The Atlanta Fed's macroblog provides commentary and analysis on economic topics including monetary policy, macroeconomic developments, inflation, labor economics, and financial issues.

Authors for macroblog are Dave Altig, John Robertson, and other Atlanta Fed economists and researchers.

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March 31, 2007

Calculated Risk Vs. Austin Goolsbee, Round Two

In Round 1 of this installment of the great subprime debate, I interpreted Calculated Risk as objecting to certain economists' excessive affection for market outcomes, certain economists including (in CR's view) Professor Goolsbee.  There is a fair amount of religion in these types of arguments. As one of those excessively affectionate economists I prefer to think of a core belief in market efficiency as a reasoned faith, but the truth is we are all operating on assumptions that are difficult to adjudicate with the meager evidence we have at hand.  But there is one part of CR's criticism that, I think unintentionally, omits some pertinent facts, and as a consequence flirts with unfairness:

... I don’t think theory can really explain the revolting disingenuousness at the end of [the Goolsbee] op-ed:

The Center for Responsible Lending estimated that in 2005, a majority of home loans to African-Americans and 40 percent of home loans to Hispanics were subprime loans. The existence and spread of subprime lending helps explain the drastic growth of homeownership for these same groups.


This is actually what CRL has to say on this topic:

According to the Fed report, even after adjusting for differences in the borrower characteristics contained in the HMDA data, African-American and Latino borrowers were more likely to receive higher-rate loans. Furthermore, a recent study released by CRL shows that disparities tend to persist even after additional adjustments were made for differences in credit scores, equity, and other risk factors not available in HMDA data. The Fed authors also adjust for originating lender. Though this adjustment reduces the disparities substantially, significant differences remain. . . .

The CRL study found that, even after controlling for legitimate risk factors, African-American and Latino borrowers were still more likely to receive higher-rate subprime loans than similarly-situated non-Latino white borrowers. With raw disparities in higher-rate loans between groups basically unchanged from 2004 to 2005, there is little reason to believe that legitimate risk factors would account for all of the disparity evident in the 2005 data.

In other words, CRL is suggesting that a pattern of finding subprime loans given to minority borrowers with similar credit, income, and equity profiles to non-Latino whites who get prime loans may imply a certain “inefficiency” in the mortgage market somewhere. For Goolsbee to use this data to buttress an unregulated free-for-all by claiming that it helps out the traditionally disadvantaged is, well, dishonest.

The "Fed report" in question is "New Information under HMDA and Its Application in Fair Lending Enforcement," by Robert Avery, Glenn Canner, and Robert Cook.  For the uninitiated, here is what "HMDA" means:

Most lending institutions with offices in metropolitan statistical areas are required by the Home Mortgage Disclosure Act of 1975 (HMDA) to disclose information to the public about applications for home loans and the home loans that they originate or purchase during each calendar year. The law’s requirements arose from concerns that, in some cases, lenders were contributing to the decline of certain neighborhoods by failing to provide adequate home financing to qualified applicants on reasonable terms and conditions. The disclosure of lending activity is intended to help determine whether lenders are adequately serving their communities’ housing finance needs, to facilitate enforcement of the nation’s fair lending laws, and to guide investment activities in both the public and the private sectors. HMDA is implemented by the Federal Reserve Board’s Regulation C.

In a nutshell, this is what Avery, Canner, and Cook find with respect to the pricing of loans to minority individuals:

The foregoing analysis indicates that the information in the HMDA data—that is, adjusting the HMDA data for borrower-related factors plus lender—is insufficient to account fully for racial or ethnic differences in the incidence of higher-priced lending; significant differences remain unexplained.

Does that settle it?  Not even close:

Clearly the HMDA data do not include all the factors that are involved in credit underwriting and pricing. However, by controlling for variations so as to make borrowers as similar as possible on the dimensions of the data that are available, one can account for some of the factors that may explain differences in the outcomes of the lending process among groups...

Explaining the remaining differences is likely to require more details about such factors as the specific credit circumstances of each borrower, the specific loan products they seek, and the business practices of the institutions they approach for credit.

