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Tilting at Windmills

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September 20, 2007
By: Kevin Drum

HOLD ON TO YOUR WALLETS....Earlier today I was wondering if the Fed had reduced interest rates so dramatically because it believed things were even worse than the rest of us thought. I guess so:

Losses from sub-prime mortgages have far exceeded "even the most pessimistic estimates", US Federal Reserve chairman Ben Bernanke has said.

....Mr Bernanke told the [House Committee on Financial Services] that US mortgage woes were set to continue — especially with adjustable rate mortgages (ARMs). Proceedings for about 320,000 foreclosures — or repossessions — were begun in each of the first two quarters of 2007 he said, against an average of 225,000 per quarter in the past six years.

Blecch.

Kevin Drum 9:03 PM Permalink | Trackbacks | Comments (44)

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Comments

The Fed is between a rock and a hard place. If interest rates don't go down, homeowners and anyone holding mortgage debt is in trouble. But if they do go down, the dollar drops like a rock, as the US dollar becomes a very bad investment for foreigners.

Posted by: Joe Buck on September 20, 2007 at 9:26 PM | PERMALINK

Thank you, Kevin. As Roger Lowenstein said it so convincingly in the NYTimes Magazine 9/2/07--

It was John Maynard Keynes who observed the paradox of securities markets: their very liquidity, which investors perceive as a safeguard, creates the conditions for disaster. “Each individual investor flatters himself that his commitment is ‘liquid,’ ” Keynes wrote, and the belief that he can exit the market at will “calms his nerves and makes him much more willing to run a risk.” The catch is that investors, collectively, can never exit in unison. Whenever they try, panic and losses are the sure result. Once, you had to be a hedge-fund player to experience such a trauma. Now, thanks to the dubious wonders of financial engineering, home buyers are exposed to the very same risks.

Posted by: consider wisely always on September 20, 2007 at 9:26 PM | PERMALINK

The worst is yet to come. ARM resets exceed the current levels for the next year then start dropping off a bit.

Check out ml-implode.com

Or for some Southern California specifics, Dr. Housing Bubble:

www.drhousingbubble.blogspot.com/

Check out the "Real Homes of Genius" at Dr. Houseing Bubble, they're pretty stunning.


AJ

Posted by: aj on September 20, 2007 at 9:36 PM | PERMALINK

Here's a thought. Since everything the US does affects all the rest of us throughout the world, and we have to suffer from every bad policy decision, how about letting us vote in your elections?

Posted by: John de Hoog on September 20, 2007 at 9:40 PM | PERMALINK

Joe Buck:
You forgot one thing, just because the Fed lowers rates doesn't always mean mortgage rates will go down. In fact there is speculation they could go higher.

Posted by: Joe Klein's conscience on September 20, 2007 at 9:45 PM | PERMALINK

The message is: Don't bother to save any money - no point in it - since interest rates are going to be rock bottom and inflation will be high - spend what you got left while you can!! Trouble is: 1) There isn't much left anyway, and 2) When we get done with those last few hits on the crackpipe it will be 2009 and it will be as bad or worse than the 81-82 recession with 10%+ unemployment.

Posted by: Doc at the Radar Station on September 20, 2007 at 9:45 PM | PERMALINK

Wish I could make an intelligent comment about all this. I keep reading and reading and still feel like a first grader when it comes to what's going on now. Here's an article that will probably make a lot of sense to most of you. I've also seen info here that isn't in mainstream media. A sample:

"For weeks we’ve been saying that the banks are in trouble and do not have the reserves to cover their losses. This notion was originally pooh-poohed by nearly everyone. But it’s becoming more and more apparent that it is true. We expect to see many bank failures in the months to come. Prepare yourself. The banking system is mired in fraud and chicanery. Now the schemes and swindles are unwinding and the bodies will soon be floating to the surface.

“Structured finance” is touted as the “new architecture of financial markets.” It is designed to distribute capital more efficiently by allowing other market participants to fill a role which used to be left exclusively to the banks. In practice, however, structured finance is a hoax; and undoubtedly the most expensive hoax of all time. The transformation of liabilities (dodgy mortgage loans) into assets (securities) through the magic of securitization is the biggest boondoggle of all time. It is the moral equivalent of mortgage laundering. The system relies on the variable support of investors to provide the funding for pools of mortgage loans that are chopped up into tranches and duct-taped together as CDOs (collateralized debt obligations). It’s madness; but no one seemed to realize how crazy it was until Bear Stearns blew up and they couldn’t find bidders for their remaining CDOs. It’s been downhill ever since.

