Credit Crunch Real Cause of Housing Tumble

[Nbadan]

Is it the short-term over-supply of homes as proposed by housing-slump naysayers, or the less-often-approved demand for credit causing housing sales to slip?


Stocks tumbled yesterday on fears that the worsening ills in the mortgage and debt markets could soon take a significant toll on consumers, businesses and the overall economy.



Job Growth in July Is the Slowest in Months (August 3, 2007) The latest decline capped a volatile two weeks on Wall Street in which the stock market has swung wildly from day to day, reflecting rising uncertainty about the outlook for markets and the risks plaguing the economy. The biggest moves lately have often occurred shortly before trading closed.

Indeed, the market dropped particularly sharply yesterday afternoon after investors were rattled by remarks by executives at Bear Stearns, the investment bank that has been heavily involved in mortgage securities. The firm’s assurances about its own financial position were overshadowed by bleak comments by its chief financial officer about the credit markets.

“I have been at this for 22 years, and this is about as bad as I have seen it in the fixed-income market,” said Samuel L. Molinaro Jr., Bear Stearns’s chief financial officer.

The Standard & Poor’s 500-stock index fell 2.7 percent yesterday, with much of the decline coming after Bear’s conference call started around 2 p.m. The Dow Jones industrial average lost 281.42 points, or 2.1 percent. And the dollar fell noticeably against the euro and the British pound.

While consumers continue to express confidence in the outlook for the economy, the government’s monthly employment report, released yesterday morning, added to worries about the spreading impact of the housing slump. The economy added only 92,000 jobs last month, down from 126,000 in June and the unemployment rate ticked up to 4.6 percent.

Mortgage companies have significantly tightened credit lately to borrowers with weak credit histories and are even cracking down on those with solid records who are taking on riskier loans.

On Thursday, the credit worries were so severe that even Countrywide Financial, the nation’s largest mortgage company, felt compelled to tell investors that it did not face any difficulties raising money.

Lenders say they are increasingly unable to persuade investors to buy packages of home loans made to borrowers with little or no down payment or those who cannot fully document their incomes. As a result, many companies are no longer offering such loans to potential buyers.

“I have never seen it happen so quickly,” said Steve Walsh, a mortgage broker in Scottsdale, Ariz. “Banks always do these little cutbacks here and there. What they are doing now is a liquidity crunch. It’s a credit freeze.”

Richard F. Syron, chief executive of Freddie Mac, the large buyer of mortgages created by Congress in the 1970s, said yesterday that the speed and severity of the tighter credit terms are surprising, but perhaps necessary given the excesses in the market in recent years.

In a telephone interview from Washington, he was wary of the calls by some mortgage industry officials that Freddie Mac and its cousin, Fannie Mae, step in to buy loans and securities that private investors will no longer purchase. Mr. Syron noted that his company was operating under an agreement with its regulator that limited the size of its portfolio.

“There are some loans that are in difficulty” because credit pools are drying up, Mr. Syron said. “There are other loans that probably should never have been made and providing more liquidity will make that situation worse in the long term.”

The interest rates on many popular mortgages have risen by as much as a full percentage point, if they are available at all, said George J. Jenich, founder of FreeRateSearch.com, a consumer Web site. But rates on conventional fixed-rate 30-year mortgages have held steady.

Bear Stearns scheduled its conference call to reassure investors after Standard & Poor’s, one of the agencies that rates the creditworthiness of companies, said it was considering downgrading Bear’s credit rating because of the collapse of two hedge funds it recently put into bankruptcy after they made losing bets on mortgage securities.

Despite all the worries about credit markets, however, the economy continues to plow ahead and even yesterday’s jobs report was not weak enough to suggest that the Federal Reserve would cut its benchmark short-term interest rate when it meets next week.

But the risks to the economy do seem serious enough that investors now expect the Fed to cut its rate to 5 percent, from 5.25 percent by November, based on the price of a trading instrument that is tied to Fed policy. And the yield on the 10-year Treasury note fell to 4.68 percent from 4.77 percent Thursday evening.

Wall Street analysts say they are increasingly concerned that consumer spending will weaken as more people in housing and related sectors lose their jobs. They also worry that many homeowners will cut back as they find it harder to refinance or borrow against the value of their homes.

“You have a broad sell-off because people don’t know how far the subprime cloud is going to hang over U.S. industries,” said Jake Dollarhide, chief executive of Longbow Asset Management, an investment firm based in Tulsa, Okla. “If they don’t get assurance, they are just selling off rather than asking questions.”

The S.& P. has fallen 7.7 percent, to 1,433.06, since July 19, the day it established a record. The last two weeks were the worst such period in more than four and a half years, and the broad market index is now up just 1 percent for the year. The Dow is doing somewhat better; it has fallen 5.9 percent, to 13,181.91, since July 19, but it is still up 5.8 percent for the year.

And through it all, businesses have been reporting strong earnings. Profits are up 9.6 percent in total for the 80 percent of the companies in the S.& P. index that have released results for the second quarter, noted Douglas M. Peta, chief market strategist at J. & W. Seligman & Company, an investment firm based in New York.

Despite that, Mr. Peta said, he was not particularly optimistic about the near-term outlook for stocks and far less so about the market for debt.

“It seems to me things got every bit as silly in the credit markets in the last few years as they did in tech stocks in the late 1990s,” he said. “I still think we may have a ways to go in this.”

