Tuesday, June 05, 2007

That Was Fast

Bernanke Says Subprime Curbs to Hurt Housing Market
By Craig Torres and Scott Lanman

May 17 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke issued a double-barreled warning on the U.S. economy, saying the housing market will continue to struggle and the Fed sees ``significant risks'' in the leveraged-buyout boom.
The Fed chairman maintained his forecast that the slump in housing won't have a broader impact on the economy, comments that were echoed by former Fed chief Alan Greenspan today. ``We do not expect significant spillovers from the subprime market to the rest of the economy or financial system,'' Bernanke said.

Risk to Growth

Fed officials this year have cited the housing recession as a main risk to economic growth, which was the weakest in four years last quarter. Bernanke's comments today reflect the consensus of policy makers that the downturn in housing is unlikely to cause consumers to cut spending.

Bernanke said banks are appropriately reducing credit to the market for securities backed by subprime mortgages.

``We are likely to see further increases in delinquencies and foreclosures this year and next as many adjustable-rate loans face interest-rate resets,'' Bernanke told the Chicago Fed Bank's annual conference on bank structure and competition. Still, ``the vast majority of mortgages, including even subprime mortgages, continue to perform well.''

-----And now just 3 weeks later-----

"appears likely to remain a drag on economic growth for somewhat longer than previously expected," ... IOW Moderate growth at or below trend due to continuing subprime troubles.

No spillover, yeah right.


FlyingMonkeyWarrior said...

And cutting interest rates FIRST would not help either, too little too late, imo.

Joe Dirt said...

Nice one FMW

walt526 said...

Cutting rates would be the absolute worst thing the Fed could do right now.

There are gross inefficiencies in the global credit market right now. The only way to alleviate their stress and mitigate their potential is to allow a minor recession now to avoid a much more devastating one later (although it may be inevitable at this point).

In my opinion, at some point in the next 20 years, the world will experience a prolonged recession of 3-5 years. Infusing the financial system with greater liquidity now will simply cause the markets to float ever higher, which only means a collapse from a higher height later on. Financial engineering created this mess by allowing investors to deviate from adhering to the market's underlining fundamentals; financial engineering cannot and will not rescue the financial world from the seeds of destruction that it itself planted.

If I were BB, I'd threaten to RAISE rates if: a) private lenders return lending standards to historical norms (already underway); and b) Congress eliminates the budget deficit within 2 years (this would almost certainly result in higher taxes). The single greatest security threat that we face is from our negative national savings rate and, concomitantly, an addiction to imports.

BB is correct that the subprime collapse will not CAUSE a widespread financial problem. Rather, the subprime collapse is a SYMPTOM of widespread malfeasance throughout the global financial system that will almost certainly devastate everyone and everything if not corrected TODAY.

And yet us fat, obtuse Americans mostly sit idly by, mostly oblivious to the impending crisis as usual. So long as the Dow is setting records, everything is good--right?

FlyingMonkeyWarrior said...

Thank you Mr. Dirt. (:

Rob Dawg said...

Barry Ritholtz at Big Picture has a discussion on rates. Earlier this year the consensus was for 2 or 3 25bp reduction in '07. Right now the bet is evenly split between steady and plus 25bp. [Disclosure, I have a futures bet on higher 10yr yields.] Anyway Ritholtz says it best; The Feds job is stability not asset price support be they stocks or houses.

FlyingMonkeyWarrior said...

@ Walt526,
I think a rate cut is exactly what is planed, but not because of housing, but to lighted the Global Government debt load, tank the USD with intent and eventually merge Mexico, Canada and the US into one North American Union with one currency, similar to what Europe did with the Euro
maybe I read too much.
Some one said that after the 08 Olympics in China TSWHTF.

The Dude said...

Flying Monkey,

Best use of FIRST in a FIRST claim.....

FlyingMonkeyWarrior said...


FlyingMonkeyWarrior said...

OT again, but I can't help myself.
Gonu Cyclone track and Major Energy Structures in the Middle East.
Bloomburg sez oil and gas pipeline, market and supply un affected by storm.
We shall see.

Rob Dawg said...

What would a rate cut accomplish? I wish I had a word count on Bernanke's speech. He must have said "subprime" 20 times in 5 minutes. A cut would prop up th bubble in theory but we are in uncharted territory. People are not going to refi out of 2.5% teaser rates into 7% 30yr fixeds just because of a 25bp cut. Recent home buyers have unmanageable debt loads, it is that simple.

walt526 said...

"Anyway Ritholtz says it best; The Feds job is stability not asset price support be they stocks or houses."

