The Great PS

[camberiu]

Writes an interesting article about the latest market events.

A Panic Move To Buy Safety

 

[brewer12345]

His comments about MBS and who owns it illustrate nicely how alarmist and poorly-informed the World's Most Enthusiastic Farm Worker is. And we seem to have a sudden shortage of piglets these days...

 

[barbarus]

Brewer, do you think the Fed should open the discount window even further?
More importantly, should "Helicopter Ben" cut the Fed Funds rate this year?

 

[brewer12345]

I think the fed should cut the discount rate to fed funds or less if they really want banks to use it. The four titans that did so only borrowed at 5.75% because they were frog-marched up to the window by Uncle Ben.

I wouldn't widen window access. The Fed has already opened a back door to the discount window to non-banks by granting Citi an exception on transactions between its bank and securities unit, which is a reasonable model for widening access without doing so directly.

Failing to chop the fed funds rate in September would be a colossal mistake. I think Uncle Ben will be tempted to avoid the cut, but ultimately I think he will have to do it.

 

[laurence]

O.K., so how did this thread get that title and not have brewer as the OP?

I heard an interesting article on NPR talking about Bern-man's work in the 80's researching the cause of the Great Depression. His conclusion in part was it was greatly excacerbated by a lack of available credit/cash for borrowers. Basically, the farmer didn't own stock, so at first the stock market crash was just something on the news. Then he goes to the bank to borrow money (like he does every year) to pay for supplies for the upcoming growing season, which he pays back (every year) once the harvest is over. But the bank is spooked or simply doesn't have funds and doesn't give him a loan. He doesn't plant as much, sells livestock, etc. and a vicious cycle is born.

That's his take, so I think now that he's proven his meddle as an inflation hawk, he'll be doing whatever it takes to ease the credit crunch, I wouldn't be surprised to see a half-point cut.

 

[brewer12345]

Don't look at me. I got yelled at in the past for using the term, so I now avoid it. But let me know if it is now a moderator-approved term...

A half point cut would be perfect, even if t hat were all they ever did.

 

[wildcat]

Half point cut and then we party on right? Beer is on me!!

 

[brewer12345]

I think a more likely scenario is another effort to se the discount window followed by a quarter point cut in september, with more cuts predicated on continued weakness. The discount window maneuvering has been pretty creative, and I think they will take more steps to make use of it if the money markets don't clean themselves up soon.

Looks like buyers have started to come back into the prime jumbo MBS space, at least for the AAA piece. That's a tentative first step and could be the start of something wider. Mortgage money will be a lot more expensive than it was for some time, which will restrain the economy. Corporate credit will also be more costly.

 

[laurence]

You know, if someone were to be a gambling man and looking to buy a new or bigger house, you might benefit from buying now while high rates are pushing down on house prices, then as rates cut refinance as the housing market rebounds. It seems pretty evident to me that part of the housing price boom was due to crazy low rates. Most buyers are looking at the payment.

As far as the farm animal violation, I guess we need to make sure we are consistent about our wrist slapping, I'll ask the real mods (I'm kind of a sub right now) what they think.

 

[brewer12345]

You know, if someone were to be a gambling man and looking to buy a new or bigger house, you might benefit from buying now while high rates are pushing down on house prices, then as rates cut refinance as the housing market rebounds. It seems pretty evident to me that part of the housing price boom was due to crazy low rates. Most buyers are looking at the payment.

Part of it was also extremely loose underwriting terms. No downpayment? No problem, and we'll even loan you the closing costs. Can't afford to amortize principal? No problem, we'll do interest only. Can't afford the interest payment? No problem, we'll tack most of it onto the principal. Not enough income to qualify? Just tell us what it is, we won't check.

Obviously a lot of those loans are no longer available. Those who need to refi will find themselves "inconvenienced" and a proportion will default. Once that bulge works its way through the RE snake, that's when you want to buy. I think its another year or two.

 

[twaddle]

It's not the rates as much as the underwriting. Essentially what happened during the bubble was that a bunch of new buyers came into the market. They have now been shut-out due to tighter underwriting. No matter how low rates get, they won't be let back in for a long time.

Of course, the other part of it was speculation, second home buyers, etc. Should be tougher on those guys too, and much less appealling to them if they've already been burned. Even jumbo loans will be harder to get, and that will hurt markets in CA and other expensive places.

BTW, the odds makers are lowering the odds of a rate cut in Sept, but the odds are still high:

Fed Funds Probabilities :: Current :: Economic Research & Data :: Federal Reserve Bank of Cleveland

(edit: simulposted with brewski)

 

[audreyh1]

Yeah - but how did all of this get to money market funds owning some of this CDO stuff? How did it have a AAA rating considered "safe" for MM funds?

I didn't think S&P & Moody's had actually rated this stuff, but rather packaged it. So who rated it?

I know some (smart) MM funds completely avoided this stuff.

