Monday, January 28, 2008

Debt Rattle, January 28 2008

Resorting to 'Zimbabwe Economics'

Learning comes at a price. When markets are rising, nobody learns anything. It’s when they go wrong that people put on their thinking caps and take instruction. And then, at Davos this weekend, up to the podium stepped Stephen Roach, acting like an old professor with an “I told you so” tone in his voice. “If we had been running our economies the old-fashioned way, for example, where saving and consumption were funded by income, maybe we wouldn’t be in this mess we are in now.” Roach went on to say that this mess “will dwarf the dotcom slump.”

As we’ve hinted, too, it is one thing to punish a few speculators with skin in the dotcom game. It is quite another to deliver a stern lesson to America’s entire middle class. The latter never liked school.

Spending on information technology was barely one sixth the spending on house building. But that’s only the beginning – because the dotcom bubble didn’t cause millions of householders to think they were a lot richer than they really were. It didn’t lead millions of families to borrow and spend far more than they could afford. And it didn’t entice bankers and investors into billions of dollars worth of losing positions. Naturally, Mr. Roach’s words didn’t seem to lift the mood at Davos. And the news coming out of the U.S. economy does little to lift American consumers’ moods either.

On Friday, the Dow sank back 171 points. What happened to the rally, investors asked themselves? Hadn’t the Bernanke helicopter squadron just dropped rates 75 basis points? Aren’t they warming up the engines for another run this week?[..]

A word to the wise: you can’t really make people wealthy by resorting to “Zimbabwe economics.” A society grows rich by producing things...and saving money. There is no other way. Cheaper credit won’t do it. More consumption won’t help. Printing money – and dumping it from helicopters – is a losing proposition. But we hope our financial authorities continue. At least it’s fun to watch. A trillion here...a trillion there...pretty soon you’re talking real money.

U.S. stocks are down about 10% so far this year...that’s about $1.5 trillion lost. U.S. housing stock is said to be down about $2 trillion. And losses from subprime, credit cards, home equity lines, rogue traders...and hanky panky...probably add up to another trillion or so. And let’s not forget the cost of the War Against Nobody in Particular – the war on terror...which costs a couple hundred billion.

And now, along comes...what’s this...a bi-partisan giveaway of tax rebates! Yes, it’s in today’s news. The Dems and the Reps have agreed to give taxpayers back some of their money. And Treasury secretary Paulson appeared in Congress telling them to get a move on. If they don’t get those checks out soon, it will be too late.

The pols are going to spend as much or more than ever. They were already running a $200 billion they couldn’t possibly give money back. And many of these “rebates” are said to be going to people who never paid anything in the first place. Still, they’re going to send out 117 million checks at a cost of some $150 billion. This is Zimbabwe economics...if you don’t have money, just print it. “Economic stimulus” they call it. But if they’re hoping to counteract the effect of trillions of dollars of lost wealth...they’re going to have to come up with more than $150 billion.

Ilargi: Looks like Bloomberg is not in a party mood today. The worst home sales year in -at least- 45 years. Ouch! Yikes! Stop hurting me!

I wonder what the White House script writers, preparing for tonight's State of the Union, will spin out of this one. Oh, I know, between all the misery, there's this: "For the year, the median price of new homes rose 0.2 percent.". We're saved!

Hey, wait a minute! Ain't all script writers supposed to be on strike? What happened to solidarity? I say: No Emmy's, No Oscar, No State of the Union!

U.S. Economy: New-Home Sales Drop to 12-Year Low
Purchases of new homes in the U.S. unexpectedly fell to a 12-year low in December, ending the worst sales year since records began in 1963 and signaling little prospect for a recovery.

Sales decreased 4.7 percent to an annual pace of 604,000, the Commerce Department said today in Washington. The median price dropped 10 percent from December 2006, the most in 37 years.

The dollar extended its drop as the figures spurred speculation the Federal Reserve will keep reducing interest rates. The report may also reinforce concern that declining home prices and stricter lending will lead to more foreclosures and hurt consumer spending.

"Today's numbers are a new blow,"said Chris Rupkey, a senior financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York, who forecast a decline to 613,000. "The broader economy is very, very close to falling over the edge. The Fed really needs to think aggressively."

Ilargi: No happy mood at the New York Times either:

Sales of New Homes Fell by 26% in 2007
Sales of new homes fell last year by 26 percent, the steepest drop since records began in 1963, the Commerce Department said on Monday. Last week, the National Association of Realtors reported that sales of previously owned single-family homes, a large portion of the overall housing market, suffered their biggest annual drop in 25 years.