NY Times (http://www.nytimes.com/2007/08/04/business/04stox.html?_r=1&oref=slogin)

The SA market continues to grow relatively steady when compared to other markets that experienced rapid price appreciation followed by almost complete collapse, still, the number of homes on the market continue to pile up and real home appreciations, what you can really sell your home for, not your tax appraisal, seems to be going down in some parts of town.

Thanks to aggresive pricing by some home sellers, prices for new homes continue to be relatively affordable in some parts of town and that makes homes easier to finance in SA, thus, new prospective home-owners don't have to resort to creative financing to afford the homes of their choice...the standard 15 and 30 year mortgage rule still applies here...

Still, there are now 30% less creative home creditors than there were in 06' and many of the creditors who still have some liquidity are asking for some money down or are enforcing thougher borrowing standards (i.e. doing their jobs).....less credit-worth buyers and more money down, more and more homes piling up....you do the math...............

[BradLohaus]

There will be a big bail out of creditors if it gets too bad in the coming years, just like 10 or so years ago with the lenders tied up in Latin America, and 20 years ago with the S&L stuff. Like always, the people at the bottom of the pyramid bail out those at the top whenever the system is threatened.

[Nbadan]

Maybe, but in the mean-time we can't bail-out giant hedge-funds and if push comes to shove, we certainly aren't gonna bail out China and other suppliers of cheap credit to U.S. Consumers....the more likely scenario is that the U.S., thus taxpayers, will have to come up with a fund to guarantee the millions of risky loans that haven't defaulted yet, or pay a increased risk premium to protect the continued availability of affordable loans in the U.S., other-wise interest rates would continue to creep upwards as loaner-nations demand a greater risk return......

[boutons_]

I read where 4 of 10 loans in the past few years "were no money down".
Now, it's almost impossible to find such a loan.

[mike07]

I read where 4 of 10 loans in the past few years "were no money down".
Now, it's almost impossible to find such a loan.

I completely agree. My brother was easily approved for a home loan three years ago. I am trying to apply for a no money down loan and it's being a big hassle. I hope gmac (http://www.gmacmortgage.com) will come through for me and help me purchase my new home. Anyone have any other suggestions?

[CubanMustGo]

Simple: save up some money for a down payment and THEN go buy a house.

If your response is "I can't afford to save any money" then you shouldn't be buying a house.

[xrayzebra]

I completely agree. My brother was easily approved for a home loan three years ago. I am trying to apply for a no money down loan and it's being a big hassle. I hope gmac (http://www.gmacmortgage.com) will come through for me and help me purchase my new home. Anyone have any other suggestions?

If you are first time home buyer you can get some pretty
good home loans. Talk to your realtor. He knows the
ones you can work with. Also look at the site below.
It answers lots of questions about federal help.

http://www.hud.gov/buying/loans.cfm

[Nbadan]

Told ya so....

Stocks fall; Dow down 300 points
TIM PARADIS, AP Business Writer 14 minutes ago


NEW YORK - Wall Street fell sharply again Thursday after a French bank said it was freezing three funds that invested in U.S. subprime mortgages because it was unable to properly value their assets. The Dow Jones industrials fell more than 300 points.


The announcement by BNP Paribas raised the specter of a widening impact of U.S. credit market problems. The idea that anyone — institutions, investors, companies, individuals — can't get money when they need it unnerved a stock market that has suffered through weeks of volatility triggered by concerns about available credit and bad subprime mortgages.

A move by the European Central Bank to provide more cash to money markets intensified Wall Street's angst. Although the bank's loan of more than $130 billion in overnight funds to banks at a low rate of 4 percent was intended to calm investors, Wall Street saw the step as confirmation of the credit markets' problems. It was the ECB's biggest injection ever.

The Federal Reserve added a larger-than-normal $24 billion in temporary reserves to the U.S. banking system.

Yahoo (http://news.yahoo.com/s/ap/20070809/ap_on_bi_st_ma_re/wall_street)

What we've seen so far is just the beginning....now is not the right time to go house shopping....save money for something down...work on your credit....and live below your means....

[UV Ray]

What we've seen so far is just the beginning....now is not the right time to go house shopping....save money for something down...work on your credit....and live below your means....


Don't buy 'til there's blood on the floor...six months to a year down the road.

[Nbadan]

New homes are so poorly constructed in TX it's usually the home-buyers blood that get's spilt, fixing and upgrading...but there are bubbles in certain older neighborhoods that could stand some correcting....

[Nbadan]

Krugman writes on the liquidity crunch....


PAUL KRUGMAN: Very Scary Things


In September 1998, the collapse of Long Term Capital Management, a giant hedge fund, led to a meltdown in the financial markets similar, in some ways, to what’s happening now. During the crisis in ’98, I attended a closed-door briefing given by a senior Federal Reserve official, who laid out the grim state of the markets. “What can we do about it?” asked one participant. “Pray,” replied the Fed official.

Our prayers were answered. The Fed coordinated a rescue for L.T.C.M., while Robert Rubin, the Treasury secretary at the time, and Alan Greenspan, who was the Fed chairman, assured investors that everything would be all right. And the panic subsided.

Yesterday, President Bush, showing off his M.B.A. vocabulary, similarly tried to reassure the markets. But Mr. Bush is, let’s say, a bit lacking in credibility. On the other hand, it’s not clear that anyone could do the trick: right now we’re suffering from a serious shortage of saviors. And that’s too bad, because we might need one.

What’s been happening in financial markets over the past few days is something that truly scares monetary economists: liquidity has dried up. That is, markets in stuff that is normally traded all the time — in particular, financial instruments backed by home mortgages — have shut down because there are no buyers.

