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More Merging with
Despite the best efforts of the Teamsters Union, the
Courts have given the Bush administration the green light for Mexican
trucks to roll into the US next Thursday, reports the Houston Chronicle.
This is a sideshow of the corporatist/globalist plan to merge the US
with Mexico and Canada (and
have its own money) without ever having to go to the CONgress
and call it what it is - merger. Instead, the administration's
weasel-wording is that this is all "administrative" in nature and
therefore no "approval" is required. As a result, there's a whole
second government push (the second government being the one that was
never elected, just appointed and really pulls the strings) which is
neatly laid out at www.spp.gov and
elsewhere, explaining how this is all really good for you.
Rove Writes on History
Karl Rove writes in the National Review's Online section that history will
be kind to George Bush.
As you might expect, Rove's
article heaps a lot of praise on George Bush and doesn't mention the
horrific assault on America's Constitution, ending habeas corpus, secret
tribunals, torture operations, nor did I see mention of the usurpation of
powers from Congress or the "administrative plan" to merge Mexico and Canada
mentioned above. No mention of how the highest level of home ownership
so touted a few years back has now blown up and is leading to a lot of
suffering. And that's just for openers.
I'm afraid I'm the last of a
breed: I'm a real Republican - not the kind of republicorp or corpgov
types that inhabit Washington. You know, the other kind - the sound
money, small central government, states rights, progressive on civil rights,
and strictly Constitutional - that kind of thing. Guess that makes me
American Whig Party or Libertarian, these days. There was a time
when those values were Republican (capitalized when appropriate, which is
In a further conversation yesterday with the folks at
www.halfpasthuman.com, it seems the thing to be on the lookout for
(at a personal level) over the next couple of days is "accidents."
So, while we're waiting for whatever it is that should dominate the TV
news coverage by late Sunday or Monday, a convergence of notes from the
predictive linguistics research and even a few astrologists says in
effect "Oh, and at a personal level, be really, really careful
especially this weekend, as Universe seems to have a wave of 'accidents'
going through it..." [related
search] Hard to get things done without using power tools here
at the ranch, but yes, I'm being super careful...
Reports are that Larry Craig is resigning from the Senate at the end of
the month. The interesting thing about this is that Craig entered
his guilty plea without consulting an attorney. Surrounded as he
is by lawyer/lawmakers, I found that a curiosity...
Speaking of Senators and accidents, a Virginia headline "Accidental
Senator Makes Good" (about the retirement of John Warner) resonates.
I see that
Indonesia is suggesting that a group of 'rainforest nations" get
together to work on global climate issues. Say,
with Tyler Texas just 0.42 inches shy of 50" of rainfall year-to-date,
any chance Texas should be part of this, too?
Freedom of Speech?
federal judge in New York's northern district has ordered a web site
that sells information on how to legally stop paying taxes to
shut down. If you go to the
site, you'll see that it is still up, but the offensive (to IRS) pages
have been removed.
According to the site, the latest is that names of people who have
purchased their materials will not be turned over to IRS...but this
one promises to drag out in court.
I mentioned this site
in an Inside Report (now Peoplenomics) way back in early 2001...but,
just so we're clear: I haven't stopped paying taxes, and yes, I report
every dime I make because although I read a lot of the tax books on how
there is not supposed to be any direct capitation on income, one stands
in harms way if you stop paying tribute as demanded.
Old saying: "He who fights and runs away, lives to fight another day..."
Nice email this morning from a new Peoplenomics subscriber:
Hey George, I am a new Peoplenomics subscriber and love the info. I
am also a mortgage broker and I totally agree that the worst is yet to
come. Thanks for the great info.
the link he sent along)
So, while I hold that a major
decline starting next week seems likely, it's interesting to read reports
like this one, that major banks have been doing contingency planning in this
OK, if you're a conspiracy
theorist, here's more grist for the mill:
Russia says they
are planning to put a man on the moon by 2025!. I don't
know if you've ever given a serious watch to some of the videos out there on
the topic, but there are several out there and you
can find info one eBay once in a while. Even if you haven't looked
at the documentaries, you have seen Capricorn One, right?
continue to crank out new advanced missiles with long enough range to
hit Canada, Mexico, and that place in between 'em...
After what has been a mild
hurricane season so far (*as long as you don't ask residents of Playa del
Carmen and Tulum) it looks like
a big mess of tropical weather is forming up in the Atlantic and Caribbean..
Lots of quake headlines, too:
was a series of three quakes on the Mid-Atlantic Ridge overnight, the
largest of which was a 5.6 shaker, and some discussion this week about
a 7.0 or larger quake might hit Lebanon in the future.
Floods and bridges continue to
make headlines, too. This
time in southern California where flash flooding has damaged a hiking bridge
- the day after its dedication!
Better Business Bureau is out with a scam alert for people in Ohio,
following the flooding there. Just when I was ready to think humans
were an OK lot...along comes this kind of report.
decent historical perspective on Labor Day from the VOA is worth reading.
Is there a "Next
So what if this week's chart of the
current market looks like it's eerily following a similar post-peak
trajectory compared with 1929 and 1987 (see
this week's ChartPack). The real question for
world's 37 remaining rational investors is to spot the Next Bubble
so we can all pile in on the ground floor of that one and make a
bunch of money before the rest of the world catches on. But,
what if there is no next bubble? Maybe we better continue our
study current economic thinking about bank runs.
Recent events in California, not to mention the recent
trouble in Second Life's virtual economy should be a smack
upside the head' for even the most confident of investors.
More for Subscribers
"No Incumbents in 2008"
To get your "No Incumbents in 2008" click here. They're just $5.
And no, that would not keep Ron Paul from running for the White House - he
is not an incumbent for that office - having never held that job
before, you see.
Pimp my Site
Tell all your
friends that you read UrbanSurvival or Independence Journal, or even
our Peoplenomics newsletter. That way,
more people will become aware of what's going on in the economy, and with
more smarts, maybe we can wake up America.
Click here to shake them from their sleep. Also, if you operate a
is always appreciated and I will link in return.
Cheap is Good
Order our handy ebook "How to Live on $10,000 a year or less - and learn
to live like a Third World person now. It's coming anyway, with big
job layoffs this summer - and by ordering now, you can beat the rush...You
may have more time to read this fall if the economy falls apart as I
Last week's report is here.
Thursday August 31, 2007
Ah yes, a little retreat to
a continuation of government site for a financial retreat? Hmmm
...anyway, this is what I'd call a two-beer read:
Remarks by Chairman Ben S. Bernanke At the Federal Reserve Bank of
Kansas City's Economic Symposium, Jackson Hole, Wyoming August 31, 2007
Housing, Housing Finance, and Monetary Policy
Over the years, Tom Hoenig and his colleagues at the Federal Reserve
Bank of Kansas City have done an excellent job of selecting interesting
and relevant topics for this annual symposium. I think I can safely say
that this year they have outdone themselves. Recently, the subject of
housing finance has preoccupied financial-market participants and
observers in the United States and around the world. The financial
turbulence we have seen had its immediate origins in the problems in the
subprime mortgage market, but the effects have been felt in the broader
mortgage market and in financial markets more generally, with potential
consequences for the performance of the overall economy.
In my remarks this morning, I will begin with some observations about
recent market developments and their economic implications. I will then
try to place recent events in a broader historical context by discussing
the evolution of housing markets and housing finance in the United
States. In particular, I will argue that, over the years, institutional
changes in U.S. housing and mortgage markets have significantly
influenced both the transmission of monetary policy and the economy's
cyclical dynamics. As our system of housing finance continues to evolve,
understanding these linkages not only provides useful insights into the
past but also holds the promise of helping us better cope with the
implications of future developments.
Recent Developments in Financial Markets and the Economy I will begin
my review of recent developments by discussing the housing situation. As
you know, the downturn in the housing market, which began in the summer
of 2005, has been sharp. Sales of new and existing homes have declined
significantly from their mid-2005 peaks and have remained slow in recent
months. As demand has weakened, house prices have decelerated or even
declined by some measures, and homebuilders have scaled back their
construction of new homes. The cutback in residential construction has
directly reduced the annual rate of U.S. economic growth about 3/4
percentage point on average over the past year and a half. Despite the
slowdown in construction, the stock of unsold new homes remains quite
elevated relative to sales, suggesting that further declines in
homebuilding are likely.
The outlook for home sales and construction will also depend on
unfolding developments in mortgage markets. A substantial increase in
lending to nonprime borrowers contributed to the bulge in residential
investment in 2004 and 2005, and the tightening of credit conditions for
these borrowers likely accounts for some of the continued softening in
demand we have seen this year. As I will discuss, recent market
developments have resulted in additional tightening of rates and terms
for nonprime borrowers as well as for potential borrowers through
"jumbo" mortgages. Obviously, if current conditions persist in mortgage
markets, the demand for homes could weaken further, with possible
implications for the broader economy. We are following these
As house prices have softened, and as interest rates have risen from
the low levels of a couple of years ago, we have seen a marked
deterioration in the performance of nonprime mortgages. The problems
have been most severe for subprime mortgages with adjustable rates: the
proportion of those loans with serious delinquencies rose to about
13-1/2 percent in June, more than double the recent low seen in
mid-2005.1 The adjustable-rate subprime mortgages originated in late
2005 and in 2006 have performed the worst, in part because of slippage
in underwriting standards, reflected for example in high loan-to-value
ratios and incomplete documentation. With many of these borrowers facing
their first interest rate resets in coming quarters, and with softness
in house prices expected to continue to impede refinancing,
delinquencies among this class of mortgages are likely to rise further.
Apart from adjustable-rate subprime mortgages, however, the
deterioration in performance has been less pronounced, at least to this
point. For subprime mortgages with fixed rather than variable rates, for
example, serious delinquencies have been fairly stable at about 5-1/2
percent. The rate of serious delinquencies on alt-A securitized pools
rose to nearly 3 percent in June, from a low of less than 1 percent in
mid-2005. Delinquency rates on prime jumbo mortgages have also risen,
though they are lower than those for prime conforming loans, and both
rates are below 1 percent.
Investors' concerns about mortgage credit performance have
intensified sharply in recent weeks, reflecting, among other factors,
worries about the housing market and the effects of impending
interest-rate resets on borrowers' ability to remain current. Credit
spreads on new securities backed by subprime mortgages, which had jumped
earlier this year, rose significantly more in July. Issuance of such
securities has been negligible since then, as dealers have faced
difficulties placing even the AAA-rated tranches. Issuance of securities
backed by alt-A and prime jumbo mortgages also has fallen sharply, as
investors have evidently become concerned that the losses associated
with these types of mortgages may be higher than had been expected.
With securitization impaired, some major lenders have announced the
cancellation of their adjustable-rate subprime lending programs. A
number of others that specialize in nontraditional mortgages have been
forced by funding pressures to scale back or close down. Some lenders
that sponsor asset-backed commercial paper conduits as bridge financing
for their mortgage originations have been unable to "roll" the maturing
paper, forcing them to draw on back-up liquidity facilities or to
exercise options to extend the maturity of their paper. As a result of
these developments, borrowers face noticeably tighter terms and
standards for all but conforming mortgages.
As you know, the financial stress has not been confined to mortgage
markets. The markets for asset-backed commercial paper and for
lower-rated unsecured commercial paper market also have suffered from
pronounced declines in investor demand, and the associated flight to
quality has contributed to surges in the demand for short-dated Treasury
bills, pushing T-bill rates down sharply on some days. Swings in stock
prices have been sharp, with implied price volatilities rising to about
twice the levels seen in the spring. Credit spreads for a range of
financial instruments have widened, notably for lower-rated corporate
credits. Diminished demand for loans and bonds to finance highly
leveraged transactions has increased some banks' concerns that they may
have to bring significant quantities of these instruments onto their
balance sheets. These banks, as well as those that have committed to
serve as back-up facilities to commercial paper programs, have become
more protective of their liquidity and balance-sheet capacity.
