Economic Despair

It is all good....

Cramer gets Bernanke to wake up and cut rates.

Sub prime doesn't matter, yeah right....

Bear Stearns is fine, three days later it crashes

The leverage ratios mentioned in this article are just out of this world....

SAN FRANCISCO (MarketWatch) -- The Great Unwind has begun, Citigroup Inc. strategists warned on Wednesday. As markets and economies de-leverage across the globe, investors should avoid companies and countries that have grown to rely too much on borrowed money, they said.

That means favoring public-equity markets over hedge funds, private-equity and real estate, while leaning toward emerging market countries and away from developed nations like the U.S., the bank's global equity strategy team advised.
Within equity markets, the financial-services should be avoided because it's still over-leveraged, while other companies have stronger balance sheets, the strategists said.

"Steady growth, low inflation and rock-bottom interest rates encouraged economic and financial participants across the world economy to gear up over the past few years," Robert Buckland and his colleagues on Citi's global strategy team wrote in a note to clients. "Easy money encouraged many to buy a bigger house, a bigger car or a bigger speculative position."

"But now, any behavior that relied upon continued access to easy money is being dramatically reassessed," they added. "Leveraged banks must lend less, leveraged consumers must consume less, leveraged companies must acquire or invest less, and leveraged speculators must speculate less."

Financial-services companies are the most vulnerable to this reduction of borrowed money across the globe, they said. During the last credit crisis in 1998, European banks were leveraged 26 to 1. In the early part of this decade, leverage grew to 32 to 1. Now the sector is geared 40 to 1 on average, according to Citi's European bank research team

Another day, another loser bank....

PARIS — Credit Suisse, the Swiss banking giant, said Thursday that it expected to post its first quarterly loss since 2003 because of large write-downs and losses related to “intentional misconduct” at its trading desk.

In a statement, the Swiss bank said that it would write off $2.65 billion for the fourth quarter of 2007 and the first three months of 2008. Credit Suisse also restated its fourth-quarter net income lower to 540 million francs from the original estimate of 789 million francs, or $788 million. Profit for 2007 declined to 7.76 billion francs.

The anticipated loss at Credit Suisse, on the heels of its write-downs and its trading irregularities in light of the rogue trading case at Société Générale, added to questions about how banks worldwide were managing risk during the expanding credit crisis that stemmed from problems in the mortgage markets in the United States.

After the shake-down, the shake out begins....

March 20 (Bloomberg) -- Sacramento may eliminate up to 600 jobs in the city's first staff reductions in half a century, and the police and fire departments in the California capital may have their budgets cut by 20 percent. The culprit is the collapse of the U.S. housing market.

California, the birthplace of the subprime mortgage industry, is paying the highest price of any state as the housing meltdown persists. Its gross domestic product will drop 1.5 percent in the first half of 2008, the most in the U.S., analysts at Lexington, Massachusetts-based Global Insight Inc. estimate.

The state had the most foreclosure filings in the U.S. last year and the biggest fourth-quarter decline in prices, according to RealtyTrac Inc., an Irvine, California-based seller of data on defaults, and the Office of Federal Housing Enterprise Oversight in Washington.

We live in a mad country when a mother is forced to consider this kind of question.

Question: Dear Bankruptcy Adviser,

My soon to be husband would like to know if he would be able to file bankruptcy (pending) on my medical bills? I told him because they were under my name, that he would not be able to; however, we are both wondering if he could file a bankruptcy under our just born son's name and eliminate the medical bills. Or will this be considered under my name as well since we were not married when the bills were incurred?

Answer: Dear Mary,

Stories like this truly make me nauseous. Illness is one of the three most common reasons people file bankruptcy. In some cases, the co-pay costs alone become insurmountable. But there are few options available to pay back the debt. You are right to consider bankruptcy when it appears there is no other option.

Before filing for bankruptcy protection, you ought to contact the hospital directly to see whether you could qualify for low-income waivers so that the hospital (or a foundation associated with the hospital) will pay the bills. Many hospitals provide financial assistance to anyone who is below 300 percent of the federal poverty level. But there are some circumstances that could make a person over that level eligible as well. Typically, an illness is also accompanied by a period of unemployment. You might easily qualify for financial assistance.

The majority of hospitals across the country, especially nonprofit hospitals, have charity care programs that pick up all or part of the cost of care for indigent or special needs families. Sometimes all it takes is one question to the hospital administrator to find out about these programs.

There are also nonprofit organizations that work with people buried in medical debt. Some are funded by large private donors. These organizations will negotiate on your behalf to reduce the balance and sometimes pay the negotiated balance. However, it is very important that you keep the bills from going into collections. Collection agencies are for-profit companies and are not as easy to work with as the primary care facility.

While I don't think you want to have your son file bankruptcy, be aware that your son will not be liable for any of the medical bills. He is under 18 and therefore cannot enter into a legally binding contract. Even if the bills are in his name only, the hospital (or subsequent collection agency) cannot sue him for the bills. What would the collection agency do anyway? Put a lien on his crib?

Your soon-to-be husband cannot file Chapter 7 bankruptcy in order to eliminate the debts in your name. You are the primary individual liable for the debt. However, he could file a Chapter 13 bankruptcy, which is essentially a monthly payment plan. As long as you include all credit debts into the Chapter 13 plan payment, then all bills will be eliminated. This is an option for you, as well.

