank profits 50% in retreat the lay offs must be coming, we are yet to feel the sting in the tail. Cascading redundancies.

I don't think a global bail out will be big enough!

/extra layer of tinfoil added!
andy in nz | 03.22.08 - 7:41 pm | #

ac writes:

Whew. The government really can save us. I was getting worried there for a minute.

Just kick back and relax. The government and the Fed can do all our thinking for us, manage our businesses, take care of our finances.

There's a safety net under this tightrope. You can take whatever risks you want. Mismanage however badly you want.

We'll be there to clean up the mess.

That's the message of the last 10 years, isn't it?

ac | 03.22.08 - 7:42 pm | #

Bob Mologna writes:
Seb wrote: "CR forecast a target for job-losses in residential construction by *last summer* that hasn't been hit *yet*."

I can only speak to my local economy (Arizona), but job losses in residential construction are massively understated because of the number of illegals working in the business. I'm in construction and RE so I know the crews and the proportion of Mexican nationals is going down fast around here.
Bob Mologna | 03.22.08 - 7:47 pm | #

jg writes:
ac, I have an incomplete understanding of history, but that seems to be the message of America since the New Deal: we'll take care of your parents and grandparents if they won't or you won't. Compound with medical care, homeowner disaster insurance, etc.

We need to start anew, with a clean slate. It will take some years, but that is where we will arrive, I think.
jg | 03.22.08 - 7:48 pm | #

Major Tom writes:
Sebastian

Where is the "real" growth in your estimates?

What will bring us out of the "near-recession" in your view?

I think these two questions are extremely important since 1) pre-1995 inflation statistics put us in below 0 real growth and 2)our consumer economy has less than 15% manufacturing.

Our economy has been predicated on services, notably financial services. Growing from less than 5% of S&P profits to 40% profits in less than 15 years under easy money Al G. So, basically, what will the financial firms sell to generate profits?

I can't find any financial advisor that can answer the 2nd question.

Can you?
Major Tom | 03.22.08 - 7:53 pm | #

Ross writes:
I vote for flation. The 'in' kind.

Inflation is slow theft by time. Given our current Government and the one we will probably get, I hope they keep their legistlation out of my wallet.

We didn't have a New Deal or a Fair Deal. We had a MISDEAL. I call a do-over.
Ross | Homepage | 03.22.08 - 7:53 pm | #

Barley writes:
Bob Mologna A question since you said:

"I'm in construction"

If the bus is soft, are you seeing raw prices fall in your neck of the woods (err sand)? Lumber, copper pipe, wage rates...et al.
Barley | 03.22.08 - 7:55 pm | #

Sebastian writes:
jg asked: "...SDS uses repurchase agreements with UBS and Credit Suisse. The collateral underlying those repurchase agreements are FNMA and FHLB bonds.

Who knows when folks will run en masse from FNMA and FHLB loans, but it could be soon. That could mean a nice margin call for UBS and CS, and a fall in confidence in SDS. Poof, my security moves to zero..."

Just a word to the wise, but if you accept the concept that a good trade comes from knowing something of which most others are unaware and exploiting their ignorance or lack of understanding, what is it that you know that others don't about the market?

IOW, if everybody's scared-to-death bearish and there's already been a -17% correction in the SP500 (which is substantial), where's the logic in a short trade?

FWIW.


Sebastian
Sebastian | 03.22.08 - 7:55 pm | #

Entrepreneur writes:
There are government actions available that, however unlikely, would be generally positive and quick acting. For instance, we could abolish the income tax and replace it with a simpler sales tax levy or true flat tax. The government could decrease it's size significantly by carefully re-thinking our commitments and how we spend money.

Cut back our military by altering strategic requirements while maintaining a high degree of readiness, equipment and focused rapid-response. Reduce our budget and debt by re-assessing the nature and structure of entitlements. Consider funding entitlements through a blind trust set aside for that purpose. Constitutional balanced budget amendments and term limit amendments could also be part of a comprehensive reform. It seems we are entering a period where people might support them. We could announce a gradual (say 5 year) transition back to an asset-backed currency, or at least competitive alternate currencies. Finally, we could re-vamp intellectual property, securities and banking laws and regulations to better reflect the 70-80 years since they were last subject to a radical overhaul.

These steps would work better than the presumed inflate-out, government buy-out, or regulate-out ideas that are the foundation of most public discussion these days. A set of principles revolving around transparency, simplicity and a realistic inclusion of the lessons we've learned over the last 100 years would work, and should be considered. Each of these ideas promotes the formation and development of capital, clear financial transparency and government, business and consumer accountability.

Perhaps we are entering a period where such approaches are no longer off the table?
Entrepreneur | 03.22.08 - 7:55 pm | #

Econoclast writes:
odograph writes:
As I understand it (?) the last TIPS auction yielded negative interest rates. Will the Fed offer more TIPS, more often?

Not true. Every recent TIP is paying some real interest rate (CPI+) to the original holder who bought at auction. The negative real rate refers to pre-owned TIPs recently purchased in the open market. With the premium paid over its par value (current CPI adjusted face value), the coupon (the fixed interest rate, 2% on last 5 yr TIP) alone doesn't return sufficient interest for the remaining term to return the buyer's price by maturity. A resold TIP still will pay a CPI-based interest as well, so if that rises significantly, a "negative" real rate TIP could still be a good investment, compared to a vanilla fixed rate note of the same maturity. A negative real rate TIP held to maturity still has a positive yield (assuming CPI doesn't go negative), but less than CPI for the period.

Unlikely that the Treasury will change the offering dates (twice a year for each maturity), but the amount offered (number of bonds) is always unpredictable. Given sufficient demand, the fixed rate could auction out to 0 on future issues, but will not be negative. The Treasury's job is to get only the money needed on the auction date at the lowest yield demanded by the bidders.