The problems with structured finance are not simply the result of shabby lending and low interest rates. The model itself is defective."

More here:

U.S. banks brace for storm surge as dollar and credit system reel, Whitney, Online Journal

Posted by: nepeta on September 20, 2007 at 9:48 PM | PERMALINK

Wait, have GOP contributors been made whole yet?

Posted by: CarlP on September 20, 2007 at 9:52 PM | PERMALINK

I was looking through the Treasury Department's senior staff list today, and guess who is Senior Adviser to the Under Secretary for Domestic Finance

Matthew Scogin

Matthew Scogin serves as the Senior Adviser to the Under Secretary for Domestic Finance. In that capacity he provides counsel on key policy matters including: domestic finance, fiscal policy and operations, governmental assets and liabilities, and related economic and financial matters.   

Prior to joining Treasury, Mr. Scogin worked as a fiscal policy adviser for Governor Mitt Romney in Boston, Massachusetts. Other previous work experiences include Healey Development, the 2004 Republican National Convention in New York, and State Representative VanderVeen in Michigan.

A native of Portage, Michigan, Matthew graduated from Hope College in Holland, Michigan in 2002 with degrees in economics and political science. He went on to earn a Masters in Public Policy from the Kennedy School of Government at Harvard University in 2005. His graduate studies included a joint project with the Heritage Foundation analyzing the savings behavior of Americans. After finishing graduate school, Matthew spent 12 months in Germany as a fellow with the Robert Bosch Foundation studying unemployment and labor market policy.

Just the guy to be advising on our domestic financial matters.  Where do they get these guys?  I could see this happening in a small state, but this is a top post in a core deportment of the federal government.   There ought to at least be some political hay in pointing this sort of thing out. 

Posted by: stefan on September 20, 2007 at 9:56 PM | PERMALINK

I was looking through the Treasury Department's senior staff list today, and guess who is Senior Advisor to the Under Secretary for Domestic Finance?

Matthew Scogin

"Matthew Scogin serves as the Senior Adviser to the Under Secretary for Domestic Finance. In that capacity he provides counsel on key policy matters including: domestic finance, fiscal policy and operations, governmental assets and liabilities, and related economic and financial matters.

Prior to joining Treasury, Mr. Scogin worked as a fiscal policy adviser for Governor Mitt Romney in Boston, Massachusetts. Other previous work experiences include Healey Development, the 2004 Republican National Convention in New York, and State Representative VanderVeen in Michigan.

A native of Portage, Michigan, Matthew graduated from Hope College in Holland, Michigan in 2002 with degrees in economics and political science. He went on to earn a Masters in Public Policy from the Kennedy School of Government at Harvard University in 2005. His graduate studies included a joint project with the Heritage Foundation analyzing the savings behavior of Americans. After finishing graduate school, Matthew spent 12 months in Germany as a fellow with the Robert Bosch Foundation studying unemployment and labor market policy."

Just the guy to be advising on our domestic financial matters. Where do they get these guys? I could see this happening in a small state, but this is a top post in a core deportment of the federal government. There ought to at least be some political hay in pointing this sort of thing out.

See http://walldorf.typepad.com/politics_economics_and_ot/2007/09/treasury-depart.html
for links (I tried submitting html but it got held.)

Posted by: stefan on September 20, 2007 at 9:58 PM | PERMALINK

Sounds like it is time for some more tax cuts!

Repeat after me -- vooDOO! VooDOO! VooDOO!

Posted by: Bokonon on September 20, 2007 at 10:07 PM | PERMALINK

Posted by: John de Hoog: Here's a thought. Since everything the US does affects all the rest of us throughout the world, and we have to suffer from every bad policy decision, how about letting us vote in your elections?

No problem. We have millions of illegal aliens who vote.

Foreigners should be allowed to run for office also. I call it the "Dream of Being President Act," and foreigners would have advantages over Americans.

Both our parties are putting up garbage candidates. We need foreigners to make up the slack. Americans love immigrants, except for the politicians who don't want competition for their jobs. We have to clear out the artificial barriers so foreigners can run for U.S. offices across the board.

