Checking In

Just in case it isn't completely obvious, macroblog is on a temporary hiatus as I make the transition to my new position at the Federal Reserve Bank of Atlanta.  For those of you who have asked -- and really, thanks so much for asking -- this blog will indeed live on.  Hope you hang tight, and don't delete me from your feeds -- I'll be back in action before you know it,

Comments

[pgl]

Hope you enjoy Hotlanta. Try the Varsity which is near downtown as Georgia Tech. Not exactly the healthiest in eating but it is a true Southern delight.

[CalculatedRisk]

Thanks for the update. Congratulations on your new job!

Best Wishes.

[theroxylandr]

Congrats! Hold those rates by the balls!

[The Prudent Investor]

Impatiently waiting for your return and all the best wishes for your new tasks.

[Jon Jonsson]

Many thanks for a fantastic blog. Much admired, also here in Europe. Best of luck.

[jeff]

congrats, and an aside to pgl, Varsity can't hold a candle to a Chicago hot dog! I'll take you to Portillo's, Super Dawg or late at night, Weiner Circle if you get here. Dave likes chile cheese burritos anyway!

Good Luck and I agree with a previous poster, hold those rates tight

[bailey]

"Naked Capitalism" Blog excerpts from Andy Xie's FT wonderful article. I highlight two specific points for FED consideration: 1. the importance of restoring FED credibility (that was blown by AG), and 2. suffering the horrors of two successive quarters of negative GDP growth would in all liklihood serve our long-term interests far better than the costs we're likely to incur to avoid a recession. I'll add, BB's done a remarkable job these past several weeks, BRAVO to BB and his senior advisors! NO ONE hopes more than I do he continues to listen to his FED staffers at this pivotal time.

"The global credit bubble is bursting. This bubble is primarily leverage financing for owning risky assets. The people who were responsible for what happened played with other people's money, marketed arcane financial products with false promises of fat profits, but stuffed their own pockets with big bonuses. Neither these masters of the universe nor their greedy but naïve investors deserve to be bailed out. They deserve what is coming to them.

The central banks bear equal responsibility in the current debacle. After 9/11, central banks cut interest rates dramatically and provided the cheap money for this leverage bubble. They must not flood the world with liquidity again to sustain this bubble or create another. The central banks should focus on price stability, not financial market stability, and should provide liquidity only to contain the multiplier effect of the bubble bursting on the economy.

Nor should central banks stimulate to avoid recession at any cost. Business cycles are not bad. Excesses must be followed with cleansing. The current upturn has lasted extra long due to the stimulative effect of the leverage bubble. After four years of 5 per cent global growth rate, a mild recession is a small price to pay. If, in response to the current crisis, central banks stimulate to pump up growth again, the excesses in the global economy will worsen and make the inevitable correction more painful.

In the past five years, Wall Street has changed dramatically and that may not be for the better. The collapsing agency business has pushed banks into betting their own money for profit and selling "high margin" structured products to their clients. Their eagerness for selling new and poorly understood products, such as sub-prime mortgage derivatives, is a major factor in the current bubble. Like after the junk bond bubble of the 1980s, lawsuits may hit Wall Street for years to come.

Rating agencies should share the guilt. They give high ratings to sub-prime derivatives with high seniority in payment. Unfortunately, the repayment behaviour of the sub-prime borrowers depends on macro conditions. As soon as property prices drop significantly, they tend to default at the same time and the seniority in repayment is not worth much. Like in the previous debt bubbles, rating agencies behave like momentum traders. The ratings are supposed to give guidance to investment risk during bad times, not to be downgraded when the situation turns sour.

The ballooning hedge fund industry is also culpable. As their funds have become big, they have focused on their 2 per cent management fees rather than the share in investment profit. So they have focused on gathering assets by over-promising. Some funds specialise in illiquid assets such as derivative products of sub-prime mortgages. As long as they do not face redemption, they can report whatever performance they want. As soon as redemptions happen, they cannot even sell their stuff and have to refuse withdrawals.