Prices have also fallen sharply. In December, the median price of a new home fell to $219,200, down 10 percent from December 2006. For the year, the median price of new homes rose just 0.2 percent, to $246,900. But the median price of a previously owned single-family home fell for the first time in at least four decades, the National Association of Realtors said.

Last month alone, sales of new homes tumbled 4.7 percent, to a 604,000 annual rate, the smallest monthly sales figure since February 1995.

The Next Bubble: The "Economic Stimulus" Bubble
You see, I have been sitting on the sidelines for 4 - 5 years now, having been "Priced Out" of the market. I hate the idea of renting, as I have been told for many years that it is just throwing my money away. I didn't have much of a choice, and at the same time couldn't save much either, due to rent prices!!! So at 47 years old, I continue to rent. I continue to read, get angry, recover, and read some more. Waiting for the houses to come crashing down. I get further annoyed when I read about "How to create a Soft Landing".

I feel, due to the Disgusting Lending / Borrowing practices, that in fairness to the Responsible Borrowers, the prices need to come down another 40 - 50 %. I am priced out, and now the Geniuses of the Political and Financial entities don't want prices to come crashing down!!!! I find this Maddening and have started to lose Hope in ever owning a Home in a Middle Class Neighborhood. I guess that is what I get for being Responsible in My Borrowing Practices. I am far from finished, as far as getting to the bottom of what is Really going on. I see an "Economic Stimulus" Bubble forming.

My description of this Bubble is this:
  1. Keep lowering interest rates, driving up inflation beyond the so called 4.1% inflation rate of 2007. *I personally believe it to be around 8% per year, for the last 10 years or so.

  2. Cut Taxes, but continue to spend, will put more pressure on Devaluating and hence, Crashing the Dollar.

  3. Keep housing at prices at levels that are still too high, even after they have dropped 20 - 30 %.

  4. The stock markets in The Developed, Sophisticated Markets, will start to crumble.

  5. We will be experiencing Hyper-Inflation soon, within 1 year, followed by Hyper-Deflation once people have been beaten into submission in regards to their spending habits.

I am getting signs that this is a Deliberate act of Crashing the Dollar, Crashing the House Prices, Crashing the prices on most everything we produce in this country, in order to bring the dollar in line with the Chinese currancy and other Emerging Markets around the World. Since we cannot, without being unrealistic, compete with workers making a product compareable to ours, either the Asian workers pay needs to go up, or our pay needs to drop to more competitive levels.

We will then be told that our hourly pay/salary needs to be cut, or maybe just an emergence of a whole new currency, (As it will be less painful in the working publics eyes), than cutting everyones pay. Sort of going back 30 years, is what I am seeing. Then once currencies of the world are on a Level Playing field, all countrys markets will return to stability. In the meantime, Hang on for a Wild Ride coming, that is what this is pointing to.

The darker side of interest rate cuts
Interest rates are headed lower. But how low can they go?

The Federal Reserve surprised Wall Street earlier this week by cutting its fed funds short-term interest rate target by three-quarters of a percentage point, to 3.5 percent. The move had the effect of reducing rates on mortgages and home equity loans, and reassured investors that the Fed will do what it can to spur economic activity as long as the threat of recession looms.

But as much as Fed Chairman Ben Bernanke might like to keep the economy rolling by slashing interest rates, it's not clear how much room he'll have to do so. Two factors complicate the outlook for further interest-rate cuts: the hefty losses in the financial sector that are making banks less eager to lend money, and the prospect that lower rates will chase overseas investors away from the dollar, lowering the value of the greenback and boosting inflation. Adding to the case against deep rate cuts is the widespread perception that it was the Fed's rate-cutting zealousness after the last recession that led to the housing bubble that now threatens to derail the economy.

For now, all those worries aside, the market expects to see interest rates go lower. Given the scale of losses tied to the collapse of the housing bubble - the decline in real estate prices in coming years could cut household wealth by $4 trillion to $6 trillion, according to some estimates - economists say it's understandable that the Fed is doing what it can to support growth.

Stoneleigh: This is the beginning of deflation.

Trading Partners Fear U.S. Consumers Won't Continue Free-Spending Ways
Several arteries of wealth that have given consumers the wherewithal to spend are rapidly drying up. During the years of the real estate boom, Americans pulled more than $800 billion a year out of their homes through refinanced mortgages, home sales and home equity lines of credit. Falling housing prices have drastically shrunk that pool. A slowing job market has deprived spenders of the means to buy.
Now, fresh data shows that Americans have been tapping their credit cards aggressively, while increasingly falling behind on the payments.