Although this episode appears to have been triggered largely by
heightened concerns about subprime mortgages, global financial losses
have far exceeded even the most pessimistic projections of credit losses
on those loans. In part, these wider losses likely reflect concerns that
weakness in U.S. housing will restrain overall economic growth. But
other factors are also at work. Investor uncertainty has increased
significantly, as the difficulty of evaluating the risks of structured
products that can be opaque or have complex payoffs has become more
evident. Also, as in many episodes of financial stress, uncertainty
about possible forced sales by leveraged participants and a higher cost
of risk capital seem to have made investors hesitant to take advantage
of possible buying opportunities. More generally, investors may have
become less willing to assume risk. Some increase in the premiums that
investors require to take risk is probably a healthy development on the
whole, as these premiums have been exceptionally low for some time.
However, in this episode, the shift in risk attitudes has interacted
with heightened concerns about credit risks and uncertainty about how to
evaluate those risks to create significant market stress. On the
positive side of the ledger, we should recognize that past efforts to
strengthen capital positions and the financial infrastructure place the
global financial system in a relatively strong position to work through
In the statement following its August 7 meeting, the Federal Open
Market Committee (FOMC) recognized that the rise in financial volatility
and the tightening of credit conditions for some households and
businesses had increased the downside risks to growth somewhat but
reiterated that inflation risks remained its predominant policy concern.
In subsequent days, however, following several events that led investors
to believe that credit risks might be larger and more pervasive than
previously thought, the functioning of financial markets became
increasingly impaired. Liquidity dried up and spreads widened as many
market participants sought to retreat from certain types of asset
Well-functioning financial markets are essential for a prosperous
economy. As the nation's central bank, the Federal Reserve seeks to
promote general financial stability and to help to ensure that financial
markets function in an orderly manner. In response to the developments
in the financial markets in the period following the FOMC meeting, the
Federal Reserve provided reserves to address unusual strains in money
markets. On August 17, the Federal Reserve Board announced a cut in the
discount rate of 50 basis points and adjustments in the Reserve Banks'
usual discount window practices to facilitate the provision of term
financing for as long as thirty days, renewable by the borrower. The
Federal Reserve also took a number of supplemental actions, such as
cutting the fee charged for lending Treasury securities. The purpose of
the discount window actions was to assure depositories of the ready
availability of a backstop source of liquidity. Even if banks find that
borrowing from the discount window is not immediately necessary, the
knowledge that liquidity is available should help alleviate concerns
about funding that might otherwise constrain depositories from extending
credit or making markets. The Federal Reserve stands ready to take
additional actions as needed to provide liquidity and promote the
orderly functioning of markets.
It is not the responsibility of the Federal Reserve--nor would it be
appropriate--to protect lenders and investors from the consequences of
their financial decisions. But developments in financial markets can
have broad economic effects felt by many outside the markets, and the
Federal Reserve must take those effects into account when determining
policy. In a statement issued simultaneously with the discount window
announcement, the FOMC indicated that the deterioration in financial
market conditions and the tightening of credit since its August 7
meeting had appreciably increased the downside risks to growth. In
particular, the further tightening of credit conditions, if sustained,
would increase the risk that the current weakness in housing could be
deeper or more prolonged than previously expected, with possible adverse
effects on consumer spending and the economy more generally.
The incoming data indicate that the economy continued to expand at a
moderate pace into the summer, despite the sharp correction in the
housing sector. However, in light of recent financial developments,
economic data bearing on past months or quarters may be less useful than
usual for our forecasts of economic activity and inflation.
Consequently, we will pay particularly close attention to the timeliest
indicators, as well as information gleaned from our business and banking
contacts around the country. Inevitably, the uncertainty surrounding the
outlook will be greater than normal, presenting a challenge to
policymakers to manage the risks to their growth and price stability
objectives. The Committee continues to monitor the situation and will
act as needed to limit the adverse effects on the broader economy that
may arise from the disruptions in financial markets.
Beginnings: Mortgage Markets in the Early Twentieth Century Like us,
our predecessors grappled with the economic and policy implications of
innovations and institutional changes in housing finance. In the
remainder of my remarks, I will try to set the stage for this weekend's
conference by discussing the historical evolution of the mortgage market
and some of the implications of that evolution for monetary policy and
The early decades of the twentieth century are a good starting point
for this review, as urbanization and the exceptionally rapid population
growth of that period created a strong demand for new housing. Between
1890 and 1930, the number of housing units in the United States grew
from about 10 million to about 30 million; the pace of homebuilding was
particularly brisk during the economic boom of the 1920s.
Remarkably, this rapid expansion of the housing stock took place
despite limited sources of mortgage financing and typical lending terms
that were far less attractive than those to which we are accustomed
today. Required down payments, usually about half of the home's purchase
price, excluded many households from the market. Also, by comparison
with today's standards, the duration of mortgage loans was short,
usually ten years or less. A "balloon" payment at the end of the loan
often created problems for borrowers.2
High interest rates on loans reflected the illiquidity and the
essentially unhedgeable interest rate risk and default risk associated
with mortgages. Nationwide, the average spread between mortgage rates
and high-grade corporate bond yields during the 1920s was about 200
basis points, compared with about 50 basis points on average since the
mid-1980s. The absence of a national capital market also produced
significant regional disparities in borrowing costs. Hard as it may be
to conceive today, rates on mortgage loans before World War I were at
times as much as 2 to 4 percentage points higher in some parts of the
country than in others, and even in 1930, regional differences in rates
could be more than a full percentage point.3
Despite the underdevelopment of the mortgage market, homeownership
rates rose steadily after the turn of the century. As would often be the
case in the future, government policy provided some inducement for
homebuilding. When the federal income tax was introduced in 1913, it
included an exemption for mortgage interest payments, a provision that
is a powerful stimulus to housing demand even today. By 1930, about 46
percent of nonfarm households owned their own homes, up from about 37
percent in 1890.
The limited availability of data prior to 1929 makes it hard to
quantify the role of housing in the monetary policy transmission
mechanism during the early twentieth century. Comparisons are also
complicated by great differences between then and now in monetary policy
frameworks and tools. Still, then as now, periods of tight money were
reflected in higher interest rates and a greater reluctance of banks to
lend, which affected conditions in mortgage markets. Moreover, students
of the business cycle, such as Arthur Burns and Wesley Mitchell, have
observed that residential construction was highly cyclical and
contributed significantly to fluctuations in the overall economy (Burns
and Mitchell, 1946). Indeed, if we take the somewhat less reliable data
for 1901 to 1929 at face value, real housing investment was about three
times as volatile during that era as it has been over the past
During the past century we have seen two great sea changes in the
market for housing finance. The first of these was the product of the
New Deal. The second arose from financial innovation and a series of
crises from the 1960s to the mid-1980s in depository funding of
mortgages. I will turn first to the New Deal period.
The New Deal and the Housing Market The housing sector, like the rest
of the economy, was profoundly affected by the Great Depression. When
Franklin Roosevelt took office in 1933, almost 10 percent of all homes
were in foreclosure (Green and Wachter, 2005), construction employment
had fallen by half from its late 1920s peak, and a banking system near
collapse was providing little new credit. As in other sectors, New Deal
reforms in housing and housing finance aimed to foster economic revival
through government programs that either provided financing directly or
strengthened the institutional and regulatory structure of private
Actually, one of the first steps in this direction was taken not by
Roosevelt but by his predecessor, Herbert Hoover, who oversaw the
creation of the Federal Home Loan Banking System in 1932. This measure
reorganized the thrift industry (savings and loans and mutual savings
banks) under federally chartered associations and established a credit
reserve system modeled after the Federal Reserve. The Roosevelt
administration pushed this and other programs affecting housing finance
much further. In 1934, his administration oversaw the creation of the
Federal Housing Administration (FHA). By providing a federally backed
insurance system for mortgage lenders, the FHA was designed to encourage
lenders to offer mortgages on more attractive terms. This intervention
appears to have worked in that, by the 1950s, most new mortgages were
for thirty years at fixed rates, and down payment requirements had
fallen to about 20 percent. In 1938, the Congress chartered the Federal
National Mortgage Association, or Fannie Mae, as it came to be known.
The new institution was authorized to issue bonds and use the proceeds
to purchase FHA mortgages from lenders, with the objectives of
increasing the supply of mortgage credit and reducing variations in the
terms and supply of credit across regions.4
Shaped to a considerable extent by New Deal reforms and regulations,
the postwar mortgage market took on the form that would last for several
decades. The market had two main sectors. One, the descendant of the
pre-Depression market sector, consisted of savings and loan
associations, mutual savings banks, and, to a lesser extent, commercial
banks. With financing from short-term deposits, these institutions made
conventional fixed-rate long-term loans to homebuyers. Notably, federal
and state regulations limited geographical diversification for these
lenders, restricting interstate banking and obliging thrifts to make
mortgage loans in small local areas--within 50 miles of the home office
until 1964, and within 100 miles after that. In the other sector, the
product of New Deal programs, private mortgage brokers and other lenders
originated standardized loans backed by the FHA and the Veterans'
Administration (VA). These guaranteed loans could be held in portfolio
or sold to institutional investors through a nationwide secondary
No discussion of the New Deal's effect on the housing market and the
monetary transmission mechanism would be complete without reference to
Regulation Q--which was eventually to exemplify the law of unintended
consequences. The Banking Acts of 1933 and 1935 gave the Federal Reserve
the authority to impose deposit-rate ceilings on banks, an authority
that was later expanded to cover thrift institutions. The Fed used this
authority in establishing its Regulation Q. The so-called Reg Q ceilings
remained in place in one form or another until the mid-1980s.5
The original rationale for deposit ceilings was to reduce "excessive"
competition for bank deposits, which some blamed as a cause of bank
failures in the early 1930s. In retrospect, of course, this was a
dubious bit of economic analysis. In any case, the principal effects of
the ceilings were not on bank competition but on the supply of credit.
With the ceilings in place, banks and thrifts experienced what came to
be known as disintermediation--an outflow of funds from depositories
that occurred whenever short-term money-market rates rose above the
maximum that these institutions could pay. In the absence of alternative
funding sources, the loss of deposits prevented banks and thrifts from
extending mortgage credit to new customers.
The Transmission Mechanism and the New Deal Reforms Under the New
Deal system, housing construction soared after World War II, driven by
the removal of wartime building restrictions, the need to replace an
aging housing stock, rapid family formation that accompanied the
beginning of the baby boom, and large-scale internal migration. The
stock of housing units grew 20 percent between 1940 and 1950, with most
of the new construction occurring after 1945.
In 1951, the Treasury-Federal Reserve Accord freed the Fed from the
obligation to support Treasury bond prices. Monetary policy began to
focus on influencing short-term money markets as a means of affecting
economic activity and inflation, foreshadowing the Federal Reserve's
current use of the federal funds rate as a policy instrument. Over the
next few decades, housing assumed a leading role in the monetary
transmission mechanism, largely for two reasons: Reg Q and the advent of
The Reg Q ceilings were seldom binding before the mid-1960s, but
disintermediation induced by the ceilings occurred episodically from the
mid-1960s until Reg Q began to be phased out aggressively in the early
1980s. The impact of disintermediation on the housing market could be
quite significant; for example, a moderate tightening of monetary policy
in 1966 contributed to a 23 percent decline in residential construction
between the first quarter of 1966 and the first quarter of 1967. State
usury laws and branching restrictions worsened the episodes of
disintermediation by placing ceilings on lending rates and limiting the
flow of funds between local markets. For the period 1960 to 1982, when
Reg Q assumed its greatest importance, statistical analysis shows a high
correlation between single-family housing starts and the growth of small
time deposits at thrifts, suggesting that disintermediation effects were
powerful; in contrast, since 1983 this correlation is essentially zero.6
Economists at the time were well aware of the importance of the
disintermediation phenomenon for monetary policy. Frank de Leeuw and
Edward Gramlich highlighted this particular channel in their description
of an early version of the MPS macroeconometric model, a joint product
of researchers at the Federal Reserve, MIT, and the University of
Pennsylvania (de Leeuw and Gramlich, 1969). The model attributed almost
one-half of the direct first-year effects of monetary policy on the real
economy--which were estimated to be substantial--to disintermediation
and other housing-related factors, despite the fact that residential
construction accounted for only 4 percent of nominal gross domestic
product (GDP) at the time.