Finally, try to negotiate a payment plan with the hospital. Something is better than nothing and bankruptcy will only place a larger burden on the hospital's bottom

Here is how the BBC over in England sees it. Hey, don't those English folks have their very own housing crisis? Whatever.....

The credit crunch has hit the US economy hard. From Wall Street to Main Street, loans that looked rock-solid a year ago now look shaky. And the US central bank, the Federal Reserve, is throwing away the rule book to contain the effects. Kevin Logan of Dresdner Kleinwort, one of the less gloomy New York economists, summarises the state of play as the credit crunch has spread to different types of assets as follows: "We're all sub-prime now".

The Fed did cut its main interest rate on Tuesday for the sixth time since September - by three quarters of one percentage point, to 2.25%. This means that interest rates are now very close to going negative in real terms - once inflation is taken into account. But amid the drama of the past few weeks, it almost seems par for the course. Whether it's rate cuts or special funding arrangements for Wall Street, the more the Fed does, the more the markets seem to need.

This is not the end, and maybe in even the end of the beginning....

As Bear Stearns careened toward its eventual fire sale to JPMorgan Chase last weekend, the cost of protecting its debt, through an instrument called a credit default swap, began to rise rapidly as investors feared that Bear would not be good for the money it promised on its bonds. Not familiar with credit default swaps? Well, we didn't know much about collateralized debt obligations (CDOs) either — until they began to undermine the economy. Credit default swaps, once an obscure financial instrument for banks and bondholders, could soon become the eye of the credit hurricane. Fun, huh?

The CDS market exploded over the past decade to more than $45 trillion in mid-2007, according to the International Swaps and Derivatives Association. This is roughly twice the size of the U.S. stock market (which is valued at about $22 trillion and falling) and far exceeds the $7.1 trillion mortgage market and $4.4 trillion U.S. treasuries market, notes Harvey Miller, senior partner at Weil, Gotshal & Manges. "It could be another — I hate to use the expression — nail in the coffin," said Miller, when referring to how this troubled CDS market could impact the country's credit crisis.

Credit default swaps are insurance-like contracts that promise to cover losses on certain securities in the event of a default. They typically apply to municipal bonds, corporate debt and mortgage securities and are sold by banks, hedge funds and others. The buyer of the credit default insurance pays premiums over a period of time in return for peace of mind, knowing that losses will be covered if a default happens. It's supposed to work similarly to someone taking out home insurance to protect against losses from fire and theft.

I have to find the youtube version of Cramer's "don't be stupid" call on Bear Stearns. Who is looking stupid now...

Hopefully your financial portfolio didn’t include stock in Bear Stearns, but it might have if you had listened to CNBC’s Jim Cramer. After it was announced March 16 that J.P. Morgan Chase & Co. (NYSE:JPM) was purchasing Bear Stearns Cos. (NYSE:BSC) for $2 a share, the stock plummeted over 80 percent at the open of trading on March 17

There will be blood.....

NEW YORK - With a deal in place to save Bear Stearns from bankruptcy, the company's shares traded above the offer price Monday even as investors began turning a critical eye to other investment banks amid worries about how far the credit contagion could spread.

Despite the weekend agreement for JPMorgan Chase & Co. to buy Bear Stearns for a fraction of its value last week, worries that other banks had sizable exposure to troubled credit markets sent global markets tumbling. The uncertainty was evident on Wall Street, where the Dow Jones industrials sank by more than 100 points.

At Bear Stearns' 47-story headquarters in midtown Manhattan, many employees said they still couldn't believe that the nation's fifth-largest investment bank is — essentially — out of business. Employees said there was no meeting to inform employees about what was happening.

"It's my first job out of school. I thought it was a big company — it would be good experience," said Ki Byung, who works for a division of Bear Stearns. "Now after a couple of months something like this happens."

It is just one big headline grabbing gesture after another. It is as if the External relations department was making monetary policy.

WASHINGTON — Hoping to avoid a systemic meltdown in financial markets, the Federal Reserve on Sunday approved a $30 billion credit line to engineer the takeover of Bear Stearns and announced an open-ended lending program for the biggest investment firms on Wall Street.

In a third move aimed at helping banks and thrifts, the Fed also lowered the rate for borrowing from its so-called discount window by a quarter of a percentage point, to 3.25 percent.

The moves amounted to a sweeping and apparently unprecedented attempt by the Federal Reserve to rescue the nation’s financial markets from what officials feared could be a chain reaction of defaults.

After a weekend of intense negotiations, the Federal Reserve approved a $30 billion credit line to help JPMorgan Chase acquire Bear Stearns, one of the biggest firms on Wall Street, which had been teetering near collapse because of its deepening losses in the mortgage market.

In a highly unusual maneuver, Fed officials said they would secure the loan by effectively taking over the huge Bear Stearns portfolio and exercising control over all major decisions in order to minimize the central bank’s own risk.

Nice interview of Krugman on the crisis

(Fortune Magazine) -- If there is any word that captures the mood in the economy right now, it's uncertainty, along with shadings of bafflement and distrust. We have never seen a credit crisis quite like this. What's next?

It is not exactly news, but some think this slowdown could be the worst in a generation.

BOCA RATON, Florida (Reuters) The United States is in a recession that could be "substantially more severe" than recent ones, National Bureau of Economic Research President Martin Feldstein said on Friday. "The situation is very bad, the situation is getting worse, and the risks are that it could get very bad," Feldstein said in a speech at the Futures Industry Association meeting in Boca Raton, Florida.