Absent information about specific credit circumstances, specific loan factors, the institutions that particular types of lenders seek to obtain loans, and the like, you are pretty much free to see things as you wish:   

The disproportionate borrowing by non-Asian minorities from higher-priced lenders could occur because of often benign factors such as a ‘‘segmented’’ marketplace in which different lenders offer different products and borrower groups self-select the product-lender combination that best matches their credit or other circumstances. Such a marketplace does not necessarily raise public-policy concerns regarding fair lending: For example, compared with non-Hispanic whites, minority groups on average perhaps because on average they may have less savings to meet down-payment and closing cost requirements), which are typically higher priced and which are the specialty of certain lenders. This explanation could account for differences in lender choice, but demonstrating it requires loan-specific information— such as loan-to-value ratios—as well as other information that is not in the HMDA data.

There is, of course, a non-benign interpretation of the Avery et al results:

However, a situation that might suggest an inadequately functioning marketplace—and that could trigger fair lending concerns—would occur if minority borrowers are incurring prices on their loans that are higher than is warranted by their credit characteristics. Such a problem could arise in one or both of the following circumstances: (1) neighborhoods with high proportions of minority residents may be less well served by lenders offering prime products, a circumstance that would make obtaining lower-priced loans more difficult for well-qualified minorities, or (2) some minority borrowers may be steered to lenders who typically charge higher prices than the credit characteristics of these borrowers warrant.

Calculated Risk's link to the Center for Responsible Lending study is apparently broken, but I think it refers to "Unfair Lending: The Effect of Race and Ethnicity on the Price Subprime Mortgages," by Debbie Gruenstein Bocian, Keith Ernst, and Wei Li.  The study purports to rectify some of the ambiguity in the Federal Reserve analysis:

This study extends previous analyses of home loan pricing disparities by supplementing HMDA data with additional loan-level information from a large, proprietary subprime database. By merging the datasets, we were able to evaluate whether race and ethnicity affect subprime loan pricing after controlling for key risk factors, including credit scores and loan-to-value ratios. The results show that African-American and Latino borrowers are more likely to receive higher-rate subprime home loans than white borrowers, even when we control for legitimate risk factors.

So that settles it?  Not really:

This analysis does not allow us to estimate precisely how much race and ethnicity increase the prices charged to borrowers. It is also beyond the scope of this paper to determine definitively why these disparities exist. However, we do posit several possible causes, including the considerable leeway mortgage originators have to impose charges beyond those justified by risk-based pricing.

The CRL -- a self-proclaimed "Resource For Predatory Lending Opponents" -- definitely choose the non-benign spin on the Bocian et al results.  But having admitted that their study cannot definitively determine why disparities in loan prices exist, it would appear that we have returned to the realm of religion.

So how about a little inter-faith charity?  Amen.

March 31, 2007 in Housing | Permalink


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Professor, actually my new co-blogger "Tanta" wrote that piece.

Best Wishes.

Posted by: CalculatedRisk | April 01, 2007 at 11:22 AM

Your "deputy assistant co-blogger," CR. Tell it straight.

Besides wishing to make sure that CR doesn't get all the credit for my mistakes, I do have a serious point to make.

It doesn't matter whether you agree with CRL's analysis or not. It doesn't even matter whether CRL is claiming to understand what the underlying cause of the problem is or is merely raising a question about it.

What matters to any understanding of Goolsbee's op-ed is that he picked up a statistic, credited it to CRL--which gives it a certain cachet, no?--and used it utterly uncritically as support for his claim that subprime lending has been an unqualified benefit to minority borrowers. Find me one spot in that op-ed where Goolsbee even acknowledges that there are serious and informed points of view other than his own about minority lending patterns.

So it isn't an argument about what CRL is up to; it's an argument about what Goolsbee is up to. And I still haven't seen anyone explain that word "drastic" to me. Am I the only one who finds it an odd choice, in context?

I don't see why I'm the one who is "flirting with unfairness." Goolsbee is saying in any understanding of idiomatic English I know of that there is no "fair" or "unfair," there is only "access to mortgage debt" and "no access to mortgage debt." In such a world, what would be an unfair price for a loan?

Why is this an unfair reading of Goolsbee?

