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Help me Ben Bernanke, you're my only hope!


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2007 Sep 16, 6:08am   32,823 views  249 comments

by Patrick   ➕follow (55)   💰tip   ignore  

Princess Leia

So is helicopter Ben going to come to the rescue on 18th, cutting interest rates, and thereby proving to speculators that they can keep profits but count on ol' Ben to save them from losses? I think the answer, unfortunately, is yes.

Since lower interest rates encourage inflation, does this mean that responsible savers will see the value of their savings eroded to support irresponsible spenders and lenders?

Or could it be that mortgage interest rates will go higher anyway, ignoring the Fed? It seems possible that banks and investors have been spooked enough by the unclear liability for a trillion dollars of bad mortgages that they will still demand higher rates from borrowers, to compensate for the risk of mortgage lending these days.

Patrick

#housing

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1   Lost Cause   2007 Sep 16, 6:29am  

Alan Greenspan says the Iraq War is over oil.

2   Paul189   2007 Sep 16, 6:42am  

Inflation is happening in holding the yellow metal too!

http://tinyurl.com/2otq3a

http://tinyurl.com/33oykb

3   Brand165   2007 Sep 16, 7:33am  

Ben will cut the rate by 25 points on Tuesday. He will disappoint everyone hoping for an immediate 50+ point cut. But honestly, if he slashed by a huge amount, that would send a signal to the other world CBs that the U.S. economy is a lot less robust than we'd like to admit.

Now oil... that might start pushing inflation anyway.

4   GammaRaze   2007 Sep 16, 7:36am  

I never cease to be amazed by the belief amongst the statist faithful that the Fed can work magic. I think those who expect mortgage rates to fall will be surprised. After all, a couple of years ago, during the mortage bubble peak, the Fed raised the rates and the mortgage rates did not budge.

The same thing will happen now. All the lenders out there are focussed on making sure they don't have to close shop. The last thing they want is to finance more homebuyers for whom half a point rate difference matters that much.

5   Brand165   2007 Sep 16, 7:40am  

Bap33: My plan is to become a pirate. Only suckers will own gold and food-producing assets when the entire world collapses. I'll use sails, too, because once peak oil hits the best way to escape your pursuers will be a few dozen yards of canvas. Avast ye swabs, how be yer housing bubble blog now? Arrrrr! :)

Or maybe we'll suffer through a few years of mild stagflation as we clean up the Iraq mess and bring the outsourced jobs back onshore again. Just a thought.

6   Paul189   2007 Sep 16, 7:47am  

My wife is a fantastic sailor. We went out last Thursday. A beautiful night on lake Michigan; the city is veryquiet and looks so beautiful and peaceful from the water!

She's also a great cook; So, I should be set, should all hell break loose!

7   Paul189   2007 Sep 16, 7:49am  

By the way - I think she is smart enough that she would cook for you should you offer a few gold eagles or duckets!

8   justme   2007 Sep 16, 7:52am  

No cut. Bernanke has shown more guts and principle in 3 months than than Greenspan did in a lifetime.

9   justme   2007 Sep 16, 7:56am  

And, even if there is a 0.25% cut, the street will react with a massive stock market sell-off. The stock market has already priced in a 0.5+% rate cut, and the smart money has taken the opportunity to sell into that (fake) rally and move to the sidelines.

10   Brand165   2007 Sep 16, 8:06am  

@justme: I agree, the Street is pricing in a bigger cut, and there will be a selloff that takes us back to 12.6-12.8 over the course of the week. I don't think that Bernanke has much of a choice, because he needs to retain credibility with the rest of the world. It seems quite possible that if he cuts a lot and the other world CBs hold steady, the U.S. could have both inflation and a weakening of the dollar vs. other currencies.

@Paul: Shiver me timbers, we've found me first port o' call! Fresh grub from yer wifey, and perhaps some rum to boot. :)

11   HeadSet   2007 Sep 16, 8:17am  

"For those who don’t already know, the Amero will be a US, Mexico, Canadian currency like the Euro."

And for counties like Panama, that currently use the $US?

Maybe even Cuba after Castro?