"As they use up their available credit, they have no other source of spending," said Ellen Zentner, United States macro-economist at Bank of Tokyo-Mitsubishi in New York. "Credit cards are their funding of last resort."

From the end of 2005 through the fall of 2007, the share of consumer credit card debt that was delinquent ticked up to 4.3 percent, from about 3.5 percent, according to data from the Federal Reserve. From the beginning of 2006 through the end of last year, growth in the use of consumer credit cards surged to 7.4 percent, from 2.6 percent in annualized terms.

Other credit available to consumers has been shrinking sharply, according to an analysis by Ms. Zentner. The pool of unused credit — predominantly home equity lines of borrowing, bank loans and credit cards — was still growing at nearly 15 percent annually as recently as the fall of 2006. Now, with debt mounting, home prices falling and job growth slowing, that pool is diminishing at an 8 percent annual rate.

Ilargi: The part of the Stimulus Package that addresses Fannie and Freddie’s ability to buy jumbo loans is by no means settled. And it may be a real bad idea to begin with. Please see the opener of yesterday’s Debt Rattle:
Freddie Mac and Fannie Mae Quick Fix Could Cost Taxpayers
In a terribly misguided attempt to address mortgage market problems, Bush's stimulus plan will include a provision to up Freddie Mac and Fannie Mae's loan limits. The dangerous initiative is liable to leave taxpayers on the hook for billions (possibly trillions) of dollars.

Stimulus: Higher mortgage loan limits could be trouble
A component of the House's proposed economic stimulus package intended to help the troubled housing market could run into trouble in the Senate. Republican senators are gearing up to resist a provision that would give a bigger role to mortgage-finance companies Fannie Mae (FNM) and Freddie Mac (FRE), saying it poses too much risk to the U.S. financial system.

Fannie and Freddie keep money pumping through the home mortgage system by buying loans from banks and other lenders and packaging them for sale to investors.

A deal reached Thursday between House Speaker Nancy Pelosi and Republican Leader John Boehner of Ohio — and endorsed by the White House — would allow the two companies for one year to buy home loans up to 75% larger than the current limit of $417,000 in areas of the country with expensive home prices, such as California and the Northeast.

House lawmakers are still negotiating how high that limit should be, with Democrats pushing for nearly $730,000 and Republicans advocating $625,000, a Boehner spokesman said Friday

Stoneleigh says: This shift in social attitudes is likely to take root quite quickly when people realize how untenable their current situation has become. This particular version is transitory however, as it depends on continued access to easy credit to finance a second purchase. The fact that such a thing is still possible indicates that credit tightening has not yet progressed very far. Unfortunately, the new lower mortgage will probably still represent too large a burden for most in a relatively short space of time, leaving them vulnerable to a second foreclosure at a time when market conditions are such that they would be unable to repeat the process.

As an alternative, people may well rent a property before sacrificing their credit by allowing the one they purchased to go into foreclosure. This option would be more viable for most as it would mean eliminating their mortgage debt as opposed to merely reducing it.

A tipping point? "Foreclose me ... I'll save money"
A commenter on L.A. Land this morning writes, "I am one of these people. My condo has dropped in value from $520K in 5/06 when I bought it to $350K now. My ARM payment will probably go up $900 per month in June.

"Despite all this, I would be willing to stay if the bank would refi the loans to a 30 year fixed, but since I'm not a 'hardship' case they'd apparently rather foreclose. I guess the only way I could qualify for loan mitigation is to get my boss to fire me, stop making payments, and wreck my credit. In fact, my bank won't even talk to me until I miss a couple of payments.

"I have purchased a cheaper place in a nearby area now, while my credit is good, and will stop making payments on house #1 after house #2 closes. I know the foreclosure will be on my credit for 7 years, but I will have saved a lot of money.

"I realize I agreed to the deal when I signed the mortgage papers, but I am within my rights to walk away from a bad deal and suffer the consequences, just as many corporations write down billions of dollars of debt, lose money for their shareholders, and lay off people as a result of their bad decisions.

Ilargi: For all the stories of people simply ‘walking away’ from their homes (also called Jingle Mail, or the newest term, Intentional Foreclosure , don’t let’s forget all those who’ve refinanced in the past few years, often to take out equity, and turned their non-recourse loan into a recourse one. Now that was not smart!

