How is M3 Doing These Days?

It has been quite awhile since we checked in with M3 to see the true growth in the money supply. As the government no longer reports it (in order to save money ROFL*), it has to be constructed manually using the relevant report data. As Barry Ritholz from "The Big Picture" reports, capital is being destroyed faster than credit can be created. It is getting ugly!

Money Supply Growth? Its Much Worse Than That!

Credit Collapsing Faster than it can be created:



Courtesy of St Louis Federal Reserve Bank

Signs of economic of economic weakness abound, despite the massive injections of credit and liquidity.

Deep down inside, I suspect Larry realizes that much of the "boom" from 2002 til '07 was driven by the absurdly cheap money -- and not tax cuts, as has been argued by many on his show. Just about everything from share buybacks to M&A to private equity bids to the Housing boom and MEW driven consumer spending to weak dollar led export boom were functions of ultra-low rates. Now, that cycle has ended, and we are seeing the repercussions of the irresponsible policies of Alan Greenspan.

Wednesday December 19, 2007

The Collapse of the Modern Day Banking System

State Pension Funds in Huge Trouble

Morgan Stanley Posts Huge Loss, Sells Stake to China

Inflation: China's Lost Battle

Tuesday December 18, 2007

US $45 Trillion Shortfall!
US Capital Controls are Coming...
ECB Offers Unlimited Cash To Stem Crisis
Home Builder's Index Steady at 22 Year Low
Grocery Bills to Keep Growing

Friday December 14, 2007

I-N-F-L-A-T-I-O-N
Citigroup Will Absorb $49B SIVs Assets
Greenspan: Odds of Recession 'Clearly Rising
'Moral Hazard on the Rise

Thursday December 13, 2007

US Inflation Surges - Biggest Jump Since '73

Central Banks Try to Ease Credit Crisis...

...But Markets Remain Uneasy After Loan Plan

Reuters: Crisis Remains Unabated

Crunch...Or Collapse?

Wall Street Headed for Its Own 'Big Bang'

Subprime Mess Moves to Plastic?

Shoppers "Dawdle" - Holiday Sales "Suffer"

China to US: Fix Your Own Economic Problems!

Wednesday December 12, 2007

The End of Denial

BoA Sounds Grim Tone on Outlook

Morgan Stanely Issues Full Recession Alert

US Trade Gap Widens...

Import Prices Rise Most in 17 Years...

Housing Bust Continues: The Capital of Slumping Homes

Tuesday December 11, 2007

13 Reasons Bush's Bailout Won't Stop Recession

Pushing on a String: Why the Fed Rate Cut is Inflationary

WAMU Cutting Dividends & Jobs (3000)

BOA Money Market Fund Drops 70%, Closes

Thursday December 6, 2007

Bank of England Cuts Rates

Toll Brothers: First Loss in 20 Years!

Housing Has Reached Stage 2 of the Bear Market

Deal Reached on Mortgage Rate Freeze

Retailers Post Disappointing November Sales

It's Not 1929, but It's the Biggest Mess Since

Steven Pearlstein does an excellent job of explaining the financial mess that has been created and the potential ramifications on the banks and the economy. This is a must read for those trying to understand the underlying problems in the credit markets:

If all this sounds like a financial house of cards, that's because it is. And it is about to come crashing down, with serious consequences not only for banks and investors but for the economy as a whole.

That's not just my opinion. It's why banks are husbanding their cash and why the outstanding stock of bank loans and commercial paper is shrinking dramatically.

It is why Treasury officials are working overtime on schemes to stem the tide of mortgage foreclosures and provide a new vehicle to buy up CDO assets.

It's why state and federal budget officials are anticipating sharp decreases in tax revenue next year.

And it is why the Federal Reserve is now willing to toss aside concerns about inflation, the dollar and bailing out Wall Street, and move aggressively to cut interest rates and pump additional funds directly into the banking system.

This may not be 1929. But it's a good bet that it's way more serious than the junk bond crisis of 1987, the S&L crisis of 1990 or the bursting of the tech bubble in 2001.

Read full article here.

Wednesday December 5, 2007

Greenspan Dodging Blame for Housing Mess...

Wall Street Firms Subpoenaed Over Subprime

Americans Turn Gloomier

Florida's Fund Crisis Worries Other States

Tuesday December 4, 2007

Crudele: Economy Already in Recession

Krugman: Innovating Our Way to Financial Crisis

Kunstler: Magic Wand Finance

IcebergsLA Times: Chill Spreads to Commercial Real Estate

Sterling Interbank Markets Collapses

The Coming China Crash

Lies, Dam Lies, and Government Statistics!

Benjamin Disraeli , the prime minister of the British Empire from 1874-1880, was reported by Mark Twain to have uttered this brilliant quote on statistical analysis: “There are three kinds of lies: lies, damn lies, and statistics.”

Todays' GDP data, GDP = 4.9% is just about the worst thing I've seen in along time.

Yeesh!

Don't look now: Here comes the recession

NEW YORK (Fortune) -- The cash registers were ringing on Black Friday, but make no mistake: American consumers are jittery, and seem all but certain to push the U.S. economy into recession.

After years of living happily beyond their means, Americans are finally facing financial reality. A persistent rise in energy prices will mean bigger heating bills this winter and heftier tabs at the gas pump. Job growth is slowing and wage gains have been anemic. House prices are sliding, diminishing the value of the asset that's the biggest factor in Americans' personal wealth. Even the stock market, which has been resilient for so long in the face of eroding consumer sentiment, has begun pulling back amid signs of deep distress in the financial sector.

With consumer spending accounting for about three-quarters of U.S. economic activity, some economists say it is inevitable that the economy will stop growing at some point in the coming year, for the first time since the mild recession of 2001. "Right now, the question is how bad it's going to get," said David Rosenberg, chief North American economist at Merrill Lynch. "The question is one of magnitude."

17 Reasons America Needs A Recession

Excellent article that "hits the nail on the head". America's excesses must be purged from the financial system so that we can start fresh. After all, that's what recessions are for.

ARROYO GRANDE, Calif. (MarketWatch) -- Yes, America needs a recession. Bernanke and Paulson won't admit it. And investors hate them. We're all trapped in outdated 1990s wishful thinking about a "new economy" and "perpetual growth."
But the truth is, not only is a recession coming, America needs a recession. So think positive: Let's focus on 17 benefits from this recession.

To begin with, recession may be an understatement. Jeremy Grantham's GMO firm manages $150 billion. In his midyear report before the credit crisis hit he predicted: "In 5 years I expect that at least one major 'bank' (broadly defined) will have failed and that up to half the hedge funds and a substantial percentage of the private-equity firms in existence today will have simply ceased to exist."
He was "watching a very slow motion train wreck." By October, it was accelerating: "Train hits end of track at full speed."

Also back in August, The Economist took a hard look at the then emerging subprime/credit crisis: "The policy dilemma facing the Fed may not be a choice of recession or no recession. It may be between a mild recession now, and a nastier one later."

However, the publication did admit that "even if a recession were in America's long-term economic interest, it would be political suicide" for Fed Chairman Ben Bernanke and Treasury Secretary Henry Paulson to suggest it.

Then The Economist posed the big question: Yes, "central banks must stop recessions from turning into deep depressions. But it may be wrong to prevent them altogether."
Wrong to prevent a recession? Why? Because recessions are a natural and necessary part of the business cycle. Remember legendary economist Joseph Schumpeter, champion of innovation and entrepreneurship?

Economists love Schumpeter's "creative destruction:" Obsolete firms get destroyed and capital released, making way for new technologies, new businesses, like Google. And yet, nobody's willing to apply Schumpeter's theory to the entire economy ... and admit recessions are a natural part of the business cycle.