Table of T note yields - * means TIP, "yield" is column of interest. Notice TIPs are low, because CPI portion can't be included.

Auction for 10 yr TIP is April 7, 5 yr on April 17.
Econoclast | 03.22.08 - 7:57 pm | #

donna writes:
Lots of us are just fine, thanks. Some of us are in trouble through no fault of our own. Many of us have been living high on the hog and now the hog is being slaughtered. My own choice is don't inflate the money supply and wipe out my savings, since I'm one of the few idiots who still has savings. Bail out those who didn't cause this mess and as for the rest, let them fall. I don't think it's any great crisis if the millionaires have to give up their mansions or yachts.

Of course, the trouble is they aren't willing to do that, since profits are never to be socialized, only losses.

This pisses me off no end, but I'm not on the Fed, so I can't do much about it.

I feel very used for living within my means and trying to save for my retirement.
donna | Homepage | 03.22.08 - 7:57 pm | #

scotty @ The Fed writes:
A Brief summation of the recession

Series: FF, Effective Federal Funds Rate
http://research.stlouisfed.org/f...F?rid=18& soid=1

Latest Observations:
Date 2008-02-13 2008-02-20 2008-02-27 2008-03-05 2008-03-12
Value 3.00 2.98 2.96 3.00 2.97


Series: DFF, Effective Federal Funds Rate
http://research.stlouisfed.org/f...F?rid=18& soid=1

Latest Observations:
Date 2008-03-15 2008-03-16 2008-03-17 2008-03-18 2008-03-19
Value 2.99 2.99 2.69 2.16 2.08

http://research.stlouisfed.org/f...art_type=line& s[1][id]=DFF&s[1][range]=10yrs


Series: DPCREDIT, Primary Credit Rate
http://research.stlouisfed.org/f...T?rid=18& soid=1

Latest Observations:
Date 2008-03-13 2008-03-14 2008-03-17 2008-03-18 2008-03-19
Value 3.50 3.50 3.25 2.50 2.50


http://www.frbdiscountwindow.org/

Source: The Federal Reserve Board
March 18, 2008
The Federal Open Market Committee decided today to lower its target for the federal funds rate 75 basis points to 2.25 percent

Current Interest Rates
Primary Credit 2.50%
Secondary Credit 3.00%
Seasonal Credit 2.95%
Fed Funds Target 2.25%

Discount Window and PSR Collateral Margins Table

http:// www.frbdiscountwindow.org...ountmargins.pdf

Brady Bonds .. great swap bait..LOL!

However: This facility will be available for business on Monday, March 17. It will be in place for at least six months and may be extended as conditions warrant. Credit extended to primary dealers under this facility may be collateralized by a broad range of investment-grade debt securities. The interest rate charged on such credit will be the same as the primary credit rate, or discount rate, at the Federal Reserve Bank of New York.

The Federal Reserve Board on Thursday approved action by the Board of Directors of the Federal Reserve Bank of Philadelphia, decreasing the discount rate at the Banks from 3-1/2 percent to 2-1/2 percent, effective immediately.



Series: DCPF3M, 3-Month AA Financial Commercial Paper Rate
http://research.stlouisfed.org/f...art_type=line& s[1][id]=DCPF3M&s[1][range]=10yrs

Latest Observations:
Date 2008-03-13 2008-03-14 2008-03-17 2008-03-18 2008-03-19
Value 2.80 2.66 2.50 2.41 2.59
scotty @ The Fed | 03.22.08 - 7:58 pm | #

AllenM writes:
okay, Sebastian, I'll bite with a specific instance- homebuilders.
they were up around 10% on thursday- so should you go long and hope next week's actual data is going to be good, or, having read all the stats here and elsewhere short those stocks?

Real life choice time? Long or short?

I will be shorting on monday- real world data versus *hope*.

Someday this war's gonna end...
AllenM | 03.22.08 - 7:59 pm | #

tj & the bear writes:
<i>the Fed may not actually be able to reduce short-term rates much from current levels</i>

Sounds like "out of ammunition" to me.

tj & the bear | 03.22.08 - 8:00 pm | #

Jim writes:
The powers that be will try to use a mix of all evils: a bit of inflation, quite a bit probably, a bit of a recession, quite a recession probably, and for the rest, why not sell a lot of our junk to the people in the world with the money to buy it? We can't be too picky about whom we sell to; we need their money. Just hold our noses and sell the stinky stuff and hope for the best. PS Don't think there will be some elegant solution. Washington doesn't do elegant.
Jim | 03.22.08 - 8:06 pm | #

jg writes:
Seb, the S&P is down nicely from the Oct. '07 peak, but for us 'doom and gloomers,' we know that it is just the start.

When the dust settles in a few years, the S&P will be 85-90% off of its peak.

The world as we know it is ending, and the endgame has just begun.

Thank goodness I have a nice Easter Vigil Mass to brighten my spirits this evening!
jg | 03.22.08 - 8:06 pm | #

JJL writes:
I was at the Mega store Sam's Club today and a gentleman was buying those huge packs of toilet paper rolls. He had about twenty packs in his oversize cart. I asked him what was with all the toilet paper and he said: "I saw on the news we are in a world of chit because of housing, so I am being proactive". Interesting take on things.
JJL | Homepage | 03.22.08 - 8:06 pm | #

ksfq writes:
This is really scary thing. Yeild on 13-week treasuries is basically 0%.

I think the only thing what Fed and gov can do is to start shuting down insolvent banks in some kind of orderly fashion. One by one. BSC is first. Then probably cames WaMu, etc.

