patrick.net

Something occured to me about the rate cuts that I don't think I've seen posted here. It has less to do with bailing out homeowners as it does shoring up bond prices on MBS.
I've said this before but a quick refresher since not everyone knows finance. A bond is a type of cash flow, just like a mortgage. If you increase or decrease the APR/Rate of Return on either it is the same effect as increasing or decreasing principal amount since they are a multiplicative relation. When a cash flow is established, the value of the paper is actually an inverse relationship to interest rates. If interest rates go up, the face value of the bond stays the same, but the bond is worth less because it pays a lower interest rate to prevailing rates so an investor will discount it.
Now for the kicker, to cushion the fallout in the markets from declining bond values due to bad loans, it appears the government is actually trying to subsidize MBS by lowering rates. Everything else being equal, MBS values would go up by an amount equal to the effect of lowering the rate on the same cashflow to maintain the same total yield.

Conclusion, the same as has always been said here, savers are being penalized to the benefit of a very wealthy minority.

Thenuttyneutron,

I have an account at emigrantdirect as well. They had a safety rating of 3/5 at bankrate,com last time a checked a month ago. Netbank, by comparison, had the worst possible rating of 5/5 at the time it folded. I cannot vouch for the predictive power or quality of these ratings, but nevertheless I have been using them as a rough guide to safety. By the way, I never saw a bank with a "1" rating. BofA was rated 3, I believe.

Malcolm,

I think you're right about rate cuts primarily being enacted to increase the appetite for higher-yielding MBS bonds and their associated risk.

When Greenspeak spoke of diminishing risk premium, I had not imagined that the way to increase the risk premium/spread was to reduce the interest rate on the lower risk loans. Foolishly, I rather thought it would entail increasing the interest on higher risk loans. How naive of me.

thenuttyneutron,

I think other people have covered your questions well. Your bank is safe and even if not, the FDIC would make your 10k immediately available to you.

Also, people have rightly pointed out that the declining purchasing power of your money due to inflation and the falling dollar is still actually increasing relative to the declines in the housing industry.

However, recessions are funny things. Job loss can really gain momentum. One of the most important things you can do today is try to cement your job (hopefully in a field not particularly subject to a recession) or develop your netowrk of contacts so that you can keep your employment uninterupted.

As for my recomendation with regards to your housing. Wait a few more years to buy, buy within your means (according to the guidelines listed above), and make certain you job can survive the looming recession. This is prudent, if unsexy, advice. Also, do not let anyone pressure you to rush into housing. As rates rise, and they will, the price of the home must be discounted. Financially it is ALWAYS smarter to buy cheaper assets with more expensive money. Even the Volcker Fed only had 2 years of high rates, but housing deals were there for the taking for people in good cash positions.

justme Says:
November 1st, 2007 at 7:57 am
"Malcolm,
I think you’re right about rate cuts primarily being enacted to increase the appetite for higher-yielding MBS bonds and their associated risk.

When Greenspeak spoke of diminishing risk premium, I had not imagined that the way to increase the risk premium/spread was to reduce the interest rate on the lower risk loans. Foolishly, I rather thought it would entail increasing the interest on higher risk loans. How naive of me."

Don't feel bad, this was right under all our noses, and I only recently figured it out. I feel like a sucker for thinking the same way. One almost feels used when he realizes that he's been manipulated for corrupt purposes. Not to be too much of an alarmist, but I suspect part of it is the amount of foreign investors affected. There are some deep and sinister forces at work.

Malcom,

A great resource for those with an appetite for any and all things debt paper is www.investinginbonds.com. They also have some great calculators and the site is used and recommended by many bond desks.

Oh and while you're there check out the "MBS Markets at a Glance" link (for entertainment purposes). You'll get to see Malcom's "inverse relationship" up close and personal!

FAB,

Absolutely hysterical observations on Bend! The "Cavalcade of REIC Stars" on Hwy 97 is a non-stop freak show. (Can't a guy get a little fishin' in around here?) What exactly it is that originally drew the REIC Freaks to Bend has always escaped me? Sure, it's nice (so is La Pine, Prineville and Silver Lake for that matter) So why... Bend? Well I suppose they have to congregate "somewhere" for the Ponzi/Musical Properties game to work!

I hope other than smug comments from soon to be un-employed "part time" contractors and the parade of bling, you still managed to have a good time!

If you can describe the costume that would be fine too. Or if you want to email me the photo

I don't have copies of the photos yet (not my camera), but as soon as I receive them, np. Basically, it was just me in a suit with lots of subprime "flair" (including Tangelo, Lereah & Greenspan buttons) and neg-am faxes pinned all over my body. Very last minute job, but the people here loved it. I even came close to winning the "scariest" prize too, but Death beat me out by a small margin. I guess people here have become very bubble-aware and/or know lots of people in trouble with toxic loans.