This could turn out to be nothing more than a brief scare. At worst, however, it could cause a chain reaction of debt defaults.

The origins of the current crunch lie in the financial follies of the last few years, which in retrospect were as irrational as the dot-com mania. The housing bubble was only part of it; across the board, people began acting as if risk had disappeared.

Everyone knows now about the explosion in subprime loans, which allowed people without the usual financial qualifications to buy houses, and the eagerness with which investors bought securities backed by these loans. But investors also snapped up high-yield corporate debt, a k a junk bonds, driving the spread between junk bond yields and U.S. Treasuries down to record lows.

Then reality hit — not all at once, but in a series of blows. First, the housing bubble popped. Then subprime melted down. Then there was a surge in investor nervousness about junk bonds: two months ago the yield on corporate bonds rated B was only 2.45 percent higher than that on government bonds; now the spread is well over 4 percent.

Investors were rattled recently when the subprime meltdown caused the collapse of two hedge funds operated by Bear Stearns, the investment bank. Since then, markets have been manic-depressive, with triple-digit gains or losses in the Dow Jones industrial average — the rule rather than the exception for the past two weeks.

But yesterday’s announcement by BNP Paribas, a large French bank, that it was suspending the operations of three of its own funds was, if anything, the most ominous news yet. The suspension was necessary, the bank said, because of “the complete evaporation of liquidity in certain market segments” — that is, there are no buyers.

When liquidity dries up, as I said, it can produce a chain reaction of defaults. Financial institution A can’t sell its mortgage-backed securities, so it can’t raise enough cash to make the payment it owes to institution B, which then doesn’t have the cash to pay institution C — and those who do have cash sit on it, because they don’t trust anyone else to repay a loan, which makes things even worse.

And here’s the truly scary thing about liquidity crises: it’s very hard for policy makers to do anything about them.

The Fed normally responds to economic problems by cutting interest rates — and as of yesterday morning the futures markets put the probability of a rate cut by the Fed before the end of next month at almost 100 percent. It can also lend money to banks that are short of cash: yesterday the European Central Bank, the Fed’s trans-Atlantic counterpart, lent banks $130 billion, saying that it would provide unlimited cash if necessary, and the Fed pumped in $24 billion.

But when liquidity dries up, the normal tools of policy lose much of their effectiveness. Reducing the cost of money doesn’t do much for borrowers if nobody is willing to make loans. Ensuring that banks have plenty of cash doesn’t do much if the cash stays in the banks’ vaults.

There are other, more exotic things the Fed and, more important, the executive branch of the U.S. government could do to contain the crisis if the standard policies don’t work. But for a variety of reasons, not least the current administration’s record of incompetence, we’d really rather not go there.

Let’s hope, then, that this crisis blows over as quickly as that of 1998. But I wouldn’t count on it.

Link (http://freedemocracy.blogspot.com/2007/08/paul-krugman-very-scary-things.html)

[BradLohaus]

Don't worry, the central banks of the world are coming to the rescue.

http://www.ft.com/cms/s/3d97cc30-472c-11dc-9096-0000779fd2ac.html

I said it before, and I'll say it again: We don't live in a free market, competitve economy, especially the investment markets. A money monopoly controls them, at least to a point, on a global scale. How could anyone say otherwise? Stocks are tumbling worldwide? No problem, just create more money and inject it into these markets. It is economically impossible for everyone to benefit from that; it would mean that everyone is getting something for nothing, which is impossible. When the Fed bails out Wall Street with inflation, these people are getting something for nothing. But it comes from the people on lower levels in an invisible transfer of wealth in the form of purchasing power from inflation; it doesn't come out of nothing.

The Fed is trying to solve a liquidity crunch - that it caused by creating too much liquidity in the first place - by creating more liquidity. I still think all of this absurdity has years left to live before it all comes crashing down - maybe 10, maybe even 20 years. How much more inflation can 1.)people stand, 2.)the international dollar holders (esp. China) stand, and how much more debt can 1.)American households stand, 2.)our government stand? When the answer to all those questions is "no more", look out. And saying "no more" to one or some of those questions will create a domino effect with the rest of the questions.

How can anyone think that injecting money into the stock market everytime there is a crisis is a plan that can work everytime forever? They are just saving the day today at the price of a bigger problem at some tomorrow that can't be saved. This could all be turned around, but it would cause a long recession and deflation and people won't stand for it politically; that's not going to happen. Investment markets wil be re-inflated during dangerous times until doing so is impossible because of the status of the dollar. It is then that inflation really takes off while the stock market plummets, causing higher prices for everything, personal savings losses, and unemployment. Not good times, but it's not here yet. The central banks of the world will be lauded shortly in the future for averting this crisis. The vast majority don't seem to understand how they do it.

[Nbadan]

The Federal Reserve Meltdown
Doug McIntosh
8 August 200


I realize some of you think I am a bit on the loony side; however, after watching a short video clip of Mr. Cramer and his performance the other day, I'm an amateur. Shakespeare got it wrong: the world is not a stage, it is a lunatic asylum. You can tell things are imploding in the economic sphere when the shills start shrieking. I would say an Oscar caliber performance at the least. The network anchor in the movie "Network" comes to mind with his "mad as hell and I'm not going to take it anymore" rant. Of course, this is exactly what the powers that be are terrified of.