I'd state it slightly different: the Fed's job is to utilize monetary policy to mute the extremes of manias and crashes, but not avoid them. It is impossible to eliminate the business cycle; all central bankers can do is try to mitigate the damage through liquidity. When they fail to do so by either not supplying liquidity in a time of financial crisis (1930s) or oversupplying liquidity in a time of irrational exuberance (early 2000s), the result is the same: an exasperation of the highs and lows of the business cycle.

In manufacturing, there is something called the Plexiglas principle. Basically, if you take a sheet of Plexiglas and bend it in one direction, when it inevitably snaps back it will not return to its natural (straight) state, but assume and bend in the opposite direction--and stay there until force is applied to revert it back to the other side. But it is never possible to quite get the Plexiglas to assume its original shape--it is forever oscillating between one extreme or the other.

Humans behave very much like Plexiglas, as do our markets. Whenever a natural state is violated by external force, there is a backlash that takes out to the opposite side. And that becomes the new natural resting state until a new external force pushes us back--but never quite back to our original state.

FlyingMonkeyWarrior said...

@ Dawg,
Exactly my point in my FIRST post. It is not about housing, it is about our trillion on debt, and that is just China. And it is about the NAU, I reckon.
Rates will hold, or go down according to my research, but I ain't nobody.
A tax cold war is in the making with China and the US, there is a global oil grab going on and there will be a global fiscal pp contest. Who will blink first, who knows.
te he
Like we bubble bloggers always say, "got popcorn?"

walt526 said...

"What would a rate cut accomplish?"

Higher inflation. As FMW said, in a perverse sense it might be in the US government's interest (no pun intended) to eliminate its debt through that instruments. But doing so would be terribly myopic IMHO. Whatever we eliminate through inflation, we will ultimately pay back in the form of higher interest on new debt because the rates demanded by the global credit markets will be crippling to our economy.

The only way to protect our future access to credit for future growth is to lessen our dependence on it for simply maintaining our present standard of living. It may already be too late to some extent, but our monetary and fiscal policies in the near future still have the power to exacerbate or mitigate the negative consequences of our government's reckless behavior over the last forty years.

Rob Dawg said...

Of course but we are already straining credulity with our current inflation ex-inflation claims. A rate cut would show up in those offical inflation numbers, can't have that. The Fed is already busy running M3 at 11-13% while claiming 2.4%. The difference is the debasement of future dollar denominated debt obligations we all here know needs to be repudiated in one form or another.

Mouse And Pencil said...

"Bernanke's comments today reflect the consensus of policy makers that the downturn in housing is unlikely to cause consumers to cut spending."

Oh, bullshit.

How much of the spending on a personal level on items like Hummers, plasma tvs, ipods, Disney cruises, and paying credit and tax debt has been done through the refi/equity ATM madness of the general public?

Northern Renter said...

You mentioned the possibility of a currency union between the US, Canada and Mexico. The biggest problem here is that the two obvious options are i) each country gets one vote in a 3-vote decision process or ii) The votes are split based on GDP or population. The US would never accept the first possibility, and Canada/Mexico would never accept the second one.


lurker said...

I am not certain that cutting off the housing ATM will drastically slow spending.The people I know that do not save will continue to try and spend (think of Casey's spending habits). It is possible that the spending will continue at a higher interest rate. Spenders will swith to the credit cards they have paid off, then new cc's then Cash Call.

Then we Crash

FlyingMonkeyWarrior said...

Whatever we eliminate through inflation, we will ultimately pay back in the form of higher interest on new debt because the rates demanded by the global credit markets will be crippling to our economy.
The Import tax rate on China manufactured goods is up for debate in our lawmakers chambers and on the floor in DC. The Dems. want to tax the US Importers of China made goods at 27%. Do you think that will help?
Just makes ya feel warm and fuzzy all over.
gtg, ltr

Jefe said...

Sorry to hijack this post, but I found this tidbit over in the comments of a recent Calculated Risk post too funny not to share.

Seems the fecal finger of Serin reached even Robert Campbell.


Mouse And Pencil said...

Casey is going to have to leave the state to get any kind of meaningful work - but it's going to take a long time to shake the reputation he's earned for himself. The ONLY good thing is IAFF is gone, so it will fade from google eventually.

Unless, of course, Caseypedia is still there.

Another step towards meme-hood. Good job Casey. You got the fame you wanted and expected, now enjoy it. Your name now means fraud, stupidity, and bounced checks.

Mouse And Pencil said...


Nobody knows, lurker, that's the skeery part. For all of the number crunching and theory, we have to contend that the future is in teh hands of people who foolishly built up the boom in the first place.

I don't see much of a party though, as most people I know are almost at their limit or overextended on cc's, and CashCash...people are stupid, but only a small percent will be stupid enough to go there.

I just saw a commercial on Discovery for some kind of loan, they're talking $99 monthly payements, to "pay off credit cards, but the car or house you always wanted, or just have money in your pocket".