And those posters who used the phrase "US Peso" will seem prophetic....

12   Paul189   2007 Sep 16, 8:30am  

1/4 cut - Ben wants to look like a hawk but deep inside he's a dove.

Remember he's a student of the great depression. That is his biggest concern that it never happen again. The longer money remains "tight" though, the more and further he will (need to) cut later. Either way the dollar is dead! Whatever happened to the "Strong Dollar Policy"! Where are Paulson's comments like the usual strong dollar comments from the likes of Rubin, Summers, O'Neil and Snow?

Let's see what greenie has to say tonight-

http://tinyurl.com/22r6af

13   HeadSet   2007 Sep 16, 8:30am  

"No cut. Bernanke has shown more guts and principle in 3 months than than Greenspan did in a lifetime."

JustMe, I hope you are right.

As far as the "street" reacting with a massive sell off after anything less than a .5 rate cut, won't the prices recover after a few days? After all, that has been the pattern for the last few months. Every big drop came back up on news such as Ford earnings higher that expected. The DOW will just recover back the the mid 13,000s within a couple days after any big sell offs.

14   skibum   2007 Sep 16, 8:31am  

While Obi-Ben Bernanke deliberates on what to do, the evil Emperor (Greenspan) is throwing Force nuggets:

http://www.ft.com/cms/s/0/31207860-647f-11dc-90ea-0000779fd2ac.html

US house prices are likely to fall significantly from their present levels, Alan Greenspan has told the Financial Times, admitting that there was a bubble in the US housing market.

In an interview ahead of the release on Monday of his widely-anticipated memoirs, the former chairman of the Federal Reserve said the decline in house prices “is going to be larger than most people expect”.

But Mr Greenspan said that his successors at the Fed – who meet on Tuesday to set interest rates – would have to be careful not to ease rates too aggressively, because the risk of an “inflationary resurgence” was greater now than when he was Fed chief.

Mr Greenspan said he would expect “as a minimum, large single-digit” percentage declines in US house prices from peak to trough and added that he would not be surprised if the fall was “in double digits”.

In other words, he's saying to Obi-Ben, "Here you go. I really made a huge, steamy, stinking pile of crap. Now figure it out. And by the way, don't forget to buy my book! I'll give you a 'double digit' discount on it, too!"

15   Different Sean   2007 Sep 16, 8:44am  

hmmm

As Fed chairman, Mr Greenspan had talked about “froth” in the housing sector, but never said there was a bubble in the market as a whole. His successor Ben Bernanke has also avoided the word “bubble”.

But Mr Greenspan told the FT that froth “was a euphemism for a bubble”.

The former Fed chairman said the current turmoil in financial markets was “an accident waiting to happen”.

He said the price of risk had fallen to unsustainably low levels beforehand, with investors addicted to asset-backed securities that offered some additional yield over Treasury bonds as if they were “cocaine”. Mr Greenspan said this demand induced the big increase in the origination of subprime mortgages by mortgage brokers.

16   Different Sean   2007 Sep 16, 8:53am  

Alan Greenspan says the Iraq War is over oil.

wow, is it really? 'paul chua' fought to the death here against that idea (see patrick's 'iraq' thread). i guess greenie decided he's had 81 good years, what can they do to him now? arrange a hit, or torture him for rolling over? only the former is likely...

17   skibum   2007 Sep 16, 8:54am  

@DS,

I was wondering about that passage too. Do you think Greenspan was thinking back to his heady days in the 1970's snorting coke at Objectivist parties?

18   justme   2007 Sep 16, 9:02am  

HeadSet,

Recovery after selloff? I'm not so sure this time. If enough of the smart money is out already, there might be benefits in selling it down still more. Or less reason to prop it up. Who knows.

19   StuckInBA   2007 Sep 16, 9:17am  

Don't praise Bernanke yet. This is his toughest meeting ever. The amount of pressure on him to be seen as "trying to do something" is extremely high. In addition the world has now got addicted to the "Greenspan put". There has not been any action/speech from him that inspires my confidence in Bernanke that he has what it takes to be tough and having a longer term outlook.