Don’t Make The California Refinance Mistake
Central to the mortgage bailout plan is the refinance of adjustable rate mortgages to fixed rate mortgages. There is even a plan to nearly double the “conforming” loan limit to help jumbo mortgages refinance. But before you jump in, make sure you are not making the California Refinance mistake.

California homeowners have been making the “refinance mistake” as long as the bubble has been going on. The big mistake homeowners make is turning a ”non-recourse” second loan into a “recourse” loan by refinancing it. A non-recourse loan is a loan that the bank can only look to their secured interest. In other words, they can only foreclose, they cannot get a deficiency judgment and chase you into bankruptcy collecting it. THIS IS HUGE! You can walk away from a non-recouse loan.

So how is a second mortgage a non-recourse loan? Simple, it was “purchase money” for your home. A purchase money loan is one where the money went from the lender, to escrow, and then to the seller or to pay purchase closing costs. In California purchase money loans made on your home (note: not second home or investment properties) are non-recourse. It’s simple as that.

The mistake comes when you refinance your second purchase money mortgage. Because it is no longer a “purchase money” loan a refinance transforms it into a “recourse” loan. That means the lender will chase you into bankruptcy collecting it. Or worse, they will sell it to a debt scrounger, the worst form of debt collector. Your life will be hell if it falls into their hands.

The black box economy
Despite the anxiety, nobody is stockpiling canned goods just yet. The prevailing assumption in today's economy is that recessions and bear markets come and go, and that things will work out in the end, much as they have since the Great Depression. That's because there's a collective confidence that the market is strong enough to correct itself, and that experts in charge of the financial system will understand how to mount a vigorous defense.

Should we be so confident this time? A handful of financial theorists and thinkers are now saying we shouldn't. The drumbeat of bad news over the past year, they say, is only a symptom of something new and unsettling - a deeper change in the financial system that may leave regulators, and even Congress, powerless when they try to wield their usual tools.

That something is the immense shadow economy of novel and poorly understood financial instruments created by hedge funds and investment banks over the past decade - a web of extraordinarily complex securities and wagers that has made the world's financial system so opaque and entangled that even many experts confess that they no longer understand how it works.

Unlike the building blocks of the conventional economy - factories and firms, widgets and workers, stocks and bonds - these new financial arrangements are difficult to value, much less analyze. The money caught up in this web is now many times larger than the world's gross domestic product, and much of it exists outside the purview of regulators.

Some of these new-generation investments have been in the news, such as the securities implicated in the mortgage crisis that is still shaking the housing market. Others, involving auto loans, credit card debt, and corporate debt, are lurking in the shadows.
The scale and complexity of these new investments means that they don't just defy traditional economic rules, they may change the rules. So much of the world's capital is now tied up in this shadow economy that the traditional tools for fixing an economic downturn - moves that have averted serious disasters in the recent past - may not work as expected.

In tell-all books, financial blogs, and small-circulation newsletters, a handful of insiders have begun to sound the alarm, warning that governments and top bankers may simply no longer understand the financial system well enough to do anything about it.

60 Minutes Legitimizes Walking Away
There was a nice expose on CBS 60 Minutes this weekend called House Of Cards. I seldom watch TV but happened to catch it.

Steve Kroft reports on how the U.S. sub-prime mortgage meltdown, in which risky loans drove a housing boom that went bust, is now roiling capital markets worldwide.

Steve Kroft: "It sounds complicated but it's really very simple. Banks lent hundreds of billions of dollars to homebuyers that can't pay them back. Wall Street took the risky debt, dressed it up as fancy securities and sold them round the world as safe investments. If it sounds a little bit like a shell game or a ponzi scheme, in some ways it was".

"Matt and Stephanie Valdez say they knew exactly what they were doing when they bought this small two bedroom house for $355,000."

....They cannot refinance because the value of the house fell below the existing mortgage. They say they can afford the higher payments but see no point in making them.

Matt: The value of the house keeps going down and the payments keep going up. Where's the logic in that?

Stephanie: Why make a $3200 a month payment on a 1200 square foot home? It makes no sense.

Steve Kroft: But that's what you agreed to do when you bought the house.

Stephanie: Fine if the value was going up. The value is going down.

Steve Kroft: You are saying essentially you are going to stop making payments.

Stephanie: The only advice we've gotten so far is to walk away.

What 60 minutes described was a Beautiful Model For Fraud. That model is now imploding as all fraudulent schemes eventually do. And for those on the fence, 60 Minutes may just have legitimized it walking away.