Posted by: Luther on September 20, 2007 at 10:15 PM | PERMALINK

Actually, John de Hoog, there may be an easier way for foreigners to have a say in US policy making. Since you are holding 50% of US government debt you are, in effect, 50% owners of the enterprise. Just ask for half the seats on the board (the cabinet, in this case) and you don't have to bother dealing with our voting machines (though that could be fun).

If you are refused, just move your money to another investment. It's the American way.

Posted by: JS on September 20, 2007 at 10:28 PM | PERMALINK

Here's a thought. Since... we have to suffer from every bad policy decision, how about letting us vote in your elections?

NO Way! You're not qualified. I bet you don't think Saddam caused 9/11. And I bet you don't even own an SUV. And you're probably Commie enough to think citizen's health is a worthy investment.

You're unAmerican.

Posted by: absent observer on September 20, 2007 at 11:30 PM | PERMALINK

Kevin--Have you noticed the banner ad accompanying this posting? A bit ironic.

Posted by: David on September 20, 2007 at 11:45 PM | PERMALINK

If banks fail, I hope it happens while W. Bush is president. The only problem is Bernanke will create hyperinflation to keep that from happening. This could be something really big. Time to plan for a vegetable garden.

Posted by: Brojo on September 20, 2007 at 11:54 PM | PERMALINK

Face it; the average person doesn’t necessarily fully understand the implications of compound interest, let alone teaser rates, ARM resets, and non-amortizing mortgages. The whole system was based on the fact that banks (who are supposed to understand all the above) wouldn’t loan money to people who couldn’t pay it back. All this went out the window when banks, and increasingly mortgage brokers, could quickly unload the debt to geniuses on Wall Street (people who had never had to collect on a bad debt from a dead beat in their life).

Posted by: fafner1 on September 21, 2007 at 12:15 AM | PERMALINK

AJ is spot-on; I've blogged more than once about how ARM resets aren't due to peak until the middle of next year. And Dr. Bubble Greenspan knew that, too, or could and should have known it.

Any idiot not a Fed chief could have told you before this that we've got definite odds of a recession due to all of this.

Posted by: SocraticGadfly on September 21, 2007 at 12:40 AM | PERMALINK

If banks fail, I hope it happens while W. Bush is president.

That's pretty much what all of this commentary is about in the first place, isn't it? Leftists have been lusting for (and predicting) the Great Crash since the first tax cut.

The committee hearing page is here, and you can read Bernanke's statement for yourselves if you want.

Posted by: harry on September 21, 2007 at 12:40 AM | PERMALINK

Leftists have been [predicting] the Great Crash since the first tax cut.

Yup. And here it comes.

Posted by: craigie on September 21, 2007 at 12:47 AM | PERMALINK

Kevin--Have you noticed the banner ad accompanying this posting? A bit ironic.
Posted by: David on September 20, 2007 at 11:45 PM

Yeah, it is kind of weird. Kinda like when you send emails to people that focus on one topic or another and suddenly the ads change to match your topics... Another thought is that the ad seems like *punishment* for all of the real estate evil.

Posted by: Doc at the Radar Station on September 21, 2007 at 12:54 AM | PERMALINK

I smell inflation...

Posted by: Ya Know.... on September 21, 2007 at 1:02 AM | PERMALINK

Each individual investor flatters himself that his commitment is ‘liquid,’ ” Keynes wrote.

You never get back as much milk as one spills no matter the quality of the paper towel.

Posted by: Ya Know.... on September 21, 2007 at 1:04 AM | PERMALINK

If you ever put your full posts in your RSS feed, I'll read them. Until, then, the first 50 words or whatever I get just make you sound flip...

Posted by: Christopher M on September 21, 2007 at 3:24 AM | PERMALINK

Just when the baby boomers start retiring, their social security checks won't buy a loaf of bread.

In the 70s Greenspan and I were saying that there would be plenty of dollars to pay social security but the money might not be worth anything. That's exactly what you're seeing and why Greenspan, Reagan, GW Bush, and whoever else brought us here.

Didn't you make millions in the housing bubble too? Didn't think so.

