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As If Declining Credit Quality Weren't Enough..
Old 08-04-2007, 01:15 PM   #1
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As If Declining Credit Quality Weren't Enough..

Excerpted From Today's Barron's:

"REMEMBER LAWRENCE LINDSEY, the former Bush economic guru who was bounced from his job in December 2002, in part for being more honest than politic?
Lindsey publicly predicted that the Iraq war would cost at least $200 billion at a time when the president wasn't even acknowledging that there would be a war. The invasion was launched in March 2003. Since then, the U.S. has spent more than $440 billion on the conflict.
Because of Lindsey's reputation for prescience, we revisited a speech on the housing market that he delivered in April to fellow economists. In it, he said: "Short of the war on terrorism, this is by far the greatest risk posed to the American economy and our way of life."
The problem isn't just that house prices appear to be in a sustained decline. Congress and the regulators are reacting in knee-jerk fashion to avenge first-time home buyers facing foreclosure. That's scaring already panicked lenders into tightening credit even more.
Congress, which Lindsey argues helped create the bubble by increasing access to homeownership through the Community Reinvestment Act, now, through hearings and the threat legislation directed at the mortgage business, is reducing the supply of financing to first-time buyers. Lindsey said it's similar to what bankers called the "regulatory reign of terror" that caused real-estate collapses in Texas, Colorado, California and New England in the late 1980s. "In 1991, spending on residential construction amounted to just 3.4% of GDP, down from a peak of 5.0 in 1987," Lindsey recalled.
This time, he predicted, the cycle will be exacerbated because losses on mortgage securities will be higher than anticipated, causing buyers of these instruments to pull back from the market. Legal risks posed by trial lawyers representing "innocent victims" will make it even worse, he said. "Given the widespread standard of joint and several liability, the one who will pay the punitive damages will not be the original issuer -- who may be bankrupt by that time -- but the buyer of that paper," Lindsey asserted.
He would have President Bush, Congress and the Federal Reserve take steps that would assure investors that they won't be sued for simply investing."


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Old 08-04-2007, 01:27 PM   #2
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Hmmmm, I'm not sure credit quality has declined that much outside of subprime. What is driving the pressure on the Alt A and prime non-conforming borrowers right at this moment is more the mortgage market pulling back than actual borrower stress. After all, unemployment is very low, the economy is healthy as a whole, and people who live in their houses will generally continue making the mortgage payment as long as they have a job. I think the Fed was hapy to see a bunch of people get scalded when the subprime and looser non-conforming lenders got hurt, but what has happened is that the mortgage securitization market is effectively closed except for GSE paper. Most of the big mortgage lenders (not scuzzball REITs) are perfectly capable of just doing GSE paper and a smidge of stuff like prime jumbo first mortgages, and those that are depository institutions have access to liquidity regardless of market conditions so the back up in the mortgage market will be painful for them but not disastrous. But this will have very real consequences for the economy if it continues.

You can say a lot of things about Bernanke, Sec. Paulson and Sen. Dodd, but stupidity is not among their traits. Bernanke probably cannot afford to charge in for fear of establishing the "Bernanke Put", but Dodd, Paulson, et. al certainly can and probably already are starting to set things in motion to restore liquidity to the marketplace. When the economic consequences show up in the data, you will see the Fed whack away.
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Old 08-04-2007, 01:45 PM   #3
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Quote:
Originally Posted by haha View Post
Excerpted From Today's Barron's:

"REMEMBER LAWRENCE LINDSEY,
Lindsey publicly predicted that the Iraq war would cost at least $200 billion at a time when the president wasn't even acknowledging that there would be a war. The invasion was launched in March 2003. Since then, the U.S. has spent more than $440 billion on the conflict.

I heard a number quoted by some political wonks/journalist that indicated by the end of 2008 the tab in Iraq would be about $1 trillion. I have not verified this number.
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Old 08-05-2007, 11:25 AM   #4
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I don't know that I would call an estemate that is off by over 100% prescience.
However, I definately agree the credit issue has a ways to unravel yet.
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Old 08-05-2007, 04:41 PM   #5
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Originally Posted by brewer12345 View Post
Hmmmm, I'm not sure credit quality has declined that much outside of subprime.
If the loss on loans causes the foreclosure of a large number of houses, home prices will decline (as they are) as home prices decline, even those who have good credit ranking are affected. You cannot use your equity to upgrade your house. These credit "bumps" are not isolated events, the ripple effect will be every bit as big as the subprime mortgages were to home prices increasing. Major coprorations are now unable to obtain funds to purchase businesses. Money flow has simply ceased for this activity. This will cause the price of businesses to fall, as the demand for the properties are reduced. Maybe a bank doesn't have to mark their loan on an office building or hotel property to market but hedge funds do, and these losses effect the overall credit quality of the economy, not just the subprime. And the fact you do not have to mark to market is not the same as saying your credit quality has not changed. Just that you don't recognize it, so you end up frequently with a loan either 100% performing going to a non-performing loan with no inbetween as points are reached where it benefits the loanee to walk.
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