Instead, everyone persists in the childlike fairy tale that "all growth is good" and "all recessions are bad," a bad hangover of the '90s "new economy" ideology. So for the folks at the Fed, Treasury and Wall Street, "eternal growth" is still America's mantra.

Unfortunately, the American investors' brain has also developed this blind obsession with "growth-at-all-costs," coupled with a deadly fear of all recessions, as if recessions are a lethal super-bug more powerful than Iran with a bomb.
Our values are distorted: It's OK to be greedy and overshoot the market on the upside -- grab too many assets, take on too much debt, make consumer spending a religion, live beyond our means, ignite hyperinflation along the way. Growth is good, even in excess.

And yet, recessions are a no-no that drives politicians, economists and investors ballistic.

Well, folks, you can block all this from your mind, you can argue that recessions are not a part of Schumpeter's thinking, that they are inconsistent with your political ideology. But the fact is, we let the housing/credit boom become a massive bubble, it popped and a recession is coming. So think positive, consider some of the benefits of a recession:

1. Purge the excesses of the housing boom
No, it's not heartless. Not like wartime calculations of "acceptable collateral damage." Yes, The Economist admits "the economic and social costs of recession are painful: unemployment, lower wages and profits, and bankruptcy." But we can't reverse Greenspan's excessive rate cuts that created the housing/credit crisis. It'll be painful for everyone, especially millions of unlucky, mislead homeowners who must bear the brunt of Wall Street's greed and Washington's policy failures.

2. U.S. dollar wake-up call
Reverse the dollar's free fall and revive our global credibility. Warnings from China, France, Iran, Venezuela and supermodel Gisele haven't fazed Washington. Recession will.

3. Write-offs
Expose Wall Street's shadow-banking system. They're playing with $300 trillion in derivatives and still hiding over $100 billion of toxic off-balance sheet asset-backed securities, plus another $300 billion hidden worldwide. A lack of transparency is killing our international credibility. Write it all off, now!

4. Budgeting
Force fiscal restraint back into government. America has been living way beyond its means for years: A recession will cut back revenues at all levels of government and cutbacks will encourage balanced budgeting.

5. Overconfidence
A recession will wake up short-term investors playing the market. In bull markets traders ride the rising tide, gaining false confidence that they're financial geniuses. Downturns bruise egos but encourage rational long-term strategies.

6. Ratings
Rating agencies have massive conflicts of interest; they aren't doing their job. They're supposed to represent the investors, but favor Corporate America, which pays for the reports. Shake them up.

7. China
Trigger an internal recession in China. Make it realize America's not going into debt forever to finance China's domestic growth and military war machine. A recession will also slow recycling their reserves through sovereign funds to our equities.

8. Oil
Force the energy and auto industries to get serious about emission standards and reducing oil dependency.

9. Inflation
Expose the "core inflation" farce Washington uses to sugarcoat reality.

10. Moral hazard
Slow the Fed from cutting interest rates to bail out speculators.

11. War costs
Force Washington to get honest about how it's going to pay for our wars, other than supplemental bills that are worse than Enron-style debt financing.

12. CEO pay
Further expose CEO compensation that's now about five hundred times the salaries of workers, compared with about 40 times a generation ago.

13. Privatization
Stop the privatization of our federal government to no-bid contractors and high-priced mercenary armies fighting our wars.

14. Entitlements
Force Congress to get serious about the coming Social Security/Medicare disaster. With boomers now retiring, this problem can only get worse: A recession now could avoid a depression later.

15. Consumers
Yes, we're all living way beyond our means, piling up excessive credit-card debt, encouraged by government leaders who tell us "deficits don't matter." Recessions will pressure individuals to reduce spending and increase savings.

16. Regulation
Lobbyists have replaced regulation. Extreme theories of unrestrained free trade plus zero regulation just don't work; proven by our credit crisis, hedge funds' nondisclosures, private-equity taxation, rating agencies failures, junk home mortgages, and more. Get real, folks.

17. Sacrifice
"We have not seen a nationwide decline in housing like this since the Great Depression, says Wells Fargo CEO John Stumpf. As individuals and as a nation Americans have always performed best in crises, like the Depression or WWII, times when we're all asked to make sacrifices. Pampering us with interest-rate cuts and tax cuts during the Iraq and Afghan wars may have stimulated the economy temporarily, but they delayed the real damage of the '90s stock bubble while setting the stage for this new subprime/credit crisis.

Wake up, the train wrecked. Time to think positive, find solutions, demand sacrifices.

Wall Street Playing With More Funny Money

NEW YORK (Fortune) -- Banks' exposure to illiquid, hard-to-value assets jumped sharply higher in the third quarter, a development that deepens concerns about the transparency and strength of bank balance sheets.

Recently, banks have been required to show in financial statements which of their assets and liabilities rarely trade and are therefore valued according to in-house estimates. These so-called level three assets ballooned at banks in the third quarter as markets for many mortgage-related assets seized up, with Merrill Lynch posting the highest increase - a nearly 70% jump - in its level three assets from the second to the third quarter, according to a Fortune survey.

It might sound like an increase in assets is a positive thing for a bank. But no financial institution wants to record a big increase in illiquid assets, because pricing and selling them is difficult and, if the credit crunch persists, many of them could be a source of large losses in coming quarters.

Investors have long been skeptical about the values that the banks themselves place on their level three assets, and that mistrust deepened after both Merrill and Citigroup (Charts, Fortune 500) recently revealed huge mortgage-related losses that were much bigger than outsiders had expected.

Changes in the values of all assets and liabilities typically create a gain or loss in a bank's income statement. At banks, assets classified as level three have been hurt to differing degrees by the credit crunch. Least hit, so far at least, are private equity stakes and real estate holdings, but the level three bucket also includes leveraged buy-out loans, as well as seriously problematic assets like subprime mortgages and collateralized debt obligations (CDOs), which are securities that pool together asset-backed bonds.

Investor frustration about the lack of transparency in banks' balance sheets have contributed to the recent slump in bank stocks, which are down 12% since the end of Sept., according to the KBW Banks Index. And even if credit markets stabilize for some assets, and lead some banks to record non-cash, unrealized gains on level three assets, those profits won't be considered anywhere near as dependable as earnings from more liquid assets. Indeed, many level three assets were deemed to be reliable earners until very recently; in the first half of this year, level three assets were a big driver behind earnings at several banks, as Fortune first reported in September.

So, how much did level three assets increase in the third quarter? Merrill's 69% jump took level three assets up to $27 billion. A big part of that increase was due to a shift of $6 billion in subprime mortgage-related assets to level three from level two, the classification for assets that are theoretically more liquid than level three assets but still don't get valued according to prices in active markets. (Only level one assets are valued on a bank balance sheet according to quoted prices in liquid markets.)

Merrill (Charts, Fortune 500) says it moved assets to level three from level two because they became less liquid. At $27 billion, Merrill's level three assets are equivalent to 70% of Merrill's equity (which is the net worth of a bank after liabilities are subtracted from assets).

Of course, no bank's level three assets are going to be marked down to zero, so the comparison with equity doesn't mean these assets could potentially wipe away all or most of a bank's net worth. However, since future losses are most likely to come from level three asset markdowns, a comparison with equity makes sense, because the losses will immediately cause a hit to equity - and banks need strong equity to grow and maintain high credit ratings.

To get a better grip on how level three assets might affect a bank, it makes sense to look at what exactly makes up level three assets, though this can be hard because of banks' limited disclosure. In the case of Merrill, for example, we know that a sizable share of level three assets are distressed mortgages and CDOs, which are likely to be subject to further losses in the fourth quarter.