Posted by: Tanta | April 01, 2007 at 02:34 PM

Now about the real substance of your article...starting about here:

" As one of those *excessively affectionate economists* [yeah? well I am one of those steely-eyed recreational economists who loves nothing better than tender economists preferably tenured.] I prefer to think of a core belief in market efficiency as a reasoned faith, [I B so punctured with this.] but the truth is [Oh no, not this again!--lucky for us, no capital T.] we are all operating on assumptions that are difficult to adjudicate with the meager evidence we [Such a comfort to invoke the collective 'we' here.] have at hand. But there is one part of CR's criticism that, I think unintentionally,[so generous] omits some [somewhat generous] pertinent facts, and as a consequence flirts [exactly like this] with unfairness [You know it: who can resist a good flirt? Not me!]:"

And then there follows that workman-like (hey, I've flirted with that too) investigation that might be construed as a concerted attack on that "meager evidence", that "omission of pertinent facts", that frolicking with "unfairness", --that left some of us in that faith-based snowbank.

"drastic" likely did not get a proof read by Goolsbee's staff. But personally I like these personal slips. Isn't this "mistake" (actually I think the proof reading team only allows "mistatement") far more engaging than even, say, self-declarations of being excessively affectionate?

Posted by: calmo | April 01, 2007 at 03:48 PM

Much of what the economists of interest are doing nowadays amounts either to the practice of public policy engineering or to the public volunteering of professional expert advice upon it.

Because public policy engineering has the same potential for grievous harm to the public as civil engineering, those engaging in it should approach it with the same care. We can easily anticipate that the consequences of the mortgage lending and real estate bubble debacles will include a disturbing number of not only of suicides, but also of divorces, instances of spousal and child abuse, and drunk-driving homicides that harm people other than those who made the bad decisions. The formulation of economic policies that can predictably inflict such harm needs to be approached with the same care as bridge design. This does not seem to be the case.

Posted by: jm | April 01, 2007 at 05:47 PM

Hm... public policy development vs "public policy engineering".

So in this (jm's --possibly bridge builder jm, possibly public policy professional, possibly concerned citizen) context:

"Much of what the economists of interest are doing nowadays amounts either to the practice of public policy engineering or to the public volunteering of professional expert advice upon it."

I'm sure "of interest" means the public's and not merely the academics', but not so sure that "engineering" is intended pejoratively (serving particular interests rather than the public's).
Easy to understand this "public policy engineering" as bad (corrupted) policy development/implementation, but I don't smell any Chomsky (~manufacturing consent) here with jm, so I take it the term is neutral. [and jm to be concerned citizen too --my preference over professional policy administrators any day]
The volunteering by professionals (eg Hamilton on behalf of San Diego pensioners, Goolsbee on behalf of ammoral agents, [Tanta on behalf of the rest]) as jm points out, does not often extend to the social costs should these policies have any liabilities. Indeed, the language ("the subprime containment", "the manageable foreclosure rates", etc ) illustrates a defense of current practice and management...by exuding confidence...no matter the dubious performance and that it needs now more than ever before, to be earned and not presumed.

Posted by: calmo | April 01, 2007 at 07:46 PM

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March 30, 2007

In Praise Of The Subprime Market (Etc.)

Yesterday's New York Times had Austin Goolsbee making good sense, at least from my point of view:

Lost in the current discussion about borrowers’ income levels in the subprime market is the fact that someone with a low income now but who stands to earn much more in the future would, in a perfect market, be able to borrow from a bank to buy a house. That is how economists view the efficiency of a capital market: people’s decisions unrestricted by the amount of money they have right now.

The Goolsbee piece is discussed, in relatively favorable terms, at Economics Unbound and at Economist's View, but Calculated Risk is agitated by the whole business: 

... In the “permanent income hypothesis” on which the economist-underwritten loan is based, the borrower’s belief that he will always be able to earn more money in the future, which justifies over-consumption of housing in the present into which he will grow, renders mortgage market “efficient” to the extent that it does away with such artificial constraints as down payment and DTI requirements—which are based on “the amount of money they have right now,” and adopts innovative standards depending on an individual borrower’s confidence in the amount of money he might have in a couple of years.

