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Mortgage rates spiked to 6.75%
last Wednesday, only Friday sliding back into 6.50% range (these rates
with no loan fees). There is good reason to expect rates to fall back, and
maybe a long way, but only in the context of effective intervention by
Federal authorities.
There is no sign of such
intervention at the moment. However, developments soon ahead will attract
the attention of officials preoccupied with market solutions, ordinary
monetary operations, opposition to any form of “bailout”, wishful
thinking, denial, or the view from any of several ivory towers.
Last week marked the
transition from a relatively orderly seven-month repricing of credit and
reduction of leverage to fire sale. Just plain panicked dumping. The Fed’s
Number One responsibility is orderly markets. Beyond inflation or economic
growth or any other objective, orderly markets come first: prevent at any
cost a disorderly liquidation that leads to chain-reaction systemic
failure.
The Fed has failed. As have
the Treasury, Congress, and the White House.
The spread between government
guaranteed (or effectively so) mortgage-backed securities and 10-year
Treasurys reached an all-time, utterly non-economic 3.00%.
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The spread between AAA-rated
municipal bonds and Treasurys is out of line by 2.00%. These and other
credit markets last week for the most part ceased to function, the capital
in the banking system effectively exhausted. Scott Simon of bond-giant
Pimco, a calm sort whose remarks are usually limited to time and
temperature, said, “Everything is telling you that the financial system is
broken.”
The good news. We have
believed since August that we would get to this place, and then obvious
danger would overcome bailout resistance in both parties and the public. A
financial accident would wake us up before grave damage would be done to
the economy. We have all the tools crafted in the Depression, and in
banking crises large and small since. These tools will work, and fast. A
fire sale is a collapse of confidence, nothing-to-fear-but-fear-itself;
confidence can be restored as fast as it left.
So what kind of accident will
do the wake-up trick? The onset of credit-market fire sale is too
technical for civilians, but they do get the stock market. The S&P 500 on
Thursday broke crucial support at 1320, made a half-hearted rally Friday
morning after job-market news that was awful but not disastrous, fell
short, and has little “technical” support for about a thousand points. A
meltdown like that will get the attention even of the stock market ya-yas
so oblivious to this crisis since August.
© 2008 - Economic Notes is published weekly by the Economics Department of
Universal Lending Corporation. |
The obvious onset of recession
should have opened the door to Federal action by now, but dissemblers have
muddied the moment. Nothing like an honest-to-goodness stock-market crash
to clarify the mind. S&P 1283, Dow down 205. Even better: a morning when
they ring the NYSE bell, but can’t open the market.
The top Pimco investment
officer, Mohamed El-Erian, raided from Pimco by Harvard to run its
gazillion-dollar endowment, then raided back by Pimco (the guy is hot)
said: “A decision is going to have to be made to cross two lines in the
sand: to use the government’s balance sheet, and to breach rights of
property and contracts.” The only way to stop a credit fire-sale is by
government guarantee and outright purchase of illiquid assets; the
contracts are mortgages to be re-worked (We’re opposed to that foreclosure
solution, but you can’t have everything).
More good news. Everybody needs something not to worry about: inflation is
NOT a problem. Wage growth in the last year has been 3.7%, a half-point
below inflation. Huge increases in energy and food costs are compressing
spending on everything else, which is deflationary for everything else.
Drop a brick with our name on it on the nearest stagflationist: you cannot
have sustained inflation without a wage-price spiral.
And another thing: stop worrying about the dollar. Europe is following us
into recession, and as global demand falls, we’ll see whose currency is
safe.
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