Thursday, February 14, 2008



By TheBigPicture | 14 February 2008

Signs Of Things To Come...
Overview: Failed muni bond auctions deepen crises
Dave Shellock in London and Michael Mackenzie in New York, FT, February 13 2008

"When an asset like real estate becomes overvalued, even if you drop interest rates to zero, you can't force consumers to borrow more, because they've already borrowed too much. Nor can you force lenders to lend, because they're already puking on 'bad paper.' It's called a liquidity trap."
-Bob Campbell, San Diego Real Estate Timing

"The Federal Reserve's interest-rate cuts last month have failed to lower borrowing costs for many companies and households, increasing the chance of further reductions from the central bank.

"Companies are
paying more to borrow now than before the Fed reduced its benchmark rate by 1.25 percentage point over nine days in January, based on data compiled by Merrill Lynch & Co. Rates on so-called jumbo mortgages, those above $417,000, have increased in the past month, making it tougher to sell properties and risking further and steeper price declines."

"[Monday] night, the lead story on ABC evening news (World News) was ‘though the Fed has cut interest rates sharply in recent weeks, banks and credit card companies are hiking rates on consumers.’"
[[But of course; that's what the Fed intended all along, a steepening of the credit curve so the banks could get whole on the backs of the lowly consumer— you surely didn't think those cuts were for our benefit did you(!?!) stupid consumer! We get all of the wonderful inflationary effects of rate cuts— but none of the economic benefits.: normxxx]]

Chase, Bank One and Bank of American were cited. The ABC News reporter said banks are hiking consumer interest rates and fees to cover losses on their crappy paper.
[[Yes, it’s that blatant and transparent.: normxxx]]

Tigger Economics

Abstract: Housing and Monetary Policy

Since the mid-1980s, monetary policy has contributed to a great moderation of the housing cycle by responding more proactively to inflation and thereby reducing the boom bust cycle. However, during the period from 2002 to 2005, the short term interest rate path deviated significantly from what this two decade experience would suggest is appropriate. A counter-factual simulation with a simple model of the housing market shows that this deviation may have been a cause of the boom and bust in housing starts and inflation in the last two years. Moreover, a significant time series correlation between housing price inflation and delinquency rates suggests that the poor credit assessments on subprime mortgages may also have been caused by this deviation. (John B. Taylor, Stanford University, September 2007, Full Paper)

Click Here, or on the image, to see a larger, undistorted image.

Click Here, or on the image, to see a larger, undistorted image.

REAL Retail Sales Fall to 2003 Levels: Thursday, February 14, 2008

This is the first negative Real Retail Sales number this cycle. This strongly suggests a US recession is either underway or due any month now. And that's using CPI as the inflation adjustment factor. It's well understood amongst the more economically sophisticated readers that CPI understates inflation.

In today's WSJ, Art Laffer critiques the stimulus package:

"In this world of ours, those resources going to the rebate recipients don't come from the Tooth Fairy. They have to come from workers and producers. If the resources come from workers and producers who thereby receive less for their work than they otherwise would have received, won't they in turn spend less? Of course they'll spend less, and the people who now supply them with less will also spend less, and so on down the line."

Now, I have no real love of this stimulus package— why $300? Why not $3,000 or $3,000,000?— however, since it was written, by the father of supply side economics, I knew there had to be something amusing to be found in it. Art Laffer did not disappoint:

As my former colleague and friend Milton Friedman liked to say, "There's no such thing as a free lunch," and this rebate is exactly what he meant. The net effect is that the reduction in demand from those who pay the real resources will be exactly the same size as the increase in demand from the rebate recipients. It's sad but true. Income effects always net to zero in a closed system."

[ Normxxx Here:  A-a-ah; but is it a closed system!?! So far, the rest of the world, especially the Chinese, have been good enough to underwrite our excesses!  ]

A rather unintentional howler. You see, one of the arguments the Supply-Siders have put forth is that tax cuts pay for themselves. (This has since been thoroughly debunked).

That's rather ironic: The latest bunch of free-lunchers, are being called out as, well, a bunch of free-lunchers, by the original free-luncher! Apparently, its only a free lunch if it does not involve tax cuts— if it involves spending only.

More Humor...
"The lobbying group representing homebuilders is cutting off contributions to federal congressional campaigns, saying lawmakers and the Bush administration have not done enough to stabilize the housing market.

The National Association of Home Builders said Tuesday its political action committee has decided to stop making contributions to candidates for Congress
"until further notice."

Since 1990, the trade group has given nearly
$20 million to federal candidates, with 35 percent going to Democrats and 65 percent to Republicans, according to the Center for Responsive Politics.

Lawmakers and the Bush administration,
"have not adequately addressed the underlying economic issues that would help to stabilize the housing sector and keep the economy moving forward," the trade group's president, Brian Catalde said in a statement. "More needs to be done to jump-start housing and ensure the economy does not fall into a recession."

Navigating the Rate-Freeze Maze via the WSJ:

"As the Bush administration announced a fresh plan to aid homeowners overburdened by their mortgages, initial figures suggest much-touted earlier efforts have done little to help most troubled borrowers.

"[The] earlier plan, brokered in December by the Treasury Department, called for the mortgage industry to freeze interest rates or expedite refinancing for potentially hundreds of thousands of subprime borrowers, so long as they were current on their payments. In a companion move, the administration announced a toll-free number for homeowners,
but the hotline has provided counseling to just 36,000 borrowers in the past two months, and representatives have suggested loan workouts for fewer than 10,000 of them— a small fraction of borrowers in need...

"The preliminary numbers throw into sharp relief the difficulty of finding a workable solution to the housing crisis, with
hundreds of billions of dollars in potentially troubled loans flowing through the financial system and foreclosures hitting [record] highs. Adjustable rates on some two million subprime mortgages are expected to rise in the next two years, raising the specter of further delinquencies and more financial turmoil."

No comments:

Post a Comment