Sunday, September 23, 2007

Question For Ben Bernanke

Last week the Federal Reserve Board had a 50 basis point cuts in the Fed funds. Since cheap debt was a significant contributor to our current economic problems, how will more cheap debt help our economic problems?

27 comments:

  1. The Fed was concerned that the banking system and Christmas bonuses were in trouble. They obviously cannot say that so they lie. 50bp gives the banks a little more time to unwind some really nasty overlevered positons. The Fed abandoned inflation and the dollar for this bailout. I can only guess that they were scared by inside information. Perhaps all their hedge fund bussies showed them the requests for 45 day redemptions?

    ReplyDelete
  2. David - stick to commentary on the housing market. Your economic commentary is usually very ignorant and unenlightening.

    ReplyDelete
  3. My, Rob, you're a cynical guy. If you're right, the first and third months of October will not be pretty for those long in the markets.

    On topic, cheap debt, or more precisely cheap credit, is good if you believe having more money makes you wealthier (for the literal minded: that's a joke, son).

    ReplyDelete
  4. I find it ironic that nothing has boosted the LIBOR like this rate cut. Its amusing the rate cut backfired.

    Yes, there was a panic for short term credit. But that doesn't seem to be helping real estate. The wife and I toured a few open houses yesterday. Every single one was a home that fell out of escrow as the buyer no longer qualified by the time the loan was to close.

    Oh, these were all 1.2M+ homes. In my area there are over a hundred mansions trying to move through the pipeline. When their price gets cut... boy will the Mcmansions drop in price. The 2,500 ftsq homes we're looking at are now dropping in price 1% to 2% per month.

    Just think, we haven't yet hit the October through February traditional season for home price drops.

    And the commercial paper market is still only processing 50% of the borrower demand.

    And condos, condos everywhere reverting back to rentals is doing wonders for cutting rents. Oh, not at the nice new places. But the three year old spots suddenly find they must cut to be competitive. Don't you love the free market when its allowed to work right?

    Got popcorn?
    Neil

    ReplyDelete
  5. Lex,
    ask anybody who knows me. I'm usually the first to reel in the whiskey and gunowder crowd. That said, I'm kinda well known. Ask the audience if I'm ever far off the mark in any of my comments. It isn't cynical to see the Fed responding so vigrously and not conclude they know something they didn't know last month and we still don't know. Cue the Cramer video where he is screaming "they know nothing!" a scant two weeks ago when the markets were predicting no change even money with 25bp cut. My two current best suspects are the hedge redemptions and the jump in "not in workforce" numbers.

    ReplyDelete
  6. anon,

    If you do not like David's blog, feel free to go elsewhere. :)

    Cheap debt always causes long term problems. Disagree? Well... let's just see how home prices, per square foot, do through the five months of year where most of the price drops usually occur? (October through February).

    But wait, all that cheap credit brought us all the lovely condos! So many we'll have cheap rent for a decade. ;)

    Make credit cheap enough and they can build more. Did you see the talk on Bloomberg today? More "better value" home projects coming our way. Builders have to build... and they are quite willing to stay above the natural absorption rate. Keep interest rates low... that will keep construction up. :)

    Near where I live are close to 50 surplus mansions in what was supposed to be a "built out" area! And McMansions by the gross. (McMansion townhomes too...)

    I do not fear cheap credit, but any non-builder home seller should.

    Got popcorn?
    Neil

    ReplyDelete
  7. The idea is to lend cheap money for people to be able to repay cheap loans which they could not repay if money was expensive.
    I would agree it sounds crazy but as long as people buy 10-year bond with a yield below 5% it is fine.
    When no one is gona want to hold US$ unless the yield is higher than the party will be over, until then, keep on filing your carts @ costco.

    ReplyDelete
  8. Neil, why aren't prices dropping then? Everything I've been reading says that other than the "edge" spots is continuing to go up in value. Are you looking for a home in a locale where no one else really wants to be looking? Are you looking in one of those formerly-overpriced exhurbs that has finally reverted to the price it was worth all along? Or are you looking in average, normal areas where prices have never stopped rising? I mean, if it makes you feel good to act as if the exception were the rule, go right ahead. Just please don't confuse honest people out there who are looking for a real home and not a contrived dream.

    ReplyDelete
  9. You ask: Since cheap debt was a significant contributor to our current economic problems, how will more cheap debt help our economic problems?

    I ask: whose economies? Someone is making money here.