"There's no doubt that this year and next year are going to be very difficult years." NBER is a private sector group that is considered the arbiter of U.S. business cycles. Feldstein is also a Harvard economics professor and former economic advisor to President Ronald Reagan.

Answering questions from the audience, Feldstein said the downturn could be the worst in the United States since World War Two. Feldstein said the federal funds rate, the Federal Reserve's benchmark lending rate, is headed down to 2 percent from the current 3 percent.

There is no crisis in farming. From the the Kansas City Star....

Greg Moe strolled out of the Sprint Center, bought a large beer in a plastic cup and waded through the crowd in the Kansas City Live area. The 57-year-old Iowa farmer still couldn’t believe he was here, in Kansas City, spending his money on the Big 12 basketball tournament.

Yes, these are rare boom times for those Midwesterners who work the land. “Corn and soybean prices are at or near record prices,” he said as he sipped his drink and paused to look around at hundreds of other fans. “There’s a lot of optimism from that. So we thought we’d come down and enjoy the big-city life of Kansas City.”

All last week, that meant doling out dollars Moe wouldn’t have had in years past, when the prices for the soybeans and corn he grows outside Moorland, Iowa, weren’t where they are today — high enough to make you think America’s breadbasket has turned into America’s ATM.

“This is my first Big Eight or Big 12 tournament, and I’ve wanted all my life to come to this,” Moe said. “Times are good on the farm, but they’ve been challenging in the past for farmers. And they will be again. So we’re here now, while we can, enjoying this.”

It’s their presence — and their money — that economists say will help boost profits for events like this tournament and offer places like Missouri a buffer against recession. The tournament was expected to bring 35,000 out-of-town visitors to Kansas City and make a $15 million impact on the local economy.

The great 2008 walkway is well underway. There is no shame in foreclosure anymore.

Foreclosure used to be a last resort, something that hard-pressed homeowners would scrimp and plead to avoid. But as the subprime lending crisis sweeps up millions of borrowers nationwide, some are deliberately choosing foreclosure as an early option.

As their home values tumble and their mortgages rise, these "walk away homeowners" decide to cede their houses to their lenders.

"It's throwing good money away after bad" to pay an escalating mortgage on a home that's plunging in value, said Army Sgt. 1st Class Nicklaus Skaggs of Vacaville. He and his wife, Tishara, stopped paying their mortgage in February. They signed up with a new company called You Walk Away to help guide them through the multi-month foreclosure process.

The couple paid $455,000 for their Vacaville home almost three years ago, shortly after Nicklaus Skaggs returned from a year in Iraq. Now the home's value has dropped to $290,000. Their adjustable-rate mortgage, which started at about $3,000 a month, has reset twice, climbing to about $4,000.

They have no regrets about their decision."I feel like the pressure has lifted off my shoulders; before I was trapped," said Nicklaus Skaggs, 40, an earnest man who plans to retire from the Army in two years, after completing 20 years of service.

Although, Bear Stearns is no more, the NY times has some interesting observations on the now dead bank....

WHAT are the consequences of a world in which regulators rescue even the financial institutions whose recklessness and greed helped create the titanic credit mess we are in? Will the consequences be an even weaker currency, rampant inflation, a continuation of the slow bleed that we have witnessed at banks and brokerage firms
Stick around, because we’ll soon find out. And it’s not going to be pretty.

Agreeing to guarantee a 28-day credit line to Bear Stearns, by way of JPMorgan Chase, the Federal Reserve Bank of New York conceded last Friday that no sizable firm with a book of mortgage securities or loans out to mortgage issuers could be allowed to fail right now. It was the most explicit sign yet of the Fed’s “Rescues ‘R’ Us” doctrine that already helped to force the marriage of Bank of America and Countrywide.

But why save Bear Stearns? The beneficiary of this bailout, remember, has often operated in the gray areas of Wall Street and with an aggressive, brass-knuckles approach. Until regulators came along in 1996, Bear Stearns was happy to provide its balance sheet and imprimatur to bucket-shop brokerages like Stratton Oakmont and A. R. Baron, clearing dubious stock trades.

And as one of the biggest players in the mortgage securities business on Wall Street, Bear provided munificent lines of credit to public-spirited subprime lenders like New Century (now bankrupt). It is also the owner of EMC Mortgage Servicing, one of the most aggressive subprime mortgage servicers out there.

Bear’s default rates on so-called Alt-A mortgages that it underwrote also indicates that its lending practices were especially lax during the real estate boom. As of February, according to Bloomberg data, 15 percent of these loans in its underwritten securities were delinquent by more than 60 days or in foreclosure. That compares with an industry average of 8.4 percent.

Let’s not forget that Bear Stearns lost billions for its clients last summer, when two hedge funds investing heavily in mortgage securities collapsed. And the firm tried to dump toxic mortgage securities it held in its own vaults onto the public last summer in an initial public offering of a financial company called Everquest Financial. Thankfully, that deal never got done.

... the day of reckoning draws closer....Red China is about to pull the plug on the US.

Until recently, it appeared that Bear Stearns (NYSE: BSC) had one investor still happy with putting money into the investment bank. That would be China's CITIC Securities. The capital would have given the firm a relationship with a large U.S. financial company. It has some real strategic value.

Over the weekend, CITIC sent a message that was the equivalent of saying "goodbye and good luck" According to Reuters, CITIC stated, "We cannot guarantee reaching a final agreement in the future."