If central banks try to bail out Wall Street, it would lead to high inflation for years. The inflationary effect of loose monetary policy of the past was offset by the deflationary effect of globalisation. Now China and other developing countries are experiencing high and rising inflation. Loose money will go straight into inflation. The vicious cycle of the wage-price spiral of the 1970s has not occurred as both labour and capital still believe in the inflation-fighting credibility of the central banks. If they loosen up again to bail out Wall Street, this credibility may be squandered. The ensuing wage-price spiral could ruin the global economy for years to come.

What is occurring is an opportunity for central banks to restore their credibility. Markets have been taking more risk than they should because they believe that central banks will come to their aid during times of crisis, like now. The penchant of Alan Greenspan, former US Federal Reserve chairman, to flood the market with liquidity during financial instability is the genesis of this "central bank put". As long as this expectation remains, financial bubbles will occur again and again. Now is the time to act. Let the crooks go bankrupt. Central banks should bury the Greenspan "put" for good."

[loryn]

Can't wait for your return! Good luck in Atlanta.

[jeff]

I think that your analysis is flawed yet somewhat correct at the same time. I agree that the "Greenspan put" should be put to bed.

However, after shocks to the economy like the 1998 LTCM scare, the 2000 turn of the century computer scare, 9/11, the Fed needed to show the world that it was ready willing and able to make the market liquid.
Not doing so invites an adverse shock to the system that could impair it for a longer term to come.

Hedge funds are trading the market. I don't fund them culpable at all. Their culpability will manifest itself in losses if they are wrong. It looks like they over extended themselves, and are feeling the pain.

Credit agencies that rate the debt only rate the debt. They don't lend the money. the lenders took risk in lending to people that probably couldn't afford it, along with extending exotic loans that were not like the traditional lending that they previously practiced. This had less to do with the Fed's easy credit, and more to do with the fact that the OTC and derivatives markets were so mature and developed that they could manage risk.

However, what models don't ever contemplate is a market meltdown. When every rat tries to jump off the ship, it doesn't matter. In this case, credit bids vaporized, and the models said we can't sell at that price. The market determines the price, not the models. So, now they are forced to take a hit.

I agree that they all need to take their hit, and the Fed should inject liquidity to protect the system, but NOT lower the rate unless it fears that we will enter a sustained recession. Right now I think Gentle Ben has done a great job, and inflation remains a much larger concern than a recession.
Fed Fund Futures are trading below 4.7%. This is where the market rate for money is, not necessarily the published discount rate.

The real lesson in this is that markets matter, not models.

[yamada]

I would like to show you the way to rescue the economy in reverse wealth effect.
Please kindly see my blog, as below.

http://reversewealtheffect.blogspot.com/

[jeff]

Bailey, they cut rates in spite of our blogging! I have to admit, when I was trading eurodollars the spreads and the volumes in the B/A were wider, and a lot less than I have seen since LTCM. So, if you believe that people should use the market to get out, you have to at least provide a liquid market for them to get out in.

I hope they do not cut any further. If they do, I think it's time to push the panic button and sell stocks to beat the band.

I am very lukewarm in favor of this latest cut. I would have liked to trade Friday without it and seen what develops over the week end.

[Joe Rotger]

When I think of wishing you the best, I recall this Andy Warhol 'thank you' posting here:
http://www.thankyouandywarhol.com/

Well... change the thank you... for... best, best... and so on... and you'll get my feeling...

What a time to be working for the Fed? Sword-swallowing is probably on par.

Best.

[HealOurWaters]

Congrats on the new position!

Meanwhile, I wanted to let your readers know:

There is a coalition coming out with an economic report in a couple weeks showing that cleaning up the Great Lakes will turn out to be CHEAPER in the long-term. Take a look at the site:
http://www.healthylakes.org/

[ericp]

I doubt the clening up will be cheaper, you have to remember one thing. While ts getting cleaned, there is more yucky stuff being dumped in...on going never ending process...

[ericp]

Any estimates for job cuts across the mortgage industry? with everyine shuting down their sub-prime...

The greed of mortgage companies finally caught up, the good old paper. This is the dot com of the 90s.