As time went on, however, monetary policy mistakes and weaknesses in
the structure of the mortgage market combined to create deeper economic
problems. For reasons that have been much analyzed, in the late 1960s
and the 1970s the Federal Reserve allowed inflation to rise, which led
to corresponding increases in nominal interest rates. Increases in
short-term nominal rates not matched by contractually set rates on
existing mortgages exposed a fundamental weakness in the system of
housing finance, namely, the maturity mismatch between long-term
mortgage credit and the short-term deposits that commercial banks and
thrifts used to finance mortgage lending. This mismatch led to a series
of liquidity crises and, ultimately, to a rash of insolvencies among
mortgage lenders. High inflation was also ultimately reflected in high
nominal long-term rates on new mortgages, which had the effect of "front
loading" the real payments made by holders of long-term, fixed-rate
mortgages. This front-loading reduced affordability and further limited
the extension of mortgage credit, thereby restraining construction
activity. Reflecting these factors, housing construction experienced a
series of pronounced boom and bust cycles from the early 1960s through
the mid-1980s, which contributed in turn to substantial swings in
overall economic growth.
The Emergence of Capital Markets as a Source of Housing Finance The
manifest problems associated with relying on short-term deposits to fund
long-term mortgage lending set in train major changes in financial
markets and financial instruments, which collectively served to link
mortgage lending more closely to the broader capital markets. The shift
from reliance on specialized portfolio lenders financed by deposits to a
greater use of capital markets represented the second great sea change
in mortgage finance, equaled in importance only by the events of the New
Government actions had considerable influence in shaping this second
revolution. In 1968, Fannie Mae was split into two agencies: the
Government National Mortgage Association (Ginnie Mae) and the
re-chartered Fannie Mae, which became a privately owned
government-sponsored enterprise (GSE), authorized to operate in the
secondary market for conventional as well as guaranteed mortgage loans.
In 1970, to compete with Fannie Mae in the secondary market, another GSE
was created--the Federal Home Loan Mortgage Corporation, or Freddie Mac.
Also in 1970, Ginnie Mae issued the first mortgage pass-through
security, followed soon after by Freddie Mac. In the early 1980s,
Freddie Mac introduced collateralized mortgage obligations (CMOs), which
separated the payments from a pooled set of mortgages into "strips"
carrying different effective maturities and credit risks. Since 1980,
the outstanding volume of GSE mortgage-backed securities has risen from
less than $200 billion to more than $4 trillion today. Alongside these
developments came the establishment of private mortgage insurers, which
competed with the FHA, and private mortgage pools, which bundled loans
not handled by the GSEs, including loans that did not meet GSE
eligibility criteria--so-called nonconforming loans. Today, these
private pools account for around $2 trillion in residential mortgage
These developments did not occur in time to prevent a large fraction
of the thrift industry from becoming effectively insolvent by the early
1980s in the wake of the late-1970s surge in inflation.7 In this
instance, the government abandoned attempts to patch up the system and
instead undertook sweeping deregulation. Reg Q was phased out during the
1980s; state usury laws capping mortgage rates were abolished;
restrictions on interstate banking were lifted by the mid-1990s; and
lenders were permitted to offer adjustable-rate mortgages as well as
mortgages that did not fully amortize and which therefore involved
balloon payments at the end of the loan period. Critically, the savings
and loan crisis of the late 1980s ended the dominance of deposit-taking
portfolio lenders in the mortgage market. By the 1990s, increased
reliance on securitization led to a greater separation between mortgage
lending and mortgage investing even as the mortgage and capital markets
became more closely integrated. About 56 percent of the home mortgage
market is now securitized, compared with only 10 percent in 1980 and
less than 1 percent in 1970.
In some ways, the new mortgage market came to look more like a
textbook financial market, with fewer institutional "frictions" to
impede trading and pricing of event-contingent securities.
Securitization and the development of deep and liquid derivatives
markets eased the spreading and trading of risk. New types of mortgage
products were created. Recent developments notwithstanding, mortgages
became more liquid instruments, for both lenders and borrowers.
Technological advances facilitated these changes; for example,
computerization and innovations such as credit scores reduced the costs
of making loans and led to a "commoditization" of mortgages. Access to
mortgage credit also widened; notably, loans to subprime borrowers
accounted for about 13 percent of outstanding mortgages in 2006.
I suggested that the mortgage market has become more like the
frictionless financial market of the textbook, with fewer institutional
or regulatory barriers to efficient operation. In one important respect,
however, that characterization is not entirely accurate. A key function
of efficient capital markets is to overcome problems of information and
incentives in the extension of credit. The traditional model of mortgage
markets, based on portfolio lending, solved these problems in a
straightforward way: Because banks and thrifts kept the loans they made
on their own books, they had strong incentives to underwrite carefully
and to invest in gathering information about borrowers and communities.
In contrast, when most loans are securitized and originators have little
financial or reputational capital at risk, the danger exists that the
originators of loans will be less diligent. In securitization markets,
therefore, monitoring the originators and ensuring that they have
incentives to make good loans is critical. I have argued elsewhere that,
in some cases, the failure of investors to provide adequate oversight of
originators and to ensure that originators' incentives were properly
aligned was a major cause of the problems that we see today in the
subprime mortgage market (Bernanke, 2007). In recent months we have seen
a reassessment of the problems of maintaining adequate monitoring and
incentives in the lending process, with investors insisting on tighter
underwriting standards and some large lenders pulling back from the use
of brokers and other agents. We will not return to the days in which all
mortgage lending was portfolio lending, but clearly the
originate-to-distribute model will be modified--is already being
modified--to provide stronger protection for investors and better
incentives for originators to underwrite prudently.
The Monetary Transmission Mechanism Since the Mid-1980s The dramatic
changes in mortgage finance that I have described appear to have
significantly affected the role of housing in the monetary transmission
mechanism. Importantly, the easing of some traditional institutional and
regulatory frictions seems to have reduced the sensitivity of
residential construction to monetary policy, so that housing is no
longer so central to monetary transmission as it was.8 In particular, in
the absence of Reg Q ceilings on deposit rates and with a much-reduced
role for deposits as a source of housing finance, the availability of
mortgage credit today is generally less dependent on conditions in
short-term money markets, where the central bank operates most directly.
Most estimates suggest that, because of the reduced sensitivity of
housing to short-term interest rates, the response of the economy to a
given change in the federal funds rate is modestly smaller and more
balanced across sectors than in the past.9 These results are embodied in
the Federal Reserve's large econometric model of the economy, which
implies that only about 14 percent of the overall response of output to
monetary policy is now attributable to movements in residential
investment, in contrast to the model's estimate of 25 percent or so
under what I have called the New Deal system.
The econometric findings seem consistent with the reduced
synchronization of the housing cycle and the business cycle during the
present decade. In all but one recession during the period from 1960 to
1999, declines in residential investment accounted for at least 40
percent of the decline in overall real GDP, and the sole exception--the
1970 recession--was preceded by a substantial decline in housing
activity before the official start of the downturn. In contrast,
residential investment boosted overall real GDP growth during the 2001
recession. More recently, the sharp slowdown in housing has been
accompanied, at least thus far, by relatively good performance in other
sectors. That said, the current episode demonstrates that pronounced
housing cycles are not a thing of the past.
My discussion so far has focused primarily on the role of variations
in housing finance and residential construction in monetary
transmission. But, of course, housing may have indirect effects on
economic activity, most notably by influencing consumer spending. With
regard to household consumption, perhaps the most significant effect of
recent developments in mortgage finance is that home equity, which was
once a highly illiquid asset, has become instead quite liquid, the
result of the development of home equity lines of credit and the
relatively low cost of cash-out refinancing. Economic theory suggests
that the greater liquidity of home equity should allow households to
better smooth consumption over time. This smoothing in turn should
reduce the dependence of their spending on current income, which, by
limiting the power of conventional multiplier effects, should tend to
increase macroeconomic stability and reduce the effects of a given
change in the short-term interest rate. These inferences are supported
by some empirical evidence.10
On the other hand, the increased liquidity of home equity may lead
consumer spending to respond more than in past years to changes in the
values of their homes; some evidence does suggest that the correlation
of consumption and house prices is higher in countries, like the United
States, that have more sophisticated mortgage markets (Calza, Monacelli,
and Stracca, 2007). Whether the development of home equity loans and
easier mortgage refinancing has increased the magnitude of the real
estate wealth effect--and if so, by how much--is a much-debated question
that I will leave to another occasion.
Conclusion I hope this exploration of the history of housing finance
has persuaded you that institutional factors can matter quite a bit in
determining the influence of monetary policy on housing and the role of
housing in the business cycle. Certainly, recent developments have added
yet further evidence in support of that proposition. The interaction of
housing, housing finance, and economic activity has for years been of
central importance for understanding the behavior of the economy, and it
will continue to be central to our thinking as we try to anticipate
economic and financial developments.
In closing, I would like to express my particular appreciation for an
individual who I count as a friend, as I know many of you do: Edward
Gramlich. Ned was scheduled to be on the program but his illness
prevented him from making the trip. As many of you know, Ned has been a
research leader in the topics we are discussing this weekend, and he has
just finished a very interesting book on subprime mortgage markets. We
will miss not only Ned's insights over the course of this conference but
his warmth and wit as well. Ned and his wife Ruth will be in the
thoughts of all of us.
Last Parties in the
While most of the financial world continues to play "me-too" and
"rearview economics", we continue to rely on the not-yet-a-science field
called predictive linguistics
to tell us where we're going, because we can't change where we've been.
The future is, as Yogi Berra pointed out, still ahead of us.
It looks like next week, we may see just what an "employment crash"
looks like; up close and personal. Besides the general ugliness of
the weekend ahead (as mentioned in yesterday's
update from time monk II Igor), one of the things that has popped
out of the data this week is that apparently the fixed income
departments of three (or more) of the top ten investment banking firms
are set to axe thousands of workers right after Labor Day. How
many, you're wondering? Well, the speculation is all over the
place in public discussion forum which the web bot project scours
looking for language shifts that foretell the future, but 35-40-thousand
seems to be the number of jobs mentioned worldwide.
Not that you should stop worrying there, however. The data seems
to suggest that out of about 10,000 hedge funds operating worldwide,
some 30% of firms reportedly have losses of 40% in their portfolios.
That's a whole lot of 'unrecoverable' as I read it.
Other details gleaned from the discussion groups are that the big
investment banking firms have not only hired specialist firms to do the
firing for them, but they have also hired extra security guards who will
start work next week.
We have no way to validate what kicks around on discussion groups and
news groups (which number more than 10,000 which are scanned for hints
of what's to come, and most likely if a certain financial writer called
the big investment bankers from the Texas outback, I'd not get past the
voicemail for loonies. Still, it's an interesting bit of comment
to follow because even if only partly correct, this would mean a huge
drop in New York area employment in September.