The oddest thing I noticed is, more people recognized Tangelo than Lereah or even Greenspan. Countrywide's HQ (Calabasas) isn't that far from Pasadena, but even so, I had no idea how famous that guy really is. I'd never heard of the guy until I came here.

I even came close to winning the “scariest” prize too.

Who won the “scariest” prize? Mr. Greenspam or Mr. Bendover Ben?

Wow - the stock market took a beating today.

HARM Says:
I even came close to winning the “scariest” prize too, but Death beat me out by a small margin.

The sheeple are more scared of Death than of Subprime-hell?

Give them a year or two of suffering the consequences, and they will be begging for the sweet sting of death instead.

SP

"begging for the sweet sting of death instead"

Right. Assuming it's quick and painless. Sadly the "death" they'll be experiencing will more resemble the 'application of leaches' (and you get to watch).

skibum Says:
Wow - the stock market took a beating today.

During my recent trip to (smoky) La Jolla, I caught the final shoot-out scene from Butch Cassidy & Sundance on the hotel's telly. Have Bernanke and the F'ed pretty much reached that point?

So they dash out of their hole and empty their clip with the last few desperate rate-cuts. And then what? Even with the rate cuts, the Dow is STILL below its July level of 14,000. Adjusted for dollar devaluation, make that "FAR below".

And, icing on the shitpile - I got three resumes this week from senior engineers leaving (different) failing startups - their cover letters all say they are looking for "long-term careers" at "stable" employers. Keep an eye on those Bay area employment numbers.

SP

The Fed printed $41 BILLION more usbucks today, and lowered the rate a quarter-point and the dow's down over 300 ...... it's a start....

Keep an eye on those Bay area employment numbers.

There still seems to be pretty strong hiring by startups to midsize companies. But I have heard rumors of hiring freeze at one big company and possible headcount reduction (due to mergers) at another big one. Both strictly rumors. But we will know before end of this year.

ex-sunnyvale-renter,

I know that's what the news accounts say. But the Fed rolled $41B of existing debt - one for $12B, one $8B and one $21B. No new paper today. Associated Press originated the reports of new loans, so it was presumed by many to be accurate.

I hate Scottsdale.

I love Sedona.

The Rich prefer Pitkins County and Teton County.

I was in Scottsdale in May and I was going... HUH?

From Scottsdale-sucks.com

And, of course, they all have the desire to fit into Scottsdale's trendy anti-business, anti-capitalist, anti-American movement that opposes ALL progress, without any good reason whatsoever. They should all just pack up and move to San Francisco (or North Korea) where they belong to leave the normal people free to live their lives.

Heh

RE: (or North Korea)

Democratic People's Republik of Kalifornistan

Never underestimate the ability of the Federal Government and the Federal Reserve to inflate away any and all of their problems.

... and still have CPI showing 2.0%.

- Continuing increases in poilce corruption and bogus tickets to offset property tax losses

This is one aspect of the housing bubble that we haven't discussed here. Mish had an article on how states are losing sales tax revenue as economy is slowing down.

I hate this bubble far more that dot com. Hence my intense dislike for Greenspan. The more I know about the bubble's aftermath, the more bad I see. Hardly anything good will come out of it. And whatever that will be (old mortgage standards, increased savings etc) will come very very slowly and after much pain. The dot com bust took away a lot of stock market wealth, but a lot positive also came out of it. It was just another economic cycle fueled by excesses.

This one is really dark. I really want to believe in hell so that Greenspan will eventually land there.

That Scottsdale guy is a little nutty I think - some of his "Why I'm moving to SoCal" posts are very "Grass is greener":

http://nevercoldcall.typepad.com/scottsdale_sucks/2007/02/scottsdale_the_.html

Newport: People who never drive below the speed limit, never hog the left lane, move out of the way if you're driving faster, and signal 95% of the time.
Scottsdale: Mean, insecure drivers who get a sick thrill out of cutting you off then going slow in the left lane.

Now I've never been to Newport - but still. This is California. That can't possibly be true that people signal 95% of the time.

I have a question for the mortgage gurus here.

As Fed continues to cut rate, shouldn't the ARM loans get a break? ARM is mostly based on LIBOR rate, which moves along with Fed rate.

Only those who are interested in fixed rate need to worry about long term rates heading up despite the cuts (but few can afford fixed nowadays). But ARM borrowers should only care about Fed rate, right?

Thanks.

Yes, ARMs and short term loan rates will track the FED rate.
Fixed rate loans will also fall but are more market driven.