While the news should not surprise anyone, it may just be the tip of the iceberg for U.S. banks and brokerages. Overseas financial institutions have been willing to put money into U.S. firms to get joint ventures in place. Sovereign funds have sent out checks to troubled Wall Street operations because they feel that when the U.S. economy turns, the equity they have purchased will rise in value.

The debacle at Bear Stearns may change much of that. The perception of the risk of putting money into U.S. financial companies may have doubled.

.....from 2005....

For the last several years as housing prices have increased all across the country we have heard incessant warnings from analysts and commentators that Americans are becoming irrationally exuberant in snapping up new homes at ever-higher prices.

The "housing bubble," as it is now called, may be about to pop, the same doomsayers predict. Paul Krugman of the NYTimes, one of the worst prognosticators in the business with a Ph.D. in economics, now sees sure signs of the bubble leaking air, or "hissing," as he terms it, because homes that not long ago were selling in 24 hours after they came onto the market are now sitting there for two or three weeks before being snapped up!! Holy Smokes!!

Of course we should be reaching a new equilibrium in housing prices, but unless Greenspan & Company drive interest rates up in order to induce a housing recession, there really is nothing to worry about.

Every now and then in this "free space" I provide for my memos on the margin and Supply-Side University lessons, I reprint a letter I have previously sent to my Wall Street clients, who pay me as much as $25,000 per year, not including bonuses, for the independent research Polyconomics provides. I'm sure my clients will not mind me sharing my June 15 letter with you -- as they know I am doing my best to influence our government policy makers to follow my advice. As far as I know, Poly has been the only outfit in the business that has correctly identified the reasons for the several trillion dollar increase in real property dollar prices in recent years. If you noticed, on the left side of this website, there is a new box advertising the client newsletter we have for ordinary people, at an affordable cost. Check it out

With the financial system going into meltdown, who is talking about the financial mess the US government is now facing? Good time for a fiscal stimulus, I'd say.

The U.S. government turned in a $175.56 billion budget deficit for February, a record for any month, as federal spending grew but a slowing economy caused receipts to fall 12.1 percent from a year earlier, the U.S. Treasury said on Wednesday.

The February gap marked a 46.3 percent increase over the previous all-time single-month deficit of $119.99 billion in February 2007 and soundly exceeded Wall Street economists' consensus estimate of a $160.0 billion deficit in a Reuters poll.

February receipts fell to $105.72 billion from $120.31 billion in February 2007, the Treasury said, as both corporate and individual income tax payments slowed. February outlays grew 17.1 percent to $281.29 billion, a record for February, from $240.30 billion in February 2007, the Treasury said

We are looking into the abyss....

The Federal Reserve’s unusual decision to provide emergency assistance to Bear Stearns underscores a long-building concern that one failure could spread across the financial system. Wall Street firms like Bear Stearns conduct business with many individuals, corporations, financial companies, pension funds and hedge funds. They also do billions of dollars of business with each other every day, borrowing and lending securities at a dizzying pace and fueling the wheels of capitalism.

The sudden collapse of a major player could not only shake client confidence in the entire system, but also make it difficult for sound institutions to conduct business as usual. Hedge funds that rely on Bear to finance their trading and hold their securities would be stranded; investors who wrote financial contracts with Bear would be at risk; markets that depended on Bear to buy and sell securities would screech to a halt, if they were not already halted.

Paulson wants to license mortgage brokers. Isn't that idea about four years too late?

WASHINGTON (Reuters) - Treasury Secretary Henry Paulson on Thursday issued a call for U.S. financial institutions to raise capital quickly so they can keep lending, and pledged tougher rules for the mortgage industry.

"We are encouraging financial institutions to continue to strengthen balance sheets by raising capital and revisiting dividend policies; we need those institutions to continue to lend and facilitate economic growth," he said in a speech at the National Press Club.

Among recommendations from a top-level Presidential Working Group that he heads, Paulson said he wanted "strong nationwide licensing standards" for mortgage brokers as part of a bid to ward off future housing crises and reassure investors.

Why does every growth rate in the housing market have to be massive. First, large price growth numbers, then large price falls, and now a 60 percent increase in foreclosures.

NEW YORK ( -- Foreclosure filings nationwide jumped 60% in February compared with the same month last year, but they decreased slightly versus January, according to a report released Thursday.

RealtyTrac, an online marketer of foreclosure properties, said 223,651 homes got hit with foreclosure filings last month, which include default notices, auction sale notices and bank repossessions. 46,508 of those were lost to bank repossessions, which more than doubled over last year. The report also indicated that foreclosure filings in February fell 4% compared with January, similar to a 6% decrease that occurred during the same time-span in 2007.

There is a bubble in the bailout costs. The numbers keep getting bigger...

Last week, it was a $200 billion cash-for-bond swap for the banks. This week, it was a $200 billion bond-for-bond swap for the big investment houses. If they keep this up, pretty soon you'll be able to walk into any Federal Reserve bank and hock that diamond brooch you inherited from Aunt Mildred.

Forget all that nonsense about the Bernanke Fed being too timid or behind the curve. In the face of what is turning into the most serious financial market crisis since the Great Depression, the Fed has been more aggressive and more creative in using its limitless balance sheet -- in effect, its ability to print money -- than at any time in history.