The lenders I'm sure will find new ways to get people on the hook. Maybe they will get another year of living high on the hog through credit cards and desperation loans. But the BIG money, the ATM refi, is tapped dry. That's a lot of spending that won't be happening this year.

It's gotten to the point where I don't want to buy a house, after watching all of this. I have zero debt, don't use credit cards, and don't even like the idea of a car loan with the way things are going. I get hit on for credit lines everywhere I go - I almost called for a manager the last time I was in Target, because the idiot cashier would NOT take no for signing up for a fucking Target credit card, AFTER I told him that A. I don't shop there enough to matter, B. I don't WANT another credit card, and C. I don't like the rates and policies of the card. Half my mail is teasers for credit cards or loans, half my e-mail is mortgage spam, credit card offers, or refi's. I love the ones addressed to my home that was in reality an apartment in a 16 unit building - but I'm preapproved for 200K for the mortgage on it! LOL.

I's SICK of credit. I don't even care what my fico is, I have a credit monitoring service for identity theft, i could care what my fico is. It's green, whatever that means on the site I'm on. I don't want any debt, loans, mortgages, cards, car loans - I want to SAVE my money, damn it!

I fucking hate our economy. It's all based on greed and spend, spend, spend.

lurker said...

Spending has started to slow and will continue to slow as people use up their credit. I know a lot of people who are living above their income and go to Starbucks regularly. These people have good credit and can get more cards.

The house ATM is cut off, but most people went to it in big chunks, refi and take 50K out, pay off the credit cards, buy a new toy and then invest. The new toys are going to be dropped but these people can't seem to address the basic problem, their overall lifestyle. The expensive part of their debt is the lifestyle, eating out, expensive car, new clothes, not the new toy.

I also think the housing ATM is reduced but not eliminated. In my mail yesterday was another easy to apply for Heloc. The housing prices are back to 2004, but we had a boom from 2000 to 2005 so there is more equity still to tap.

I hate the credit lifestyle as well

R-Boy said...

I don't think a rate reduction will help matters. I think this is where we cinch up the belt and swallow our medicine for a bit.

I too have gotten tired of the credit card offers and refis I see on TV. I've personally called these companies and told them that I don't want to get anything anymore. It still comes.

We just don't incentivize savings like it used to be. There are attempts at trying to do that but I think that the development of mass media has created the consumeristic society that trades off fast growth and consumption today for dieting tomorrow.

Some people do make smart decisions. It does happen. A co-worker of mine is selling her house (in a non-paniced state) and her husband and 3 kids will be moving in with her mother in her mother's hyuge townhome. Not only will they not have a mortgage payment (mother's home is paid in full), but they'll have a live-in babysitter, and while they're there they're going to renovate and fix the thing up with the money they would've been paying into a mortgage.

Smart woman

Rob Dawg said...

R-Boy, that demographic will absolutely kill the housing market. I've been predicting the very same shift for years. You see in addition to natural housing stock growth and the explosion in second homes there has been a trend down in occupancy. Just returning to the 1995 American Housing Survey (AHS) occupancy rates would free up something like 2 million houses. These are extra houses not just for sale but for sale with no one to buy them.

lurker said...

The move in together is what is going to save the McMansion. As a single person, I know a bunch of single people (all homeowners) I suspect at some point several of us are going to sell our 3 bedroom houses and move in to a McMansion. In addition to mortgage savings, we will have huge savings on utilities, cable, etc.

Rob Dawg said...

Yah, when I think of all the waste of our nation's surplus housing it sickens me. Vacation houses ticking over gas and electricty and cable and water for 2 weekends a month. And you are right. Utilities are going out of sight. One cable bill split 3 ways is a lot easier to justify.

soem dood said...

At 6:29 AM, walt526:

"Plexiglas effect" is a new one on me, but the phenomenon you describe is often seen in sheet metal and is then called "oil canning." In electronics, the effect is known as 'hysteresis.'

@ 5:44AM -- FMW: he he I saw what you did there!

soem dood said...

@7:44 Mouse and Pencil on the Hummer reference:

I was in Miami traffic today behind one of those Hummer behemoths, with only one guy in it, with cell phone affixed to ear, cutting across lanes, and I was thinking, "Hey, if you pay for it, I guess it's your decision", but then I got P.O'ed -- the license plate was: "TX RT OF" and it reminded me that for Suburbans, pick ups, Suburus etc, small biz got no write off, but there was indeed a loophole for Hummer tax break

sid_finster said...

Interesting. In Russia, it is perfectly normal to live with the folks, even after getting married. In part this is because only the rich can afford to buy a home.

Everyone else gets them by inheritance, either from relatives or from the Soviet days.

soem dood said...

At 1:27 AM, sid_finster said...

"... this is because only the rich can afford to buy a home."

In Soviet Russia, you not own house; house own you.