    ReplyDelete
  10. Interesting article in The Post:

    High Appraisals Signal Change

    By Kenneth R. Harney
    Saturday, September 22, 2007; Page F01

    www.washingtonpost.com/wp-dyn/content/article/2007/09/21/AR2007092100793.html

    ReplyDelete
  11. Lance, the money the Washington Post makes off of real estate advertising is huge. It is in fact its number one revenue generator, followed closely by automobile advertising. If your next question is, "so what, that doesn't mean anything," well we don't expect anymore (actually, less) from you anyway.

    ReplyDelete
  12. Your economic commentary is usually very ignorant

    Before you start throwing around the word "ignorant," you might actually want to use the word correctly. Only a non-inanimate entity can be ignorant when used as a nominative object in a sentence. A commentary is inanimate. Ergo, your usage is incorrect.

    ReplyDelete
  13. Neil, why aren't prices dropping then? Everything I've been reading says that other than the "edge" spots is continuing to go up in value.

    Huh? Median is going up because the average home size is going up. Cost for the same homes are dropping. Either that or you are looking in very different neighborhoods than I am.

    I'm looking to buy a 4 or 5 bedroom with 2,400 ft^2, to 2,800 ft^2. And did you notice how many homes are returning to the market after failing to close escrow?

    We've talked for a while on how Case-Shiller index is dropping. The transaction prices for equivalent homes are dropping. Now, only 1% to 2% per month in the areas I'm looking at... Nothing like Florida or San Diego. But they are dropping. :) Don't confuse median with what the average home is doing.

    But many of the homes are like my in-laws. They added 400Ft^2 to the house. But do recall that in recessions like this the affluent neighborhoods lose more "value" than those priced for the median income.

    Don't believe me? Walk open houses. I keep my mouth shut while previewing, but it was funny hearing other potential buyers chew out the realtor for wasting their time with an overpriced listing.

    And the significant impacts from the failing commercial paper market are 60 to 90 days away. Cest la vie.

    Or am I imagining when I notice that before I could barely afford a 3 bedroom a year ago while now I'm finding 4 bedrooms priced what 3 bedrooms were. :) There is a reason they say buyers are usually more in tune with the market...

    And yea... the 3 bedrooms aren't selling like they used to... so the median looks good for the larger/nicer 4 and 5 bedrooms still sell. I'll wait. I'm patient.

    Besides, my company has announced a restructuring in December. The renters are looking forward to the news. Homeowners are stressed. Worse comes to worse, there are plenty of jobs for me in Denver. :) High wages too. :)

    Got popcorn?
    Neil

    ReplyDelete
  14. Have to agree with anonymous September 23, 2007 8:30 AM. I am sometimes interested by the housing market commentary here (if only because it is at times illogically pessimistic), but the economic chatter truly has no merit.

    A recent stabilization in core inflation numbers led to a rapidly rising real federal funds rate (the rate adjusted for inflation), so the Fed had to make a cut to get back closer to the long-run equilibrium funds rate. This wasn't (entirely) a sop to investors, and was actually based on sound economics! In fact, most real economists would agree that the Fed's move was exactly what was needed, regardless of the cut's impact on the stock market (which will be fleeting). See some good analysis here.

    ReplyDelete
  15. "Before you start throwing around the word "ignorant," you might actually want to use the word correctly. Only a non-inanimate entity can be ignorant when used as a nominative object in a sentence. A commentary is inanimate. Ergo, your usage is incorrect."


    That's not true, but thanks for trying to police the blog for grammar.

    ReplyDelete
  16. OK, perhaps those craving some "useful" economic commentary may want to check out Roubini's appearance this morning on CNBC:

    http://tinyurl.com/2ktu85

    ReplyDelete

  17. Lance said:
    interesting article in The Post:

    High Appraisals Signal Change

    By Kenneth R. Harney
    Saturday, September 22, 2007; Page F01


    It's typical for appraisals to lag behind both climbs and drops. This isn't news for anyone familiar with ordinary trends in real estate cycles.

    ReplyDelete
  18. Ron Paul Schools Ben Bernanke on Moral Hazard.

    http://www.youtube.com/watch?v=AeHWW5gbc0w#GU5U2spHI_4

    ReplyDelete
  19. Andrew said:
    "It's typical for appraisals to lag behind both climbs and drops. This isn't news for anyone familiar with ordinary trends in real estate cycles."

    That makes sense. But the following (from the article) also makes sense:

    "It certainly puts us in an uncomfortable position when we find that the selling price is below market value," said Karen J. Mann, an appraiser in the San Francisco area. "We wonder what's going on out there. Are sellers giving in to the bottom-feeders?" she said, referring to people who troll for hints of distress or urgency.

    I.e., when one cries "wolf", one can empty out a crowded market place pretty quickly ... but invariable, people figure out what is going on ... and return.