[calmo]

Geeze the host is talented: nobody home and so many visitors dropping by to turn on the lights, make the coffee, mow the lawn, wash the car...no wonder one of the banks picked him up!

[Mark]

Do you know of any web site that posts a current chart of the global yield curve? Thanks!

[Mark]

Do you know of any web site that posts a current chart of the global yield curve? Thanks!

[Mark]

Do you know of any web site that posts a current chart of the global yield curve? Thanks!

[Mark]

Do you know of any web site that posts a current chart of the global yield curve? Thanks!

[Mark]

Do you know of any web site that posts a current chart of the global yield curve? Thanks!

[Mark]

Do you know of any web site that posts a current chart of the global yield curve? Thanks!

[Mark]

Do you know of any web site that posts a current chart of the global yield curve? Thanks!

[Mark]

Do you know of any web site that posts a current chart of the global yield curve? Thanks!

[Mark]

Do you know of any web site that posts a current chart of the global yield curve? Thanks!

[Mark]

Do you know of any web site that posts a current chart of the global yield curve? Thanks!

[Mark]

Do you know of any web site that posts a current chart of the global yield curve? Thanks!

[Mark]

Do you know of any web site that posts a current chart of the global yield curve? Thanks!

[bailey]

On Jan 30, 2007 Dave A pondered rising housing vacancy rates. 8 months later, here's a fun look back. (As usual I jumped at the opportunity to move the topic 180 degrees.)

Comments
It's all simple. Sellers took the news that "market is bottoming" at face value and took homes out of market until Spring comes.
I personally know 2 people who have empty homes waiting to be put on market in Spring. They both failed to sell in Summer and decided that Spring will be much better.
What it means is that 2 months from now we will have absolutely astonishing inventory coming for sale. It will be something we never saw.
I think the last year "housing crash" was just a warmup. The real crash is coming during the next 3 years. I think 2009 will be the worst.
Posted by: theroxylandr | January 30, 2007 at 11:24 PM

I've been watching the MLS listings in my Northwest Chicago suburb since about two years ago, and quite closely since May last year. In January 2005 less than ten homes were listed for rent. Today the number is 64. (Most of these have "wishing prices" that seem to me quite unrealistic -- anyone who could pay them would probably choose to buy, unless in a short-term posting/transfer job situation.)
Although nearly all the sales action is in the under-$500k price range, about 40% of the single-family homes listed are priced above $600k. A significant fraction of those are obviously spec homes still abuilding (no photo, photo showing construction, etc.), and a significant fraction of the others have photos showing rooms that are empty of furniture or appear staged with rental pieces (one giveaway is lack of the window treatments you'd expect in a lived-in $600k+ home). And many of those empty/staged homes were the same back in the summer. Moreover, I've noticed a few homes whose summer '05 listings appeared empty/staged that have been delisted but haven't shown up in the Chicago Tribune's listings of recorded sales (which pick up all sales with about 1-1/2 month delay).
There've been some price reductions, but mostly only one-time and only around 5%. It will be interesting to see how long these people will hold out, adn what will happen to the overall market price structure if they can't and the $600k+ homes start sagging into the range buyers are actually able to pay (esp. as llending standards tighten).
Posted by: jm | January 31, 2007 at 11:27 AM

OF COURSE the number of vacant homes is up, the number of people buying more than one home was way up in '05 & '06!
Let's get back to business. There's a VERY simple way to assess the state of our residential real estate sector, and if I've thought of it so has FED Senior Staff.
HOW WERE THE HOMES SOLD IN OUR BUBBLE ZONES IN 2006 FINANCED?
These make up some 40% of all our sf homes and are the homes whose prices TRIPLED in only nine years ('97-'05). IF '06 purchases were financed as they were in the three prior years (with funny loans), it's clear all the FED's efforts last year merely postponed the endgame.
Is it coincidental that CA, NV AND FLA, three HUGE Bubble states, have yet to sign onto the CSBS Directive on nonconforming mtgs.? This guidance is all but toothless, so why the reluctance of bubble-states to sign onto it?
I think the FED has a MUCH bigger problem to reconcile than trying to disprove a statistical phenomenon. Supporting efforts to prevent home prices from naturally reverting to their long-term historical growth rate risks changing the role housing has played in perpetuating our country's most cherished values.
So, what is the role of the FED, to see we never again have to endure the horror of two successive quarters of negative growth, or to look out and act for our long-term economic viability?
I sure wish someone would look BB in the eyes & tell him it's his time to stand up!
Posted by: bailey | January 31, 2007 at 12:34 PM