Goldman Sachs' level three assets leapt by a third in the third quarter to $72 billion, which is equivalent to 184% of equity. That looks high. However, Goldman spokesman Lucas van Praag responds that roughly half the increase was due to leveraged loans. These loans are nowhere near as toxic as subprime mortgages and CDOs. Van Praag adds: "It's worth noting that, since the end of the quarter, the leveraged loan market has eased somewhat and pricing inputs are more readily available."

Citi's write-downs: When did it know?
With its nearly $90 billion of level three assets equivalent to 255% of equity, Morgan Stanley looks particularly exposed to illiquid assets. In response, a Morgan Stanley spokesman notes that much of the level three total isn't in distressed mortgage assets, but assets like private equity and real estate. In announcing $3.7 billion of losses on subprime in the two months ended Oct. 31, Morgan Stanley disclosed a remaining net subprime mortgage exposure at Oct. 31 of $6 billion. The subprime assets that give that exposure are all in level three, the bank says.

But focusing only on level three assets would be a mistake, because banks could also be holding assets at disputable values in their level two buckets. For example, some of the CDOs that Merrill marked down in its third quarter were shifted from level two to level three. To be sure, in the second quarter, those CDOs may have been correctly classified as level two, but the movement of assets between levels at Merrill shows that these regulatory classifications are frustratingly fluid. Since banks typically don't disclose gains and losses from level two assets, this part of their balance sheet is likely to remain opaque.

Much hope has been placed on banks' auditors making sure that assets are properly valued, especially those marked according to internal guesstimates. In October, the Center for Audit Quality, which represents the auditors, warned brokerage managers and company directors that they had no choice but to abide by a recently introduced accounting rule for valuing illiquid assets.

But even a well-resourced auditor can't be expected to properly scrutinize the huge amount of level two and three assets sitting on banks' balance sheets. For the seven banks Fortune surveyed, level three assets totaled over $430 billion, equivalent to 110% of the banks' combined equity. That number will likely increase in the fourth quarter, making bank balance sheets even harder to read. Yes, that's right: Wall Street's black hole is getting bigger.

Analysis of November 13th Stock Market Rally

Bill King is bang on with his assessment of investor stupidity that led to the huge market rally yesterday.

"Ironically, or rather idiotically, traders poured into stocks on Blankfein’s assertion that Goldie is doing well because Goldie is short mortgage-backed securities and CDOs. Blankfein believes the financial situation will worsen: “...many institutions don’t understand what the credit crunch is going to do to earnings and their balance sheets.”

So what we have is a huge rally because Goldie will profit from the US economy and financial system going to hell. And people pay fortunes to go to Ivy League schools and B-schools to learn how to play the new economy!?!?! Apparently a critical mass of traders believes that not only what is good for Goldman is good for America but as long as Goldman profits everything else is immaterial...

Wal-Mart admits that customer visits declined in Q3; but food sales increased 5.3% and pharmacy sales jumped 7.9%. Thank God for food & drug inflation that is not recorded in official inflation!

Recession, inflation, dollar collapse, financial system implosion – no problemo, Goldie is making money so pour into stocks! And let’s be merry and jiggy now because Wal-Mart is booking Christmas sales weeks before Thanksgiving and food inflation is virulent enough to significantly boost revenue!"

The Bearish Financial Advisor

Ben Stein does a fine job of ending his career in this August 18 video where he recommends financial stocks right before they got destroyed. But just in case, Peter Schiff is there to stick the knife in and twist.

Remember - this is from August 18, 2007. And we all know what happened since then.

Bottom line - Fox and other channels are full of idiots who have no idea what they're talking about. What is truly unbeleivable is the venom that a bearish advisor (Peter Schiff) faces when he attempts to render a negative opinion about the market.

Ron Paul - The Truth is Out There!

As I've noted in my blog many times in the past, Ron Paul is running for President. He is fighting for the Republican nomination. He came 4th in fundraising in the last quarter. He just set the Republican record for most fundraising dollars in a day (almost $5 million) through an internet campaign.

Who is Ron Paul and why is his message gaining traction? Ron Paul is a Congressman from Texas that has been telling the truth about inflation, the devaluation of the U.S. Dollar, and the mess that the Federal Reserve has made over the years.

His supporters have been labelled as "fringe" and "loony" so that the real message doesn't spread. It's getting harder to contain because of the internet and specifically Youtube videos that have been circulating lately. Enjoy Ron Paul crucifying Ben Bernanke and try to understand Bernanke's lame responses to his legitimate questions.

The Headlines Get Uglier!

Markets Fear Banks Have $1 Trillion in Toxic Debt

'The Worst Crisis in 30 Years'

Beazer, Hovnarian Cancellations Up - Pink Slips Galore

Bill Gross: Fed Can't Afford to Let Housing Crack

Borrowers Face Dubious Charges in Foreclosures

BW: The Persistent Credit Crunch

$300 Oil? Peak Oil Revisited.

Supermodel Dumping Dollar!

Once the supermodels start to clue in, you know that officially the last people are understanding the problem with the U.S. Dollar!



Nov. 5 (Bloomberg) -- Gisele Bundchen wants to remain the world's richest model and is insisting that she be paid in almost any currency but the U.S. dollar.

Like billionaire investors Warren Buffett and Bill Gross, the Brazilian supermodel, who Forbes magazine says earns more than anyone in her industry, is at the top of a growing list of rich people who have concluded that the currency can only depreciate because Americans led by President George W. Bush are living beyond their means.

Even after the dollar lost 34 percent since 2001, the biggest investors and most accurate forecasters say it will weaken further as home sales fall and the Federal Reserve cuts interest rates. The dollar plummeted to its lowest ever last week against the euro, Canadian dollar, Chinese yuan and the cheapest in 26 years against the British pound.

``We've told all of our clients that if you only had one idea, one investment, it would be to buy an investment in a non- dollar currency,'' said Gross, the chief investment officer of Pacific Investment Management Co. in Newport Beach, California, and manager of the world's biggest bond fund. ``That should be on top of the list,'' said Gross, whose firm is a unit of Munich- based insurer Allianz SE.

No Inflation? Think Again!

Hat tip to "The Big Picture" for the CRB index reference:



Inflation is raging!

Americans Turn Negative on Economy, Expect Recession, Poll Says

Almost two-thirds of Americans say a recession is likely in the next year and a majority believes the economy is already faltering, according to a Bloomberg/Los Angeles Times survey.

By 65 percent to 29 percent, Americans say they expect a recession, the poll found. Fifty-one percent say the economy is doing poorly, compared with 46 percent who say it is doing well, the gloomiest view since February 2003.

The negative sentiment on the economy contrasts with a June poll in which 57 percent of respondents said it was doing well. The pessimistic turn comes just before the Federal Reserve meets next week to decide whether to further reduce interest rates to try to head off a possible recession. The poll results square with the Reuters/University of Michigan consumer index, which showed confidence in October at its lowest ebb since August 2006.

``I'm starting to think there's a good possibility of recession,'' said poll respondent Roger Sharp, a retired procurement analyst in Milwaukie, Oregon. ``The housing industry is driving the economy down and people are starting to get laid off from jobs that have been around for a long time,'' said Sharp, 63, a registered Republican.

The poll brought bad news for his party: By 44 percent to 33 percent, Americans say Democrats would be better than Republicans at restarting growth should a recession occur.

October 16, 2007 Headlines

Paulson: No Bailout of Speculators

Bernanke: Fed 'Can't insulate investors from risk'

Greenspan: 'Credit crunch will weigh on US growth'

Citi Sees Consumer Hit Hard

Understanding Market Data

This is circulating around trading desks these days. Funny stuff!

