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Politics : American Presidential Politics and foreign affairs -- Ignore unavailable to you. Want to Upgrade?

To: Peter Dierks who wrote (16040)	1/4/2007 5:35:31 PM
From: DuckTapeSunroof	Read Replies (1) \| Respond to of 71588

"That is scary." Yep. Leverage is much higher throughout the US home equity market then it has ever been before in history. Though, the fed chartered mortgage banks have already started mopping up credit (tightening lending requirements, requiring higher net capital, etc.), it will take several years to move back to historical norms. Many RE bankruptcies ahead still. Gov moving to mop-up excess liquidity is good (letting air out before bubble causes disaster), but it also places the Fed in a potentially dangerous spot --- should the economy seriously down-turn, the Fed will be between a rock and a hard place: lowering rates would pump back up the RE bubble they have been trying to deflate... and lowering rates would also knock the legs out from under the dollar (possibly/certainly accelerating the rush of Arab 'petrodollars' and Chinese/Japanese/Russian central banks to 'de-dollarize' a greater portion of their reserves, thus risking a dollar panic, and certainly pushing LONG BOND rates much higher --- as the US would be unable to finance it's continuing deficits without the ability to sell sovereign bonds, and in the environment of a falling dollar would have to offer much higher yields to sell it's paper.) In recent months some 90% of the Treasury debt sold at auction has gone to Asia (mostly China/Japan) or to Gulf Arabs. Rising treasury rates could have a 'crowd-out' effect on private debt... and rising long rates would certainly confound the Fed's ability to stimulate a weakening economy with lower short rates. Thus, the potential box we might fall into. If the economy moves close to a deflationary recession, the Fed may not be able to pull a rabbit out of it's hat.