Bill Bonner - "Dollar-Holders, Beware" -
As anticipated, here comes the Bush Administration with a plan to make the subprime situation worse.
It's called the 'teaser freezer' program and it could be announced as early as today. What's the idea? Well, it's quite simple - just pass a law! Actually, we're exaggerating. The discussion so far, as we understand it, is to ask for voluntary cooperation from the mortgage lenders. They are supposed to let the teaser rates ride…for people who can't afford an increase.
"Deal in the Works to Freeze Rates on Subprime Loans," says the Washington Post. Of course, if such a deal made sense, lenders and borrowers could work it out on their own. And if it were possible to eliminate the problem - or even ease it - by government decree, it would be a very different world than the one we live in. When people owe money and can't pay it back, someone is going to take a loss. You can diddle with the details all you want…all you're going to do is to shift the loss from someone who deserves it onto someone else.
The great innovation of the recent credit boom was to create a stick that was long in the middle and short on both ends. On one end, the borrowers are now losing their houses. On the other, the investors are losing their money. The financial intermediaries - notably Goldman Sachs (NYSE:GS) - are sitting pretty. They made their money by putting the two dumbbells together. And now, the Bush Administration is taking the time-honored tradition of pushing more of the losses away from the borrowers…and towards the other end of the stick, that is, towards the lenders. Why? Hey…where have you been, dear reader? We live in a democracy. One man, one vote. How many subprime borrowers are there? How many subprime investors are there? You do the math. And expect more meddling as the crisis continues.
Among the many investors in subprime debt were state and local governments. Now, the press reports that Florida schools are "flat broke" as a consequence. And they're not the only ones. We're read about a couple French banks that have taken huge hits. And in last week's news was a report from north of the Arctic Circle, where towns in Norway had - you guessed it - invested in subprime debt. Citibank sold them the toxic stuff. Now, the poor Norwegians are not going to be able to retire in the style to which they had hoped to become accustomed.
So you see how it works? What goes around comes around. A fellow buys a home he can't afford. Wall Street sells the debt to a pension fund. The guy defaults on his mortgage. He loses his house…and his pension! The Wall Street financier, in the meantime, puts a new wing on his palace in Greenwich.
But don't worry. Another rate cut is coming - in less than two weeks. Let's see how this works again…people get into trouble because they've borrowed too much money. Then, the feds come to the rescue - by offering to lend them more at lower rates!
But what's this? The banks aren't cooperating. While the feds lower…the banks raise. They ask for higher rates to protect themselves from the growing losses.
Part of the problem is that there is so much credit around…of such dubious quality…that the banks (and investors generally) don't know what to make of it. Double-A mortgage-backed credits are now trading at half their prices three months ago. It may be true that investors are overreacting. But after such a long period of not reacting at all…what would you expect?
"Lower rates usually boost stock prices. But there's another side to this story. There's a side few financial forums care to consistently report," Free Market Investor's Christopher Hancock tells us.
"Lower rates mean more money. More M3 means more inflation. Most haven't noticed the effect yet, because Chinese imports have delayed the hangover. But the days of importing Chinese deflation are coming to an end, as well.
"Every imaginable rescue mission for the overly indebted American consumer, not to mention the overly indebted American government, leads to increasing quantities of dollars and credit, which can only mean one thing:
"Dollar-holders beware."
Christopher tells us that at Free Market Investor, they're committed to businesses with little debt, tangible assets and earning power from consumers with cash to burn. Not a subscriber? Find out how to become one here.
And isn't is possible that the Fed, like the Bank of Japan before it, is now in the unenviable position of no longer pulling on the string of credit…but pushing on it? Isn't it possible, that the market no longer welcomes cheaper credit, but fears it? And isn't it possible, as we guessed last week, that the Fed is no longer driving the price of credit - by lowering rates - but following along behind what the market is already doing? U.S. Treasuries are dear; yields are low. The 10-year note is already below the yield of the Fed Funds rate. People are happy to lend to the government, because they know they will get their money back. But woe to the borrower without the U.S. government behind him.
Will a lower Fed rate encourage the mortgage lender to finance another house in the Detroit area? Will it encourage a builder to put up more condos in Miami or Las Vegas? Will it entice the marginal homebuyer to enter into another ARM contract?
Maybe not. That's the trouble with the immoveable object of deflation. It can be stubborn. Sometimes, it won't budge.
............................................................
dailyreckoning.com |