Also remember that HELOCs will track with the Fed rate or LIBOR (depending on th specific loan). However, remember also that lower rates will not help FBs all that much. Those facing a reset will still face a significant payment shock.

Doesn't this mean that ARM has now become the self-selective FB's program? Once you get an ARM, you can only stay with an ARM (at the mercy of the Fed), because you won't be able to get a fixed-rate mortgage, the rate of which will reflect the world's lack of appetite for USD denominated fixed income instrument.

So, does that mean Fed will need to drop the rate to the floor for many years to come? It is almost like a self-fulfilling vicious cycle.

I was just now musing on the source of inflation. The traditional source in the US arises from wage inflation. People demand more money, get it, then prices trend up as more dollars are chasing the same amount of goods.
Current inflation is not derived from wages. Globalization has held wages down. The sources are: China wanting more and more for its goods as its own workers are demanding more pay, resource rich countries wanting more and more for their base materials (the most obvious of which are the Oil nations), foreign holders of American debt dumping their dollar reserces, and foreign banks demanding greater premiums on American debt.
Externally driven inlfation is going to be much harder to slay. With specific reguard to housing we will have to see 30 year rates track up as bond prices track up until, as I theorize, a local savings and loan rate finally becomes more attractive to a borrower.
Companies will be forced to do what they do in any inflaitonary periods, despite its source, will have to lay people off. When senior engineers chase stability over dollars you are seeing the bow wave of the labor problem.
Presuming the low savings rate and the need for 30 year fixed rates to make housing affordable as a percentage of net pay, housing will be very sensitive to increased interest rates. This means discounts on the price side.

It is said that recessions either develop character or reveal character. How Americans respons to this one will be revealing.

http://www.bloomberg.com/apps/newspid=20601109&sid=a8BXAv.pLCxM&refer=home

I missed this article when it originally came out - has anyone else got any comments on it - mine was Oh- S### - they're gonna want to tax us some more now!

http://www.bloomberg.com/apps/news?pid=20601109&sid=a8BXAv.pLCxM&refer=home

Sorry, first link didn't work!
Basically it's "Schwarzenegger Discipline Shattered by Subprime Slump" - he's having to borrow money coz his revenues have slumped!

he’s having to borrow money coz his revenues have slumped!

Yep, and I suspect the same for localities elsewhere. When tax revenues rose because of skyrocketing assessments, you'd think the localities would have treated the extra money as a windfall and banked it. Instead, the localities considered the windfall as normal and will consider the lack of a windfall as a "slump." This slump will spawn cries that the "loss" will need to be made up with with borrowing or more taxes.

'This slump will spawn cries that the “loss” will need to be made up with with borrowing or more taxes.'

But no way they would lay off the $100k+ earners who got in during the hiring binge.

@Headset,

And the mentality really IS just that simple. What!? What part of "We're Broke!" don't you understand?

Oh and btw, for all of those that struggled during the post nuclear world we call the tech wreck? I guess we now know how Merrill (among others) were having blow-out quarters when the rest of us were covering margin calls, hitting the street for interviews and hoping our car didn't get towed that day!?

I guess our 401k will now take hit - lucky we don't need it for quite a few years - however, I get a bit pissed when I see that even though we've been making contributions, our balance is actually going down!

I never believed in the whole 401k thing. There are usually not enough options to insulate a portfolio from the decline of the dollar.

I hate to say this but some of the bigger 401K Rollovers I see come from the last people you would ever think. Safeway truck drivers w/750K. Nike guys that never got past middle mgmt. Rank and file dudes that just kinda signed up and forgot about the whole deal and just put in their time.

NIA

Peter P,

My exact problem. I have about 20 options to choose from in my 401k and none of them insulate me from the decline of the dollar or inflation. I have shifted my contribution to minimum to pick up the company match (which gves a 50% buffer on decline) and I will make up the difference under my self managed Roth and other accounts.

Kinda funny when both Social Security AND the private pension system stinks.

@Dinor,

You are completly correct on that. I work at a power plant in Ohio as a "blue collar" worker. My coworkers and I stash lots of cash away in our retirement accounts. I know of people with 30+years of work history with more than 1 million dollars in the 401k/403 accounts. This is going to be a good nest egg to add to the pension we are promised and social security. I have only been there 2 years but managed to maximize my contributions pre tax to my 401k last year and will max out this year.

There is somthing simple about the blue collar worker. We are happy if we just have cold beers on our days off and we will drive the same beatup cars for 20+years. Keeping up with the Jones is just a stupid idea to us.

Schwarzenegger Discipline Shattered... What a joke. His first act was to borrow money to make the payments on the other loans. We never got out of the so-called financial crisis. He has been nothing but borrow and spend. He pushed a huge amount of bond debt. He never once exhibited restraint.