Much has been made of the American Stock Markets as "economic indicators." What rubbish! Any resemblance between the American Stock Markets and the actual American Economy are pure delusion. For instance, the fiat Federal "dollar" has been collapsing at a steady rate the last five years. It would be logical the stock markets would be declining since the sacrosanct "corporate profits" they worship are actually going down. Nope. Or perhaps the stock markets would judge the Federal Government as actually bankrupt? Nope. The markets just gleefully crash through the 14,000 barrier based upon the delusion of the moment. Well, the delusions are ending. And the hangover is going to be savage. Risk is coming back into the economic sphere.

We are assured all is well since the market "recovered" on Monday. This "recovery" is based upon the belief the Fed will "save" the stock markets at today's, August 7, 2007's, meeting. This is the only rational explanation for the rise Monday, although the Plunge Protection Team sure looked active around 2 p.m. to me. The PPT that doesn't exist of course. The PPT is like dark matter in the universe. You can't actually see it, but you sure can see its effects.

At any rate, the Fed is starting to look like the puddle that used to be the Wicked Witch in the Wizard of Oz. Greenspan may be a rat, but he got out of the Fed at the right time. Now if Greenspan only would just shut up. It looks like to me Braying Bernie, my designated name for the new Fed Chief, will be left holding the noose. You could see this coming once the M3 money supply reporting ceased last year. And then the Fed started faking the inflation numbers by dropping energy and food, both dealing with 25 to 33% increases in the last year, to maintain the fiction of low inflation. The Fed Chief now sounds more like a braying jackass than an economist when he issues his profundities these days. The Treasury Chief is reduced to whining about raising the debt level, as if the nine trillion will ever be paid back. And this is the crew which will save the stock markets? The inmates are certainly running the economic policy of the Fed.

What exactly do the markets expect the Fed to do? The Fed can lower interest rates, they can increase them, or they can leave them alone. The Fed is already increasing the money supply at an hyperinflationary rate, although in an openly secretive way, if you get my drift. I think the difference between the insolent elite is not that they don't care about the rabble, they never did. The difference is the degenerate elite now no longer cares that we know they don't care. Hurricane Katrina showed that. Think on that for a moment. Hold on to your gold and silver kiddies, Weimar is coming.

The Fed is now caught between domestic political and economic realities and international political and economic realities. I'm afraid the stock market is on its own. The stock market investor sentiment, or the toxic vapors and fumes inhaled from the media economic shills, analysts, assorted whores, fools, con men and women, shysters, idiots, criminals, morons and liars on a daily basis, needs to be restored. The fundamentals are sound we are told. Unfortunately, the economic fundamentals are not sound, or else I wouldn't be writing this. If the Fed raises rates, to protect the collapsing dollar, the domestic economy will collapse in a sea of foreclosures, debt and risk based collapsed. You do remember risk? If the Fed, lowers rates, to protect the collapsing domestic economy and squirt more lighter fluid onto the stock market bonfire, the dollar will accelerate both its collapse and replacement as the global reserve currency used to price oil. If the Fed does nothing, the game will go on until some trigger event overwhelms the economic reality.

We will look back, at some future date, at the summer of 2007 as a defining era in the economic sphere. We are witnessing the reemergence of RISK after a long hiatus. Obviously, risk has been the missing factor in pricing of everything really. Whether it is houses, or stocks, or bonds there has been little risk factored into the pricing equation. What happened since the stock market hit the famous 14,000 level is people actually started to question the assumptions. What has passed for economic wisdom these last few years, the endless hype of endlessly rising asset values, houses, stocks etc., has been shown to be the idiocy it is. The idiocy I may remind you dear reader that I have endlessly told you it was. God, it is hard for me to be humble sometimes. The American Stock Market has decided that the housing collapse has legs. They have concluded the fabled second quarter recovery of 2007 is not coming. They have concluded the debt based fantasies used to finance all this sub prime, prime and not quite ready for prime time economics is really dangerous up and down the food chain. As long as only the lower income trash gets thrown out onto the street it was no big deal, but now that the big boys, Bear Stearns for instance, are losing money and bosses, well this is serious. You would think with Bear in its name Bear Stearns would have covered their rear better. I think I am correct. The elite really is the stupid, arrogant and greedy fools I have always said they were. I may have had egg on my face here at www.gold-eagle.com from time to time, but who has that brown stuff all over theirs? HUM?

Braying Bernie and his Fed cannot alter the economic fundamentals of a psychological shift in perceptions. It is beyond them. Now that risk is back in the markets and the economy it is Pandora box time. The reason I know this is true is what happened, or actually didn't happen to Chrysler, and their attempt, their failed attempt, at finance. What if they tried to raise a bond and nobody bought it? What if investors concluded the risk premium wasn't factored into the bond price and they refused to buy it? What will happen to the issuers? The parties involved? The American economy? The global economy? What will happen to the vaunted, fantasy stock market when merger activity implodes? Stay tuned.

When I was a young man, I used to work at an orchard. One of my jobs, was to grease the various types of equipment we used. Back then, late 1960's to early 1970's, factory sealed bearings were a rarity and you used to have to manually lubricate the bearings. I can remember using a paint stirring stick, a five gallon pail of Chevron Grease and filling a "grease gun." I would then stick the end of the grease gun on the nipple and pump away. I think they were called zierks if I remember correctly. The economic jerks of our time, the shills and fools, the politicians and greedy sleaze balls who have conned an entire people, have come full circle. What is now happening is what I said would happen. The fiat funny money system runs on illusion, fantasy, endlessly creation of money, of credit and of debt. Our economic system runs on the belief the reckoning will never happen, or at least not in our lifetimes. But, like the tractors I used to lubricate, the grease must flow, or the wheels will lock up.