It's not just that firings would come before bonus time (inflicting more
pain than just being let go because bonuses are such a big piece of
change in this world), but it's the secondary and tertiary jobs that
spin off the street that get hurt as well. The secondary jobs
might be the drivers of limos and the tertiary's might be restaurant
workers and the actors off Broadway.
Like I said, there's only this rumbling on the discussion groups, which
is hard to validate, but intuitively it would make sense. The
stink from the piles of liar's paper is far from gone. For the
folks who play in the Hamptons, enjoy the weekend, as the ranks may be
thinned out a lot and within just a few weeks time.
One of my deep-thinking friends reminded me that the British have a much
more sophisticated way of thinking about advanced financial instruments
than do most Americans. "They call it gearing - which
implies a much more complicated set of relationships than does the term
leverage," he noted. "Gearing implies that one
derivative can have many impacts throughout a large block of instruments
because there are so many paper relationships. Leverage
implies a single lever, fulcrum, and point of force being applied."
I agreed that the distinction is probably worth mentioning. So, as
you slurp yourself back to consciousness, think of the financial mess as
a clockworks, not a room full of levers and rocks. A badly broken
clockworks, at that.
Not that layoffs on Wall Street would come as a surprise, or alone.
As CNN Money pointed out in a headline earlier this week "Next
Victim of Mortgage Mess: Auto Sales." But, while things may not be
going well for domestic car makers, Toyota is setting new global targets
and one of these is
selling more than 10-million vehicles by 2009. Just a model
year from now.
The Teamsters Union has
gone to Federal Court, seeking to block the Bush /corpgov plan to open
the US-Mexico border to foreign truckers tomorrow. The
Teamsters are citing safety issues and concern about driving records,
but corpgov says the suit is without merit. But, then again, what
did you expect they would say?
They're fighting what's really the elitist plan - never even sent to
CONgress because it's claimed to be "administrative" in nature - to
'merge' Mexico, Canada, and America into a European-style Union and
roll out a new currency, the Amero, to replace the
now-being-trashed US Dollar.
Not that the end of the dollar is in sight...yet: There's still a
titanic battle between inflation and deflation going on. My friend
Michael Nystrom posted the Bob Prechter (Elliott Wave) report from
earlier this week "Why the
Fed will not Stop Deflation."
The core Big Lie spread by bankers is that inflation is when the
general level of prices goes up. What they fail to mention is
that no, the real meaning of inflation is the creation of money (to pay
the bankers their interest demanded as rent (on our own money!).
More paper chasing the same amount of goods and services waters down the
purchasing power of money and they claim "Prices Go Up!" Damn lie.
The truth is "Purchasing power of money goes Down! This
well-disguised fact is extremely important.
The reason the corpgov people fear deflation so much is that it
would actually reward people who hold dollars. That'd be people
like me who have no debt and a few bucks in the bank, and people in
China who hold bushel baskets of US paper assets. Naturally, the
elites of corpgov don't want China to hold appreciating dollars, so the
slickest answer will be to trash the dollar with inflation. Solves
the falling house prices problem, too. And, oh yeah, screws China
over pretty good, as well.
I've been trying to sort out how the future is planned to roll out by
the PowersThatBe and one of the questions is "Would the existing US
Dollars/ Federal Reserve Notes have any convertibility to
Amero's? In other words, if we had (for example) a complete
collapse of the US dollar this fall, would people saving for their
retirement be able to convert say $10,000 dollars into a thousand
Amero's? Probably not. The whole point of a new currency is
to replace the old one, so any convertibility would need to be squashed.
That would lock China in a big theater with the bushel baskets of US
dollarized debt, too. Is that smoke I smell?
My point is this sick thinking - I mean strategic contingency planning -
has led me to consider ways to deploy financial assets in non-dollar
ways in advance of any currency change. It seems legal to have
offshore bank accounts in other currencies, as long as this is reported
on your tax forms (if the outside the US amount exceeds what I seem to
recall as a $10,000 threshold, although check with your tax
advisor/attorney on this point). Parking assets in some other
currency, or a fund denominated in something other than Pesos and
Dollars, or Loonies might make sense. Of course, then
there's the whole question of foreign exchange controls, but you know
the elitists are going to leave themselves a way to move their wealth
around. It'll just cost you a little 'dahsh" to find it.
Dollar dropping and gold up in the early going today. Look for a
stock rally into the weekend because the Fed knows we're really close to
- or at - a critical inflection point. Rally like crazy or face a
mid September crash, so it looks to me.
Stopping Ron Paul
I couldn't help but notice that
story out of Florida where a Clermont resident has been told he has to put
up a $50 deposit in order to display a Ron Paul sign in his own yard.
Care to bet me the city of Clermont is not enforcing this with equal vigor
for signs of candidates already bought by the PowersThatBe? The
Lesson? Free Speech ain't free. It's apparently $50 in Clermont.
They must have a different Constitution in Florida...maybe it goes with
their voting machines...yah think?
The Dirty Hands at BLS
A law professor writes in a
dandy column today that "CPI
Fraud directly linked to subprime credit crisis." The gist
of it is that BLS changed statistical methods to hide rampant inflation and
sucker you into accepting 4% instead of twice that - and don't mention those
I'll let you in on a little
Hans Christian Andersen were alive today, he'd be a guv'mint
Grimm's Fair Tales
As long as we're on the topic,
you don't think the
Brothers would be working at BEA if
at BLS, do you? No, I thought not.
Skilled as they were in their craft (was
Hansel & Gretel outing child abuse?), they could never hold a candle to
this morning's Personal Income and Expenditure report from the Bureau of
Personal income increased $61.9 billion, or 0.5 percent, and disposable
personal income (DPI) increased $57.3 billion, or 0.6 percent, in July,
according to the Bureau of Economic Analysis. Personal consumption
expenditures (PCE) increased $37.8 billion, or 0.4 percent. In June,
personal income increased $45.7 billion, or 0.4 percent, DPI increased
$36.5 billion, or 0.4 percent, and PCE increased $16.1 billion, or 0.2
percent, based on revised estimates.
laughing so hard at this - way over the consensus 0.3%, it's hard to
paste it all in with a straight face...)
Private wage and salary
disbursements increased $26.9 billion in July, compared with an increase
of $28.7 billion in June. Goods-producing industries' payrolls increased
$1.2 billion, compared with an increase of $5.2 billion; manufacturing
payrolls increased $1.9 billion, compared with an increase of $4.2
billion. Services-producing industries' payrolls increased $25.7
billion, compared with an increase of $23.5 billion. Government wage and
salary disbursements increased $1.9 billion, compared with an increase
of $3.8 billion.
(The capper is the savings
rate - which was 'statistically revised from a big negative number to a
positive number a month or so back - this is rich!)
Personal saving -- DPI less
personal outlays -- was $72.2 billion in July, compared with $52.0
billion in June. Personal saving as a percentage of disposable personal
income was 0.7 percent in July, compared with 0.5 percent in June.
Saving from current income may be near zero or negative when outlays are
financed by borrowing (including borrowing financed through credit cards
or home equity loans), by selling investments or other assets, or by
using savings from previous periods. For more information, see the FAQs
on "Personal Saving" on BEA's Web site.
(and just when I thought
I'd read it all...)
Real PCE -- PCE adjusted to remove price changes -- increased 0.3
percent in July, compared with an increase of less than 0.1 percent in
June. Purchases of durable goods increased 0.5 percent, in contrast to a
decrease of 1.8 percent. Purchases of nondurable goods increased 0.4
percent, compared with an increase of 0.1 percent. Purchases of services
increased 0.2 percent, compared with an increase of 0.3 percent.
PCE price index -- The PCE price index increased 0.1 percent in July,
compared with an increase of 0.2 percent in June. The PCE price index,
excluding food and energy, increased 0.1 percent, compared with an
increase of 0.2 percent.
Wilhelm and Jacob
would be so proud!
Department of Silliness
Criminees. We've got a
department (and a cabinet member, and a Congressional oversight committee
that does nothing) for everything else in the world, so why not a
Department of Silliness?
Why, with a half ounce of
common sense, we could demand government look into some of the following
Just to keep it really simple
for you - this being the start of a holiday weekend for some of us - here's
what I am expecting for the next month or so:
This weekend: all kinds of
some meteors to watch along with
wildfires and such. Maybe restrictions on travel too - The
FAA's boss says bring a book to read at the airport...
Next week, layoffs are
rumored to start on Wall Street
Also next week, the Bush
administration is planning to ramp up the pre-Iran war PR campaign.
See LameStreamMedia for details next week.
September 10/11, something
goes really wrong for the WH and their decisions in some way precipitate
whatever is coming Slater in the month.
Then we get 72 days of
tension building to late November and then a big emotional release
There's a lot more to it for
subscribers - who might see Part One of the current data run posted today or
tomorrow. Oh, and don't forget the two Big Earthquakes are in their
somewhere. 19th maybe?
Thursday August 30, 2007
Just in from the predictive linguistics team at
Clif has worked all day yesterday and all last night. And was back at
it at 4 this morning when I checked in. We have a large data bubble of
datas which are showing up for Sunday, 9-2.
Clif says that he will have part 1 posted by Saturday afternoon at
the latest since so much of the data says that Sunday and Monday will be
very nasty here in US.
He probably ain't wrong about this one. And I think that he is
probably right about the 19th too. But anyway part 1 by late Saturday.
Everybody guard your pies. Igor out. "
No, I have no idea what the bubble is that is showing up in the 'time
scanning' technology, but something 'out of the blue' Sunday/Monday seems to
Happy numbers from happygov
Real gross domestic product -- the output of goods and services produced
by labor and property located in the United States -- increased at an
annual rate of 4.0 percent in the second quarter of 2007, according to
preliminary estimates released by the Bureau of Economic Analysis. In
the first quarter, real GDP increased 0.6 percent.
The GDP estimates released today are based on more complete source
data than were available for the advance estimates issued last month. In
the advance estimates, the increase in real GDP was 3.4 percent (see
"Revisions" on page 3).
The increase in real GDP in the second quarter primarily reflected
positive contributions from personal consumption expenditures (PCE) for
services, exports, nonresidential structures, federal government
spending, state and local government spending, and equipment and
software that were partly offset by a negative contribution from
residential fixed investment. Imports, which are a subtraction in the
calculation of GDP, decreased.
The Market's Prison
I had just finished doing two projects I had been putting off for a
while (changing out a balanced modulator tube in my nearly antique
HT-37 ham radio
transmitter, and putting a
in my truck's electrical system to harden it against potential EMP
effects) when the phone rang. It was my consulting attorney:
"There, you see? I told you! The Fed has the same charts are
you do and they know that Wednesday was the inflection point and they
got the markets to move the way they wanted 'em to..."
I had already put the day's rally on the chart - along with an X
indicating where the market would close if the futures were right about
down 55 today:
Although, no shortage of them, it seems. We exchanged a few more
observations about how the parallel was going, but in the end, I think
the conversation ended on a "let's just wait and see" note.
Not like I'm the only skeptic to look over yesterday's rally. Ty
Andros editor of the Tedbits Newsletter, has a posting over at Financial
Sense this week "Fingers
of Instability subtitled "September: Blitzkrieg of Bad News" which is
worth a careful read - along with parts 1 & 2 as well. The
thing most people don't get is that a lot of this structured
product floating around is quietly called liar's paper for a
Since there is no ready market for a lot of the bundles of debt pedaled
as 'investment grade securities', the industry has been valuing the
various tranches by doing something called "mark to model." Here's
how the game is played: I sell you a piece of paper (GeorgeNotes)
which I claim is worth X number of dollars. But, because there's
no ready market for GeorgeNotes, I give you a spreadsheet (or you make
up one of your own, based on what I tell you about the future value of
the GeorgeNotes) and it contains some completely fictional numbers about
what GeorgeNotes should be worth on a particular day, or at the end of
any particular month. This spreadsheet is called the
model (of how much GeorgeNotes should be worth).