Cheat sheet: reacting to data and market releases

weak data = Fed ease, stocks rally

consensus data = lower volatility, stocks rally

strong data = economy strengthening, stocks rally

bank loses $4bln = bad news out of the way, stocks rally

oil spikes = great for energy companies, stocks rally

oil drops = great for the consumer, stocks rally

dollar plunges = great for multinationals, stocks rally

dollar spikes = lowers inflation, stocks rally

inflation spikes = will inflate all assets, stocks rally

inflation drops = improves earnings quality, stocks rally

Can't Give Away U.S. Dollars!

The mighty fall of the U.S. Dollar continues. Wallstrip.net did a good spoof on giving away the worthless currency to people on the street:

Hilarious Countrywide Financial Prank!

Angelo (Agent Orange) Mozillo will have a fit over this. Someone has to bring his shenanigans to the mainstream media. This memo was posted at a Countrywide Financial office this morning. Employees read it as they entered the office. A good prank is a way to get noticed. This will be bigger than Enron! (click on picture to read memo)



Hat tip to W.C. Varones for this.

Updated Case-Shiller Home Price Index

Look Out Below!

Ron Paul Rips Ben Bernanke Apart!

Ron Paul lays it all out for Ben Bernanke and Bernanke provides the most feeble, pathetic answer I have ever witnessed. It looked like Bernanke could barely get out the words and was on the verge of breaking down and crying. When confronted with the truth, it's very difficult to deal with the actual question. So, Bernanke ignored the sermon and talked about phony inflation numbers. PATHETIC!

Credit Crisis - Canadian Style

For those that believe that the recent credit crisis is contained or that it only applies to the U.S., a report in the Financial Post indicates that it also exists in Canada and the problem is significantly worse.

Canadian banks are struggling to contain a credit crisis that could spiral out of control here more than it has elsewhere because of a lax regulatory regime, sources have told the National Post.

The crisis relates to the market for a complex type of short-term funding known as asset backed commercial paper (ABCP), which had grown out of proportion in this country partly thanks to Canadian rules that were not as tough as in other nations.

"It's a made-in-Canada problem," said Claude Lamoureux, head of Ontario Teachers' Pension Plan. Many people in the market "didn't know or didn't ask questions" because they were making more profits than elsewhere, he added.

The Canadian ABCP market attracted a flood of foreign financial institutions such as Barclays Bank and Deutsche Bank, who exploited the gaps in the Canadian ABCP rules to make big profits at lower risk to themselves, sources said.

"They were effectively able to earn fees from supplying liquidity without ever having to supply the liquidity or set aside capital," said a source.

In the worst-case scenario, if global financial players lose confidence in the Canadian ABCP system altogether, the crisis could spread to Canada's big banks, leaving them on the hook for tens of billions of dollars.

ABCP is a package of debt obligations -- anything from car loans to credit-card debt. The product grew in popularity in recent years among everyone from pension funds to corporate treasury departments to banks because ABCP offered higher returns than, for example, a corporate bond or treasury bill.

Typically, ABCP products also involve liquidity support from a supplier, usually a major bank. In simple terms it is an agreement to buy the ABCP in the event of a disruption to the market.

In Canada, the market grew more quickly than in other countries, doubling between 2000 and 2007 to $120-billion, because the Canadian definition of disruption to the market was much narrower than elsewhere.

In Canada, liquidity suppliers did not have to provide funding except in catastrophic circumstances.

Also the Canadian banking regulator, unlike regulators in other countries, did not ask the liquidity supplier -- the bank -- to set aside any capital, so they could use it to grow other lines of business.

"ABCP growth outstripped traditional personal and commercial loan growth," and was "meaningfully above the pace of U.S. ABCP market expansion," said Blackmont Capital banking analyst Brad Smith.

In addition, Canadian debt rating agency Dominion Bond Rating Service gave a rating to Canadian ABCP even though other rating agencies such as Moody's and Standard & Poors shied away from doing so.

By June this year, Canada's ABCP market was about 10% of the size of the market in the United States, although the overall U.S. financial system is proportionately far larger than Canada's.

When concerns surfaced in August about the underlying assets in ABCP -- many of which have included troubled mortgage loans in the U.S. -- some owners of ABCP were caught off guard. Owners of ABCP were under the belief that they could convert it to cash or another similar product at the end of 30 or 60 days but instead were left holding the product.

Canadian investment bank Coventree Capital Inc. became one of the first major victims of the global credit crunch when it was unable to trade the ABCP it was holding because of the general seizing up of credit markets around the world.

Following Coventree's collapse, Canadian non-bank owners of $40-billion of troubled asset-backed commercial paper -- pension funds and corporate treasury departments -- were forced into an unprecedented joining-of-forces known as the Mont-real Accord to try to salvage their holdings.

If the Montreal Accord does not result in a long-term agreement on how to resolve the issues in Canada's non-bank ABCP market by an Oct. 15 deadline, there could be a carryover effect on the demand generally for ABCP, said Blackmont's Mr. Smith.

"Failure to fully restore investor confidence levels could reduce demand ...which could restrict the future ability of banks to manage capital," he said.

Mr. Smith calculated that Canada's big six banks are on the hook for total liquidity facilities worth $135-billion.

Canada's bank regulator -- the Office of the Superintendent of Financial Institutions -- did not return calls from the National Post seeking comment for this story. However, in an e-mail the regulator indicated that the rules enforced in Canada were in accordance with international guidelines.

HOW IT WORKS - A bank packages a collection of mortgages, credit card balances, or lines of credit into an ABCP that matures in 30 days. - The bank sells ABCP for a fee to an intermediary that assumes all the risk associated with the underlying assets. - The intermediary sells pieces of the ABCP to investors, including pension funds or corporations or individuals. - Investors are paid interest and assume there will be a buyer for their piece of the ABCP after 30 days. - For a fee, the bank supplies funds to buy the ABCP if there are no other buyers - in Canada, this feature did not work in August when investors could not find a buyer.

Peak Oil Theory a Scam?

This is a great article published in the Asia Times Online site. It challenges all of the conventions of Peak Oil Theory and the underlying assumptions regarding "Fossil Fuels".

Russia is far from oil's peak

The good news is that panic scenarios about the world running out of oil any time soon are wrong. The bad news is that the price of oil is going to continue to rise. "Peak Oil" is not our problem. Politics is. Big Oil wants to sustain high oil prices. US Vice President Dick Cheney and friends are all too willing to assist.

The Peak Oil school rests its theory on conventional Western geology textbooks, most by American or British geologists, which claim oil is a "fossil fuel", a biological residue or detritus of either fossilized dinosaur remains or perhaps algae, hence a product in finite supply. Biological origin is central to Peak Oil theory, used to explain why oil is only found in certain parts of the world where it was geologically trapped millions of years ago.

That would mean that dinosaur remains became compressed and over tens of millions of years fossilized and were trapped in underground reservoirs perhaps 1,200-2,000 meters below the surface of the Earth. In rare cases, so goes the theory, huge amounts of biological matter should have been trapped in rock formations in the shallower ocean regions such as in the Gulf of Mexico or North Sea or Gulf of Guinea. Geology should be only about figuring out where these pockets in the layers of the earth, called reservoirs, lie within certain sedimentary basins.

An entirely alternative theory of oil formation has existed since the early 1950s in Russia, almost unknown to the West. It claims that the conventional US biological-origins theory is an unscientific absurdity that is unprovable. They point to the fact that Western geologists have repeatedly predicted finite oil over the past century, only then to find more, lots more.

Not only has this alternative explanation of the origins of oil and gas existed in theory, the emergence of Russia as the world's largest oil and natural-gas producer has been based on the application of the theory in practice. This has geopolitical consequences of staggering magnitude.