European Central bank deeply split on immediate rate cut
A serious conflict at the European Central Bank has broken into the open after Spain's finance minister revealed that a number of board members are pushing for an immediate rate cut in light of the emergency action by the US Federal Reserve week.
Pedro Solbes, the former EU monetary commissioner and now Spain's deputy premier, confirmed persistent reports that there had been a tug-of-war at the ECB headquarters, belying the facade of unity.

"An important debate is going on within the European Central Bank over whether or not to cut interest rates," he told the television station Telecinco. While he did not elaborate, it appears that a bloc of governors from southern Europe and probably Ireland are deeply at odds with the hawkish anti-inflation stance of the German Bundesbank.

Jean-Claude Trichet, the ECB's president, gave no hint of the disagreements in a talk at the World Economic Forum in Davos. He stuck rigidly to the script that the chief threat to the eurozone is inflation, which reached 3.1 percent in December -- the highest since the launch of the euro. "There is one needle in our compass -- price stability," he said.

This is "no time for complacency" over inflation, he said, implicitly playing down the danger of a credit implosion. The ECB continues to hold rates at 4 percent. It has made no change since the credit crunch hit in August. Axel Weber, the hard-line Bundesbank chief, went further, insisting that rates are "still on the accommodative side and in no way restrictive."

This may be true for Germany, which is lean after driving down wages, but it is another matter for Latin-bloc countries. Spain's property bubble has burst, with prices falling in most of its cities.

The Profile of a Third World Country: How Bush Destroyed the Dollar
It is difficult to know where Bush has accomplished the most destruction, the Iraqi economy or the US economy.

In the current issue of Manufacturing & Technology News, Washington economist Charles McMillion observes that seven years of Bush has seen the federal debt increase by two-thirds while US household debt doubled. This massive Keynesian stimulus produced pitiful economic results. Median real income has declined. The labor force participation rate has declined. Job growth has been pathetic, with 28% of the new jobs being in the government sector. All the new private sector jobs are accounted for by private education and health care bureaucracies, bars and restaurants. Three and a quarter million manufacturing jobs and a half million supervisory jobs were lost. The number of manufacturing jobs has fallen to the level of 65 years ago.

This is the profile of a third world economy.

The "new economy" has been running a trade deficit in advanced technology products since 2002. The US trade deficit in manufactured goods dwarfs the US trade deficit in oil. The US does not earn enough to pay its import bill, and it doesn't save enough to finance the government's budget deficit.

To finance its deficits, America looks to the kindness of foreigners to continue to accept the outpouring of dollars and dollar-denominated debt. The dollars are accepted, because the dollar is the world's reserve currency.

At the meeting of the World Economic Forum at Davos, Switzerland, this week, billionaire currency trader George Soros warned that the dollar's reserve currency role was drawing to an end: "The current crisis is not only the bust that follows the housing boom, it's basically the end of a 60-year period of continuing credit expansion based on the dollar as the reserve currency. Now the rest of the world is increasingly unwilling to accumulate dollars."

Paul Craig Roberts was Assistant Secretary of the Treasury in the Reagan administration.

Ilargi: Naked Capitalism talks about the ratings agencies ‘hesitancy’ in downgrading the bond insurers. He feels they will comply with pretty much everything that’s thrown at them. I’ve written before that I think they may not, because they cannot. I also wrote that I agree that the pressure on them must be enormous. Still, they have a huge confidence problem with the market as a whole, and more faulty ratings may finish them off in that regard. They may opt to come more (or less) clean, just so people start trusting them again. It depends how deep they see the misery unfolding if they do give the monolines the CCC or lower that they deserve. It also depends, perhaps, on how gullible they think big players in the market are. That's a risky way of looking at things, however.

What Happened to the Promised S&P and Moody's Review of MBIA and Ambac?
....the markets have already given a huge vote of no confidence in the debt of Ambac and MBIA. Their credit default swaps are trading at distressed level. Distressed means "serious risk of bankruptcy." Now even if you think the market reaction is a tad histrionic, given the rating agencies' track record with structured credits, I would place my faith in the markets' perception of risk. And even if you are merely democratic and split the difference, say, between an AAA and a CCC (and even CCC may be a tad generous), you get a BBB. A downgrade of that magnitude, even while still leaving the bond guarantors with an investment grade rating, makes their guarantees effectively worthless and will create chaos. Barclays estimated that a downgrade of MBIA and Ambac to a mere single A would produce $143 billion of losses to banks and brokerage firms.