By proping up the insolvent institutions, Fed is just prolonging the pain for all of us.
ksfq | Homepage | 03.22.08 - 8:06 pm | #

Jim writes:
JJL: well thank God he's buying. I was in a supermarket today and there was only one register operating and not too active either. I guess we are at the starvation stage of this recession, or somethin'.
Jim | 03.22.08 - 8:08 pm | #

Anonymous writes:
JJL

Bathroom humor.

On CR.

Really?
Anonymous | 03.22.08 - 8:08 pm | #

JJL writes:
Any humor is good. No takers on my serious question of what "crisis" needs to be avoided at any and all costs a few posts back so I resorted to a joke. Sorry.
JJL | Homepage | 03.22.08 - 8:10 pm | #

Billy Shears writes:
JJL, your point about Japan was something I was telling a colleague the other day. While their stock market has gone nowhere, the people there seem to be doing fine.

I think the 'crisis' is that Boomers' retirement funds have become overly dependent on stocks. Wall Street is telling the Fed that they must save the stock market so Boomers can retire comfortably...since that was their promise if you invested with them.

So all those rosy scenarios we see on TV from all the investment companies helping you build your nest egg into a retirement of luxury may end up being a dream. Dennis Hopper says don't let your dreams die. They won't, they'll just stay dreams.
Billy Shears | 03.22.08 - 8:13 pm | #

Anonymous writes:
"This pisses me off no end, but I'm not on the Fed, so I can't do much about it."

Ditto
Anonymous | 03.22.08 - 8:14 pm | #

Sebastian writes:
AllenM said: "Real life choice time? Long or short?"

You probably missed it, but I posted a while back that I had already moved some retirement money into an SP500 Index fund in the latter half of January.

I'll be buying a portfolio of a half-dozen growth stocks (my primary active-trading vehicle) next week. I'll post them after I buy-in, if you're interested.


Sebastian
Sebastian | 03.22.08 - 8:15 pm | #

Anonymous writes:
EDT March 20, 2008
Print RSS Disable Live Quotes
WASHINGTON (MarketWatch) -- The Federal Reserve will auction off $75 billion of Treasurys for 28-day loans to its 20 primary dealers on March 27 in the first auction in its Term Securities Lending Facility announced a week ago. The Fed will accept mortgage-backed securities, including collateralized mortgage obligations (or CMOs), as collateral in the first auction. The second auction will take place April 3.

Fed's first auction to accept mortgage-backed securities

http://www.marketwatch.com/news/...ccept-mortgage-
March 20, 2008) - Brascan Adjustable Rate Trust I (the "Fund") (TSX:BAO.UN), today announced recent initiatives undertaken by the Manager in response to the ongoing challenges in the credit and mortgage-backed securities markets. The Fund was established to provide unitholders with an investment in credit securities, primarily mortgage-backed securities, on a leveraged basis. At March 13, 2008, the Fund had total net assets of approximately $8.8 million or $6.06 per unit.

Portfolio Update

In accordance with its investment objectives, the Fund has exposure to an actively managed portfolio of primarily mortgage-backed securities held by a partnership ("the Partnership"). The market for asset-backed and mortgage-backed securities has experienced unprecedented disruption over the past 12 months. This disruption has been precipitated by a severe credit contraction that is presently occurring in the United States. As a consequence, many securities have fallen in value notwithstanding that they retain high quality ratings from the rating agencies.

In order to reduce leverage and protect asset values, the Partnership has sold all of its Agency mortgage-backed securities, which have the greatest amount of current liquidity, and used the proceeds to repay debt and reduce its leverage to approximately 1:1. This strategy of reduced leverage is expected to enable the portfolio to better withstand the severe price volatility characterizing current markets. The Manager believes this action is in the best interests of the Fund, given the illiquidity and very heavy penalty for sales in the non-Agency mortgage-backed securities markets. As such, the Fund's current holdings are 100% non-Agency mortgage-backed securities, with the majority of these holdings rated BBB. In light of these changes to the portfolio mix and the resultant weighted average rating factor, the Manager understands that the units of the Fund have been downgraded to 'BBBf' by Standard and Poor's.
Anonymous | 03.22.08 - 8:15 pm | #

jg writes:
JJL, there is no great crisis to avoid. We are blessed to have productive fields, so food production will not be a problem. Lords knows that there will be plenty of empty homes around for shelter.

The only tricky part is what happens when the Chinese, Japanese, and sheikhs understand that we are implicitly or explicitly defaulting on our debt. Good thing that we have two big oceans to our sides.

Social unrest and potential invasion, we can deal with it with a well armed milita, worst case.
jg | 03.22.08 - 8:15 pm | #

Major Tom writes:
Sebastian,

"Average recession" includes a drop in S&P of 27%. So the answer to shorting would be yes.

I happen to think that the recession is/will be much deeper due to the profits booked by financials from derivatives. So, if a deep recession occurs, a peak to trough of say 40% might be in order. That takes the S&P to around 940.

Since you like charts and history, run a 7% per year for S&P (historical average). I picked a random year, 1954 in Jan when the S&P was around 24.95. For 2008 - guess where that leaves the S&P? 963. That is how overextended the markets got in both the dot.com bubble and the latest housing/securitization bubble.
Major Tom | 03.22.08 - 8:16 pm | #

Sebastian writes:
JJL said: "No takers on my serious question of what "crisis" needs to be avoided at any and all costs a few posts back so I resorted to a joke."

Defining the crisis, as you suggested, cuts it down to size. Reduced earnings for banks for a while, which is not a sector-wide or economy-wide problem.


S.
Sebastian | 03.22.08 - 8:18 pm | #

odograph writes:
Thanks Econoclast, I was off surfing and found some of that, but not all.
odograph | Homepage | 03.22.08 - 8:20 pm | #

Sebastian writes:
Major Tom said: "Average recession" includes a drop in S&P of 27%. So the answer to shorting would be yes."