In the 1950s, the Soviet Union faced "Iron Curtain" isolation from the West. The Cold War was in high gear. Russia had little oil to fuel its economy. Finding sufficient oil indigenously was a national-security priority of the highest order.

Scientists at the Institute of the Physics of the Earth of the Russian Academy of Sciences and the Institute of Geological Sciences of the Ukraine Academy of Sciences began a fundamental inquiry in the late 1940s: Where does oil come from?
In 1956, Professor Vladimir Porfir'yev announced their conclusions: "Crude oil and natural petroleum gas have no intrinsic connection with biological matter originating near the surface of the Earth. They are primordial materials which have been erupted from great depths."

The Soviet geologists had turned Western orthodox geology on its head. They called their theory of oil origin the "abiotic" theory - non-biological - to distinguish it from the Western biological theory of origins.

If they were right, oil supply on Earth would be limited only by the amount of organic hydrocarbon constituents present deep in the Earth at the time of the planet's formation. Availability of oil would depend only on technology to drill ultra-deep wells and explore into the Earth's inner regions. They also realized that old fields could be revived to continue producing, so-called self-replenishing fields. They argued that oil is formed deep in the Earth, formed in conditions of very high temperature and very high pressure, like that required for diamonds to form.

"Oil is a primordial material of deep origin which is transported at high pressure via 'cold' eruptive processes into the crust of the Earth," Porfir'yev stated. His team dismissed the idea that oil is is biological residue of plant and animal fossil remains as a hoax designed to perpetuate the myth of limited supply.

The radically different Russian and Ukrainian scientific approach to the discovery of oil allowed the USSR to develop huge gas and oil discoveries in regions previously judged unsuitable, according to Western geological exploration theories, for the presence of oil. The new petroleum theory was used in the early 1990s, well after the dissolution of the USSR, to drill for oil and gas in a region believed for more than 45 years to be geologically barren - the Dnieper-Donets Basin in the region between Russia and Ukraine.

Following their abiotic or non-fossil theory of the deep origins of petroleum, the Russian and Ukrainian petroleum geophysicists and chemists began with a detailed analysis of the tectonic history and geological structure of the crystalline basement of the Dnieper-Donets Basin. After a tectonic and deep structural analysis of the area, they made geophysical and geochemical investigations.

A total of 61 wells were drilled, of which 37 were commercially productive, an extremely impressive exploration success rate of almost 60%. The size of the field discovered compared to the North Slope of Alaska. By contrast, US wildcat drilling was considered to have a 10% success rate. Nine of 10 wells are typically "dry holes".

Peak Oil theory is based on a 1956 paper by the late Marion King Hubbert, a Texas geologist working for Shell Oil. He argued that oil wells produced in a bell-curve manner, and once their "peak" was hit, inevitable decline followed. He predicted that US oil production would peak in 1970. A modest man, he named the production curve he invented Hubbert's Curve, and the peak as Hubbert's Peak. When US oil output began to decline in about 1970, Hubbert gained a certain fame.

The only problem was, it peaked not because of resource depletion in the US fields. It "peaked" because Shell, Mobil, Texaco and the other partners of Saudi Aramco were flooding the US market with dirt-cheap imports from the Middle East, tariff-free, at prices so low California and many Texas domestic producers could not compete and were forced to shut their wells.

While the US oil multinationals were busy controlling the easily accessible large fields of Saudi Arabia, Kuwait, Iran and other areas of cheap, abundant oil during the 1960s, the Russians were busy testing their alternative theory. They began drilling in a supposedly barren region of Siberia. There they developed 11 major oilfields and one giant field based on their deep abiotic geological estimates. They drilled into crystalline basement rock and hit black gold of a scale comparable to the Alaska North Slope.

They then went to Vietnam in the 1980s and offered to finance drilling costs to show that their new geological theory worked. Russian company Petrosov drilled in Vietnam's White Tiger oilfield offshore into basalt rock some 5,000 meters down and extracted 6,000 barrels a day of oil to feed the energy-starved Vietnam economy. In the USSR, abiotic-trained Russian geologists perfected their knowledge and the Soviet Union emerged as the world's largest oil producer by the mid-1980s. Few in the West understood why, or bothered to ask.

Dr J F Kenney is one of the only Western geophysicists who has taught and worked in Russia, studying under Vladilen Krayushkin, who developed the huge Dnieper-Donets Basin. Kenney told me in a recent interview that "alone to have produced the amount of oil to date that [Saudi Arabia's] Ghawar field has produced would have required a cube of fossilized dinosaur detritus, assuming 100% conversion efficiency, measuring 19 miles [30.5 kilometers] deep, wide and high." In short, an absurdity.

Western geologists do not bother to offer hard scientific proof of fossil origins. They merely assert their belief as a holy truth. The Russians have produced volumes of scientific papers, most in Russian. The dominant Western journals have no interest in publishing such a revolutionary view. Careers, entire academic professions are at stake, after all.

Fed Destroys Dollar to Help Wall Street!

Business Week is the latest publication to finally stand up and take notice of the Fed policies that are destroying the dollar to prop up Wall Street.

Aside from the dollar and long-term bonds, markets rose last week as the Federal Reserve demonstrated that it is more fearful of a slowing economy and banking woes than inflation. In fact, it is willing to sacrifice the dollar to save the banks. Just last month, the Fed was saying that the threat of inflation is just as great as the threat of a slowdown in the economy. Now it is cutting rates in a huge way as the Dow nears its all-time high, gold is making new highs, and the price of oil is exploding.

The Fed is obviously terrified. Chairman Ben Bernanke built his career on a doctoral thesis that claimed that the Fed didn't cut rates fast enough during the 1929 stock market crash. But if you look at a chart of the Depression bear market with an overlay chart of interest rates, you'll see that the Fed cut interest rates as the market topped. And when you look at the charts for a few years later, when the market finally bottomed, you'll see that the Fed had been lowering rates all the way down.

Bernanke believes that the Fed should have cut rates all at once during the start of the bear market instead of gradually over two years. He seems to be putting this belief to work right now. It means that he is gravely concerned about the state of real estate and banking in the U.S.


If the credit markets don't revitalize in the next few weeks, you can expect to see the Fed lower rates again by another 50 points at their October Federal Open Market Committee meeting no matter where the dollar, gold, or the Dow are. They have signaled that they don't give a damn about the dollar. All they care about is Wall Street.

However, there's another way to view the matter. One could say that they don't care about inflation because they see a total bust in housing that will create deflationary pressures in the economy. Mishkin's paper projects negative gross domestic product growth for the next five years, a federal funds rate falling two full points lower, consumer spending shrinking for five years, and the consumer price index going down and staying negative if housing prices decline by 20%. These negative trends are expected to begin now and accelerate through 2010.

Mishkin sees such a housing price decline as very likely, given that home prices fell by 16% from late 1979 through late 1982. Contrary to people who believe that real estate is the best investment you can buy because it never drops, remember: It has dropped in the past. And with bubbles leading to busts, it is happening right now. The question remains, when will it stop? After the Nasdaq topped in March, 2000, it didn't bottom for two full years. Real estate topped out a year ago.

I have to wonder what happens if the Fed lowers rates by 1% or more in the next three months and real estate doesn't rebound? A central bank has never tested these theories. We don't know if cutting rates all at once will prevent the damage caused by a bursting bubble. Even when the tech bubble burst in 2000, Alan Greenspan didn't lower rates until almost a year later, after the Nasdaq fell to almost half its value.

The problem is that real estate is still overvalued, just as tech stocks became overvalued in 2000. It's likely real estate will need to return to a normal valuation before it bottoms out, setting the stage for recovery, so simply lowering interest rates may not have the wonderful effects that Mishkin and Bernanke hope for.