So don't shower the accolades for the time being.

20   Paul189   2007 Sep 16, 9:20am  

By the way - they already cut

It's called the discount rate and it was 50 bps!

21   Paul189   2007 Sep 16, 9:23am  

How about waiting in line to get your money from Northern Rock in the UK only to see them close down the branch before you get in to get your money. Also, the web site is down, surprise, surprise, surprise!!!

22   Paul189   2007 Sep 16, 9:24am  

US Mint not selling gold eagles any more either -

http://tinyurl.com/27dgw2

23   DJM   2007 Sep 16, 9:24am  

I think the Fed will cut 25bp, the stock market will tank for a while and then realize that, actually, this is a good thing in the long term and bounce back. I think the Fed will cut at least 75bp over several meetings to try and get ahead of the exploding ARMs.

The effect on long rates is unclear. They've proven stubbornly resistant to efforts to influence them from the short end, because they're actually set by foreign buyers of long-dated paper. China won't want to tank the US and global economy, certainly not before the 2008 olympics, so they'll play along and the dollar won't completely unravel. Eventually, though, the long rates need to come up to curb the speculation and to more accurately reflect inflation risk.

None of this in any way bails out holders of bad loans. The Fed needs to continue providing liquidity to give institutions time to sort through the byzantine layers of derivatives and find out just who's holding the bag for how much on these loans. Then they can take their lumps, charge off the losses or simply fail, and the survivors will move on.

Just how bad can an AAA tranche of toxic loans be? Even with a 50% default rate (the other 50% refi or continue paying), and even if the defaulted loans yield 50 cents on the dollar (after foreclosure), the overall pool would still be worth 75 cents on the dollar, which barely impacts the top tranche. I'll wager that some strong hands will eventually step up and buy these things from weak holders strapped for liquidity, at a huge discount to face value, and will in the long run look like geniuses for not panicing.

24   StuckInBA   2007 Sep 16, 9:27am  

There is very little chance that the rate cut will help the FBs. Actually the mortgage rates may not dip at all. Weather the congress, NAR and the FBs like it or not, sanity in lending will be restored. The Fed may reduce the rates to zero. But it cannot force the lenders to lend if they think they might lose their principal. Why don't so many reporters/Realtors get this basic fact ?

25   Paul189   2007 Sep 16, 9:28am  

Northern Rock update-

http://tinyurl.com/ytfoz7

26   Paul189   2007 Sep 16, 9:37am  

BECAUSE THEY DONT WANT TO

Why don’t so many reporters/Realtors get this basic fact ?

27   StuckInBA   2007 Sep 16, 9:43am  

I want to point out that PPI and CPI are coming out coinciding with the same dates of the Fed meeting. These numbers especially the non-core CPI can make the Fed look really really ridiculous. A surprise jump in the core CPI may not have the power to stop the Fed from cutting, but it can tank the market really bad.

28   Zephyr   2007 Sep 16, 9:46am  

Mortgage rates are low and have been low. Tuesday will not be significant for mortgages.

It is about trying to avert the recession or slowdown that is now well on its way. The economic storm will continue to worsen for at least six more months. Given the long lag between monetary policy changes and any measurable impact on the economy, it is already too late to avoid the storm. However, if the fed lowers rates during the next few months we could see some recovery in the 3rd quarter of 2008.

29   justme   2007 Sep 16, 9:50am  

StuckInBA,

I agree it may be a little too early to praise Bernanke. I suppose we will find out on Tuesday what the real answer is.

Bernanke is under a lot of pressure because Wall St and the MSM have spun and (mis)construed his recent statements about monetary policy into a promise of a rate cut. Now, if he doesn't "deliver" the rate cut, he is going to get a lot of flak from the media and the blame for the resulting drop in the stock market, although it is no fault of his.

Another problem is that the f@%kers that are on the hook for big losses are threatening to take the rest of the market down with them, in effect holding the Fed hostage.

Next week is going to get REAL interesting.