Well, as you may or may not be aware, I don't think there is or is going to be a recession any time soon.:)

If *that's* the case, a -17% correction in the SP500 is a *huge* buying opportunity.


S.
Sebastian | 03.22.08 - 8:21 pm | #

ipodius writes:
JJL, as one who has worked with Japanese companies and people, I can tell you that you are spot on. Even with the "financial crisis" most people over there are doing just fine. And just look around Tokyo to see the amount of luxury goods adorning the populace.

If you get out of the house instead of reading all the alamist people on blogs, we are doing fine too. Some people are goint to get creamed. Some businesses are going to vaporize (like Bear), and some people (like Bear stockholders and other investors and hedgies) are going to lose a lot. Boohoo. Welcome to capiralism. No one said you were entitled to double-digit returns or even ANY return. People around here don't get that.

At the end of this, as conjure is saying, there is going to be a new financial landscape. That's a good thing. Houses will return to being places to live. That's a good thing. And credit is going to be scarce forcing people to live within their means. That's also a good thing. Perhaps instead of focusing our collective American energies on $500 handbags and 8000 sq ft houses, we'll go back to being the global leaders in innovation and technology. And a better leader in finance too.
ipodius | 03.22.08 - 8:23 pm | #

AllenM writes:
Sebastian,
We realistically have had two big failures already-
Countrywide and Bear Stearns.

Failure and forced mergers are not *reduced* earnings. That is like saying that Penn Square had a little problem.

Essentially, you are playing a very optimistic and conventional pathway. While that usually works, we, most of the readership of CR, believe that what is currently occuring is not *normal*, but instead an event that is unprecedented in recent history. History is all that you seem to know, and the fact that ECRI just called a recession means that you are taking the average of 6 months and positing it will all pass in the next five months. I think you are wrong, and if you are, your investments that you think will fund your retirement will fail you.

Think about *your* risk in the game, and how glibly you rely on *models* for your own future security.

Someday this war's gonna end...
AllenM | 03.22.08 - 8:24 pm | #

Anonymous writes:
"a -17% correction in the SP500"

The trend is your friend, Oh that only works when stocks are going up silly me.
Anonymous | 03.22.08 - 8:25 pm | #

Major Tom writes:
Sebastian - you may have missed my post above. I asked 2 questions to you to try and understand why you think we are not in a recession and where the economic growth will come from. Take a peek at the previous post and try to answer the questions.

More than anything, just curious on your thought process.

I have read your posts and know that you do not believe we are in recession.

Cheers
Major Tom | 03.22.08 - 8:26 pm | #

zackattack writes:
Not a good idea to fight window-dressing week by being on the short side, in my opinion. Indices will want to go higher at the start of the week.

A lot of the best-performing groups last week were dead-cat bounces in various things the financials touch. Not touching any of these yet.

I have two buys in the transports. Already got one of them on last week.
zackattack | 03.22.08 - 8:26 pm | #

kahunabear writes:
So I guess Stage III is where we move from crony capitilsm to socialsim.
kahunabear | Homepage | 03.22.08 - 8:28 pm | #

Sebastian writes:
AllenM said: "...History is all that you seem to know, and the fact that ECRI just called a recession means that you are taking the average of 6 months and positing it will all pass in the next five months."

Well, actually, I'm taking the current conditions, comparing them to conditions over the past 40 years or so, and have seen that they're not all that bad by comparison to previous "bad" times.

Can't tell that from the bearish MSM and bloggers, though.:)


S.
Sebastian | 03.22.08 - 8:30 pm | #

JJL writes:
Sebastian and ipodius,
exactly what I am saying. things are not so dangerous to freak out and resort to fast ill conceived plans. Stop and think would be my advice to the FED. Things will be ok.
JJL | Homepage | 03.22.08 - 8:32 pm | #

rich writes:
I've listed in my mind the important trends now underway that I expect to continue at least into early 2009.

Home price declines
Home foreclosures high
New home construction down
Commercial real estate construction down
Consumer spending down
Business capital spending down
Government spending down
Higher unemployment
Corporate earnings down

The major unknowns are oil prices and inflation. But even if oil comes down some, any price over about $80 on average would still be negative.

I don't see much help from rebates, but lower interest rates should start to stimulate at some point in 2009. Also, new home construction and business capital spending could turn up in 2009.

But I see two new drags coming in 2009: Iraq War (military spending0 wind-down and higher taxes of several types.

Through all this, of course, a steady drip of defaults among homebuilders, construction loans, small and medium-size businesses, consumer finance and mortgage companies, and bank failures.

So, this scenario would probably put the darkest hour before the dawn around Q2 2009, without much light until then.

What am i missing?
rich | 03.22.08 - 8:32 pm | #

Anonymous writes:
The Social Democratic Party had been in power in Sweden since 1932, and Labour parties also held power in Australia and New Zealand. In Germany, on the other hand, the Social Democrats were defeated in Germany's first democratic elections in 1949.

Social democracy at first took the view that they had begun a "serious assault" on the five "Giant Evils" afflicting the working class, identified for instance by the British social reformer William Beveridge: "Want, Disease, Ignorance, Squalor, and Idleness."

http://en.wikipedia.org/wiki/Socialism

Banking Socialism
Anonymous | 03.22.08 - 8:33 pm | #

ipodius writes:
You know Sebastian, I do admire your fundamentalist type belief, but honestly, you're starting to sound like one of those people that try to argue that god put dinosaurs in rocks to fool us.

If you've paid any attention to what either mp/conjure have written or what I have been saying, you see some uncanny accuracy. Bear is the first, there will be others including a big bank or two. There will be no "bailouts" unless you think wiping out stockholders is a bailout. The fed will do what it has to do to make sure the great unwind is orderly. That is all. That is exactly what it is doing now, no more.

