John Pitera's Market Laboratory Message Board

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Strategies & Market Trends : John Pitera's Market Laboratory

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To: MulhollandDrive who wrote (8150)	8/25/2007 5:44:31 AM
From: Augustus Gloop	Read Replies (5) of 33421

Many good points! I'd like to add a few thoughts but I need to do that with some disclaimers. 1) I'm a free market guy but I think we may have a situation that requires some outside the box thinking. 2) I'm on brain (pain) killers (jaw infection) so I'm sure this wont be my best post. 3) I'm not a great writer anyhow and disclaimer number 2 doesn't help so sorry for what I suspect will be a long winded post. Some of this I wrote last week but it works for this discussion with a few modifications RATE CUTS On the surface that sounds great but I'm not sure its the right move. I tend to not believe the inflation numbers we're being fed. I think inflation is afoot and cutting rates is not generally what you do in the face of inflation. Your point about low rates being one of the things that got us here is exactly what I'm thinking - more on that in moment. Mortgage loans I heard or read that next year 650 billion in ARM's come due. Of that 650 billion, 511 billion are considered sub prime notes. We're already seeing default rates at fairly high levels (I think I heard we're at a 37 year high) and this will increase when those ARM's ratchet up. Property values are down and banks are holding notes with greater loan amounts than the property values themselves. That would seem to suggest we need a general rate cut. The problem is how do we cut rates without stoking inflation and creating more of a housing bubble? Unless we do this right people will just walk away from their homes and the banks will be left with an inventory of real estate with declining value (See Las Vegas for a great example of this). The Golden Goose Make no mistake about it - the American consumer is the global golden goose. When they're strapped for cash the entire globe suffers. That's what makes this banking issue so critical. You mentioned lowering rates probably wont prevent a recession. I think you're right! What worries me is that this has the makings of 'the perfect storm' - so are we talking recession or potentially the D WORD! We can politicize this and play the blame game but in the final analysis we need to fix the consumer credit/mortgage issue or we could be facing the big ugly. So lets talk about that outside the box thinking - i.e. bailout. I know nobody who believes in the 'free market' would approve of this (and I know this would never happen) but since this is all hypothetical just humor me as I try and make a few points. What if the FED came up with a plan for a one time bailout in an effort to stave off an event? Extend money to the banks at 3% to refinance existing mortgages. In turn the banks would be forced to refi ALL existing mortgages at say 4 - 4.5% fixed. In this scenario certain guidelines would apply 1) No new home purchases would qualify for this rate - only existing mortgages. 2) No new home equity loans would qualify for this rate. 3) Commercial property would not qualify. The reason for the above restrictions would be to avoid a new bubble as well as not allow people to ENHANCE their debt load. Yeah....it sounds crazy and could never happen (Nice Garage Economics Gloop LOL - have another pain pill) but we may find ourselves looking at many crazy things if an event unfolds next year. I bet the notion of .25 - .50% interest rates sounded crazy in Japan before their Real Estate market died for 20+ years. The point being that we may be in a pickle that requires us to do some things to avert a real crisis

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