The next part is important: In order to make you believe my
story that GeorgeNotes really have any value, the spreadsheet I
supply to you (or the one you have made up based on my representations
about GeorgeNotes) allows you to enter all kinds of numbers so that the
model has some credibility. You might, for example, put in
the discount rate, the current CPI, the wholesale costs of goods - all
kinds of things including maybe rainfall in the Midwest. Based on
this multiplicity of factors, the model then offers some advice
on what your bundle of GeorgeNotes is worth. If it has changed,
you make a tweak in your accounting, but in the end, the mark-to-model
process is a wild-ass guess based on a lot of assumptions.
And, as a few people who are higher ups in the computer consulting
business have told me privately that some of the biggest models in the
country have stopped working and highly paid programmers have been
called in on an emergency basis, who are in turn pulling their hair out,
trying to make the models work. The problem is that we're in
uncharted territory on this stuff, the models are in some cases out of
bounds, and if you listen closely, you can hear the falls as the ocean
falls off the edge of the earth off in the distance.
yesterday's big rally might have been the Fed behind the
scenes pushing things higher, I don't expect it will last
About now, you may be wondering what was the reference to prison camp
psychology all about? Well, let me explain. Humans are very
odd beasts. In World War Two, it was noted that millions of
people were carted off to prison camps by relatively small numbers
of guards. Even though the number of people was more than enough
to overwhelm the guards, people obeyed orders and did as they were told
(with untold numbers ending up dead) because of the presence of
To my way of thinking, what we are seeing in the market at the moment is
another exercise in prison camp mentality. Everyone with
who has read a book on economics ought to know that the Fed can't stem
the flow of the market if it's allowed to get rolling because the market
is bigger than the Fed. But, at least for now, the Fed is wearing
its badge of authority and has convinced a lot of market players that
"We're in charge here - resistance is futile."
Next week, we will see if the hypnosis can hold. Frankly, based on
the predictive linguistics I've read, it's not going to work - but I'm
perfectly willing to be wrong because if I'm right, it's the end of the
financial world as we know it, and millions of Americans my age will be
screwed out of their life savings. But this morning, a little
thought about how 'prison camp mentality' works is worth pondering.
The brahmans tell you to follow (do as you're told, don't question
'the way') (these would be like Fabians - the corpgov elites) and
hold power while the shamans tell you to discover of offer power
- Like the Framers of the individualist Constitution.
Web Bot Hits
I don't know how long I have been telling you "Web bots predict regime
change in September in Pakistan in September" (but
it has been a couple of months anyway). The reports are still
will give up army title" says one report, but then again "Pakistan's
Musharraf rejects pressure to quite Army post in Bhutto deal" says
another. Well, the foreplay is certainly right on schedule.
A couple of web bot subscribers have asked if
isn't the untainted, non-partisan woman who the linguistics have making
headlines about now. Yes, but there's one important
archetype-level image that hasn't been fulfilled: Seems she will
need to be seen by millions carrying a handbag which might be a
purse, briefcase, something like that. So, if she returns to the
US as a 'peace ambassador' and is seen carrying a prominent
handbag/portfolio kind of thing, then yeah, that'd be her...
Speaking of immigration, a group of labor unions is planning to sue the
federal government over plans to crack down on employers who are hiring
illegal aliens. Meantime, the
government has raided a poultry plant in Ohio where illegals are thought
to have been working.
Another labor note:
400 arrested demonstrating for better wages and working conditions in
Chile. I hope the boom in Chile won't change the price of my
Conch y Toro...
The Chicago Trib headline sums it up neatly: "GOP
acts swiftly to make Craig scandal 'go away'"
Speaking of politics, I don't know if I mentioned that
car was bumper-stickered by Obama pranksters, but there's also some
buzz in discussion groups that Rove might support Obama...
Trouble Over Bridged
The condition of the nation's infrastructure continues to draw emails -
like this one from a reader who goes fishing near New Orleans:
I just finished reading today's posting on 'Peoplenomics" and under
the "Stranger" topic pertaining to the I-10 bridge closing in Memphis
this week I thought I'd send this little tid-bit along just FYI.
Just last week a good friend of my sister's was out fishing in Lake
Pontchartrain, just east of New Orleans and pulled his boat under the
I-10 bridge to get out of the sun for a while. BTW this is the same 5
mile bridge destroyed by Hurricane Katrina exactly two years ago today.
He happened to look up and noticed two jacks still in place, still
holding up this section of bridging for nearly the past two years. See
photo attached. Notice the gap between the girder and the support? The
two jacks are keeping the span somewhat level I suppose, I hope!
When I notified the LA. DOT of this they were quite unconcerned and
matter of fact about it. Patted me on the head and sent me on my way.
George, I believe that we are in much greater danger on a daily basis
from the incompetent, arrogant, attitude of our government than we could
ever be from Terra intruding. The latter not to be taken lightly by any
means of course!"
Yah think? Looks to me like the
bridge above hasn't been earthquake retrofitted yet either. Oh well, I
don't run the highway department.
I may have resolved my pesky
Gray Screen of Death issues with MS Vista. For one thing, I
uninstalled a demo version of Office 2007 Home and Student which may have
interfered with my real grown up version of the product. Then, MSFT
has a new video patch that was installed. And, I killed some start-up
programs. Knock on wood...
Meantime, looks like Vista Service Pack One will be out in 2008...
Wednesday August 29, 2007
We begin this morning by recalling that the linguistics boys, also known
as the time monks, warned us all a long time ago that we were going to
see strange, almost unreal things such that life would take on a surreal
edge to it along about in here. If the emails are any indication,
My nominee for "strange" today is the eerie parallel between the post
market high action of 1929, 1987, and the present day. Subscribers
have been watching this develop for a couple of weeks now...but after
Bart from www.nowandfutures.com
sent me his charts, I figured it was time to trot out the one the
subscribers have been watching...
As you might expect, the futures are pointing to a slightly higher open,
but I'm watching to see how close to 'threading the needle' the current
market will be able to remain between past declines from market peaks.
Adding to the high strangeness of this 'echo of the past' is that the
1987 track 'bottoms' on 9/11 (!) while the 1929 track 'bottoms' on 9/27.
The chest beating of the republicorps was almost deafening as new
poverty figures were trotted out this week. But
just because the figures dropped a whole 0.3% (a third of a penny on
a dollars worth, put another way), the sage investor would have to step
back, look at sample size and wonder "How big is the margin of error in
this report?" People/reporters for LameStreamMedia don't ask those
kinds of questions much - they just swallow whatever herring is tossed
their way and then bark like trained seals from inside that big
fish-tank looking thingy in the living room.
Of course, my point is that with the foreclosure rate on homes just
about double what it was just a year ago (Thanks again, Mr. Greenspan,
for pimping those ARM's!) we're not likely to see the gain (miniscule as
it is) hold over time. When the numbers come reflecting impacts of
the housing repo crisis, the democorps will likely have their put-up in
office and the charade will reset for another four years.
In the meantime, mortgage applications are down a bit. Could
it be people are awakening to the idea that the term "wage slavery"
starts with the instant gratification and the debt noose?
Expect a "Rousing Rally!" from the bull tube touters this morning.
I'll just lay off on the applause for a few weeks if you don't mind -
I'm still skeptically watching my chart evolve. The bullish hype
today won't likely make up for the 280 point nosebleed on Tuesday,
unless you've got a really, really, short term term...ah....short
term..... er....Where was I? Oh yeah: Repeat after me: dead
cat bounce. Even a rally to 13,577 by Friday (on the holiday
effect) wouldn't impress me. Grouch that I am.
Ok, then there's the whole terra intruding thing. Too early to
talk about food shortages; for that, ya'll check back early next spring
(maybe later winter). For now, we've got earthquake jitters
since the Peru Quake was likely Quake 1 in our linguistic three quake
set, and now, what's this?
A report says the LA area has been in a one-thousand year earthquake
The potential for a big quake to seriously screw up globalism
can't be overstated. Just yesterday, there was a report that
in Japan a while back is still impacting auto production.
All of which opens the discussion of earth changing and tectonic plate
movement. Although, it turns out that
closure of the I-40 bridge in Memphis this week wasn't due to bridge
supports going on walk-about, just normal settling. Or, is a
bridge pier dropping 4-inches apparently overnight, not presactly
There's also this UFO meme out there in the data - and an email with a
link to a really cool YouTube video tops the "strange" pile this
I'm a devoted Urban Survivalist and also an avid subscriber to HPH.
Although I have been reading the webots' musings on terra intrusion and
market calamity with great interest, I have given only the most fleeting
attention to the UFO meme, namely that contact and/or disclosure with
alien life is highly probable in the next 2 years, and perhaps with
shocking suddenness and without control from the powers that be. I've
always thought, "Okay, right. But what in the world will that look
Like everyone else, I've seen hundreds of clips of footage from
various alleged UFO sightings. At this point, nothing surprises or
impresses me. But I have to say, THIS video gives me pause. You might
watch it and think I'm crazy, but what struck me is that (a) either the
amateur videographer who captured these images needs to be signed up by
a major studio to direct a sci fi film NOW, as he can clearly do it on a
smaller budget than most of these high-paid dolts or (b) this is REAL.
I'm leaning towards (b).
Note one of the comments that was posted: "I thought it was real for
a second then i realized that with that many ufos the government would
be scrambling to area 51, it d be all over the news." Right, like the
coming economic collapse and pole shift are making headlines on CNN?
Anyway, would be interested to get your read on this. Then again,
maybe you'll think I'm crazy...wouldn't be the first time I've heard it
No, Other Reader, you are not
nuts. On the other hand, you need to buy my $59.95 course "Learning to
be Skeptical" - operators are standing by, this is a free call....
The giveaway for me was that as
the "ufo's" were going off into the distance, they banked which would
infer that in UFO training school, alien flight instructors yell
"Step on the
ball!" and point at the turn & bank indicator, just like mine did.
Oh, and then there's that little matter of the creator of the video
admitting it's a hoax.
On the other hand, the
linguistics are often right so I continue watching the UFO reports.
And the latest 'secrets revealed' in that realm includes a claim that
Werner Von Braun was at Roswell New Mexico back when. What happens
in Roswell stays in Wright-Pat?
Why would a somewhat serious
economics site (Here, you dolt!) pay attention to UFO reports? You
see, Grasshopper, we have noticed before some of the Big Earthquakes in the
past, an uptick in reported sightings of UFO's and other high strangeness in
the skies seem to occur in advance of events. Such as the Southeast
Asia uptick in UFO reports before Banda Aceh let rip. Sooo...
When I see a report like this
mysterious object seen in skies over the Tasman Sea near Kaitaia is baffling
UFO experts", I make a mental note that this might be (take your pick
of) a) inter-dimensional visitors doing a little before and after quake
sight-seeing, or b) some kind of undocumented pre-earthquake release
of energy, along the lines of
piezoelectric effects driven by crustal shifting. Or, like the
research (more links) and
the earthquake light
Seeing as we're in a 'release
period' till September 19th, the word 'release' is popping up all over.
Taliban releasing more hostages. Then there's the
US release of eight Iranians held in Bagdad. Students in
demanding release of a union leader.
Diamonds are for...
What's up with the biggest diamond in history reportedly being found in
Dumb and Dumber
SAT scores are
down for a second year in a row. No child left where?
like 900 workers will be cut says one report.
To Much Dough?
General Mills is planning to close an Ontario frozen dough plant by 2009
idling 470. Wonder if that means that bread making machines are
out of vogue for now? Frozen waffle plant in Allentown PA will be
closed too, idling 111. Should I short Mrs. Butterworth?