What we are starting to witness is the great credit lock up. The reason credit is locking up is people are now factoring in all the risk factors they have ignored. The leaders have repeatedly lied to us about the true nature of our economic situation. The people have allowed themselves to be sucked into a fantasy that now increasingly resembles a jet engine. And we know what happens to the pigeons which end up in the belly of a jet engine. The Powers that be may yet continue the delusion for a while longer. However, they cannot change the fundamental economic reality underlying the stock market declines, or the housing collapse, or the dollar collapse or the rise in precious metals prices. This reality is people now view things differently. Braying Bernie can bray all he wants. The people are beginning not to listen, or care.

10 years ago began the greatest financial crisis of our modern economic age. The collapse of the Asian Tigers in the summer of 1997 eventually led to the collapse of the Russian bond market in 1998. This led to the near collapse of the global economic system. Even Greenspan agrees with me on that one. Now we find ourselves at a similar decisive point. We are at the wrong place at the wrong time. I believe we will date economics from Before Chrysler and After Chrysler in the summer of 2007. The reason for that is we have seen the credit spigot dry up. When risk is factored into the pricing it is all over. All of it!

We are looking at liabilities in the 600 TRILLION range, not billion. We are looking at unwinding 600 TRILLION in unfunded liabilities at all levels of the global economy. Braying Bernie and his Fed can't print enough money to cover it. The entire economic system can't comprehend it, much less deal with it. Once you look at the harsh realities underlying the global and domestic economies you realize we are like the people sitting in their cars on that bridge in Minneapolis. Take care of yourself since you can't expect any help from the system.

Link (http://www.gold-eagle.com/gold_digest_05/mcintosh080807.html)

[BradLohaus]

^That was a great article. That's a good site for articles, along with kitco. I'm sure you've heard of that one too, Dan, but for anybody else those are 2 precious metals related sites that have great editorials on a range of economic topics.

http://www.gold-eagle.com/

http://www.kitco.com/

[Wild Cobra]

I don't understand why this is such a big news item. It is such a slim slice of the economy. People made bad decisions, and they are losing assets. Boo-hoo. They shouldn't have made such gambles. It is not the governments responsibility to pick up the pieces for other peoples poor choices. If anyone thinks so, then what should I ask for my slice? Who should pay for making me whole for my bad decisions in life?

[Nbadan]

Trouble in the asset-backed commercial paper market today...


NEW YORK (Reuters) - Trouble is mounting in the $2.2 trillion commercial paper market, and further deterioration could trigger problems for banks that would rival what they've suffered from the subprime crisis.

While the problem could still subside, and there are no signs of a full-blown panic, at least five issuers of asset-backed commercial paper have had trouble refinancing that debt when it matured, forcing them to make investors wait before getting repaid. The asset-backed notes now makes up half of all commercial paper.

Most recently trustees for a Canadian asset-backed commercial paper issuer on Tuesday said it could not find the funds to repay investors in their outstanding asset-backed commercial paper.

Generally, trading in asset-backed commercial paper is choppier than it was before the isolated problems hit, and there is some danger that investors will be less willing to buy the paper, which offers only slightly higher returns than other forms of commercial paper, traders said.

Reuters (http://www.reuters.com/article/reutersEdge/idUSN1334682320070814)

Canada’s big six banks are the biggest players in the asset-backed market, as both issuers and providers of liquidity on commercial paper programs. Dominion Bond Rating Agency said in a report Tuesday that a number of unnamed banks had not provided funding to commercial paper programs. DBRS said “Failure to receive funding in a timely manner ... may result in an event of default under the issuers trust indenture after applicable grace periods have expired.”

[mookie2001]

the federal reserve is neither federal nor a reserve


discuss

[Nbadan]

From the Cincinnati Enquirer, "Drooping Dollar Driving Growth, Firms see increased foreign sales because of weak currency.” BY JAMES MCNAIR


“Maybe because it touches a patriotic nerve, the phrase "weak dollar" sounds like a symptom of national feebleness."

“Weak it is. Five years ago, a dollar got you a Euro and change. Today, it gets you a lousy 73 Euro cents.”

This is a media story called good is bad, bad is good. They tell you facts but they tell you in a way designed to make you feel good about bad news. No truths were injured in the writing of this news because there are many facts in it but very few truths. Yes five years ago a dollar got you a euro and change but five years ago a dollar bought you almost an entire gallon of gasoline.

Mr. Miller implies that it’s our patriotism, just an emotional response, like a bunch of old women. Strong and weak dollar are just meaningless adjectives that hold no real relevance. Weak is good so is strong bad? The Japanese and the Germans both have strong currencies, the poor fools!

“But the traveler's lament is the producer's bonus. American manufacturers are enjoying a welcome windfall from the stronger buying power of customers in places such as Europe, Great Britain, Canada, Brazil and Australia. That windfall has trickled into Greater Cincinnati and Northern Kentucky, and local executives say the weak dollar is spurring more sales abroad.”

"The dollar to the euro is significantly in our favor," said Jim McLaughlin, sales director for Goettsch International, an exporter of corrugated packaging machinery in Blue Ash. "We're selling more in Europe now, and that's the backyard of the European manufacturers."

“Goettsch doesn't make the machines it sells, and all of its sales are outside the U.S. McLaughlin said sales rose 20 percent to about $35 million in 2006. He attributes a small part of that growth to the currency exchange rate.”



If Goettsch doesn’t make the machines it sells, who does? Chinese perhaps or Mexicans who benefit from their own weak currency. But America is better because Goettsch sells more machines manufactured over seas.