so bailey what is your solution?-drive up short term rates so you break the back of the housing market?
lower rates to give unsold stock a better chance to sell-but you risk creating a bigger bubble?
print lots of cash so that people can afford the super premium prices being asked on a lot of these homes?
or hold rates steady and give the market time to sort itself out?
I vote for hold rates steady unless you really start to see some inflationary pressures. then crank up rates. I would not lower rates, unless you had a spiraling situation, which I don't foresee.
gentle ben has been doing a good job with some really tough problems to handle.
Posted by: jeff | January 31, 2007 at 07:32 PM

Jeff, Good question. What's the objective if holding rates steady facilitates the same old profligate lending policies that created the housing bubble?
BB should immediately distinguish HIS FED from the failed policies of his predecessor's.
I think he should use his bully pulpit to start preaching fundamental economic principals to the Administration, Congress, its Banks, our largely deregulated financial sector & even consumers. He should follow that up by submitting a detailed plan to Congress asking the FED be appointed single body regulatory oversight of our financial sector. He should immediately stop acting as an Administration stooge (his China trip was humiliating, not embarrassing, his recent comments about our out of control entitlements ignored the simp[le point that this Administration's spending spree might have squared us for many, many decades (see Stiglitz on true Iraq cost). I'm still not over BB's analysis that our housing rush was driven by "fundamentals". I'd like to see him publicly question the value of FF as a spending/saving balancing point.
Early last fall his own Banks told him they were planing on loosening their already loose mtg. lending criteria this year to "remain competitive". A week later he released his toothless nontraditional Mtg. "Guidance". Huh? Since he stopped raising FF at 5.25% he's bought via open market purchases 16 times. Every time he buys out the curve he's supporting artificially low mtg. rates & I think he's signalling market players. He should stop this immediately.
And, what happened to his belief the FED should be transparent. Instead of worrying about what a r.e. price retracement would do, what no retracement will do.
What our economy needs most is someone to speak as an honest broker for our longterm economic wellbeing.
Posted by: bailey | January 31, 2007 at 09:23 PM

Among the many statements & actions I failed to mention is BB's recent claim that CPI STILL (significantly) OVERSTATES inflation. Huh? I'd love it if he'd share his definition of inflation & show us a representative population sampling that supports this claim.
Posted by: bailey | February 01, 2007 at 01:44 PM

Excerpt from Wm. Poole's 1/17/06 speech:
" the Federal Reserve has a responsibility to maintain financial stability. That responsibility includes increasing awareness of threats to stability and formation of recommendations for structural reform."
Sounds good like a good idea, doesn't it?
Posted by: bailey | February 02, 2007 at 11:55 AM

[jeff]

Well, they did it. I am very glad that they did not do .25, which would have been a waste of time.

I assume that this is a one and done. The credit crunch is a shock, and it looks like because of the way the players have spread risk around the globe, one that the FED felt could not be overcome.

If it's not one and done, then there are some very serious underlying problems with the economy.
I don't see them, but only in certain sectors. Housing in certain segments, and certain areas of the country is in trouble. Supply and demand will cure that over time. Auto is in trouble, but that is not due to the FED, but do to the way they do business.

The one scary thing in all this is the way the commercial paper market has traded. It has been a very thin trade, and hopefully this rate cut will get it on its feet again.

One and done would be a good thing. If conditions change by the next meeting, begin taking it away.

[steveO]

Bad credit causes a lot of extra hardship that people don't often see until it happpens and they realize how bad it can become.