But seriously - baking industry
changes are afoot elsewhere:
is planning to cut 1,.300 southern California jobs as Wonder Bread is slated
to stop production October 20th. Don't know the Twinkie plan for
Got a few million sitting
around idle? How's about we partner: You put up the dough... er......money...
and I'll run the
currently for sale Albuquerque Tribune for you. What a deal, huh?
On Your Side?
Nationwide is planning to dump 39,000 homeowner insurance policies in
Florida. Many of the major insurance companies are cutting back Florida
homeowner policies because of a state legislature mandated rate reduction.
State Farm and Allstate, you may remember, have also announced cuts in the
Katrina Turns Two
I was listening to WWL this
morning while waking up and they mentioned that today is
years past Katrina and a memorial ground breaking is on tap.
Republicorp spin machine seems bound and determined to rewrite history.
Speaking of which...
Architect has been selected for the Bush Library. No jokes about
where are they going to put both books, but seriously: I wonder if that kids
book read while the Twin Towers were being attacked will be on display
The 9 MM Workshop
Here in the East Texas outback,
we're always looking for efficient ways to get things done, and about once a
year it's time to build a new burn barrel for trash. After cutting the top
of a locally procured 55-gallon steel drum, I was faced with the problem of
putting in air holes. The answer? A single click from the '9.
But, it got me to wondering: Has anyone written the definitive book on
using guns in lieu of step drills?
The US being the most armed place on earth with 90 guns per 100 people,
I just thought it would be an interesting alternative use...
Tuesday August 28, 2007
The Fed's Thinking
As expected, the FOMC (Fed
Open Market Committee) meeting notes were just posted. I'll let
you read them for yourself - I bolded a few things....
|Minutes of the
Federal Open Market Committee
August 7, 2007
A meeting of the Federal Open Market Committee was held in
the offices of the Board of Governors of the Federal Reserve
System in Washington, D.C., on Tuesday August 7, 2007 at 8:30
||Mr. Bernanke, Chairman
Mr. Geithner, Vice Chairman
||Ms. Cumming, Mr. Fisher, Ms.
Pianalto, and Messrs. Plosser and Stern, Alternate Members of
the Federal Open Market Committee
Messrs. Lacker and Lockhart,
and Ms. Yellen, Presidents of the Federal Reserve Banks of
Richmond, Atlanta, and San Francisco, respectively
Mr. Madigan, Secretary and Economist
Ms. Danker, Deputy Secretary
Ms. Smith, Assistant Secretary
Mr. Skidmore, Assistant Secretary
Mr. Alvarez, General Counsel
Mr. Baxter, Deputy General Counsel
Ms. Johnson, Economist
Messrs. Connors, Evans, Fuhrer, Kamin, Rasche, Sellon, Slifman,
Tracy, and Wilcox, Associate Economists
Mr. Dudley, Manager, System Open Market Account
Mr. Struckmeyer, Deputy Staff Director, Office of Staff Director
for Management, Board of Governors
Messrs. Clouse and English, Senior Associate Directors,
Division of Monetary Affairs, Board of Governors
Ms. Liang and Mr. Reifschneider, Associate Directors,
Division of Research and Statistics, Board of Governors
Messrs. Dale and Reinhart, Senior Advisers, Division of
Monetary Affairs, Board of Governors
Mr. Blanchard, Assistant to the Board, Office of Board
Members, Board of Governors
Mr. Meyer, Visiting Reserve Bank Officer, Division of
Monetary Affairs, Board of Governors
Ms. Dykes, Project Manager, Division of Monetary Affairs,
Board of Governors
Mr. Luecke, Senior Financial Analyst, Division of Monetary
Affairs, Board of Governors
Mr. Driscoll, Economist, Division of Monetary Affairs, Board
Ms. Low, Open Market Secretariat Specialist, Division of
Monetary Affairs, Board of Governors
Mr. Connolly, First Vice President, Federal Reserve Bank of
Messrs. Judd and Rosenblum, Executive Vice Presidents,
Federal Reserve Banks of San Francisco and Dallas, respectively
Ms. Mosser and Mr. Sniderman, Senior Vice Presidents, Federal
Reserve Banks of New York and Cleveland, respectively
Mr. Cunningham, Vice President, Federal Reserve Bank of
Mr. Chatterjee, Senior Economic Adviser, Federal Reserve Bank
Mr. Hetzel, Senior Economist, Federal Reserve Bank of
Mr. Weber, Senior Research Officer, Federal Reserve Bank of
|In the agenda for this
meeting, it was reported that advices of the election of Eric S.
Rosengren as a member of the Federal Open Market Committee had
been received and that he had executed his oath of office.
By unanimous vote, the Federal Open Market Committee selected
Brian F. Madigan to serve as Secretary and Economist until the
selection of a successor at the first regularly scheduled
meeting of the Committee in 2008.
The Manager of the System Open Market Account reported on
recent developments in foreign exchange markets. There were no
open market operations in foreign currencies for the System's
account in the period since the previous meeting. The Manager
also reported on developments in domestic financial markets and
on System open market operations in government securities and
federal agency obligations during the period since the previous
meeting. By unanimous vote, the Committee ratified these
The information reviewed at the August meeting suggested that
economic activity picked up in the second quarter from the slow
pace in the first quarter. On average, the economy expanded at a
moderate pace during the first half of the year despite the
ongoing drag from the housing sector. While the growth of
consumer spending slowed in the second quarter from its rapid
pace in prior quarters, wages and salaries increased solidly and
household sentiment appeared supportive of further gains in
spending. Business fixed investment picked up in the second
quarter after little net change in the preceding two quarters.
Inventories generally appeared to be well aligned with sales at
midyear. Overall inflation receded in June because of a
decline in energy prices, while the core personal
consumption expenditure (PCE) price index rose a bit less
than its average pace over the past year.
Private nonfarm payroll employment continued to increase at a
healthy pace; the rise in July was about equal to the average
increase over the first half of the year. Solid hiring in the
service sector was partly offset by declines in construction and
manufacturing employment. Most of the drop in construction
employment occurred in jobs typically associated with
nonresidential construction. Both the average workweek and
aggregate hours ticked down in July. The unemployment rate edged
up to 4.6 percent; it had remained between 4.4 percent and 4.6
percent since September 2006.
Industrial production picked up in the second quarter after
little net change over the preceding two quarters. The increase
was largely attributable to a smaller drag from inventory
liquidation and a modest improvement in net exports.
Manufacturing production rose solidly in the second quarter
because of substantial increases in the output of light motor
vehicles, other durable consumer goods, business equipment,
construction supplies, and materials. Production in high-tech
industries rose relatively modestly in comparison to its
The growth of real consumer spending slowed considerably in
the second quarter after substantial increases earlier in the
year. The deceleration primarily reflected sharply slower growth
in outlays for goods as purchases of motor vehicles decreased
noticeably. Although a spike in energy prices eroded real income
growth in the second quarter, there were solid gains in wages
and salaries. Despite continued softness in house prices,
household wealth moved markedly higher in the second quarter,
mostly reflecting rising equity prices.
Demand for housing in the second quarter was restrained by
higher interest rates and by tightening credit conditions in the
subprime mortgage market. Sales of new and existing homes in the
second quarter were down substantially from their average levels
in the second half of 2006. In June, single-family housing
starts held steady at their May rate, although adjusted permit
issuance slipped further. The combination of decreased sales and
unchanged production left inventories of new homes for sale
still elevated. House-price appreciation continued to slow, with
some measures again showing declines in home values.
Outlays for nonresidential construction rose rapidly in the
second quarter. Business spending on equipment and software,
other than transportation equipment, posted a solid increase
after being flat, on net, in the preceding two quarters. The
rise was led by a rebound in purchases of industrial machinery.
Expenditures for computers, software, and communications
equipment grew moderately in the second quarter after a brisk
first-quarter increase. Spending on transportation equipment
again declined sharply. The drop was largely a continuation of
the payback from exceptionally strong purchases of heavy trucks
in 2005 and 2006 in anticipation of tighter emissions standards
on diesel engines. New orders for medium and heavy trucks edged
up in the second quarter, though they remained at low levels,
suggesting that the downturn in business spending on motor
vehicles may be ending.
Real nonfarm inventory investment was a roughly neutral
influence on real GDP growth in the second quarter after having
held down the growth rate by an average of 1 percentage point in
the previous two quarters. Businesses made considerable progress
in reducing the apparent inventory overhangs that had emerged at
the end of 2006. In the motor vehicle sector, low rates of
assemblies in the first half of this year left inventories of
domestic light vehicles at the end of the second quarter fairly
well aligned with sales; however, inventories rose again in July
as production accelerated and sales remained weak. More broadly,
the number of purchasing managers who viewed their customers'
inventory levels as too high in July only slightly exceeded the
number who saw them as too low.
The U.S. international trade deficit widened in May, as a
rise in imports more than offset an increase in exports.
Within imports, most categories of goods recorded an increase,
as did services. The value of oil imports rose sharply, boosted
by a jump in the price of imported oil. The increase in exports
was largely attributable to capital goods, including aircraft,
computers and semiconductors, and industrial supplies.
Economic activity in advanced foreign economies expanded
somewhat less rapidly in the second quarter than in the prior
quarter, but nonetheless appeared to have grown faster than
trend, reflecting upbeat business and consumer confidence as
well as favorable labor market conditions. Although many of
those economies recently experienced sharp declines in equity
prices and widening credit spreads amid deepening concerns about
credit quality, these developments occurred too late in the
intermeeting period to have any apparent effect on incoming
data. In Japan, survey evidence suggested that its economy
expanded moderately. Survey evidence indicated high levels of
economic sentiment and strong capital spending plans among large
manufacturers. In the euro area, survey measures of business and
consumer confidence remained near record highs in July, and
labor market conditions generally continued to improve in May
and June. In the United Kingdom, real GDP growth rose in the
second quarter, an increase driven mainly by robust expansion in
the service sector. Canada's growth seemed to continue to pick
up from its disappointing rate posted in much of last year.
Recent data indicated that economic activity in
emerging-market economies remained generally strong. The Chinese
economy continued to expand at a rapid pace, and activity
elsewhere in emerging Asia appeared to have accelerated. In
Latin America, Mexican indicators pointed to a
weaker-than-expected rebound in the second quarter, whereas
Brazil and Argentina appeared to have experienced solid growth.
While equity prices fell and bond spreads widened in several
emerging-market economies, particularly in Latin America, there
was no evidence that this increased volatility had yet weighed
on economic activity.
U.S. headline consumer price inflation slowed in June as
energy prices flattened out after a rapid increase over the
preceding three months. Core PCE prices rose 0.1 percent in
June, as a decline in the price index for core goods nearly
offset a rise in the index for core services. The readings on
core PCE price inflation in recent months had been held down, in
part, by declines in prices of some categories of goods, such as
apparel, that tend to be volatile on a monthly basis. Household
surveys conducted in early July indicated that the median
expectation for inflation over the next year remained unchanged
from June's elevated level despite declines in gasoline prices
in both months. Median expectations of longer-term inflation
ticked up and were near the top of the narrow range that had
prevailed over the past few years. The employment cost index
rose somewhat faster in the second quarter than over the
preceding three months, and the twelve-month change was slightly
higher than that of a year ago.
At its June meeting, the Federal Open Market Committee (FOMC)
maintained its target for the federal funds rate at 5-1/4
percent. The statement announcing the policy decision noted that
economic growth appeared to have been moderate during the first
half of the year, despite the ongoing adjustment in the housing
sector. The economy seemed likely to continue to expand at a
moderate pace over coming quarters. Readings on core inflation
had improved modestly in recent months. However, a sustained
moderation in inflation pressures had yet to be convincingly
demonstrated. Moreover, the high level of resource utilization
had the potential to sustain those pressures. The Committee's
predominant policy concern remained the risk that inflation
would fail to moderate as expected. Future policy adjustments
would depend on the evolution of the outlook for both inflation
and economic growth, as implied by incoming information.