Posted by: slanted tom on September 21, 2007 at 5:28 AM | PERMALINK

'But integrity in a central banker is like honesty in a politician or chastity in a prostitute – the quality is completely at odds with his profession.' - Bill Bonner

Posted by: MsNThrope on September 21, 2007 at 8:29 AM | PERMALINK

"The top three Fed concerns are as follows:

* Bailing out its banking buddies
* Bailing out its banking buddies
* Bailing out its banking buddies"
- Mike Mish Shedlock Sep 19, 2007

"It is illogical to assume that holders of cash will have a strong desire to lend money at low rates in a currency that is declining in value when they can take these same funds and lend them at high rates in a currency that is gaining in value. By lowering interest rates the Federal Reserve will not stimulate economic growth or create jobs. It will crash the currency, stimulate inflation, and weaken the economy and the job markets" - Richard Bove

Posted by: MsNThrope on September 21, 2007 at 8:34 AM | PERMALINK

It's worth pointing out, again ,that Bush's magic tax cuts are, so far, still in effect; what's changed is Fed policy.

Dishonest right-wingers -- but I repeat myself -- love to tout the magic of Bush's tax cuts but almost always. somehow, fail to address the long streak of historically low interest rates and the resulting housing boom. The allegedly nonpartisan Alan Greenspan, despite his recent attempt at historical revisionism, managed to stave off the predicted and predicable effect of yet another destructive round of supply-side economics, but the chickens are coming home to roost.

Posted by: Gregory on September 21, 2007 at 9:07 AM | PERMALINK

So, the Secretary of the Treasury becomes the Secretary of Foster Farms.

Posted by: thethirdPaul on September 21, 2007 at 9:33 AM | PERMALINK

If banks fail, I hope it happens while W. Bush is president.

That's pretty much what all of this commentary is about in the first place, isn't it? Leftists have been lusting for (and predicting) the Great Crash since the first tax cut.

No, it's the virtual certainty that the Democrats who have to mop up all the puke on the floor after the Republicans swilled down all the punch will be blamed for the puke in the first place. The Wurlitzer is gearing up to do this with Iraq, and you can bet they're figuring out how to do this with the economy.

You can fool all of the people some of the time, and approximately 30% of the people all of the time, looks like.

Posted by: ericblair on September 21, 2007 at 10:30 AM | PERMALINK

May the talking point of an upbeat economy be now removed from the ever diminishing list conservatives regurgitate regarding positive attributes of the Bush Administration?

Posted by: Zit on September 21, 2007 at 11:16 AM | PERMALINK
No problem. We have millions of illegal aliens who vote…Luther at 10:15 PM
While you're so busy attacking straw men, be aware that non-citizens cannot vote, and all the Republican searching hasn't been about to prove it, although there are always cases of election fraud perpetuated by Republicans. If you want foreigners in office, support your Republican hero, Arnuld, jawohl!, Schwarzenegger. He's a winner in the RNC garbage sweepstakes.
….Leftists have been lusting for (and predicting) the Great Crash since the first tax cut,,,harry 12:40 AM
It was Ronald Raygun who campaigned on the issue of deficit spending and then produced the largest in history until BushII. It was Republicans who used to demand a balanced budget amendment and fiscal responsibility. But that was then. Now, their policy is to allow new unregulated markets, including mortgage, fueled by artificially low interests which lead to huge profits but are unsustainable. It looked good on paper. For a while. Then the crap hits the fan and again Democrats have to clean up a mess that the Republican crooks and liars made. Posted by: Mike on September 21, 2007 at 11:28 AM | PERMALINK

"Hold onto your wallets" should be your headline when the next "progressive" Democrat president is elected and has a majority in the House and a filbuster-proof senate. That gang will make Lyndon Johnsons' disastrous War on Poverty look like a skirmish.

Posted by: mhr on September 21, 2007 at 11:30 AM | PERMALINK

My understanding is that the biggest mortgage problem is you cant sell them anymore because of the ARM problem and foreclosures. If Banks cant sell mortgages they dont want to make them, as they do not want to service them, they want to make them, sell them, and get the liquidity back for more loans. So the Fed has acted to increase liquidity to banks with a rate cut and more will come. As the next 12-24 months playout,the system ought to start correcting itself. Some of the worst credit risk customers will be hurt and hopefully Congress will act to help them.

As to the dollar, its always a problem. Too high, and exports go down and American corporations and jobs get hurt. Too low, and imports go up in price. We are trading higher prices on cut rate imports for a much better world economy for American corporations to prosper with exports and hire more people. No matter where the dollar is, there are consequences. My understanding is that other world banks are going to be cutting rates too, so a collapse of the dollar is unlikely. In addition, anyone owning lots of our bonds wont dump them unless they want to hurt themselves.