Overseas business can benefit, but the products we purchase are more expensive, now what commodity do we purchase from overseas…. Oil? In the last five years the price of crude oil has doubled but the price at the pump has tripled. Greedy oil companies or that weak dollar that Mr. Miller likes to brag about.

The administration that likes to boast about economic growth rates between 3 and 4% the administration has doubled the amount of dollars in circulation. That’s how you make weak dollars more dollars with less value in each bill. The administration points with pride to rising wages but they are being paid in those weak dollars.

The rising stock prices are purchased in weak dollars, dividends are paid in weak dollars.You cash in your stock portfolio and head for Euro Disney World and you will be in for a shock. That portfolio that had done so well had done well in weak dollars and when the market began to hiccup the value of the Euro went up and the dollar went down.

Mr. Miller might think weak currency is cool tool but world investors don’t. The sub prime troubles will encourage world investors to avoid Wall Street in favor of Tokyo or London those fools with their strong currencies. After all, the dollar could get weaker still and what good is 3 or 4% growth if the currency weakens by and equal amount.

Government statistics tell us inflation is a 3% but most Americans suspect there is something wrong with that number. They’re working harder to get by and are losing ground. Maybe those weak dollars have something to do with it?

Our number one trading partner China has been accused of manipulating the value of it’s currency to keep its exports cheap as well. But China buys our treasury bills with weak dollars so who kiting whom?

“Tom Duesterberg, president of the Manufacturers Alliance/MAPI, a public policy and business research organization in Arlington, Va., (AKA Industry lobby) said the dollar began weakening in 2002. For U.S. manufacturers, the weaker dollar is a mostly positive turn, in spite of the fact that many companies built plants overseas and are now making products there with a higher currency basis.”

Oh it’s good for manufacturers, I see, I thought it was good for everybody that’s what Mr. McNair implied. but what will become of those poor manufacturers that moved overseas.

"In general, U.S.-based manufacturers, especially smaller- and medium-sized manufacturers that don't have the flexibility to move abroad, have largely been helped by the slow decline of the dollar," Duesterberg said. "Three or four years ago, most manufacturers were getting hammered by the lower-cost producers like China, Korea and Taiwan."

They don’t have the flexibility? Meaning they would if they could?

“Gold Medal Products Co. of Evendale makes concession equipment such as popcorn machines, Sno-cone machines and nachos-and-cheese dispensers for customers in more than 60 countries. Bob Burns, vice president of administration, said the company has added China, India, Japan, Russia and South Korea as markets in the last three years. Favorable dollar exchange rates, he said, have helped make selling easier.”

"We're the world's largest manufacturer of concession equipment and supplies, and we keep ahead of competitors through investments in new technology, new products and quality improvements," Burns said. "But exchange rates have certainly helped our international sales. It's not making or breaking us, but about 17½ percent of our sales are outside the U.S. It was 13 percent in 2005."

I’m confused the title said the weak dollars were driving growth but the Sno cone king says it helps but not that much? “It's not making or breaking us” Well the average consumer is being broken maybe weak dollars help manufacturers but it doesn’t help retiree’s or working people or students or anyone that drives a car or eats food.

So whom does it benefit? The best example is post war Germany after the treaty of Versailles Germany was forced to pay out 200 million marks so the Germans turned on the printing press and simply printed them. The value of the Mark plummeted and the price of a loaf of bread went from one Mark to 1000 Marks. The baker simply factored in the cost of materials, labor and profit and business went on as usual. Except the baker had borrowed 100,000 of the old Marks to build a new bakery, now with the new revalued Marks he was virtually debt free a whole new bakery for the price of hundred loaves of bread.

The German middle class was wiped out but the German government and industry’s debt had evaporated. The loans made by the American banks after the war were repaid in new Marks. The weaker German currency has created a hole in the credit markets and someone had to take the loss. As it turned out it was American banks and depositors but to the German ruling elite they favored a weaker currency or were favored by a weaker currency.

There is no free lunch, a weaker dollar is a pay cut to every American worker. Industry and manufacture’s benefit and their workers gain by extra work hours only to be paid in less valuable dollars or screwed twice. But what sort of article headline would “American’s Take Pay Cut” be when “Drooping Dollar Driving Growth,” sounds so much better.

Enquirer (http://news.enquirer.com/apps/pbcs.dll/article?AID=/20070812/BIZ01/708120356/-1/all)

[Nbadan]

Stock Market Brushfire; Will there be a run on the banks?
By Mike Whitney


On Friday, the Dow Jone’s clawed its way back from a 200 point deficit to a mere 31 point loss after the Federal Reserve injected $38 billion into the banking system. The Fed had already pumped $24 billion into the system a day earlier after the Dow plummeted 387 points. That brings the Fed’s total commitment to a whopping $62 billion.

By some estimates, $326.3 billion has now been added to the G-7 Nations’ intra-banking system to prevent a breakdown. That amount will rise considerably in the weeks ahead as the situation continues to deteriorate. Some readers may remember that on Tuesday, August 7, the Fed announced that it was NOT planning to bail out the market.

My, how quickly things change.

So far, economic pundits and CEOs have applauded the Fed’s intervention as a “constructive” way of staving off an impending credit crisis.

Are these same “experts” who always sing the praises of unregulated “free markets” while condemning any government intervention?

Yes.

The investment banks and fund mangers love “free markets” when it means eliminating the rules that prevent them to “gaming the system”. But they don’t like it so much when their shabby Ponzi-rackets start to unravel. Then they’re the first in line to beg for a bailout.