What I do know for sure, which is all you need to know to make money, is that the Fed is setting up an inflationary trend. The money the Fed prints has to go somewhere. Of course, this is bullish for gold and commodities—which are now leading the stock market. Still, it's entirely possible that the Dow and broad market could continue to go up, too

Gap Widening Between The Rich and the Super-Rich!

Priceless!


In The Know: Are America's Rich Falling Behind The Super-Rich?

A Fine Line!

A big hat tip goes out to the Richter Scales for this excellent tribute to the current credit meltdown!

Greenspan Admits Ignorance!

It's too late to save millions of homeowners that duped lenders or those that were duped by lenders but Greenspan finally admits that he was ignorant of the extent of the subprime mortgage problem. It's about time!

Greenspan: I didn't grasp subprime threat

Former Federal Reserve Chairman says he didn't see early on the damage that lending to those with questionable credit could do to the economy.

WASHINGTON (AP) -- Former Federal Reserve Chairman Alan Greenspan acknowledges he failed to see early on that an explosion of mortgages to people with questionable credit histories could pose a danger to the economy.

In an upcoming interview, Greenspan said he was aware of "subprime" lending practices where home buyers got very low initial rates only to see them later jacked up, causing severe payment shock. But he said he didn't initially realize the harm they could do.

Robert Miller of the Daily Telegraph joins CNN to discuss the Bank of England and European Central Bank's rate decision.
Play video

"While I was aware a lot of these practices were going on, I had no notion of how significant they had become until very late," he said a CBS "60 Minutes" interview to be broadcast Sunday. "I really didn't get it until very late in 2005 and 2006," Greenspan said.

An excerpt of the interview was released Thursday.

A meltdown in the subprime mortgage market has rocked Wall Street. Foreclosures and late payments have soared and lenders have gone out of business. Nervous financial institutions tightened credit standards, making it harder for even more creditworthy borrowers to get financing. This has increased chances the economy might slide into a recession this year.

Greenspan, who ran the central bank for more than 18 years - the second-longest serving chairman in history - left in 2006. His successor, Ben Bernanke, has had to deal with a credit and financial crisis stemming from the subprime mortgage mess.

When he was at the helm, Greenspan maintained there was little the Fed - which also oversees the safety and soundness of banks - could do about the subprime situation. One of the Fed's governors, however, had raised a red flag about questionable lending practices.

"Well, it was nothing to look into particularly because we knew there was a number of such practices going on, but it's very difficult for banking regulators to deal with that," Greenspan said in the interview.

Some blamed Greenspan's interest rate policies for feeding the housing frenzy. Sales had hit record highs and house prices galloped from 2001 to 2005. Then the market fell into a deep slump.

Turmoil could take months to resolve, Paulson says

WASHINGTON (MarketWatch) -- Strains in global credit markets could take months to work out as the markets reassess the price of risk, Treasury Secretary Henry Paulson said Thursday in a televised interview.

"There have been real strains in the capital markets and across some of the credit markets," Paulson told the Nightly Business Report on PBS. "And I think this will take a while to play out, and almost certainly over time this will have an impact on our economy."

"It's certainly going to be into the weeks, maybe a number of months," he said.
Investors seem to "learn their lesson every seven, eight, 10 years or what have you," he said.

Paulson said the economy would pay a "penalty," but insisted that the U.S. and global economies were "very strong."

Paulson said estimates of 2 million foreclosures are exaggerated. He said the Bush administration is not seeking to bail out "speculators."

Words of Wisdom From The Chief Bubble Blower!

Former Federal Reserve Chairman Alan Greenspan Says Market Turmoil Like 1998, 1987

NEW YORK (AP) -- "The human race has never found a way to confront bubbles," former Federal Reserve Chairman Alan Greenspan said Thursday in reference to the euphoria that can precede contractions, or reactions, like the current market turmoil, according to a published report.

Ah yes, it is the human race that cannot control themselves. They are not enticed by the allure of easy money from Federal Reserve Chairmen that lower interest rates to 1%, keep rates low for too long, encourage homebuyers to take on variable rate mortgages, raise interest rates 14 times, and applaud the use of subprime mortgages to make housing more attainable for all Americans.

Greenspan, speaking to economists in Washington, D.C., compared the turmoil to that of 1987 and in 1998, when the giant hedge fund Long-Term Capital Management nearly collapsed, The Wall Street Journal reported on its Web site.

"The behavior in what we are observing in the last seven weeks is identical in many respects to what we saw in 1998, what we saw in the stock-market crash of 1987, I suspect what we saw in the land-boom collapse of 1837 and certainly the bank panic of 3/8 1907," Greenspan said at the event organized by the Brookings Papers on Economic Activity, according to the Journal.

Greenspan, now a private consultant, said euphoria takes over when the economy is expanding and leads to bubbles, "and these bubbles cannot be defused until the fever breaks," the Journal said.

...or when inept Federal Reserve Chairmen retire and someone else has to clean up their mess.

Bubbles can't be defused through incremental adjustments in interest rates, he suggested, the paper reported. The Fed doubled interest rates in 1994-95, and "stopped the nascent stock-market boom," but when stopped, stocks took off again. "We tried to do it again in 1997," when the Fed raised rates a quarter of a percentage point, and "the same phenomenon occurred."

That's right Easy Al. When you create a monstrosity of a bubble and you hope that incremental interest rate hikes will scare home buyers from taking on mortgages, it doesn't work. They fall prey to corrupt mortgage brokers, bankers, and real estate agents as they are consumed by greed and fear. They want to make money. They don't want to miss out on a once in a lifetime investment opportunity. Ultimately though, the cheap money was created by Greenspan and Wall Street ran with it. Banks gave money to anybody that had a pulse, repackaged the toxic waste mortgages, and sold them off and the disastrous results are only beginning to be discovered. Am I the only one getting tired of hearing his retirement sermons? It's time to give up the limelight Al. Now that the mainstream media is pointing fingers in the housing bubble blame game, there really is nowhere to hide.

All Is Well!

Michael Shedlock has a scathing analysis of a CNN article on the Fed's Beige Book Report. Their article "Beige Book Finds 'Limited' Credit Hit Outside Of Housing" paints the picture that "All is Well". As Mish points out:

Panic Speaks Louder Than Words

Peter Schiff - Straight Talk on CNN

Peter Schiff pulls no punches on a CNN Housing Bubble segment. It's like a breath of fresh air to hear someone tell it like it really is. This was a true "No spin zone" segment. Government intervention will only make things worse. The problem is that swallowing a bitter economic pill is probably easier than dealing with the political fallout of having adverse economic conditions before an election year.

Risk Apathy

I came across this video showing a High Stakes Poker Hand in which the pot was over $500,000 and I was amazed at the reaction of Daniel Negreanu and Gus Hansen at the end of the hand. The commentators explained that winning or losing hundreds of thousands of dollars wasn't a big deal to them because they don't value money in playing poker the way they would in the real world. It reminded me of the housing market and how willing people were/are to take on massive mortgages between $500,000 to $1 Million because they could/can afford the payments in a low interest rate environment. When did the apathy regarding risk become so commonplace in society?

How Do You Know When An Empire Is About to Crumble?

It's citizens, after years of global dominance and ridiculous excess, lose their minds and degenerate into rambling idiots...

Analysis of Bush's Housing Proposal

This analysis of Bush's housing "bailout plan"by Michael Shedlock is hilarious and right on point.

Bush Moves to Aid Lenders

Brilliant!

Bush to The Rescue!