We survived the tech bubble burst and we will survive this too.

Posted by: Jammer on September 21, 2007 at 11:38 AM | PERMALINK

Ah, yes, inflation hurts debt-holders if the debt has an adjustable rate.

I can see where ARMs would seem to protect banks from inflation but they better be careful.

Here is an example from a family small town bank. They were financing a florist shop which was slowly going under. On paper the bank looked great, racking up huge penalty funds for late payments and bounced checks. Yup, on paper that shop looked like a real moneymaker for the bank.

You can see the problem though. The shop didn't have the money and had no way to get it. All those paper profits were defaulted on. The same can happen with a bank giving out an ARM. If the client goes under then it doesn't matter how much money they owe you.

Yeah, they can make it harder to default and harder to declare bankruptcy but at the end of the day if the money isn't there the money isn't there.

Posted by: Tripp on September 21, 2007 at 11:48 AM | PERMALINK

Leftists have been lusting for (and predicting) the Great Crash since the first tax cut.

Predicting and fearing an economic meltdown from W. Bush Republican policies, yes. Lusting for one, no. It has been the W. Bush Republicans who have done everything possible to ruin America's economy. Now you want to blame the people who pointed out your disastrous policies.

Posted by: Brojo on September 21, 2007 at 11:53 AM | PERMALINK
Losses from sub-prime mortgages have far exceeded "even the most pessimistic estimates", US Federal Reserve chairman Ben Bernanke has said.

Obviously, he has never met a real pessimist, if he thinks that things are worse than the most pessimistic estimates.

Posted by: Daryl McCullough on September 21, 2007 at 12:03 PM | PERMALINK
Obviously, he has never met a real pessimist, if he thinks that things are worse than the most pessimistic estimates.

I think there is an implicit "that we paid any attention to" that needs to be read at the end of that. Just like all the times Bush Administration officials have come up with variations on "No one could have imagined..." with regard to 9/11 should have "that we paid any attention to" inserted after "No one".

Posted by: cmdicely on September 21, 2007 at 12:12 PM | PERMALINK

If interest rates don't go down, homeowners and anyone holding mortgage debt is in trouble

No, only those stupid enough to have followed Greenspan's advice to take out an adjustable rate mortgage when rates where at historic lows.

If you have a fixed-rate mortgage, you're not affected at all.

Posted by: Juanita de Talmas on September 21, 2007 at 12:16 PM | PERMALINK

Here's a thought. Since everything the US does affects all the rest of us throughout the world, and we have to suffer from every bad policy decision, how about letting us vote in your elections?

And risk the chance of electing a Dutchman?

Posted by: Mr. Awful on September 21, 2007 at 12:29 PM | PERMALINK

"elect a Dutchman"

Well, he could help by sticking his finger in the ARM levee.

Posted by: thethirdPaul on September 21, 2007 at 1:11 PM | PERMALINK

'"The scores of billions of dollars and euros that central banks have poured into the maw of losses lately," he writes, "will only paper over the essential problem for another few weeks, at most. The damage to global structured finance has been done, and it can be stated rather precisely: a widespread recognition that it's not possible to get something for nothing, after all. And that when you hold a lot of paper that was gotten for nothing, and put it up for sale, nothing will be offered for it. What a surprise." - James Howard Kunstler

Henry K. Liu : “A market that catches on to the impotence of central-bank intervention can go into free fall.”

(Excuse me, Paul K but...That whole Wile E. Coyote Moment meme is mine, mine, mine. I've been using it hither and yon for more than two years now. Which just goes to show ya who reads Andrew Leonard at Salon and post at this joint, huh?)

Posted by: MsNThrope on September 21, 2007 at 4:26 PM | PERMALINK


harry: Leftists have been lusting for (and predicting) the Great Crash since the first tax cut.

speaking of the depression...

2005...and 2006...

were the first back to back years for the USA to have a negative savings rate since the depression..

is that from tax cuts?

Posted by: mr. irony on September 24, 2007 at 7:00 AM | PERMALINK

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Posted by: lwfjkn crlvwo on January 13, 2008 at 12:22 PM | PERMALINK




 

 

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