Consider further that the amount Dinallo is seeking is likely to prove insufficient. His target of $5 billion now and an additional $10 billion down the road sounds very much in keeping with hedge fund Pershing Square's estimates. But those were made based on end of third quarter data. A current requirement is certain to be lower. And other experts have come up with mind numbing requirements. Rating agency Egan Jones said the bond insurers as an industry need $200 billion to keep their AAA ratings. Even if that is high by, say, 400%, it is still a vastly bigger total than Dinallo is seeking.

But the name of the game is getting the rating agencies not to downgrade the big bond insurers. There already is evidence of a tacit understanding that there will be no downgrades while the negotiations are in play, particularly since Moody's and S&P are participating.

And the very fact that the agencies are part of the process means that they will be subject to both subtle and explicit pressure to knuckle under and accept any package, no matter how inadequate.

Bummer Monday: "Who is the replacement buyer?"
OK, if your life is ruled by how the markets are likely to open (hint: lower), you haven't been paying attention to our advice to chill out, gently slide away from paper-based assets and into things you can hold - like gold (up again this morning) and silver (ditto at press time) and things that can be used to actually make something. Asian markets were the overnight center of fear, although Europe this morning is also a little, ah, how do I say this? Disappointing...yeah, that's a good one: disappointing.

Not telling how many billions the Fed threw at the market last week via the Plunge Protection Team, but that 'emergency rate cut' didn't buy much: About a110-point gain or the week.
If you've missed past columns around here, you might not remember one of my favorite mantras: "Who is the replacement buyer?"

If you have a whole bunch of Baby Boomers about to retire and selling off stock to fund their retirement dreams, it stands to reason that there must be at least an equal number of buyers ready to wade in to equities. The simple math says if there are fewer buyers than sellers, prices will go down - a nice way of saying your retirement dream may be hosed.

Whenever I talk to the kids, I ask "What are you buying?" The eldest is saving for her first house. The others are content to rent - and invest money in stocks? "Dad, are you crazy? We have student loans to pay off..." Oh yeah, those.

Well, that's the whole economic problem in a nutshell. Where is the replacement buyer?

Ilargi: Fortis recently bought highly coveted Dutch bank ABN-AMRO. That cost them some serious dough, putting them in a tight position. Now come the write-downs. Wonder what the shareholders are thinking.

Fortis to write off billions in subprime losses - report
Belgian-Dutch bank insurer Fortis NV will write off between EUR1 billion and EUR2 billion from its subprime portfolio, Belgian newspaper De Standaard reported Saturday, citing a well-informed source.

The bank's share price dropped 10.9% Friday at EUR13.21 in Amsterdam, on market rumors it might be considering a profit warning and a rights issue.

Fortis said Friday it was not aware why the shares moved so heavily.

Saudi to debate riyal-dollar peg
Saudi Arabia's finance minister and central bank governor will appear before a council to discuss the riyal's peg to the US dollar and a surge in inflation, a council member said yesterday. Inflation in Saudi, which pegs its riyal to the dollar, rose to a 16-year high of 6.5 per cent in December, partly driven by a rise in global commodity prices and the declining US currency.

The Shura Council, whose members are appointed by King Abdullah, will meet Finance Minister Ibrahim Al Assaf and Saudi Arabian Monetary Agency governor Hamad Saud Al Sayyari on February 10, Mohammad Al Zulfa said.

"The finance minister and the central bank governor were invited to debate these issues, discuss this dollar peg debate, its repercussion and what the government plans to do about it," Zulfa said. The 120-member Shura can review draft legislation and make recommendations, which are not binding on the government.

Saudi Arabia has been trying to offset the effect of higher prices on its 25 million people through measures such as subsidies on imported rice and baby milk, introduced last month by order of the king.

Inflation is now above official interest rates. The negative real interest rate environment could deepen if the Fed cuts again when it meets this week.

Emergency rate cut revives talk of "Bernanke put"
"Disclosures that unwinding of rogue trades also contributed to the weekend meltdown have nurtured perceptions that a new 'Bernanke put' has appeared," Morgan Stanley economists Richard Berner and David Greenlaw wrote on Friday, referring to Ben Bernanke, the chairman of the central bank.

The idea of a put reflects concerns that the rate cut shielded investors from a stock sell-off in the same way traders use a "put" option to limit losses on a security.