30   Zephyr   2007 Sep 16, 9:55am  

I would not be surprised if no cut comes on Tuesday. This will precipitate a sell off in the stock market. It will also worsen the slowing of the economy. All of this is bad for peoples' jobs, and for housing prices in the short run. However, it will create a buying opportunity as the cycle effects become exagerated by the Fed's overplayed monetary policy.

Once again the Fed has already overdone it. Once again vultures like me will profit from the panic.

31   justme   2007 Sep 16, 9:56am  

DJM,

Maybe so, but a bank losing 25% on their principal is nothing short of disaster. Yes, maybe someone will buy their junk at 75% of face value, but banks aren't just holding stock and obligations in trust for their customers, they are holding CASH and supposed to return ALL of it, on demand. Cf. the Northern Rock Bank problem in England.

32   skibum   2007 Sep 16, 10:05am  

I will be surprised if there is no rate cut on Tuesday. Bernanke has made no effort to counter all the Wall Street, CNBC, Bloomberg pundits debating whether it will be a 25bp or 50bp cut.

Too bad. If I were him, I'd be thinking more selfishly (in a way) about my own legacy:

Will I be remembered as a Fed chairman ala Volcker who made the country swallow a bitter pill to stamp out inflation, enabling one of this country's longest market bull runs in history, or will I be remembered as the also-ran, "that guy who followed Greenspan" and kept the status quo of enabling market recklessness, and enabling inflation, just so he could keep politicos from calling for his resignation?

33   Zephyr   2007 Sep 16, 10:06am  

What is best for the average person is a softening of the coming downturn, and a more rapid recovery.

What is best for savvy investors is to have a buying opportunity caused by the general distress of a more severe than expected downturn.

Either way I will be happy. If the rates are cut I will feel good about the greater good for the average guy. If rates are kept high I will be happy to profit from the mess.

34   Patrick   2007 Sep 16, 10:08am  

“Use the ARM, Luke ….. feel The Force”

Bap33 gets the prize for all-time best quote so far, but only those who have heard of the term the term "fisting" will get it. That includes most of San Francisco.

The question remains: who will get the fist attached to the ARM: savers, taxpayers, borrowers, or lenders? Maybe all of the above.

35   SP   2007 Sep 16, 10:29am  

Based on the chatterati, it is likely there will be a quarter-point cut. In this case, the most visible effect will be a drop in stocks, which have already priced in more than a quarter-point cut. The FB's at the margin may just be able to scrape themselves into a fixed rate refi. The rest of the FB's will stay F'ed. While I expect the dollar will weaken, the effect on the dollar is hard to predict because we don't know if there is a concerted/co-ordinated rate-cutting campaign with other CB's.

However, Obi-Ben has been rather mum for a while - and we don't know what kind of new core-CPI numbers he is getting - which means there is at least a glimmer of hope that he will hold the rate steady with no cut.

SP

36   SP   2007 Sep 16, 10:30am  

Administrator Says:
“Use the ARM, Luke ….. feel The Force”

Bap33 gets the prize for all-time best quote so far, but only those who have heard of the term the term “fisting” will get it. That includes most of San Francisco.

"Use the lube, Ben..." ???

SP

37   Paul189   2007 Sep 16, 10:44am  

http://www.northernrock.co.uk/

Typical verbage during a run on the bank!

38   Paul189   2007 Sep 16, 10:47am  

Nope, the bank of England lent to you because you are insolvent and not well capitalised!

39   azrob   2007 Sep 16, 11:47am  

hmmm, even ben cuts .5% or more I predict the following:

1. All the news stories will run wild saying how housing will now bounce back!

2. A few "knife catchers" will jump, and join the dead cat bounce

3. Within a few months, data will mount that the crisis is deepening.

The reason is that the 10year has already come down nearly 100 basis points, and you will notice that has hid little effect! Fed funds rate will affect ARM rates, so maybe a handfull of ARM buyers are able to hang on by their fingernails, due to a slightly less painfull reset but... This will not have much of an effect on the underlying lack of confidence in risky paper assets, and might even cause more capital flight away from the dollar.

40   lunarpark   2007 Sep 16, 11:50am  

I think the Fed will cut, stocks will rally, Bay Area housing will get a boost - in the short term. I would love to be wrong.

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