And DeLong is really as dogmatic as you. Three posibilities? Please. There are many. Again, most Japanese are fine, just like most Americans will be fine.

Depression or total destruction is not in the cards. A shallow recession and a lot of unwinding is, followed by a couple of years of very stangnant growth. RE is done for our lifetimes. And as for stocks, the Dow is going to kiss past 11,000 Sebastian because forward earning this year are going to suck big time. There is no uptick at all in Q3 and Q4 EVEN with the "stimulus" because it's going to people that are screwed by debt instead of to people like me that would actually spend it.
ipodius | 03.22.08 - 8:33 pm | #

Anonymous writes:
Why is The Fed saying they have no plans to buy MBS? This story clearly suggest they will be buying them, but maybe there is a difference between buying and holding, or exchanging??

The Federal Reserve will auction off $75 billion of Treasurys for 28-day loans to its 20 primary dealers on March 27 in the first auction in its Term Securities Lending Facility announced a week ago. The Fed will accept mortgage-backed securities, including collateralized mortgage obligations (or CMOs), as collateral in the first auction. The second auction will take place April 3.

Fed's first auction to accept mortgage-backed securities
Anonymous | 03.22.08 - 8:35 pm | #

Jack writes:
Is that Obama on hsi T-shirt?
Jack | 03.22.08 - 8:36 pm | #

Anonymous writes:
What is Fed saying??

The Fed will accept mortgage-backed securities, including collateralized mortgage obligations (or CMOs), as collateral in the first auction. The second auction will take place April 3.

Fed's first auction to accept mortgage-backed securities
Anonymous | 03.22.08 - 8:37 pm | #

Anonymous writes:
Beijing tax move to boost ailing share prices

Beijing has temporarily suspended the collection of corporate taxes from Chinese mutual funds in an attempt to boost the country's slumping stock prices.

China's finance ministry and State Administration of Taxation announced the exemption in a brief statement carried by state media last night but did not say how long the measure would last.

The exemption applies to all income from investment funds from securities markets - including stock and bond trading, and interest or dividends from stock or bond investments - according to state news agency Xinhua.

The exemption also applies to investors who receive income from such funds, the notice said.

The move is aimed at shoring up a market that has dropped almost 40 per cent since the historic peak it reached in October and contrasts with the situation a year ago, when officials were casting around for a way to slow a raging bull market

http://www.ft.com/cms/s/0/86901c...? nclick_check=1

Just buy china, they have a currency that is appreciating and at least they are straight up about goosing their markets. Capital flight.
Anonymous | 03.22.08 - 8:38 pm | #

Anonymous writes:
March 22 (Reuters) - The U.S. Federal Reserve is not engaged in talks with other central banks about the possibility of purchasing large amounts of mortgage-backed securities to stem the credit crisis, a senior Fed official said on Saturday.

"The Federal Reserve is not involved in discussions with foreign central banks for coordinated buying of MBS," the official said, disputing an account in the Financial Times that central banks were "actively engaged" in discussions on that possibility.


However/

The Fed will accept mortgage-backed securities, including collateralized mortgage obligations (or CMOs), as collateral in the first auction. The second auction will take place April 3.

Fed's first auction to accept mortgage-backed securities
Anonymous | 03.22.08 - 8:39 pm | #

Major Tom writes:
Amen ipodius - "because forward earning this year are going to suck big time"

Kind of what I am getting at Sebastian. Care to refresh last year's projected earnings? Yeah, stock's were cheap in October because forward p/e was 15... Guess how cheap the dow is now? trailing P/e in Jan of 46... Doesn't sound as cheap as 15 does it. That simply meant either the dow will be cut in half to bring earnings in line, or we will have many years of no growth.

The real comical thing is that financials are projecting a 60% increase in earnings in Q3 and Q4... How realistic is that?

Again, for anyone out there - what sector(s) of the economy will bring us out of this recession?
Major Tom | 03.22.08 - 8:41 pm | #

ipodius writes:
Why is The Fed saying they have no plans to buy MBS? This story clearly suggest they will be buying them, but maybe there is a difference between buying and holding, or exchanging??

I'll say this again slowly in case someone needs to lip read: this paper isn't worthless. The Fed overcollateralizes the loans. It will hold it until everyone stops freaking out and the market settles down, at which time its worth will be more apparent. Just like all of you are freaking out now. What the markets don't need is a lot of people like some that post on here. It's like that old scene from Airplane when the woman is screaming and everyone is lined up to slap her.

ALL mortgages will not fail. ALL subprime will not fail. ALL AltA and prime will not fail. Some will. How many? Who knows...and that is the issue. In fact, I'd wager there's a huge amout of money to be made picking up assests now at freak-out firesale prices. Just ask JPM.
ipodius | 03.22.08 - 8:42 pm | #

Anonymous writes:
The Federal Reserve is not involved in discussions with foreign central banks, because it is already decided they will buy them, however, that discussion already took place, and, thus:

The Fed will accept mortgage-backed securities, including collateralized mortgage obligations (or CMOs), as collateral in the first auction. The second auction will take place April 3.

Fed's first auction to accept mortgage-backed securities
Anonymous | 03.22.08 - 8:42 pm | #

tg writes:
"we'll go back to being the global leaders in innovation and technology. And a better leader in finance too."

I hope so but it is only possible if you reward savings more than $500 handbags.
tg | 03.22.08 - 8:44 pm | #

Anonymous writes:
Re: What the markets don't need is a lot of people like some that post on here.

So, why are you here pumping up worthless chatter about the value of something you and The fed know nothing about? Why would The Fed, or you buy or exchange something that is highly risky in order to provide someone like you with a backdoor to taxpayer cash?

What the taxpayers don't need is a lot of people like some that post on here, like you!
Anonymous | 03.22.08 - 8:45 pm | #

AllenM writes:
What ipodius said, in spades.