Bush has come up with a plan to save all the homeowners that were "victimized" by predatory lenders and greedy real estate agents. Now that the housing bubble is blowing up, despite Bush's assurances that all will be fine, Bush is trying to find a way to save:

1) Homeowners
2) Banks and
3) Speculators

In other words, the Government will always be there to save you if you make a financial mistake. You are never responsible for your actions. The U.S., which is already heading for bankruptcy, according to Comptroller General David Walker, will just take on more debt to save homeowners from the consequences of irresponsible borrowing/lending practices. There is a limit to this bailout, of course, and it could quite possibly be simple political posturing that has no real chance of passing into law which would reflect poorly on the Democrats.

Bush Moves to Aid Homeowners

President Bush, looking for ways to respond to the subprime-mortgage crisis, will outline a series of policy changes and recommendations today to help borrowers avoid default, senior administration officials said.

Among the moves will be an administrative change to allow the Federal Housing Administration, which insures mortgages for low- and middle-income borrowers, to guarantee loans for delinquent borrowers. The change is intended to help borrowers who are at least 90 days behind in payments but still living in their homes avoid foreclosure; the guarantees help homeowners by allowing them to refinance at more favorable rates.

Mr. Bush also will ask Congress to suspend, for a limited period, an Internal Revenue Service provision that penalizes borrowers who refinance the terms of their mortgage to reduce the size of the loan or who lose their homes to foreclosure. And he will announce an initiative, to be led jointly by the Treasury and Housing and Urban Development departments, to identify people who are in danger of defaulting over the next two years and work with lenders, insurers and others to develop more favorable loan products for those borrowers.

The moves are the first visible steps the Bush administration has taken to help stem the fallout from the subprime crisis, which has roiled financial markets and threatened to contaminate the housing sector. Defaults and foreclosures are increasing as borrowers -- many of whom got interest-only or no-money-down loans -- begin having trouble making their mortgage payments as higher rates kick in. Many homeowners believed they could refinance their loans, but that has become much harder as lenders tighten their standards in the face of defaults and foreclosures.

With more than two million loans expected to adjust to higher rates over the next two years, possibly triggering many more defaults, the Bush administration is looking for ways to stem the damage.

"The president wants to see as many homeowners who can stay in their homes with a little help be able to stay in their homes," a senior administration official said. "We're not looking for an industry bailout or a Wall Street bailout. The focus here is on the homeowner."

Mr. Bush is instructing Treasury Secretary Henry Paulson to look into the subprime problem, figure out what happened and determine whether any regulatory or policy changes are needed to prevent a recurrence.

I can recommend a blog or two for Paulson to read that predicted this fallout was coming two years ago. It's too bad that Bush is not very computer literate or familiar with "The Internets".

Suzanne Researched This!...Husband Has Meltdown!

This is what happens when you make the biggest financial decision of your life based on emotion. This is the other side of "Keeping up with the Jones". This is the bitter pill that needs to be swallowed during the housing bubble hangover. This is the end result of "Suzanne Researched This" which is, in my opinion, the best explanation for the housing bubble. You can put that commercial in the time capsule to explain this period of time to future generations. If you haven't seen the commercial, I've re-posted it below the Dr. Laura phone-in call.


powered by ODEO

I wonder where Suzanne is hiding.

Prechter: Why the Fed Will Not Stop Deflation

Excellent Article!

Why the Fed Will Not Stop Deflation

Never Say Never Again!

This article reminds me of the horrible Bond movie "Never Say Never Again". Sean Connery had relinquished his role of James Bond to Roger Moore and stated that he would never make another Bond movie again. Of course, he did, and they aptly named it "Never Say Never Again". Federal Housing Agencies are going to report the first national decline in median housing prices since they started keeping track in 1950. This is happening despite assurances from Alan Greenspan, Ben Bernanke, David Lereah (okay, he doesn't count) that we have never seen a decline in median prices nationwide. FYI, we've never seen such a ridiculous housing bubble with such horrific, non-existent lending standards that made this possible. So the next time someone says that something has never happened, please remind them that it doesn't mean that it can't happen!

Drop Foreseen in Median Price of U.S. Homes

The median price of American homes is expected to fall this year for the first time since federal housing agencies began keeping statistics in 1950.

Economists say the decline, which could be foreshadowed in a widely followed government price index to be released this week, will probably be modest — from 1 percent to 2 percent — but could continue in 2008 and 2009. Rather than being limited to the once-booming Northeast and California, price declines are also occurring in cities like Chicago, Minneapolis and Houston, where the increases of the last decade were modest by comparison.

The reversal is particularly striking because many government officials and housing-industry executives had said that a nationwide decline would never happen, even though prices had fallen in some coastal areas as recently as the early 1990s.

While the housing slump has already rattled financial markets, it has so far had only a modest effect on consumer spending and economic growth. But forecasters now believe that its impact will lead to a slowdown over the next year or two.

In recent years, many families used their homes as a kind of piggy bank, borrowing against their equity and increasing their spending more rapidly than their income was rising. A recent research paper co-written by the vice chairman of the Federal Reserve said that the rise in home prices was the primary reason that consumer borrowing has soared since 2001.

Now, however, that financial cushion is disappearing for many families. “We are having to start from scratch and rebuild for a down payment,” said Kenneth Schauf, who expects to lose money on a condominium in Chicago he and his wife bought in 2004 and have been trying to sell since last summer. “We figured that a home is the place to build your wealth, and now it’s going on three years and we are back to square one.”

On an inflation-adjusted basis, the national median price — the level at which half of all homes are more expensive and half are less — is not likely to return to its 2007 peak for more than a decade, according to Moody’s Economy.com, a research firm.

Unless the real estate downturn is much worse than economists are expecting, the declines will not come close to erasing the increases of the last decade. And for many families who do not plan to move, the year-to-year value of their house matters little. The drop is, of course, good news for home buyers.

It does, however, contradict the widely held notion that there is no such thing as a nationwide housing slump. A 2004 report jointly written by the top economists at five organizations — the industry groups for real estate agents, home builders and community bankers, as well as Fannie Mae and Freddie Mac, the large government-sponsored backers of home mortgages — was typical. It said that “there is little possibility of a widespread national decline since there is no national housing market.”

Top government officials were more circumspect but still doubted that the prices would decline nationally. Alan Greenspan, the former Fed chairman, said the housing market was not susceptible to bubbles, in part because every local market is different.

In 2005, Ben S. Bernanke, then an adviser to President Bush and now the Fed chairman, said “strong fundamentals” were the main force behind the rise in prices. “We’ve never had a decline in housing prices on a nationwide basis,” he added.

US could be heading for recession

Uh-oh! They're starting to use the "R" word. Yes, the dirtiest word in finance is rearing its ugly little head as the entire world embraces the full ramifications of the "innovative financial instruments" that have proliferated through this debt-driven bull market. As this ugliness unfolds, economists, analysts, and money managers all scratch their heads wondering how this all happened as they continue to insist that macroeconomic factors "don't matter". They point to corporate earnings and individual company fundamentals as the only things that matter. Guess what? When corporate profits are driven by record consumer debt and then credit markets unravel, macro factors matter.

Ex-Treasury Secretary Summers warns of risks 'greater than any since aftermath of 9/11', reports Ambrose Evans-Pritchard

Former US Treasury SeFcretary Larry Summers warned that the United States may be heading into recession as the biggest victim to date of the sub-prime mortgage debacle was humiliatingly sold for a token sum in Germany.

Traders are braced for another week of turmoil after the near breakdown of America's $2,200bn (£1,100bn) market for commercial paper.

"It would be far too premature to judge this crisis over," Mr Summers said. "I would say the risks of recession are now greater than they've been any time since the period in the aftermath of 9/11."

In Germany, it emerged that the state-bank SachsenLB may have accumulated $80bn of exposure to risky assets through a set of Irish funds kept off balance sheet.