That’s what’s happening right now. The Fed is keeping the stock market afloat by increasing liquidity at the banks. If it wasn’t for Bernanke’s billions of dollars of low interest credit—the banking system and stock market would collapse in a heap. The Fed’s “not-so-invisible hand” is the only thing holding the whole dilapidated system in place.

Is that the way it’s supposed to work in a free market system—with the Fed acting as the nation’s Economic Central Planner intervening whenever it suits the interests of its wealthiest constituents?

Sounds more like a Financial Politburo, doesn’t it?

In truth, the “free market” means nothing to the men who run the system. It’s just a public relations scam designed to dupe investors into plunking their money into a system that’s rigged for the carnivores at the top of the economic food-chain.

Does anyone really believe that the market-commissars would allow the system to operate according to the arbitrary swings in investor confidence and random speculation?

This is THEIR SYSTEM and they run it THEIR WAY. The only time that changes is when their twisted schemes go haywire and they need a handout from the taxpayer. In the present case, they are asking Big Brother Bernanke to bail them out on trillions of dollars of non-performing subprime garbage-loans which masquerade as securities in the secondary market. The Fed has already indicated that it is only-too-willing to help.

But what good will it do?

The banks are currently holding (roughly) $300 billion in collateralized debt obligations (CDOs) and another $225 billion in collateralized loan obligations (CLOs) More than one-half trillion dollars in debt which is essentially “illiquid” and has no clear market value. They could be worthless for all we know.

That hasn’t stopped the Fed riding to the rescue, buying up many of these toxic CDOs and increasing banking reserves so the great fractional banking con-game can continue unabated. This is what one astute observer called “alchemy finance”.

Central banks around the world have opened up the liquidity spigots to avoid a global credit meltdown. But their efforts are bound to fail. The banks are sitting on huge losses from assets that they can’t move through the pipeline and which have gobbled up their reserves. Bloomberg News summed it up like this: “The $2 trillion market for mortgages not backed by government-sponsored agencies is at a standstill”.

The same is true of the corporate bond market. As the Wall Street Journal reported last week:

“The investment grade corporate bond market HAS GROUND TO A HALT, making it difficult for companies to access capital and hard for investors to find a place to put their money to work. ….The problems in the primary market could, if they persist, throw a wrench in the workings of corporate America, making it tougher for companies to finance, among other things, investments, buyouts and equity buybacks….For July, corporate bond issuance was down 77% from June.” (“Corporate Bond Market has come to a Standstill”, Wall Street Journal)

The mighty wheels of commerce have rusted in place. Nothing is moving. Only the sense of panic continues to grow. Trillions of dollars poisonous CDOs need to unwind, but the banks cannot put them up for bid for fear that they’ll only get pennies on the dollar. This is what a slow-motion train-wreck looks like. The Fed’s cheap credit won’t help either. At best, it’ll just buy a little time before the true value of these bonds is established and trillions of dollars in market capitalization vanish into cyber-space. Banks, equities, hedge funds, insurance companies and pension funds are all in line to suffer major losses.

The irony, of course, is that the Federal Reserve created this mess by lowering interest rates to 1% and flushing trillions of dollars into the economy. That cheap money created a series of lethal equity-bubbles in housing, credit, stocks and bonds which are quickly falling to earth. Expanding the money-supply might be a short-term fix, but it’s really just throwing more gas on the fire. Why add hyper-inflation to the long-list of existing problems?

The volatility in the stock market is a red herring. We should be paying attention to the underlying problems which are just now beginning to surface. The banks have been originating loans and bundling them off to Wall Street to avoid the normal reserve requirements. Now they’ve been “caught short” and don’t have adequate funding to cover their bets. If the Fed doesn’t help out, we’ll see at least one or two major bank closures.

This is a story that won’t appear in the media. Bank-runs are the beginning of the end—financial Armageddon.

And there’s more bad news, too. If the stock market corrects more than 10 or 15%, the massive overleveraged $1.7 trillion hedge fund industry will crash-and-burn. This may explain why the stock market has behaved so erratically recently. There have numerous late-day rallies with no good news to support the soaring equities prices. Is the market being micro-managed behind the scenes to keep it above a certain level?

Many people think so. There’s been a flood of articles about the activities of the Plunge Protection Team’s in the last two weeks. The Fed’s desperate infusions of credit into the banking system will only reinforce growing suspicions of market manipulation.

DERIVATIVES DOWNDRAFT

Banks routinely hedge against adverse moves in the market by purchasing various types of insurance in the form of derivatives contracts. Derivatives trading has skyrocketed in the last few years and the “British Bankers Association estimated last fall that by the end of 2006, the market for all credit derivatives was $20 trillion and expected to be $33 trillion by the end of 2008.”These relatively new instruments are about to be put to the test by worsening market conditions. “Hedge funds may account for as much as 30% of such credit protection” but that is little solace for the banks “because hedge funds that are losing money but also selling credit insurance may not be able to honor their commitments, rendering the protection worthless.” (“Insuring against Credit Risk can carry risks of its own” Henny Sender, Wall Street Journal)

Credit insurance in the form of credit default swaps have created a false sense of security that may prove to be unfounded. In fact, the Credit insurance business has probably encouraged lenders to make shakier and shakier loans believing that they were protected from risk. But that doesn’t appear to be the case. For example, Bear Stearns tried to soothe investor’s fears during the collapse of its two hedge funds by pointing to its derivatives coverage.