Seb, once again, you are looking backwards with data that has been comprehensively shown to be manipulated over the last four decades, and arguing the situation is just fine.

I would argue that the common man is leading the msm, which just follows trends like most of wall street.

The herd is nervous, and the reason why is because they are worried.

Our economic leadership has pushed us into a cul de sac that has no easy and convenient pathway out.

If you don't see that, you are simply parroting Kudlow, and are operating on his level. For instance, where is the massive amount of financing going to come from to maintain the current level of real estate pricing? Wall Street and the international investors that bought all that crap paper have already begun puking up all of their putative profits, and losing even more. Now, you can posit the GSE's are going to step into the breach, but only for the truly innocent with bona fide earnings and paperwork from their initial loan, and ability to repay to some extent.

So that leaves a ton of folks who are just going to walk rather than even attempt to work out their houses, speculators or just subprime borrowers, I don't care which. The end result is a huge amount of housing with no viable purchaser waiting- gee you think that 9 plus months of inventory is sitting there appreciating?

Next shoe to drop is commercial real estate- you should see the numerous buildings here in Phoenix, and all throughout the Southwest that are new and empty.

After that you have retail falling on top of the other two sectors.

http://www.azdor.gov/Newsroom/ Ta...0108Taxfact.pdf
Just follow the link and read the facts for one state, admittedly, one that had a huge boom.

Those are YOY drops Seb, huge drops.
Not inflation adjusted, not seasonally adjusted, just hard hard hard data.

That is what I see.

Someday this war's gonna end...
AllenM | 03.22.08 - 8:45 pm | #

Anonymous writes:
"If you don't see that, you are simply parroting Kudlow"

Maybe Sebastian is Kudlow.

In drag of course.
Anonymous | 03.22.08 - 8:48 pm | #

ipodius writes:
I hope so but it is only possible if you reward savings more than $500 handbags.

Saving is its own reward, but we forgot that. The reward is you can retire. And we forgot the goal was to stay ahead of inflation and perhaps make a little more, not to invent ways to falsely get double-digit returns for years, or sell people on the fact that it is possible. For a few yes, as a matter of course no.

And when we remember why buying a house is a good idea, we'll be better off too. The reason is that your housing cost DOESN'T rise with inflation, as your wages do. It's also because, when you retire and move to a place where you have less income, you have much smaller housing expense. And you can sell it if you need to and downsize. That's why. Try getting that benefit as a renter. I pay the same for my house as I did in 1996. No one around here pays 1996 rents. I will pay only taxes and maintenance when I retire. THAT's the benefit full stop.
ipodius | 03.22.08 - 8:49 pm | #

Anonymous writes:
"The herd is nervous, and the reason why is because they are worried."

Lol.....

George Bush, Warsh, or Ben is here tonight....LOl bawhahahahahahahaa
Anonymous | 03.22.08 - 8:50 pm | #

ipodius writes:
Why would The Fed, or you buy or exchange something that is highly risky in order to provide someone like you with a backdoor to taxpayer cash?

Very simple - to control the unwind. Period.
ipodius | 03.22.08 - 8:52 pm | #

Anonymous writes:
Tanta, Tanta,

Get the tranquilizer guns out.....

Re: "The herd is nervous, and the reason why is because they are worried."


Bawhahahaaaahahahaha
Anonymous | 03.22.08 - 8:53 pm | #

FT Woods writes:
On Tanta's Predation article down below...the next door neighbor at 104 E Reed Avenue who bought in December 2007 is also named Salgado. Coincidence?
FT Woods | 03.22.08 - 8:54 pm | #

Missed Information writes:
ipodius,

nobody said MBS were worthless.
But even formerly AAA rated paper is worth around 60-70c on the dollar. Acknowledging that price makes banks insolvent. Fed holding this paper for them doesn't make them solvent, only adds liquidity.

The real game is, can Fed hold this marked-to-fantasy paper long enough for banks to raise sufficient extra cash to absorb the losses?

Now comes a trillion dollar question:
who will give banks cash to absorb the losses? They ain't getting mine.
Missed Information | Homepage | 03.22.08 - 8:56 pm | #

Marcus Aurelius writes:
What the hell are we all waiting for the Fed to do? Serve the interests of Americans?

While it might sound a bit like a gold-bug whacko ranting, the Fed is a fabrication created to keep us from facing the music after our last brushes with national bankruptcy.

Our forefathers, who were perhaps by the luck of time and place, much more competent and thoughtful than us, set our country on the road to permanent prosperity by rejecting the idea of a central bank. You might be able to argue with my opinions on the subject, but it's very difficult to argue with theirs.

A fellow on another blog spent quite a bit of time compiling quotes from our forefathers and others regarding CBs. I'll post them in my next comment. Be forewarned, they are lengthy, and it is a cut and paste job. If you don't like it, please skip my next post.

These ideas are worth digesting.
Marcus Aurelius | 03.22.08 - 8:57 pm | #

Anonymous writes:
Re: "The herd is nervous, and the reason why is because they are worried."

The MBS myth was popularized by a Disney nature film, MBS White Wilderness, made in 1958 by director James Algar and filmed by photographer James R. Simon. And most of it -- the lemming sequence, at any rate -- was faked.

The film was made in the province of Alberta. Lemmings don't live in Alberta. They had to be flown in from Manitoba, where they had been captured by Inuit schoolchildren and sold to the Disney people, who had put a bounty on the little fellows' heads.

There's no sea in Alberta, either; it's an inland province. No problem -- Simon just used a river. It would look like the ocean on film.

Actually, there weren't thousands of lemmings in the film. There were a few dozen. Simon really did a remarkable job of special effects, filming the lemmings from various angles, using turntables and various camera effects to make that handful of lemmings look like a whole herd.

