The fact of the matter is that the technology bubble is but one very critical component of the Great U.S. Credit Bubble. The key yet unappreciated point to recognize today is that years of reckless credit excess have created unprecedented leverage throughout the U.S. credit system and extremely weak debt structures. And while Wall Street and Greenspan obviously hope that another bout of monetary excess will do the trick and alleviate the spectacular technology collapse, the preponderance of new liquidity will avoid technology like the plague. Moreover, it is unavoidable that the most recent Reliquefication is and will continue to lead to inflation elsewhere, while it also creates greater consumer debt burdens, perilous financial sector leverage, and even more fragile debt structures.
It is certainly significant both financially and economically that the latest shot of extreme monetary expansion is avoiding the tech collapse to play the real estate bubble. Could this prove the catalyst for the marketplace finally recognizing the dysfunctional nature of the U.S. credit system? While Lucent and a myriad of technology companies fight for survival, credit availability could not be easier in mortgage finance. Could there be a more conspicuous example of a highly maladjusted financial system and economy?
This morning the Commerce Department announced that January housing starts jumped a much stronger than expected 5%, with single family starts running at the strongest rate in one year. Building permits jumped 13%, with multifamily permits surging 24%. The bursting of this unrelenting real estate bubble will wait for another day. Also, fourth quarter mortgage refinance data has been released by Freddie Mac. During the quarter, “78% of Freddie Mac-owned loans that were refinanced resulted in new mortgages at least five percent higher than the original mortgages…” Only 9% of refinanced loans were for amounts less than the original mortgage. Interestingly, on average, loans were refinanced at comparable interest rates, confirming that the overriding motive of borrowers was to extract equity (housing inflation). The “median appreciation of refinanced property” was 28% during the fourth quarter, down slightly from the third quarter’s 29%. However, the “median age of refinanced loan” dropped sharply from 6.6 years to 4.9 years. During the refinancing boom back in the fourth quarter of 1998, the median appreciation was 9%.
There should be no doubt that the current refinancing boom is greatly exacerbating the bubble in money market fund assets, a very dangerous financial distortion that runs unchecked. What are the ramifications today for a loss of investor confidence in the $2 trillion dollar money market fund industry? Astounding… Interestingly, yesterday’s American Banker carried a lead story titled “FDIC Said to Whisper Fund Premium Warning – The Federal Deposit Insurance Corp. has been quietly warning trade groups that it could start charging banks premiums again by yearend – in part because of fast-growing accounts at large firms such as Merrill Lynch & Co., industry sources said Wednesday.”
Also from the article: “Industry representatives said the FDIC has cited fast-growing and de novo institutions that have added billions of dollars to insured deposits without paying new premiums as one of the key reasons for the coverage ratios dilution…the poster children for the issue have become Merrill Lynch, which has moved nearly $50 billion from uninsured accounts into insured deposits at its banks in New Jersey and Utah during the past nine months, and Salomon Smith Barney, a Citigroup Inc. unit that started moving money from uninsured accounts into insured deposits last month.”
Apparently, Salomon Smith Barney is now aggressively moving client assets into FDIC insured deposits, with a structure that includes six separate banking entities providing up to $600,000 of FDIC insurance protection. Coincidently, from the pile of financial reports I read from the last year’s third quarter, the one sentence that sticks most clearly in my mind came from Citigroup – Salomon Smith Barney: “Total client assets in the Private Client business grew 24% from a year ago to $1.047 trillion while annualized gross production per Financial Consultant reached $526,000 in the first nine months of 2000…” It will be quite interesting to see how aggressively Wall Street moves to obtain FDIC insurance for all this “money” it has helped create. I know if I were either Sandy Weill or Bob Rubin (Citigroup chairmen) I would do my best to get my clients into FDIC insured accounts, and this current Reliquefication provides a convenient window of opportunity.
above is just a couple of the points noland makes in his credit bubble bulletin. the austrians surely are at odds with the ecri. i think there is simply such a disconnect here because no one has seen anything like this in their lifetimes and rational reactions don't exist for most people since they don't get the rationale. denial remains the operant force.
the push to get money mkt. accts. under the fdic umbrella is quite telling. how do we handle a much, much larger replay of the s&l fiasco?
also, the inflation vs. deflation argument is fascinating. you absolutely cannot have liquidity increased beyond what a normal pool of savings would offer and not have inflation. the money just has to go somewhere. lot of folks are pointing at real estate right now and looking at the gse's as if they were hand grenades with the pins already pulled. i think they are. what bothers me a bit is don hays calling to 8 - 10 years of deflation, and the signals gold is giving. i have written to don to ask how his prediction fits into a.g.'s money spigot staying open.
read all of noland. his lips are moving and it's your name he is whispering.
don
prudentbear.com
p.s. just found the below comparing australia's problems several years ago with our own and throwing in some esoteric austrian stuff just for fun. lot of good economic comment comes out of australia.
newaus.com.au |