We can argue till the cows come home about whether this is a bailout for Wall Street. It is -- but only to the extent that it is also a bailout for all of us, meant to prevent a financial and economic meltdown that drags everyone down with it. In broad strokes, we're going through a massive "de-leveraging" of the economy, wringing out trillions of dollars of debt that had artificially driven up the price of real estate and financial assets, and, more generally, allowed Americans to live beyond their means. The Fed's goal has not been to impede that process, simply to make sure that it proceeds in an orderly fashion. But even that has required central bank intervention that is unprecedented in scale and scope. And despite yesterday's huge rally in the stock market, Fed officials warn that this de-leveraging is nowhere near finished.

If rate cuts will not work, what will? Would nationalizing the mortgage sector do the trick?

With worsening strains in credit market threatening to deepen and prolong an incipient recession, analysts are speculating that the Federal Reserve may be forced to consider more innovative responses -– perhaps buying mortgage-backed securities directly.

“As credit stresses intensify, the possibility of unconventional policy options by the Fed has gained considerable interest, said Michael Feroli of J.P. Morgan Chase. He said two options are garnering particular attention on Wall Street: Direct Fed lending to financial institutions other than banks and direct Fed purchases of debt of Fannie Mae and Freddie Mac or mortgage-backed securities guaranteed by the two shareholder-owned, government-sponsored mortgage companies.

Fed officials have said that, at times like these, the prudent course is to at least evaluate all sorts of ideas, many of which may be rejected. Since 1932, the Fed has had the authority to lend, against collateral, to individuals, partnerships or corporations other than banks in “unusual and exigent circumstances,” subject to the vote of five members of the Board of Governors. (The board has seven seats, but two are currently vacant.) This power has never been used.

But, Mr. Feroli noted, that Congress in 1966 gave the Fed temporary authority, made permanent in 1979, to purchase obligations of government-sponsored enterprises, such as Fannie Mae and Freddie Mac. So far, the Fed hasn’t purchased GSE obligations except in its short-term repurchase operations. When the federal budget was in surplus, the Fed considered outright purchases of GSE obligations, but judged against such a move as it would reinforce the perception of an implicit government guarantee.

What?? House prices are likely to fall? Really??? I am shocked.....

WASHINGTON (Dow Jones) -- U.S. home prices have much further to fall, the chief executive of major mortgage-buyer Freddie Mac said Wednesday.

Speaking to analysts on a conference call, CEO Richard Syron estimated that housing prices, from peak to trough, have dropped only a third as far as he thinks they're going to. The McLean, Va.-based company's expecting a peak-to-trough decline of 15% in all.

The derivatives time bomb is ticking.....

(MarketWatch) -- "Charlie and I believe Berkshire should be a fortress of financial strength" wrote Warren Buffett. That was five years before the subprime-credit meltdown. "We try to be alert to any sort of mega-catastrophe risk, and that posture may make us unduly appreciative about the burgeoning quantities of long-term derivatives contracts and the massive amount of uncollateralized receivables that are growing alongside. In our view, however, derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal."

That warning was in Buffett's 2002 letter to Berkshire shareholders. He saw a future that many others chose to ignore. The Iraq war build-up was at a fever-pitch. The imagery of WMDs and a mushroom cloud fresh in his mind.

Also fresh on Buffett's mind: His acquisition of General Re four years earlier, about the time the Long-Term Capital Management hedge fund almost killed the global monetary system. How? This is crucial: LTCM nearly killed the system with a relatively small $5 billion trading loss. Peanuts compared with the hundreds of billions of dollars of subprime-credit write-offs now making Wall Street's big shots look like amateurs. Buffett tried to sell off Gen Re's derivatives group. No buyers. Unwinding it was costly, but led to his warning that derivatives are a "financial weapon of mass destruction." That was 2002

Check out this great piece on asset bubbles......

"All these crises are different. But many have shared common features. They begin with capital inflows from foreigners seduced by tales of an economic El Dorado. This generates low real interest rates and a widening current account deficit. Domestic borrowing and spending surge, particularly investment in property. Asset prices soar, borrowing increases and the capital inflow grows. Finally, the bubble bursts, capital floods out and the banking system, burdened with mountains of bad debt, implodes.

With variations, this story has been repeated time and again. It has been particularly common in emerging economies. But it is also familiar to those who have followed the US economy in the 2000s.

When bubbles burst, asset prices decline, net worth of non-financial borrowers shrinks and both illiquidity and insolvency emerge in the financial system. Credit growth slows, or even goes negative, and spending, particularly on investment, weakens. Most crisis-hit emerging economies experienced huge recessions and a tidal wave of insolvencies. Indonesia’s gross domestic product fell more than 13 per cent between 1997 and 1998. Sometimes the fiscal cost has been over 40 per cent of GDP (see chart).

The government can not fix this problem, but it doesn't mean that they will not try.....

Fevered talk in the capital of possible government
fixes for the mortgage crisis belies an inconvenient truth of the credit market: banks simply are not eager to lend money. Congress and the government may have a limited capacity to ease the crisis because it has gotten too advanced, experts say.

The latest signpost: Even a relatively modest legislative proposal to tighten the government's reins on mortgage finance companies Fannie Mae and Freddie Mac won't be coming together soon in the Senate Banking Committee, its chairman Sen. Christopher Dodd said Thursday.

Even with the Federal Reserve cutting a key interest rate five times in recent months, banks have been retrenching on lending. Many have suffered billions of dollars in losses from subprime mortgage securities that have sucked their capital dry.

On a retail level, 55 percent of U.S. banks recently reported tightening their lending standards for mortgages to creditworthy borrowers, not those with tarnished credit histories considered high risk. Distress in the credit markets rippled further Thursday when Alabama's most populous county teetered toward becoming the nation's largest municipal bankruptcy. Two major financial companies said they received default notices from banks nervously looking for loan payments

I, for one, never thought things would get this bad....