Market participants had largely anticipated the FOMC's
decision at its June meeting to leave the target for the federal
funds rate unchanged, although the accompanying statement
expressed greater concern about inflation than investors
reportedly had foreseen and caused the expected path for the
federal funds rate to edge higher. Expectations for a policy
easing diminished somewhat more in the wake of favorable
economic news early in the period. Subsequently, the semiannual
Monetary Policy Report to the Congress and the
accompanying testimony, which reported lower projections for
real GDP growth than investors apparently expected, appeared to
prompt a downward shift in investors' expected path for the
federal funds rate. Later in the intermeeting period, growing
apprehension that turmoil in markets for subprime mortgages and
some low-rated corporate debt might have adverse effects on
economic growth led investors to mark down their expectations
for the future path of policy considerably further. At the same
time, measures of long-horizon inflation compensation based on
inflation-indexed Treasury securities edged down.
Financial market conditions were volatile during the
intermeeting period, particularly over the last few weeks of the
interval. Yields on nominal Treasury securities fell on balance,
possibly reflecting an increased preference by investors for
safe assets as well as revisions in policy expectations.
Conditions in markets for subprime mortgages and related
instruments, including segments of the asset-backed commercial
paper market, deteriorated sharply toward the end of the period.
Credit conditions for speculative-grade corporate borrowers
tightened substantially, as investors pulled back from
higher-risk assets. Spreads on speculative-grade bonds increased
to near their highest levels in the past four years. A number of
high-yield bond and leveraged loan deals intended to finance
leveraged buyouts were delayed or restructured, though other
high-yield bonds were issued. In contrast, credit conditions for
investment-grade businesses and prime households were relatively
little affected by the market turbulence. Issuance of
investment-grade bonds continued. Yields on investment-grade
corporate issues rose relative to yields on Treasury securities,
but because yields on Treasuries declined, yields on
investment-grade bonds were about unchanged on net. Nonfinancial
commercial paper outstanding posted a modest gain in July, while
the pace of bank lending to businesses picked up from an already
solid clip. Mortgage loans and consumer credit appeared to
remain readily available to households with strong balance
sheets, although late in the period some evidence pointed to
diminishing availability of jumbo mortgages.
Broad stock price indexes declined substantially, on net,
over the intermeeting period despite generally solid
second-quarter earnings reports. Share prices of financial firms
fell especially sharply, reportedly a reflection, in part, of
concerns about exposures to subprime mortgages and about the
effect of a potential slowdown in merger activity on operating
profits. The foreign exchange value of the dollar against other
major currencies fell, on balance.
Growth of home mortgage debt likely slowed again in the
second quarter, mainly reflecting the decline in home-price
appreciation over the past year and the drop in home sales.
Overall consumer credit expanded moderately through the year
ending in May. The debt of nonfinancial businesses expanded at a
robust pace in the second quarter but slowed in July. After
rising at a rapid pace in the first half of the year, M2 grew at
a more moderate rate in July.
In preparation for this meeting, the staff lowered
somewhat its forecast of real GDP growth in the second half of
2007 and in 2008. The reduction was in part due to the annual
revision of national income and product accounts (NIPA), which
revealed somewhat less rapid growth in output and productivity
during the past three years than previously reported and led the
staff to trim its estimates of the growth rates of structural
productivity and potential GDP; the reduction also reflected
less accommodative financial conditions and the softer tone of
some near-term indicators. The near-parallel revisions to the
forecasts for potential and actual GDP left the staff's
projections for resource utilization about unchanged.
Although part of the recent favorable monthly readings on core
PCE price changes was expected to be transitory, the staff
revised down slightly its forecast for core PCE price inflation
in the second half of 2007; however, in light of slower growth
in structural productivity and prospects of somewhat greater
pressure from import prices, the staff left its projection for
core PCE inflation unchanged for 2008. Overall PCE inflation was
expected to slow in the second half of 2007 from the elevated
pace of the first half, as the effects of the sizable increases
in food and energy prices earlier this year abated, and then to
move down a bit further in 2008.
In their discussion of the economic situation and outlook,
meeting participants indicated that they still saw moderate
economic expansion in coming quarters as the most likely outcome
but that the downside risks to growth had increased.
Participants reported that economic expansion had continued at a
moderate pace in many regions of the country despite further
weakness in the housing sector. Going forward, most participants
anticipated that growth in aggregate demand would be supported
by rising employment, incomes, and exports, with the result that
growth in actual output probably would remain close to growth of
potential GDP despite the ongoing adjustment in the housing
sector. Several mentioned that the revisions to the NIPA pointed
to a modest downward adjustment in projected growth of actual
and potential GDP, but thought that potential output growth was
likely to be a bit higher than forecast by the staff. However,
recent spending indicators had been mixed, and credit conditions
had become tighter, suggesting greater downside risks to growth.
Participants generally expected that core inflation would edge
lower over the next two years, reflecting a slight easing of
pressures on resources, well-anchored inflation expectations,
and the waning of temporary factors that had boosted prices last
year and early this year. Participants anticipated that total
inflation would slow as well, particularly if market
expectations of a modest decline in energy prices in coming
quarters were to prove correct. But they were concerned that the
high level of resource utilization and slower productivity
growth could augment inflation pressures. Against this backdrop,
the Committee agreed that the risk that inflation would fail to
moderate as expected remained its predominant policy concern.
Participants agreed that the housing sector was apt to
remain a drag on growth for some time and represented a
significant downside risk to the economic outlook. Indeed,
developments in mortgage markets during the intermeeting period
suggested that the adjustment in the housing sector could well
prove to be both deeper and more prolonged than had seemed
likely earlier this year. Participants noted that investors had
become much more uncertain about the likely future cash flows
from subprime and certain other nontraditional mortgages, and
thus about the valuation of securities backed by such mortgages.
Consequently, the markets for securities backed by subprime and
other non-traditional mortgages had become illiquid, and
originations of new subprime mortgages had dropped sharply.
While these markets were expected to recover over time, it was
anticipated that credit standards for these types of mortgages
would be tighter, and interest rates higher relative to rates on
conforming mortgages, in the future than in recent years.
However, participants also observed that mortgage loans remained
readily available to most potential borrowers, and that interest
rates on conforming, conventional mortgage loans had declined in
recent weeks, providing some support to the housing sector.
Participants thought that consumer expenditures likely would
expand at a moderate pace in coming quarters, supported by solid
gains in employment and real income. Though growth in consumer
spending had slowed in the second quarter, the slowing likely
reflected temporary factors in part, including some payback from
unusually strong growth in prior quarters and the surge in
gasoline prices. Several participants noted the risks that house
prices could decline significantly and that credit standards for
home equity loans could be tightened substantially as factors
that could weigh on consumer spending. However, the sizable
upward revision--from negative to positive--in estimates of the
personal saving rate during the past three years suggested
somewhat less need for households to rebuild their savings.
Participants expected that business investment would be
supported by solid fundamentals, including high profits, strong
business balance sheets, and moderate growth in output. Recent
financial market developments were thought unlikely to have an
appreciable adverse effect on capital spending. Although lenders
recently appeared to be less willing to extend credit for
financial restructuring, the supply of credit to finance real
investment did not appear significantly diminished. Funding had
become more costly and difficult to obtain for riskier corporate
borrowers, but there had been little net change in the cost of
credit for investment-grade businesses. Also, businesses in the
aggregate continued to have sufficient internally generated
funds to finance the expected level of real investment.
Nonetheless, participants recognized that conditions in
corporate credit markets could change rapidly, and that adverse
effects on business spending were possible. Moreover, heightened
asset market volatility and the associated increase in
uncertainty, if they were to persist for long, could lead
businesses to pare capital spending plans. Still, participants
judged that continued growth of investment outlays going forward
was the most likely outcome.
Rapid economic growth abroad and the decline in the foreign
exchange value of the dollar in recent quarters were seen as
likely to boost U.S. exports and thus support the economic
expansion. Some participants also anticipated that growth in
government purchases of goods and services would support
continued growth in output.
The data on core inflation received during the intermeeting
period were favorable, but meeting participants believed that
the readings for the past few months likely had been damped by
transitory factors and did not provide reliable evidence that
the recent level would be sustained. Still, participants thought
that a slight decrease in pressures on resources and the
stability of inflation expectations likely would foster over
time a gradual moderation in core inflation. Participants
anticipated that total inflation would slow as well,
particularly if market expectations for a modest decline in
energy prices in coming quarters were to prove correct.
Participants remained concerned about factors that could augment
inflation pressures, including the continuing high level of
resource utilization and slower trend growth in productivity.
Some also pointed to the strength of aggregate demand worldwide
and the depreciation of the dollar, and their potential effects
on the prices of imports and globally traded commodities, as
contributing to upside risks to U.S. inflation. Several
participants noted significant increases in wages in their
Districts, particularly in the service sector, but it was also
observed that that overall gains in labor compensation had
remained moderate, suggesting that sustainable rates of resource
utilization could be slightly higher than typically estimated.
On balance, participants continued to agree that risks to the
outlook for sustained moderation in inflation pressures remained
tilted to the upside.
In their discussion of monetary policy for the intermeeting
period, Committee members again agreed that maintaining the
existing stance of policy at this meeting was likely to be
consistent with the overall economy expanding at a moderate pace
over coming quarters and inflation pressures moderating over
time. The expansion would be supported by solid job gains and
rising real incomes that would bolster consumption, and by
increasing foreign demand for goods and services produced in the
United States. The ongoing adjustment in housing markets likely
would exert a restraining influence on overall growth for
several more quarters and remained a key source of uncertainty
about the outlook. The recent strains in financial markets posed
additional downside risks to economic growth. Members expected a
return to more normal market conditions, but recognized that the
process likely would take some time, particularly in markets
related to subprime mortgages. However, a further deterioration
in financial conditions could not be ruled out and, to the
extent such a development could have an adverse effect on growth
prospects, might require a policy response. Policymakers would
need to watch the situation carefully. For the present, however,
given expectations that the most likely outcome for the economy
was continued moderate growth, the upside risks to inflation
remained the most significant policy concern. In these
circumstances, members agreed that maintaining the target
federal funds rate at 5-1/4 percent at this meeting was
In light of the recent economic data, anecdotal information,
and financial market developments, the Committee agreed that the
statement to be released after the meeting should indicate that
economic growth was moderate during the first half of the year
and that the economy seemed likely to continue to expand
moderately in coming quarters, supported by solid growth in
employment and incomes and by robust economic growth abroad.
Members also agreed that the statement should incorporate their
view that downside risks to growth had increased somewhat, and
should mention volatile financial markets, tighter credit
conditions for some households and businesses, and the ongoing
correction in the housing market. In addition, the Committee
agreed that the statement should again note that readings on
core inflation had improved modestly in recent months but did
not yet convincingly demonstrate a sustained moderation of
inflation pressures, and that the high level of resource
utilization had the potential to sustain inflation pressures.
Against this backdrop, members judged that the risk that
inflation would fail to moderate as expected continued to
outweigh other policy concerns.
At the conclusion of the discussion, the Committee voted to
authorize and direct the Federal Reserve Bank of New York, until
it was instructed otherwise, to execute transactions in the
System Account in accordance with the following domestic policy
"The Federal Open Market Committee seeks monetary and
financial conditions that will foster price stability and
promote sustainable growth in output. To further its
long-run objectives, the Committee in the immediate future
seeks conditions in reserve markets consistent with
maintaining the federal funds rate at an average of around
The vote encompassed approval of the text below for inclusion
in the statement to be released at 2:15 p.m.:
"Although the downside risks to growth have increased
somewhat, the Committee's predominant policy concern remains
the risk that inflation will fail to moderate as expected.