Former Fed Chairman Alan Greenspan faced long-standing criticism that he pursued a policy of protecting markets, a view that became popular after the central bank cut interest rates sharply in the wake of the collapse of Long Term Capital Management in 1998. Critics fear that a similar impression of the Bernanke-led Fed could be a costly one to correct, and might mean higher interest rates in the future than would otherwise be required.

As safe as houses? Dutch history suggests not
The house sugar merchant Cornelis Sasbout built in 1617 at number 150 on Amsterdam's Herengracht canal tells a cautionary tale about investing in property -- prices fluctuate wildly, but are ultimately flat. From boom to bust, the plot Sasbout bought for 4,600 guilders (2,100 euros) and which today might sell for several million euros on the prestigious canal, will in the long run always revert to some kind of price equilibrium.

This can be seen in a unique index dating back 350 years, drawn up by Piet Eichholtz, a real estate professor at Maastricht University using records of house prices on the canal. Even for people with no intention of buying property, it has been cited by Yale economist Robert Shiller for its reflection of the inexorable logic that bubbles always burst.

Just now for Eichholtz, the arrow is pointing down. He says home-owners worldwide may need to brace for double-digit losses in once-booming markets, and even more in places with low birth rates like eastern Europe as well as Japan and South Korea. "I'm really concerned about housing markets where the demographics look bad," he said. "Then prices can really fall a long way."

His Herengracht index came to prominence in 2005 when Shiller, whose book "Irrational Exuberance" forecast the 1990s stock market bubble would burst, picked up on it as an ill omen for the U.S. house market. Shiller and fellow economist Karl Case did the pioneering research in the 1980s that produced the S&P/Case-Shiller index of the U.S. housing market which has shown big recent falls.

Eichholtz says what makes his index stand out from house price histories in other cities is what he calls "constant quality" -- the Herengracht has always been prime real estate. The index corrects for rising consumer prices but not wages. Sasbout's canalside plot doubled in value over the next 50 years in one of the world's first housing bubbles, as immigrants flocked to the booming hub of the richest trading empire during the Dutch "Golden Age".

Ilargi: What if the targeting of African Americans by subprime lenders becones an election issue? It will if community leaders play their cards properly. Could be interesting.

US blacks see 'financial apartheid' in subprime crisis
They had small means and big hopes of owning a house. But African-Americans snared in the US mortgage crisis have seen the American dream turn into a nightmare many call "financial apartheid." The storm triggered by risky "subprime" loans has left many in ruins, forced out of their modest homes and furious at falling victim to financial dealings that have taken a particular toll on minority families.

"People of color are more than three times more likely to have subprime loans," concluded the organization United for a Fair Economy in a recent report which estimated that minorities have seen between 163 billion and 278 billion dollars of their equity go up in smoke since 2000.

With its weakened economy and a large black population more used to renting, Cleveland has become a poster child of the subprime crisis in a country where some 2.1 million borrowers are behind on their mortgage payments. City officials estimate that foreclosures have swallowed some 70,000 homes and turned entire neighborhoods into ghost towns. The city has responded by suing lenders, accusing them of targeting black borrowers and steering them to the loans granted with few formalities and at hefty interest rates to people with poor credit histories.

In this city where nearly 27 percent of the population lives under the poverty line -- about 20,000 dollars a year for a family of four -- many have a friend, a cousin, a brother, a co-worker or a neighbor who lost a home because they could no longer make their monthly payments once their adjustable rates jumped.

"Cleveland, Detroit, Baltimore (are) cities where lots of people of color live and what do they have in common? They are hit by the foreclosures meltdown. Is it a coincidence?" said Jesse Tinsley, who lives in the low-income Mount Pleasant neighborhood.
"When the wave of foreclosures blighted our neighborhood, members of our community rang the alarm. Nobody did anything. Now that white suburbs are hit, the city hall discovered foreclosures," he said.

"The mayor didn't do anything for our community for four years, they said 'they deserved it.'

SIVs Must Refinance $70 Billion This Year, Merrill Lynch Says
Structured investment vehicles have $70 billion of medium-term debt maturing this year, according to Merrill Lynch & Co. analysts.

Dresdner Bank AG's K2 Corp., Bank of Montreal's Links Finance Corp. and nine other SIVs have to repay $21 billion of medium-term notes before April, Merrill analysts wrote in research dated yesterday. The figures are based on SIVs that haven't been bailed out by banks.

SIVs, companies that use short-term debt to buy higher- yielding assets, have been unable to borrow since August as the collapse of the subprime market caused investors to shun securities linked to mortgages.