Stock markets rallied strongly late last week on the belief that the Federal Reserve would start to cut its key lending rate in September, and that the European Central Bank would refrain from further tightening. Goldman Sachs said any hint the banks may prove more hawkish could quickly dampen investor spirits again, warning it was too early to give "all clear" on equities.

Federal Reserve data shows that the outstanding stock of US commercial paper has fallen by $255bn over the last three weeks, a sign that borrowers have been unable to roll over huge amounts of debt. The fall is comparable to the sudden shrinkage that occurred at the onset of the dotcom bust, and may have the effect of draining liquidity.

The New York Fed issued a statement on Friday stressing that asset-backed commercial paper (ABCP) would be accepted as collateral for loans to banks from the discount window. The move has helped trim the average yield slightly to 6.04pc, helping to calm a key part of the money market that lubricates the financial system.


Even so, the cost of this credit is still up roughly 80 basis points since late July - for those borrowers who can obtain it at all. Bill Gross, head of the US bond-giant PIMCO, said parts of the commercial paper industry were now so discredited that it may be impossible to revive them.

A string of Germany banks have run into trouble after taking leveraged bets on CDOs and the even more deadly 'synthetic' or derivative CDOs - bond-like securities that often contain slices of US mortgage debt.

The scale of carnage in Europe explains the series of emergency actions by ECB, which injected a further $85bn in liquidity through various mechanisms last week. IKB was the first German bank to crumble earlier this month, requiring an €8.1bn state-rescue just days after it denied any significant exposure to sub-prime debt.

CDO Insiders: "We Knew We Were Buying Time Bombs"

If you want to know how this subprime mess spread and how financial institutions, hedge funds, pension funds were so stupid to not know that there was a problem with CDO's you have to read this gem article from The Big Picture. This e-mail was sent to Barry Ritholz to highlight how CDO's proliferated, despite the obvious risk. In the end, it's always about greed folks. Greed is the main motivator and it doesn't matter who get's hurt when the music stops.

1. XXXXXX and I were talking in 2003 about how shaky these low FICO, high LTV, 2/28 ARM's that were being created were. People in the know knew then those loan products were going to be a problem in the future. Way back in 2003, it didn't make sense.

2. In early '05, XXXXXX tried to hook me up with a HF he knew that wanted to play the CDO issuer game. I talked to the guy and told him that at the risk of talking them out of hiring me, I wouldn't do it. I thought that game was topped-out even back then. A bit early, but perhaps the right call.

3. I was talking to CDO managers in mid-'05 that were saying how rich sub-prime MBS was and how wrong everyone was for buying that stuff at the spreads they were. To a man, they all agreed they were paying too much for the risk, they all believed that HPA [ED: home price appreciation] was going negative soon. But, sadly, they had to buy the stuff because they needed to accumulate collateral for their CDO issuance. F**k, we all knew we were overpaying, even back in 2005. We knew it was essentially a bet that home price appreciation was going to continue at levels that couldn't be sustained. No way that could keep going on.

Everyone was saying the same thing: Home pricing cannot continue appreciating at the same rate, and the second this thing turns, we are F***ED.

Is it really any surprise to anyone that the mortgage business got too far ahead of itself? To me, the only surprise has been it took so long for all of this to happen."

So what was the prime motivating factor?:

"The answer is quite simple: DEAL FEES. I gotta keep buying collateral, in order to keep issuing these transactions as a CDO manager. Its my job: I gotta keep accumulating collateral, and I gotta issue the liability against that collateral.

In 2005, we all said "I hate the real estate market, I hate the credit spread, but my job is to keep doing this: Buying Collateral and issuing CDOs. Everyone was the buying this shit to do any deal. The greed went thru the whole chain, from the home owner buying a property they couldn't afford right up to the CDO manager buying subprime paper."

Why did these managers keep buying this bad junk?:

"Well, nothing is "bad junk" -- it's just priced wrong. No one believed the under-performance of these MBS loan pools would ever be so severe. Everyone knew in the back of their minds that the possibility existed, as did the possibility that residential real estate prices would move LOWER someday.

But no one wanted to be the first to acknowledge it fearing that they'd miss the opportunity to participate in big fees, big alpha, etc. . . ."

Dennis Gartman: Short Stocks, Long Gold

Investment legend Dennis Gartman weighed in on the recent market weakness, the Fed actions, the prospects for stocks and the reason why he loves gold. Here are some excerpts from the interview:

They've signaled now that when they meet in September they will vote to move the Fed fund rate down for the first time in a very, very long time and it's long overdue. What I've learned in a mere 35 years of watching the Fed is that when the Fed changes direction it moves in that new direction for a long period of time and takes rates much farther than anyone wants to anticipate.

Will they move in December? That's not the important question.

The important question is that their next move, after they ease rates in September, will be to ease again. The move after that will be to ease again and the move after that will be to ease again. You can rest reasonably assured that the Fed funds rate will be markedly lower a year from now than it is now.

Right now I am short of stocks, and got that way yesterday, and I am long of gold, and I intend to stay that way. I think the Fed has responded to disconcerting economic news by easing monetary policy and that disconcerting news in the mortgage market is not going to go away anytime soon.

A 25, 50, 75, or 100 basis point decline in Fed funds is going to be a very immaterial consequence to the reset home mortgage owner who's watching his teaser rate go from say, three percent to eight percent. Maybe it goes from three percent to seven percent, but that's not going to stem a large sum of foreclosures in the mortgage market next year.

The Fed has a big job ahead of it to take care of that problem.

I've been bullish on gold for some period of time simply because of reserve adjustments by the Central Bank of China and the Central Bank of India, Thailand, and Malaysia, all of whom are running large trade surpluses. They find themselves with rather more reserves of euros and dollars than they would like and rather fewer reserves of gold than those held by the central banks of the industrialized world, so they're going to be moving in that direction.

Brilliant Economists Can't Figure It Out

Barron's Weighs In On The Mortgage Mess

From W.C. Varone's Blog:

It was all a big scam to unload garbage loans on stupid foreigners. Randall Forsyth explains:

How did this all come about? A (bearish) hedge-fund operator, in a letter to his investors, describes how a senior Wall Street marketing director recounted the genesis of the current situation:

"'Real money' (U.S. insurance companies, pension funds, etc.) accounts had stopped purchasing mezzanine tranches of U.S. subprime debt in late 2003 and [Wall Street] needed a mechanism that could enable them to 'mark up' these loans, package them opaquely, and EXPORT THE NEWLY PACKAGED RISK TO UNWITTING BUYERS IN ASIA AND CENTRAL EUROPE!!!!

"He told me with a straight face that these CDOs were the only way to get rid of the riskiest tranches of subprime debt. Interestingly enough, these buyers (mainland Chinese banks, the Chinese Government, Taiwanese banks, Korean banks, German banks, French banks, U.K. banks) possess the 'excess' pools of liquidity around the globe. These pools are basically derived from two sources: 1) massive trade surpluses with the U.S. in U.S. dollars, 2) petrodollar recyclers. These two pools of excess capital are U.S. dollar-denominated and have had a virtually insatiable demand for U.S. dollar-denominated debt... until now."

These investors then had standing orders on Wall Street desks for any U.S. debt rated triple-A. Through the "alchemy of CDOs" and "the help of the ratings agencies," the CDO managers collected triple-B and triple-B-minus subprime and repackaged them so the top tier got paid out first. Then leverage the lower mezzanine tranches by 10-20 times and, "POOF... you magically have 80% of the structure rated 'AAA' by the ratings agencies, despite the underlying collateral being a collection of BBB and BBB- rated assets."

The letter concludes: "This will go down as one of the biggest financial illusions the world has EVER seen."