“Bear executives repeatedly referred to their dependence on hedges, including credit derivatives, to offset their losses on subprime mortgages and loans to poorly rated companies, stating that such hedges would offset losses.” (Ibid, H. Sender, Wall Street Journal)

We all know how that story ended up.

Derivatives have been celebrated as a critical part of the “new architecture of the financial markets”. Now we can see that they are poor-performers under real-life conditions and liable to trigger an even greater disaster. If the stock market stumbles, we can expect a major breakdown in credit insurance-trading with trillions of dollars in derivatives disappearing overnight.

The abstruse world of derivatives trading will suddenly explode onto the headlines of newspapers across the country.

HOUSING BRUSHFIRE SWEEPS THROUGH THE ECONOMY

The contamination from the massive real estate bubble has now infected nearly every area of the broader market. The swindle which began at the Federal Reserve–with cheap, low interest credit—has spread through the entire system and is threatening to wreak financial havoc across the planet. The Fed’s multi-billion dollar bailout will do nothing to contain the brushfire they started or avert the catastrophe that lies just ahead. Greenspan opened Pandora’s Box and we’ll all have to live with the consequences.

Link (http://dandelionsalad.wordpress.com/2007/08/12/stock-market-brushfire-will-there-be-a-run-on-the-banks-by-mike-whitney)

[Nbadan]

How does Fed "inject" money into the system?
By John W. Schoen
Senior Producer
Aug 12, 2007


On Friday, the Federal Reserve -- and other central banks around the world -- pumped money into the global credit markets to head off a developing panic. The move was supposed to calm down the markets and ease fears that the mortgage mess will get worse before it gets better.

All of which has some readers wondering just what happens when the Fed pumps money into these systems. Whose money is it and where does it go when the pumping starts?

What does it mean when the Fed (and other countries) injects money into the banking system? Does this mean the government is printing money to get itself out of jam? Doesn't such an action create inflationary consequences? If so, wouldn't lowering interest rates be an at least equally effective mechanism? It seems to me that of those two mechanisms, even though both have inflation consequences, the lowering of interest rates would help the end consumer quicker.
--Richard, address withheld

The Federal Reserve, like all central banks, has several tools at its disposal to pump more money into the banking system (or drain it out), which helps to grease the economy and the financial markets or slow them down.

Contrary to popular notion, printing physical reserve notes (currency) isn’t the most important mechanism. (Thanks, anyway, to those readers who kindly remind us that the Fed's secret manipulation of illegitimate, 'fiat' currency is root cause of the world's economic and financial ills.) Most of the “money” that flows through the global financial markets is actually electronic data moving from one account to another.

One of the broadest tools the Fed can apply to the supply of money in the system is raising or lowering the amount of reserves that banks are required to hold in their accounts. Raising reserves means banks have to hold onto more money, which tends to tighten credit. This works fine as long as the borrowing you’re trying to manage is coming from banks. These days, much of the credit at the center of the current financial turmoil is coming not from banks but from the global money markets, where bonds are bought and sold and the market sets interest rates.

That s where the other two main weapons in the Fed’s arsenal come in: 1. raising or lowering short-term interest rates and, 2. what are called “open market” transactions.

Setting interest rates is the most visible and important tool because it essentially sets the “wholesale” cost of money. If you make money cheaper, it tends to move more quickly through the system. So if the economy is sluggish, a rate cut perks things up. If the economy is strong, raising rates is supposed to prevent the economy from picking up too much speed. Under those circumstances, too much money in the system feeds inflation.

Open market transactions are more limited, but have a more immediate impact. That’s why the Fed turns to these when the financial markets get into trouble, as it did on Friday. The specific mechanics of open market moves are pretty simple.

The Fed operates a trading desk in New York through which is can buy or sell bonds. If it buys bonds, the broker-dealer that sold them gets cash in return. That cash then flows through the system.

If the Fed wants to soak up money, it sells bonds from its account -- taking cash from the dealer that bought them and taking it out of the system (or "draining" money.) The Fed maintains its own account, so any money being ‘injected’ into the system is not coming directly from the tax dollars collected by the Treasury.

Sometimes, the Fed will restrict these transactions to short-term ‘repurchase agreements’ (or repos) which means the party on the other end of the trade agrees to reverse it after a few days or weeks. This means the shot in the arm is temporary -- after the market settles down the money comes back out of the system to avoid pushing inflation higher.

In the case of last Friday's "injection" the Fed did something a little unusual:
Ordinarily the bonds it offers to buy or sell are good old U.S. Treasuries; the Fed has lots of them lying around. But because the current breakdown in the credit markets is caused by bonds backed by subprime mortgages, those are the bonds the Fed specifically went shopping for (some $38 billion worth, to be exact).

Until the Fed stepped in, there were virtually no buyers for these things, because investors have all but given up trying to figure out what -- if anything --they're worth.

Until it's clear how many more mortgage holders are going to default on their loans, it hard to know where things will shake out. But, based on recent sales, it turns out these bonds may be worth as little as a third of what they were supposed to be worth.

The Fed may have put out the fire for now.

But the larger worry is that the banks, investment funds and hedge funds that are holding billions more of these bonds may now have to book those losses. And since the hedge funds holding these bonds are not regulated by the Fed, it's anyone's guess just who is holding them and how much damage was done by the collapse in their value.

Some holders, including Bear Stearns and the French bank Paribas, have already let Wall Street have the bad news.

But there are almost certainly more shoes to drop before the current credit crunch runs its course.

MSNBC (http://www.msnbc.msn.com/id/20218020)