How did they get them to stampede off the cliffs? They herded them. Remember, this was 1958; there weren't as many animal protection laws then as there are now.
Anonymous | 03.22.08 - 8:58 pm | #

Anonymous writes:
Ya gotta love the American public.

Various versions of bear stearns billionaires whose investment went from 900 million to 12 million.

Oh to eeek out an existance on 12 million.

Woman I work with opposes nationalized health insurance because: "Why should Bill Gates be forced to pay for health insurance."

Who can argue with that logic?
Anonymous | 03.22.08 - 8:58 pm | #

ipodius writes:
AllenM, Seb is sort of like the weather guy that is telling you it's not going to rain while you see it. You want to scream "LOOK OUT THE WINDOW INSTEAD OF AT THE COMPUTER!".

The same applies to these people. Just look out the window and you'll see everything grinding to a halt. I have tons of respect for people that just call it as it is. People who wave about dogmatic assertions, I have no use for. No matter what the past data says cause, you know, like the prospectus...past performace is not an indicator of future returns.
ipodius | 03.22.08 - 8:59 pm | #

Billy Shears writes:
AllenM, your mention of Penn Square Bank brings back memories! I was in OKC when that grenade went off. That was the first signal of the coming S&L crisis. The president of that bank reminds me of Cayne at Bear Stearns.
Billy Shears | 03.22.08 - 8:59 pm | #

Anonymous writes:
Marcus,

How about a short version?
Anonymous | 03.22.08 - 9:00 pm | #

Jas Jain writes:
--
Depressions happen because of bankers' mischief, i.e., bad lending and securitization of bad debt in the present case. Why was it allowed in the first place? In the name of innovation and flexibility or to defraud millions?

Economists are disgusting human beings with no moral compass. They just believe in govt, including the Fed, coming to the aid of crooks and morons. What part of free market they do and don't subscribe to? Bailouts of any kind mean feeding corruption and immorality. All the problems now surfacing were fully predictable, no? And we have so many crooks that come out sand say that no one could have foreseen these problems. What a bunch of liars.

America is full of rogue economists and they are as guilty as some of the bankers because of what they support and what they oppose, or don't oppose.

Americans are screwed because everyone in the position of power or authority is trying to screw them. They will be the best-screwed population and sore all over.

Future of a nation of born-and-bred dopes (voting for Crooks’ agents) led by Crooks, including some economists, is not too bright. One day this system must collapse. And it will within the lifetime of most here.

Jas
Jas Jain | 03.22.08 - 9:01 pm | #

ipodius writes:
The real game is, can Fed hold this marked-to-fantasy paper long enough for banks to raise sufficient extra cash to absorb the losses?

That is the truest statement in this whole thread. But remember they don't have to raise anything, they have to be able to hold this such that earnings offset these losses. One thing everyone glosses over is that most institutions were PROFITABLE last year even with the losses. You will only pull a Bear Stearns IF a panic ensues and there is a run (money pulled and credit withdrawn) or there is massive counterparty default.

So the game is to dribble out the losses quarter by quarter offsetting with profits. Which is why, incidentally, Seb is so wrong about forward earnings in the financial sector. This is going to go on until at least Q2 of next year.
ipodius | 03.22.08 - 9:04 pm | #

Anonymous writes:
"Future of a nation of born-and-bred dopes (voting for Crooks’ agents) led by Crooks, including some economists, is not too bright. One day this system must collapse. And it will within the lifetime of most here."

And then you will switch sides and continue bitching.
Anonymous | 03.22.08 - 9:05 pm | #

Missed Information writes:
what I find ludicrous is that people keep saying Fed Fed Fed Fed.
What is Fed supposed to do, magically transform us all into better people?

What is happening right now is this:
say I owe my neighbor 100 bucks but only have an old bicycle in my garage and no money. But I think it could fetch 100$ on garage sale - but then again, maybe not, maybe noone will want a rusty bicycle. But helpful Fed takes my bicycle and gives me a 100$ loan, so I pay my neighbor. Now I am sitting here scratching my ass waiting for someone who will buy my bicycle. Note that Fed wants 100$ back eventually.

This is where we are right now. So how exactly is Fed supposed to help me further? huh?
Missed Information | Homepage | 03.22.08 - 9:05 pm | #

ipodius writes:
This is where we are right now. So how exactly is Fed supposed to help me further? huh?

Your analogy is incorrect. The Fed will ask you to pledge your bike AND your garage as collateral for that $100. Now you are scratching your ass trying to figure out how not to lose your garage to the Fed because, if you don't pay, the Fed it going to take it and your bike and sell them both for $200 and stuff the money back into the general fund.
ipodius | 03.22.08 - 9:11 pm | #

Anonymous writes:
There was a comment on a pevious thread that the Roubini blog equivalent of conjure predicted that banks will be allowed to stabilize and THEN the market will be allowed to fall.

I guess this would coincide with the "out of ammunition" attribution Delong sees coming.
Anonymous | 03.22.08 - 9:11 pm | #

ipodius writes:
I guess this would coincide with the "out of ammunition" attribution Delong sees coming.

Not at all. It's very orderly which is all the Fed cares about...saving the financial system from a panic destruction. It does not care if a lot of people lose their shorts in the markets. And that is where everyone is wrong. This isn't about a bailout. It's about saving the biggest part of the global financial system to life to fight another day. The Fed is NOT Wall Street's bitch, no matter how much they think it is. They will stand by while the Dow re-adjusts to reality AFTER the system is stable.
ipodius | 03.22.08 - 9:14 pm | #

Anonymous writes:
Re: ...... The real game is, can Fed hold this marked-to-fantasy paper long enough for banks to raise sufficient extra cash to absorb the losses

Ok, we have a liquidity trap and banks are not going to be making money!
Anonymous | 03.22.08 - 9:16 pm | #

Anonymous writes:
Is that possible? Meaning is it possible to decouple the bank solvency problem from the overall market.
Anonymous | 03.22.08 - 9:17 pm | #

Anonymous writes:
"The Individualistic Capitalism of today, precisely because it entrusts saving to the individual investor and production to the individual employer, presumes a stable measuring-rod of value, and cannot be efficient--perhaps cannot survive--without one."

http://quotes.ino.com/chart/?s=N...NYBOT_DX& v=dmax

Case closed!
Anonymous | 03.22.08 - 9:18 pm | #

Major Tom writes:
ipodius,

The FED is taking the MBS as collateral.