Nearly 6% of all mortgages were delinquent nationwide in the fourth quarter and foreclosure starts were at the highest levels ever, according to a report issued Thursday by the Mortgage Bankers Association.

Michigan continues to rank high for delinquencies and the number of homes in foreclosure. The state ranked second nationwide with 8.97% of its home loans more than 30 days delinquent during the three months ended Dec. 31. Mississippi was first with 11% of loans delinquent and Georgia was third with 8.37%. Michigan ranked third when it came to foreclosure inventory with 3.38% and third based on foreclosure starts with 1.29% during the quarter.

The total national delinquency rate of 5.82% is the highest in the mortgage bankers survey since it reached 6.07% in 1985, said Doug Duncan, chief economist for the mortgage bankers. The housing market bust could end up being even more dramatic than the long boom that ran from 1998 to 2005 and drove prices to astronomical levels in states like California and Florida. Those states are now suffering with a disproportionate share of foreclosure starts.

California and Florida represent 21% of loans outstanding and 30% of foreclosure starts. They also account for 18% of gross domestic product, Duncan said. if we needed another one. This time it is food....

WHAT HAS the food crisis got to do with Northern Rock? Quite a lot, actually. The rocketing price of wheat, soya beans, sugar, coffee etc is all part of the credit crisis which has caused panic in financial markets and encouraged investors to take their money out of risky mortgage bonds and shaky equities and put it into commodities as "stores of value". Put another way, the Western banks are exporting their debts to the third world.

The phenomenal increases in food prices are only in part a consequence of climate change and population. Most of the recent rises have been the result of speculation and the collapse in the value of the dollar. This is being tacitly encouraged by the central banks, such as the US Federal Reserve, who are trying to ignite another asset bubble to replace the real estate and dotcom bubbles which have burst in spectacular fashion. It's the third bubble and it's hitting the third world hard.

Desperate for quick returns, trillions of dollars are being taken out of private equity and financial derivatives and ploughed into food and raw materials. The financial websites call it the "commodities super-cycle". It ranges from precious metals at one end, to corn, cocoa and cattle at the other - speculators are even placing their bets on water prices.

The collapse in the price of the dollar means that most international commodities are more expensive for poor people. The dollar's decline is a result of the low interest rate policy of the Federal Reserve. When rates are set below the rate of inflation, investors have to keep moving their massive funds from sector to sector in search of higher returns

What took the feds so long?

WASHINGTON — Federal agencies have opened a criminal inquiry into Countrywide Financial for suspected securities fraud as part of the continuing fallout over the mortgage crisis, government officials with knowledge of the case said on Saturday.

The Justice Department and the Federal Bureau of Investigation are looking at whether officials at Countrywide, the nation’s largest mortgage lender, misrepresented its financial condition and the soundness of its loans in security filings, the officials said.

The investigation — first reported on Saturday in The Wall Street Journal — is at an early stage, said the officials, who spoke on the condition of anonymity because they were not authorized to discuss ongoing criminal matters. It is unclear whether anyone will ultimately be charged with a crime.

Richard Kolko, a spokesman for the F.B.I., declined on Saturday to confirm whether the agency had started an investigation of Countrywide related to its securities filings. A Countrywide spokeswoman, Susan Martin, said, “We are not aware of any such investigation.”

Foreclosures are like a plague of locusts, destroying the heart of American cities. Somebody make it stop, please.....

March 6 (Bloomberg) -- U.S. mortgage foreclosures rose to an all-time high at the end of 2007 as borrowers with adjustable-rate loans walked away from properties before their payments increased, the Mortgage Bankers Association said today.

New foreclosures jumped to 0.83 percent of all home loans in the fourth quarter from 0.54 percent a year earlier. Late payments rose to a 23-year high, the organization said in a report today.

"We're seeing people give up even before they get to the reset because they couldn't afford the home in the first place," said Jay Brinkmann, vice president of research and economics for the Washington-based trade group.

The Bush administration is urging lenders to avert foreclosures by modifying mortgage terms amid the worst housing slump in a quarter century. The Federal Reserve has slashed its benchmark interest rate twice this year to try to avert the first recession since 2001. The central bank yesterday said the net worth of U.S. households decreased by $532.9 billion during the fourth quarter as home values fell.

Risk is back.......

March 5 (Bloomberg) -- The extra yield that investors demand to own agency mortgage-backed securities over 10-year U.S. Treasuries reached the highest since 1986, boosting the cost of loans for homebuyers considered the least likely to default.

The difference in yields on the Bloomberg index for Fannie Mae's current-coupon, 30-year fixed-rate mortgage bonds and 10- year government notes widened about 12 basis points, to 215 basis points, or 79 basis points higher than Jan. 15. The spread helps determine the interest rate homeowners pay on new prime mortgages of $417,000 or less. A basis point is 0.01 percentage point.

Some owners have been selling the debt ``to make room for the cheaper alternatives or to lighten up because they anticipated further unraveling'' in the financial markets, UBS AG analysts led by Laurie Goodman wrote in a report yesterday. Agency securities, which are guaranteed by government-chartered companies Fannie Mae and Freddie Mac or federal agency Ginnie Mae, were the ``most liquid'' bonds they could sell, they wrote. are now offering scripts for realtors to handle all those difficult objections from buyers and sellers regarding the state of today's market. The scripts are so ridiculous that they are reproduced here with no more comment from me. Read and enjoy.....