U.S. Treasury Secretary Henry Paulson initiated talks to set up a fund to avert a firesale of SIV assets further roiling credit markets. Banks abandoned the initiative after cutting SIV assets to about $282 billion from a peak of $400 billion last year, based on Standard & Poor's data.

Refinancing "is likely to remain a concern for non-bank sponsored SIVs this year," wrote Merrill analysts led by Alexander Batchvarov in London. "The influence of SIVs on the overall structured finance market is likely to remain negative."

Banks led by Citigroup Inc. in New York and London-based HSBC Holdings Plc are bailing out their funds, while non-bank SIVs are selling assets, reorganizing or going out of business.


George in Vermont said...

"I concur. We're all still here - at least I am - and I think I hear heavy breathing out there so I don't think we're alone, but this is all way above my head and I don't plan on commenting much.

It is however extremely educational and useful to have this information and it is influencing my plans personally. We're selling our house in Vermont (and ditching our plans to move to Holland permanently as the dollar is in the toilet over there), and looking for a place in New York State instead.

But I'm now considering just renting for the next two years while everyone watches the value seep out of the cracks of their inflated homesteads.

It's scary to think that our deposits could be at risk, a la Argentina. I doubt the FDIC has the ability to bail out every bank in the country simultaneously."

Anonymous said...

You say there is a huge 'shadow economy' created with these derivatives that is outside the normal control of the fed (and presumably other central banks). I'm wondering if it has the same problems as the 'known' economy ie. excess liquidity, inflation etc. and if so does is there any control over it or is it out of control. Also will it export these problems around the world (to those banks, investors involved) and could it be exporting those problems in fact faster than they are appearing in the local US economy. For example the US government and other parties appear willing to bail out their local investors, banks etc. to some extent but when the problems occur overseas the US won't even think of doing anything about it. So the pain could be spread out until everyone starts to get into trouble.

Ilargi said...


First, if you get a handle of some sort, it's easier to communicate; if there are multiple people signing in as anonymous, it gets confusing. By the way, people mailed us saying commenting was hard, but I haven't been able to reproduce the difficulties.

Then, we did not say anything about the shadow economy, that was a Boston Globe article. But yes, you are right in thinking problems there will spill over into the 'normal' economy. And they look to be huge.

The derivatives market, much of which is 'over-the-counter', meaning there is no marketplace for it and no oversight, swelled to over $700 trillion in 2007. Well, that is by some estimates; some more conservative voices say $500 trillion; still good chump change.

I think we need to look at the growth rate it had last year, which according to the Bank for International Settlements, the central bank for central banks, was 27%.

That tells me that at least for a substantial part of the 'players' in that market, it's time to play double or nothing at the crap table. To cover their losses, they issue more paper all the time, no doubt at ever higher interest rates. And that never goes right.

In short, that means a lot of this 'capital' (which in reality is not very real) will vanish into the same void it was born in, never to be heard from again. And that in turn is why Stoneleigh and I say that inflation is out of the question, other than some very short term spurt.

The total money supply is about to decrease so fast and so much, faster than it can be 'printed', that deflation is the only possible result.

For now, all that 'money' is still circulating (though much of it is locked away in vaults), giving the idea that there is much more money than there really is. When it comes out of hiding, and is shown to wear no clothes, all assets will drop in value faster than you can imagine.

This will happen in a cascading dominoes sort of way; one revelation will lead to another. The write-downs so far by Wall Street will pale, to a very white shade, in comparison.

Needless to say, if for instance twice the $60 trillion world GDP disappears overnight, there will be trouble. And that will be less than 20% of outstanding derivatives. It could get much worse.

george in vermont said...

Re: "Concurring" above... I had tried to post that in yesterday's comments section to agree with the fella who expressed his appreciation for your work, and who said that it would take a little while for the comments to get up to speed.

Anyway, as long as I'm here I'll mention that I used to live at Herengracht 164, a few doors down from the house mentioned in the article. Very nice spot on the canal there, near Dam Square.

I'm just back from a couple of months in Amsterdam where we had thought of returning to live. Unfortunately the dollar is so low, and the home prices so high, that we would take too big a hit in our standard of living to make the move at this time. So, post-peak planning scenario C is to move closer to a river and a train and stay in the Northeast. We are too far out here in the woods in Vermont if we were really to experience a transportation fuel crisis. I would feel stranded.

Anywho, I'm blabbering, keep up the good work!