Above and beyond the hedge funds, etc., owning this stuff which does not surprise me, and some bond funds owning this stuff which is not that surprising, I am fairly flabbergasted by it showing up in MM funds.

Audrey

 

[twaddle]

Ask Tanta (there's a bit about how the CDO's are rated in the middle of the article):

Calculated Risk: Leverage, Ratings and Forced Unwind

 

[brewer12345]

What is in MM funds is commercial paper backed by some sort of asset. The rating agencies only rate it, they do not have anything to do with the mechanics. The A1/P1 (not rated AAA, but the short term equivalent) asset backed commercial paper (ABCP) is actually very high quality stuff. The problem now is that we have an unprecedented shutdown of the CP market, so rolling over this stuff as it matures is iffy. But it is all backed by more than sufficient collateral, as such highly rated paper shuld be.

 

[twaddle]

Brew, sort of OT wrt Piglet Sodmoizers, but why is it that companies use ABCP? Seems they're paying a pretty high rate for short-term borrowing and going through a pretty complicated market-based mechnism for such short-term needs.

Isn't that what credit lines are for?

 

[brewer12345]

Brew, sort of OT wrt Piglet Sodmoizers, but why is it that companies use ABCP? Seems they're paying a pretty high rate for short-term borrowing and going through a pretty complicated market-based mechnism for such short-term needs.

Isn't that what credit lines are for?

It s another source of funds that in normal time is highly reliable and low cost. If you are a big enough, say, mortgage originator, there isn't enough in the way of bank lines available to finance all of the billions of dollars of callateral you have to warehouse for a while until it goes wherever it is destined. So you set up bank lines, and you set up warehouse lending facilities, and you set up an ABCP conduit, and you issue some bonds, etc. The idea is to get funding diversification, and ABCP is usually thought of as readily available and relatively cheap.

I suspect it will be a while until this is the way ABCP is viewed again.

Interestingly, the NY Fed explicitly said today that it would take prime CP as collateral for loans. That means that this paper will be real easy to finance, as opposed to nearly impossible.

 

[wildcat]

I changed the title to a PG rating, is everyone happy?

 

[barbarus]

Brew, you're the man of the hour for this thread.

It seems to those of of us ignorant in the rules of economics that if Bennie lowers th ff rate, inflation will grow even worse and the dollar would drop.
While it's true the markets would love it, such a thing has been referred to as a "war on savers".

Also, there are houses on the coasts that are being sold for 5 times what they brought in the early 00s. Can the value of money have declined(at least in a residential sense) by such a great amount?

 

[brewer12345]

"A war on savers" is one interpretation. Personally, I'd prefer a slight reduction in money rates than a failure of the banking system and a repeat of the Great Depression.

You don't know how much value is lost and how quickly until after the fact.

 

[barbarus]

No doubt Brew, no doubt.
But your operative word is slight.
Barbarus is by nature a conservative investor. That's why he finds posts by yourself and others like Ha who actually understand and consistently profit from equities trading to be so intriguing.

Like many (alright, the few) that actually save rather that spend, was grievously wounded by "That Hate-filled Old Man", BB's immediate predecessor, when he crashed rates in the first decade of the 00s. No saver will ever make up the amount eaten up when inflation ate away at capital faster than the ridiculously low time deposit or CD rates could increase it.

One fears that Uncle Ben will begin a like-minded SERIES of cuts, sending the conservative end of fixed-income instruments down the rat hole.

 

[brewer12345]

No doubt Brew, no doubt.
But your operative word is slight.
Barbarus is by nature a conservative investor. That's why he finds posts by yourself and others like Ha who actually understand and consistently profit from equities trading to be so intriguing.

Like many (alright, the few) that actually save rather that spend, was grievously wounded by "That Hate-filled Old Man", BB's immediate predecessor, when he crashed rates in the first decade of the 00s. No saver will ever make up the amount eaten up when inflation ate away at capital faster than the ridiculously low time deposit or CD rates could increase it.

One fears that Uncle Ben will begin a like-minded SERIES of cuts, sending the conservative end of fixed-income instruments down the rat hole.

Then buy TIPS and keep saving.

Personally, I would rather see the Fed keep the economy stable and growing than get too wound up about the level of real or nominal interest rates.

 

[twaddle]

Why didn't lowering rates work in Japan? Well, it worked to create a robust carry trade, but it did nothin to improve their real estate crash or economic growth.

 

[al_bundy]

Japan is very socialistic and has a lot more government control in their society than the US

 

[haha]

Japan is very socialistic and has a lot more government control in their society than the US

Maybe so, but then this "control" should have made the government interventions more effective rather than less effective. They in fact were amazing ineffective, considering how far-reaching and dramatic the Japanese Governments actions were.

I think we are guessing about things that are hard to know about.

Ha

 

[al_bundy]

i'd say most times government intervention in the economy is bad. exceptions are regulations to keep the playing field fair and programs like Fannie Mae and FHA.

in japan i heard they like to support unprofitable companies because its bad morale or something to let them close