Say the Right Thing

Use these scripts to handle the sticky questions from prospects and you’ll never be left speechless again. If you’re not prospecting because you’re not sure what to say, fear no more. Here are techniques for handling today’s most common objections from prospective clients.

1. “All I read about in the papers are how real estate prices are falling. Why would I want to buy now when I’ll be able to get a better deal later on?”

You: “It’s true that real estate prices have declined slightly nationwide in the last couple of months, but that’s after an increase of some 88 percent in the last 10 years. In fact, according to the NATIONAL ASSOCIATION OF REALTORS®, 2007 is the fifth best year in the history of real estate in the United States. You do intend to live in your new home for a while, don’t you?”

Buyer: “Yes, we want our 10-year-old to finish high school before we move again.”

You: “Even if home prices fall slightly over the short term, you’re still likely to come out ahead if you live in your home for eight or nine years, as you plan to do. Historically, housing prices have risen about 6 percent a year, according to NAR.”

(You should cite your own market’s price figures in this answer, especially if you’re in a market with stable or rising prices. If that’s the case, emphasize that all real estate is local.)

Buyer: “Still, it wouldn’t hurt to wait a while, would it?”

You: “One big reason to buy now is that interest rates are still near historic lows. But if oil prices and other rising costs push up inflation, as some economists think they will, interest rates will probably go up, too. That can make your monthly mortgage payment higher and affect how much home you could buy.

Buyer: “Yes, that’s a good point.”

You: “Another reason that it’s a great time to buy is that there’s a big inventory of houses to chose from right now. A couple of years ago, when the market was overheated, I had buyers who would just buy the first thing they saw because they were so afraid of not getting any home at all. Now you have the option of more time and a bigger choice so you’ll get the best home for you. And because of the large inventory, you’re in a better position to negotiate a price discount with the seller than you will be when the market begins to strengthen.”

2. “Prices are falling. It’s just not a good time to sell.”

You: “It’s true that home prices have fallen about 6 percent this year, (substitute statistics for your area), but that was after an increase of some 88 percent in the last 10 years, so you’re still way ahead.”

Seller: “I still think it’s best to wait until prices rise again.”

You: “If you don’t have to sell, of course, you have the option to wait, but because of the high inventory of homes, it may be a couple of years for prices to start going up again. Can you wait that long?”

Seller: “I guess we could, but we really hoped to move closer to our children in Texas and buy a house before next winter.”

You: “If you’re going to be a buyer, it’s a great time to sell because you’ll make up on the buying side what you don’t get on the selling side. In addition, interest rates are still near historic lows, which may not be the case too much longer, so more buyers will be able to afford your home.”

Seller: “You’re probably right, but what if my home won’t sell?”

You: “It’s true that the days it takes the average home to sell has gotten longer (use your market figures). But I’ve learned that no matter what the market, it takes the same three things to sell — presentation, promotion, and price. Just price your house right against your local competition, and you’ll be able to sell it in a reasonable amount of time.”

3. “My last sales associate had the listing for 90 days and didn’t do anything with it. So why would I want to list with you?”

You: “I know it can be frustrating in today’s slower market, since you want to sell your home promptly. What specifically do you feel your sales associate failed to do.”

Seller: “He didn’t advertise it enough, and he didn’t hold enough open houses.”

You: “That’s interesting. I know your sales associate, and I’m sure he worked hard for you. But maybe I can suggest a few ways that might help attract more buyers to your home. For example, I give each home its own dedicated Web site, which prevents it from getting lost in the high number of listings on the market today when it can take an average of 120 days (substitute local figure) to sell the average home.”

Seller: “That sounds good. What else would you do?”

You: I got a chance to look at your home when it was listed, and I think you could increase its appeal to buyers by using a professional stager. She would come in and spend a couple of hours helping you get your home buyer-ready. This wouldn’t cost you anything; it’s part of my service. I find those little extras are especially important now that your home will be competing against so many others for buyers.”

Seller: “I guess that’s not a bad idea.”

You: “If you’re still interested in selling, I have other suggestions of what I’d include in my marketing plan for your home that I’d like to share with you. Can we setup an appointment for me to stop by to go over them with you?”

4. “I can’t afford to use a real estate salesperson. I need every dollar I can get to pay off my mortgage loan.”

You: “So you’re really concerned about your net proceeds, right? What if I could prove to you that your net would be higher if you used a sales associate?”

FSBO: “How can you do that?”

You: “Research shows that in 2006, sellers who worked with a real estate professional sold their homes for an average of 32 percent more than homes that sold directly by their owners. So even if you pay me a commission, you’ll still come out way ahead. In fact, nearly four out of five people who try to sell on their own end up listing with a real estate professional. Do you have a moment for me to get some information about your home?”

(Ask questions to assess FSBO’s motivation, including “Where are you moving, and when do you need to be there?” If they can’t answer those questions, you’ve learned that they may not be motivated, and you can move onto FSBOs who are more eager to sell.)

FSBO: “You’re just saying that to get me to list with you.”

You: “Those statistics are all true. But I’m not here to list your home. I’m here to help you market your home. I’d like to give you a free brochure that describes some ways you can market your home more effectively. In exchange, I ask that you give me the names of people who look at your house but don’t buy it.”

Seems sensible to keep away from the US housing disaster, at least for the time being....