    ReplyDelete
  20. "I.e., when one cries "wolf", one can empty out a crowded market place pretty quickly ... but invariable, people figure out what is going on ... and return."

    WTF?

    Lance predicting things are about to turn?

    Bidding wars in May right lance?(May 07 in case anyone forgot)

    ReplyDelete
  21. So what is the point of the article? That appraisals based on bubble prices (bubble comps and all other "frothy" factors) are just that, and the market will determine the actual selling price? Not very interesting at all.

    ReplyDelete
  22. anonymous said:
    "Bidding wars in May right lance?(May 07 in case anyone forgot)"

    I NEVER predicted bidding wars in May ... or any other time soon. If you think I did, then find the quote.

    ReplyDelete
  23. Thanks for playing lance... below is your original quote.

    As usual, you would have been better off if you had just kept your mouth shut.

    Price increases between Jan and May? Bubbleheads fighting each other to buy at higher prices?

    LOL...

    "Lance said...
    wannabuy said:
    "To think this really hasn't started. It won't be until May that things get interesting in the RE market. So Yawn."

    I agree. That's just about when a lot of bubbleheads will be coming to the realization that missed the bottom and will be fighting each other to buy at prices higher than current prices. Ouch!

    January 13, 2007 3:39 PM"

    ReplyDelete
  24. Anon,

    Again, I never said there would be bidding wars in May. If you can't find the quote, just say it. Don't substitute other quotes taken out of context.

    ReplyDelete
  25. Anon,

    Hint as to why your "proof" isn't proof ...

    "Bubbleheads fighting each other" doesn't equal "bidding wars." Bidding wars are waged by people ready and able to buy at market prices ... i.e., not by Bubbleheads. They aren't ready or willing to buy at market prices. They want "something for nothing".

    ReplyDelete
  26. It is really funny watching you try to wiggle out of your own idiotic predictions...

    Tell me lance, since the bottom was before May, where exactly was it? April?


    lol

    Better to keep quiet and have everyone in the room suspect you are an idiot than open your mouth and remove all doubt...

    ReplyDelete
  27. Lance's quotes:
    ..."why aren't prices dropping then? Everything I've been reading says that other than the "edge" spots is continuing to go up in value."

    And yet you are a quote unquote *contributor* to the Northern Virginia Housing Bubble, which shows the prices of houses up for sale that have gone DOWN in price.
    Doesn't your head and neck hurt wearing those blinders all day and night?

    "I.e., when one cries "wolf", one can empty out a crowded market place pretty quickly ... but invariable, people figure out what is going on ... and return."

    Do you ever watch The Nightly Business Report? Tonight's headlines:

    Median price for new homes
    Down 7.5%
    to $225,700

    K B Home, a major home builder, predicts a worsening market until 2008
    Quote from Carl Riccadonna Senior Economist Deutsche Bank

    "the data across the board have been weak on housing front from existing home sales to builders confidence to buyers confidence
    everything is down and down hard.
    We're at in many of the series record lows that we havent seen since the housing recession of 1990-1991"
    These are not exactly naughty little boys crying wolf, now are they?
    An economist admitting that house buyers confidence is down and the housing market is down, and unlike Lereah, if this economist is wrong, he ends up fired, unable to get work, unable to write a book about his errors and losews credibility in the realm of business and investment.
    Of course, +Lance is superior to any old economist, since the wisdom of Lance is superior to everyone on Wall Street and everyone in Washington DC. (Now where is that sarcasm off button again? Oh here it is +/-)

    Jason's quote:
    "A recent stabilization in *core inflation numbers* led to a rapidly rising real federal funds rate (the rate adjusted for inflation), so the Fed had to make a cut to get back closer to the *long-run equilibrium funds rate.* This wasn't (entirely) a sop to investors, and was actually based on sound economics!"

    Core inflation numbers? The problem with inflation numbers is the method to measure inflation is an elastic yardstick, it can stretch like a rubber band and never snap.
    The cost of automobiles have increased over the decade, the cost of health insurance has increased over a decade, and we should be convinced that inflation is under control?

    The long-run equilibrium funds rate
    is adjusted by the FED calculations, which would work if the M3 wasn't as high as it is running. You will have to go to shadowsats.com to find out what the M3 is through their calculations since the FEd convieniently stopped reporting the figure.

    http://quotes.ino.com/chart/?s=NYBOT_DX&v=d12

    http://quotes.ino.com
    /chart/?s=NYBOT_DX&v=d12

    US Dollar index shows the dollar below the line-in-the-sand 80.0 that was supposed to be the absolute floor for the Dollar, and yet no one makes a sound that it is now in the 78 territiry.

    ReplyDelete