The analogy should be - you never built the garage, but pledged it as collateral and the bank took it without regard to the structure being in place.

All the financials pledging their "garages" do not care if the fed comes to claim it, since it doesn't exist.
Major Tom | 03.22.08 - 9:18 pm | #

christofay writes:
I've been reading the Delong Blog for a few years, and he has never met a central bank action that he didn't like. While he didn't get up on a chair and applaud, he wad quite supportive of Greens'an's early 2000s interest rate policies. While Delong, of course, is more learned that I am about economics, what is the name of the situation where the less informed could see the mistake building while the greater informed carries out the mistaken act? The more I read over there at Gasping Reality, the more I'm scared of contemporary American consensus economic thinking
christofay | 03.22.08 - 9:22 pm | #

ipodius writes:
No Major Tom, that is not correct. The Fed is taking Aaa rated MBS as collateral, and OVER-collateralizing. The garage exists. The MBS is real. What you are arguing about is the value on the tranche versus the value in reality. And if it is going at .60 on the dollar, then the Fed takes that into account. So I'm not sure what the point is. The Fed would have given you $60 bucks unless you came up with another bicycle.

Your assumption about what the Fed is taking is wrong. It isn't taking the collateral pledged at face. So the Fed is now the pawnbroker of last resort. In fact, I'd tell the Fed to even discount the MBS further so that in the case of default, we could use the difference to fund Social Security.
ipodius | 03.22.08 - 9:23 pm | #

Anonymous writes:
Investors are looking for new hives.

Re: White Wilderness may have popularized the notion of lemming suicide, but it didn't originate it. The story had been popular lore for some time. Lemmings are cute little rodents, somewhat resembling hamsters, who live in arctic areas. Their population growth has a cycle, and every four years or so it grows to a huge level, and lemmings set out in a mass migration to find new places to live. And, since there are so many of them, there are sure to be mishaps -- the guys on the outside of the herd are pretty susceptible to getting pushed off a cliff or two. This means that for centuries, people have been seeing huge masses of lemmings traveling across the wilderness, often leaving a significant number of little lemming bodies behind. It's easy to see where the rumors got started.
Anonymous | 03.22.08 - 9:23 pm | #

Anonymous writes:
"They will stand by while the Dow re-adjusts to reality AFTER the system is stable."

That's what I assumed/hoped would happen.

I was just thinking when CNBC has to come up with a sound bite reason for the drop it would be yep, looks like "the fed ran out of ammunition."
Anonymous | 03.22.08 - 9:24 pm | #

FFDIC writes:
Economist
Wall Street - What went wrong
http://www.economist.com/ finance...ory_id=10881318
FFDIC | 03.22.08 - 9:27 pm | #

Troy writes:
where is the massive amount of financing going to come from to maintain the current level of real estate pricing?

AllenM, this chart that I made from the most recent Fed Flow of Funds report is IMV most descriptive, if you know what these particular "flow of funds" meant to the economy, 2003-2006.
Troy | 03.22.08 - 9:28 pm | #

ipodius writes:
Oh they'll think of something anon. Don't worry. And they'll be screaming for the Fed to do something, but there is nothing the Fed can do. Does anyone think they are so stupid that they don't see that there is nothing to be done about house prices? If you listen closely, all the suggestions point to stabilization, NOT to keeping prices afloat.
ipodius | 03.22.08 - 9:28 pm | #

Missed Information writes:
And if it is going at .60 on the dollar, then the Fed takes that into account.

no, Fed is giving 90c for MBS that market says costs 60c on a dollar.
Missed Information | Homepage | 03.22.08 - 9:29 pm | #

Anonymous writes:
"we could use the difference to fund Social Security."


“A lot of people in America think there is a trust – that we take your money in payroll taxes and then we hold it for you, and then when you retire, we give it back to you….but that’s not the way it works. There is no trust fund – just IOUs.”

George W. Bush , University of West Virginia, April of 2005

The only honest thing he has ever said and why inflation will be the chosen way out.
Anonymous | 03.22.08 - 9:30 pm | #

ipodius writes:
no, Fed is giving 90c for MBS that market says costs 60c on a dollar.

Really? And your source is?
ipodius | 03.22.08 - 9:30 pm | #

ipodius writes:
The only honest thing he has ever said and why inflation will be the chosen way out.

Actually, that's not even honest. It's a "pay as you go" program where the current payments are used to pay out the current recipients. The surplus is supposed to be put into a trust, but is always raped to pay for, well you know, to pay for things like a stupid, unnecessary quagmire of a war. But he left that part out because he went to HBS and that's what they teach you to do there.
ipodius | 03.22.08 - 9:34 pm | #

sk writes:

Your assumption about what the Fed is taking is wrong. It isn't taking the collateral pledged at face.
ipodius


There's a subtlety here that I note; from the NYFED website FAQ on the PDCF:


How will collateral be valued?

The collateral will be valued by the clearing banks based on a range of pricing services.


The Fed is relying on the clearing bank ( of the primary dealer) to value the collateral. The potential for collusion is enormous - given all that we know about these greedy a*holes its gonna happen.

-K
sk | 03.22.08 - 9:36 pm |