Future policy adjustments will depend on the outlook for
both inflation and economic growth, as implied by incoming
Votes for this action: Messrs. Bernanke,
Geithner, Hoenig, Kohn, Kroszner, Mishkin, Moskow, Poole,
Rosengren, and Warsh.
Votes against this action: None.
It was agreed that the next meeting of the Committee would be
held on Tuesday, September 18, 2007.
The meeting adjourned at 1:25 p.m.
By notation vote completed on July 18, 2007, the Committee
unanimously approved the minutes of the FOMC meeting held on
June 27-28, 2007.
Market Reaction? We'll see later in the session as the market
weighs the notes - which seem to my read to be a lot longer and o-pen to
interpretation than the Greenspan notes. I feel like there will be an Econ
406 quiz at the end of this one...
Want my opinion? The Fed is not being clear enough. The
market doesn't like equivocation and there's a little something in the
statement for everyone. That makes me nervous as hell. I expect
most investors will feel the same way...but we'll see how the close looks
today. 1987 or 1929, anyone?
If this morning's report seems a little shorter than normal it's because
I had a 'gray screen of death" (That's the Vista improvement on the
older Windows blue screen of death) at about 10-minutes to upload time.
So, the stories which I will run by you really quickly are:
If This were 1929 or 1987...
This would be a marvelous day if we were exactly replaying the
pre-mini-crash period of 1987. Today would be October 5 of 1987
and the Dow would close today at (an equivalent of) 13,557.48. On
the other hand, if this was 1929, it would be October 11th, 1929, and
the Dow would close today at around 12,982.95. In both cases,
today would be the 'last train out' before the respective slides began.
It's therefore none too comforting to realize that the Dow yesterday
close was 259.51 points below where the track went in 1987 but561.15
points above the 1929 track.
Can you say "bracketed"?
Predictive linguistics - getting a glimpse of the how the future will
likely arrive as bespoken at the archetype language level between humans
- is not an exact science. However, I first started
mentioning back in mid June [6/14/2007 to be exact -- long
subscribers got the word on what was coming] how this time of year would
"Markets begin a
slow kind of decline over late summer.
Then we get a real roller coaster (e.g. going down) from September 3
to September 19th as the 'release period' (emotional release) - a sort
of finale to the late summer events. Big pop in unemployment.
Then, suddenly (like spinning on a dime) something come up which is
going to build emotional values like we've never seen in model space
before for a 75-day period which will take us into December.
Then we get another huge release. "
It's against this backdrop that the following email popped in this
I am sure that you have read this by now, but I thought I would write a
thank you email to Cliff, you and the other Time Monks."
With the latest data run about to start posting data, I'm still
scratching my head about what reads like a terrorism event being
interrupted (more on that after the fact, although that's been passed
along the food chain), and what looked like it will be about 72 - maybe
not 75 days of emotional 'build' going on from September 19th.
Then there's 'earthquake #2', not to be confused with the 'summer
Still, quite odd that, as CNBC reports, someone (or group) is betting on
a 5-11% decline in the S&P 500 by options day in September - and isn't
it strange that the Fed meeting will be held within hours (before) our
"turning point" where emotions reverse.
Just to make it clear, the period just just ahead is a 'release period'
emotionally (after the Labor Day holiday) and such things are generally
accompanied by strongly exhaled words like "Wow! Did you see that on
TV?" The 'building' period on the other side of September 18th
will be the formed more of strong gulps of air inward - like when
you see a poisonous snake and your breath draws in - and you watch to
see if the snake makes a menacing move. Tension builds till the
snake, or you, leaves. If the snake has a 'release' - that would
be a striking out. An attack on Iran would be a 'release event',
as would a major Pacific earthquake, or a terrorism event (even if
foiled). Emotional tension build periods would be like the Cuban Missile
Crisis, or the constitutional showdown as pressure built on Nixon, or
the six-days of after-effects of the Katrita 'canes.
Enough people have written in, unclear about release and build periods,
that it's useful to state is several ways: If you were about to be in a
car wreck, the emotional 'build' would be as you see (seconds before the
impact) whets going to hit you and you suck in your breath, get ready,
and brace as best you can. This is followed by the moment of
impact (and thereafter) which is the release - where the breath is
forced from your body by external events.
Monday August 27, 2007
Bye Bye Gonzalez?
Rumors are flying about about the possible resignation of Alberto
Gonzalez as US Attorney General.
NY Times says it will happen later today.
Let me see: Laying the foundation for
torture, extending federal wiretapping, refusing Congressional demands,
suspending habeas corpus, massive expansion of Executive power and the
diminution of Congress role in national conduct of foreign policy?
Yeah, I'd say it's time to resign, too.
if Michael Chertoff takes over from him, who will watch Homeland
Web bot project subscribers have to chalk
up another hit: Bushco resignations ramping up late summer/fall.
The tally: Rove, Gonzalez, snow...who will be next to jump ship? Stay
Pumping the Economy
If you got the feeling over the past couple
of weeks that things are not all rosy, like they're made out to be on
the TV/LameStreamMedia, you're right. But, the signs of financial
desperation to keep the economy afloat are subtle, so an extra slug of
the bean this morning while we go through some of the tell-tale signs
that all is not as pretty, as we might wish.
Dawned on me this week that gasoline prices, at least here in San
Diego, have dropped some $.50+/ gal. in the last 3 months or so. No one
seems to be commenting on it and I wonder if it's an attempt to soften
the overall implosion of the economy for the average person. Just
strange when crude is over $70 and it means nothing to the pump price...
Keep up all the great work and let's have at least an entertaining
This reader email is a great example of what I call "Street
Level Economics". Sure enough, if you check this morning's papers,
you'll find headlines like "Price
at gas pump slides 3-cents in two weeks"
be sure, the headlines seem contradictory. One headline says that "Oil
trades near one-week high on improved US economic outlook." But,
another headline claims that "Oil
prices drop on profit taking". And, yet another suggests that no,
what we are seeing is: "Oil
sheds gains: Hols near $71 on supply worries." All of which
seems confusing enough that the average person (including me) could be left
head-scratching and wondering WTF?
Here's the point:
Oil companies don't want to see a recession
in America any more than do big retailers, home builders, or any other
industry group. In order to keep people rolling (as in driving)
they want you to consume as much of their product as they can produce,
at the highest possible price point. While it's true that they
could make more per gallon by bumping up the price at the pump,
the consumers of America are a little gun-shy about spending right now
because with refi's drying up, things like long driving vacations for
the Labor Day weekend can be easily put on the back burner. Who
needs to drive, anyway, with HDTV and lots to watch over the weekend,
anyway? So, as a result, the oil companies price their product for
maximum [price * volume] revenue.
The wholesalers are keeping prices firm
(peak oil, peak debt, and peak consumption being all intermarried and
all) because they know that the whole world will consume more energy
than replacement energy is discovered for a very long time to come.
Even though places like Africa hold promise of being able to make up for
much of the Middle East's declining output over time, the ugly reality
is that Africa is not a highly stable place and as the Gulf Times
reports today, "Western
oil firms face growing troubles in African countries."
There, don't you feel more comfortable with those momentarily weak gasoline
Add to this, the sweetheart deals that the Fed is pushing at the discount
window (and doing things like taking unpriceable collateralized whatever's
as security) - a previously unheard of practice - and you can see just
under the surface, how really, really, dangerously close to a mini-crash
like 1987 we are. Next week, for example.
The New York Times piece Sunday forecasting "Drop
foreseen in median price of U.S. homes" comes as little surprise.
Along the same line, being an UrbanSurvival reader, the headline that "Flips,
scams blames in California housing decline" will come as no shocker to
About two years ago I told a former colleague who lived in the Golden State
that refinancing his home to 100% plus was a very, very bad idea. I'm
usually right on such things, over time. But, at least I can say I
tried to warn 'em.
Not that the R word (as in "recession") is exactly a secret:
"Ex-treasury Secretary Larry Summer warns of risks 'greater than any since
aftermath of 9/11' reports Ambrose Evans-Pritchard."
I interpret as Oh My Goodness, of course): When do I cross over from being a
nut job/lone voice in the wilderness, to being an economic sage?
Peak Oil = Peak Revenue
People in Trinidad & Tobago are looking at their current production rates
wondering what happens to government tax revenues when oil and gas output
declines. No government's going to take declining revenue laying
You know, I was having a hard time understanding why people were fighting
Sri Lanka so much. Mystery solved!
leases are being let in the area between Sri Lanka and India. Aha!
Now, when I read headlines like "Sri
Lanka says kills 9 rebels in northwest clashes" and "Sri
Lanka defuses suspected rebel bomb near pageant" I read is as fight
over future oil/resources.
Career of the Future
Noticing the recent spate of kidnappings in places like Nigeria, I got to
asking myself one of those odd/Monday morning kinds of questions: How
long before vocational schools and distance-learning universities start
offering courses on how to be a Hostage Negotiator?
Look at all the stories out that using the term "hostage" - it's an
eye-popper. Yet, rather than worry about the obvious social
implications, why not figure out a way to profit by it? Being a
certified hostage negotiator seems like it might be one of those 'jobs
of the future' - along with being a machinist, which I argue will be one of
the trades repatriated to America (on-shored) once the mania of off-shoring
runs its course, and that's a cinch as the dollar collapses...
The week starts off with more "terra intrudes" that the linguistics reports
from www.halfpasthuman.com have
been talking about since the first of the year. The 'flood' meme is
alive and well ion the Midwest, where water is still in the streets of many
particular, those in Ohio.
Too much water one place, and not enough in another. That's the case
Utah wildfires which has thousands of homeowners fleeing. And in
Greece, the wildfire death toll continues to mount.
Dean leftovers are bringing muggy weather and a few thunder-bumpers to the
Southland (local parlance for LA).
Having gone through what has been an extreme milk summer here in East Texas,
I keep waiting for more folks to see that the changes in weather this year
are not going to be good for food prices by next spring. Oh,
it's not out in the mainstream yet- and I don't expect it until late winter,
but there are a few headlines crossing even now that beg the question
"What's the weather doing to food prices going forward?" "Cold
weather cuts Kenya's tea output 4 percent in July" says a Reuters report
out of Africa. "Warm
weather worries livestock producers" in Australia.
PartZero of the www.halfpasthuman.com
linguistic series focused out to May 2008 is posted - lots of high immediacy
values being processed. Big emotional release period due to start a
week from today...seat blets?
Invest in Wheaties?
Every once in a while I get a craving for a bowl of
Wheaties - and given
the price of wheat lately, I'm beginning to wonder if Wheaties might not be
such a bad investment. "OK, Ure, what's this about?" you're asking.
wheat prices raise Japanese food costs" is one reason, and another is a
report out of France: "Wheat
price surge bites baguettes." Seems to me that Wheaties have held
their price better than Countrywide stock, lately...
arrested 10 people in connection with the murder of a Russian reporter.
New Trade War
As I explained last week, I'm looking at
the scuffles over Chinese imports (pet food/pajamas, shrimp, toys, etc)
and US exports to China as mere the public work-out of China's apparent
refusal to sign up for more puffed up US consumer debt paper (of the
kind currently decaying on global markets).
So, when I see headlines like "China
says US also to blame for toy safety scares" I take it with a grain
of salt: "Subprime
crisis will slow China's currency gains" says a Bloomberg report.
Here's the kind of headline I like: "Gold
may climb on demand for dollar alternative, survey says."
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