BOSTON (Reuters) - For decades, buying a home was a key step on the path to financial security for the American middle class. Home owners could count on a fixed mortgage payment rather than rising rent, take advantage of tax breaks, and build equity as their houses increased in value over time.

But with home prices falling and families losing their homes to foreclosure, some people who under other circumstances would be looking to buy their first home now see greater security in renting. One such person is Lisa Chesnut, who lives in Tucson, Arizona, and works as an information systems coordinator. With a good job and two young sons, 29-year-old Chesnut and her husband, Bryan, look like classic first-time buyers.

The fed's attempts to save the housing market have come to nothing. Risk has returned with a vengence. Banks have remembered how interest rates should properly reflect default probabilities.

Feb. 29 (Bloomberg) -- Consumers like Valerie Jacobsen aren't getting much of a break on borrowing costs even after five months of interest rate cuts by the Federal Reserve. Jacobsen, 30, wants to refinance her 7.25 percent first and 8.5 percent second mortgages into one loan at a lower cost. To cut the payments enough to recoup her $3,000 in closing costs, she needs a rate well below 6 percent. She wasn't ready when costs dipped in January and now they're back at levels that make her plan too expensive, the Austin, Minnesota, resident says.

``Rates I'm seeing aren't really mimicking what the Federal Reserve is doing,'' said Jacobsen. ``I'm wondering why that is.''

Trying to spur lending and avert a recession, the Fed has chopped 2.25 percentage points off its benchmark rate since September. Wariness among lenders and fears of inflation are keeping mortgage and auto loan rates close to or above levels before the central bank began easing, while credit-card issuers are tightening their standards.

The slippage between the Fed's rate cuts and consumers' ability to borrow or reduce loan costs is weakening the central bank's ability to stimulate the biggest part of the economy, consumer spending. It accounts for more than two-thirds of goods and services output and stalled for the second consecutive month in January after adjusting for inflation, the Commerce Department said today.

Homes everywhere and not a sale in sight. It is bad, real bad...

Feb. 29 (Bloomberg) -- When Quinn Cuthbertson looks around his new neighborhood in El Dorado Hills, California, he sees rows of empty homes and barren hillsides. A promised new school and a clubhouse haven't materialized.

Cuthbertson paid $460,000 for a four-bedroom house in this northern California town named for the mythical golden city. He now suspects his neighbor spent $45,000 less. Nearby, 87 of 98 Toll Brothers Inc. home sites are undeveloped.

Almost 200,000 newly constructed single-family homes are sitting empty in the U.S., the most since Commerce Department statistics began in 1973. Partially completed developments reduce revenue for cities and towns and hurt businesses, said Nicolas Retsinas, the director of Harvard University's Joint Center for Housing Studies. Rising foreclosures and falling property values may cut tax revenue by more than $6.6 billion for 10 states, including New York, California and Florida, the U.S. Conference of Mayors said in a November report.

``Half-filled developments are an advertisement for a failing housing market,'' said Retsinas, a former assistant secretary for housing at the U.S. Department of Housing and Urban Development. ``It also has a spillover effect on the surrounding community.''

He is only stating what we all know already....

OMAHA, Neb. (AP) -- Billionaire Warren Buffett said Monday that the U.S. economy is essentially in a recession even if it hasn't met the technical definition of one yet. Buffett said in an interview with cable network CNBC the reports he gets from the retail businesses his holding company owns show a significant slowdown in purchases.

The chairman and CEO of Omaha-based Berkshire Hathaway Inc. said millions of people have also lost equity in their homes because home prices have dropped.The technical definition of a recession most economists use is two consecutive quarters of negative growth in the nation's gross domestic product. "I would say, by any commonsense definition, we are in a recession," Buffett said on CNBC.

More bad news, if more were needed.....

As if investors didn't have enough to worry about, Friday's batch of economic numbers shows more signs of recession as well as its evil twin--inflation. First, the government reported that U.S. consumer spending rose more than expected in January, but the gain was eaten up by swiftly rising prices.

Then, a Chicago-based business group said U.S. Midwest business activity contracted sharply in February, showing that even areas of the country least affected by the boom-bust housing cycle are feeling ripples from the crisis. On top of that, U.S. consumer sentiment dropped to a 16-year low in February, hitting levels that usually sound the alarm bells of recession, on worries about declining incomes and rising unemployment, a survey showed.

No surprise, then, that stocks opened sharply lower on Friday--and then proceeded to fall even more. Friday's reports were just the latest in a string of worrisome news about the growing threat of recession and inflation.

"Over the last three to four weeks, there have been a string of economic releases that were dramatically weaker than expected," said John Canavan, a market analyst at Stone and McCarthy Associates. "The implications are quite negative for the economy."

The only bright spot: futures traders are now speculating that the Federal Reserve will cut interest rates by three-quarters of a point at its March 18 meeting instead of the half point that was expected previously.

Nowhere is safe....

NAPA, Calif. - For many residents of this, one of the most storied valleys in the world, life is still a bowl of grapes. But beyond the picturesque vineyards and stonewalled estates, times are shaky, the future unclear.

Tourists sipping their way up the 30-mile valley from the city of Napa to Calistoga may never see this other Napa Valley. But this celebrated wine country is proof that there are few places in the nation left unsmacked by the housing crisis. Beautiful Napa is experiencing foreclosures, plunging housing prices, unheard of drops in home sales and the nervous sense of foreboding that has spread across the country like a flu.

High-End Foreclosures
High-End Foreclosures

Foreclosures for houses valued at over $1 million are rising.