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Wow. The basics: mortgages
5.75% the week of the 14th – the 18th, Monday the 21st a holiday, Tuesday
markets stunned by the Fed’s .75% cut; mortgages early Wednesday morning
to 5.375%(!), wholesale rate-locking websites crashed in an hour,
mortgages back to 6.00%(!!) by Thursday noon. Citibank wholesale raised
its rates nine separate times in 24 hours.
Summary: the economy --
including housing -- is probably better than feared, and we’ll all be
okay. However, this was the worst week for economic public policy in our
memory. We’ll survive it, too.
The details center on the Fed Chairman, and are not pretty.
First, a crucial concept: bond
buyers love recessions and hate rescues. As the economy faints, bond
players join a frightened scramble into bonds for safety, and make a great
deal of money IF they can sell the bonds before the Fed rescue. If the Fed
looks too easy too quickly, bonds reverse in self-protection.
A properly conducted Fed
rescue must be delicate because rescue depends on lower long-term rates,
not just the short-term ones that the Fed controls. Precedent is more
important to the Fed than to the Supreme Court. If the Fed moves in
stately, predictable, and dignified fashion, long-term rates will follow,
even though reversal one day is inevitable. This economy needs lower
long-term rates than any in modern times.
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Last Thursday, Mr. Bernanke
went to Congress to ask for a stimulus package “quickly.” A Chairman
without confidence in his own resources immediately destabilized markets
all over the world (Dow down 400 that day). The Fed Chairman never, ever
goes to Congress to ask for stimulus: that’s the Administration’s job. The
Chairman must stay in his tower, appearing confident, in charge, able to
respond to any emergency, any and all doubts a state secret.
The destabilization worsened
worldwide on our Monday holiday, futures indicating a down-500 Dow open on
Tuesday. When the Fed cut .75 (to 3.50), the first assumption was that it
knew of some new credit disaster. Like a man after a car accident patting
himself, looking for injury or blood, markets took inventory. Nothing. The
only reason for the timing of the ease was to support the stock market --
as Bernanke had done in August on purpose, and by accident in December.
His extreme action, unprecedented in the entire history of the Fed, was
notably not joined by any other central bank.
After that injury inventory,
we thought maybe Bernanke had panicked -- soiled his skivvies as no
Chairman before. Now... We think oblivious, or maybe a combination of the
two. He has shown political ineptitude from the first months in office
(blabbing intentions to a pretty reporter at a party), and does not appear
to have learned a thing.
© 2008 - Economic Notes is published weekly by the Economics Department of
Universal Lending Corporation. |
The consequence of random,
academic-in-a-china-shop behavior: an already fragile and illiquid bond
market raised rates and slowed trading.
The stimulus package has had
similarly destabilizing results. At best it will be harmless. More likely,
late, adding stimulus after the need has passed. The new mortgage limits,
$625,000 for Fannie and $750,000 for FHA, will be intercepted by a
125%-of-median-prices lid in each Metropolitan Statistical Area. Out of
156 MSAs in NARs database, only 20 will benefit. In Boulder CO, the City
has a home price median near $550,000, but the whole MSA is $367,000,
hence a new Fannie/FHA limit (maybe -- not final) of $460,000, an
undetectably minor help.
Good news: short term rates are so low that ARMs are adjusting down, into
the 5s. Prime-based HELOCS are adjusting down from the mid-8s to low 6s.
The whole of Wall Street thinks that home prices will fall to a clearing
price, and they won’t -- foreclosures will rise for years, but Bubble Zone
prices may well bottom this year.
Pending news: the Fed meets
this week (Saints preserve us...), and mortgage-defining jobs data on
Friday. Ultimately the economy drives rates, loopy Fed or no.
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