CR is a fair-minded, smart, and honest fellow, and does recognize that the market does not actually operate on the assumption that "the borrower... will always be able to earn more money."  Quoting CR quoting Goolsbee:

Of course, basing loans on future earnings expectations is riskier than lending money to prime borrowers at 30-year fixed interest rates. That is why interest rates are higher for subprime borrowers and for big mortgages that require little money down. Sometimes the risks flop. Sometimes people even have to sell their properties because they cannot make the numbers work.

But CR is not convinced:

Of course it’s not surprising that Goolsbee ignores the evidence of a house-price bubble, since there can apparently be no bubbles in perfect markets. Theories do that to you.

I think Felix Salmon had this one covered a few weeks back: 

... much of the increase in subprime credit was concentrated in depressed areas such as Michigan and Ohio, which accounted for 15% of all U.S. foreclosures in January.  And it's precisely those areas that did not see a run-up in housing prices.

Embracing the Goolsbee point of view does not require one to believe that every nook and cranny of the mortgage market was, or even is, operating on safe and sound principles.  But -- sorry to sound like a Real Economist™ -- curious moves, big mistakes, and bad behavior are sometimes just part of the game.  On this, Free exchange, the blog from the Economist, adds some good sense its own:

There seem to be some cases of abuse in the subprime market... But it's not clear that this has been very widespread.  Even in a very bad subprime market, the overwhelming majority of homeowners will continue to make their payments, benefitting (one presumes) from the ability to own a home and build some equity.

And elsewhere, keith at Housing Panic links (not approvingly) to comforting comments from Bloomberg:

"The contagion isn't that big a problem,'' [head of Bears Stearns' mortgage business Tom] Marano said. "I don't see the risk as being that significant at this point.''

And again from Felix Salmon:

The big losers will be the holders of the equity tranches of MBSs and subprime-backed CDOs, as well as those subprime originators who find themselves holding a bunch of scratch-and-dent loans they thought they'd sold already. So it makes perfect sense that subprime mortgage originators are closing shop. But I'm not shedding too many tears for them: they made a lot of money in the boom years, and then they relaxed their underwriting standards far too much at the end of 2005 and the beginning of 2006. They deserve to bear the consequences.

As for the holders of MBS and CDO equity, we're talking very, very sophisticated investors and financial institutions here, who are almost without exception both willing and able to bear those losses. I see no systemic risks there.

Like Jim Hamilton, I'm not yet willing to argue that financial markets will definitively dodge the spillover bullet.  But beyond the heat of the moment, I think Professor Goolsbee has it exactly right.

March 30, 2007 in Housing | Permalink


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The comment at CR that was referenced may have been by Tanta not CR. Maybe you used CR as short and for all the members of the CR community?

Posted by: DILBERT DOGBERT | March 30, 2007 at 11:39 PM

At the peak, there was pretty aggressive use nationwide and particularly in California.

Posted by: BR | March 31, 2007 at 12:01 AM

As Dilbert notes, the post was by Tanta, who like CR is fair-minded, smart, and honest, but I'm not sure about the "fellow" part.

Posted by: James Hamilton | March 31, 2007 at 12:27 AM

Dave, I'm afraid too many readers miss the subtlety of your teaching method. So, I'll take you to task on this one in hopes it will encourage more to adhere to your mantra that it's the argument that counts.

There seem to be two issues at play and as usual the purported innocence of the first disguises & conceals the second.

I'd be more inclined to give Mr. Goolsbee a break IF we were in a classroom, ceteris paribus. In the real world his argument fails miserably. I'll list five significant problems, hopefully calling attention to the misdirection.

First, young graduate Doctors have long been afforded the credit being discussed so to me it's not a question of lending programs. It's always been about risk pricing and credit availability.

(1) First, risk spreads are too important a consideration to be dismissed. It's already abundantly clear reflective pricing would have entirely negated many of bubble inducing transactions.
a. I bid on two houses only to lose to bidders availing themselves to 100+%, no-doc loans. I was a cash buyer, they were betting without risk. In each case they set new buying highs for local comps. These in turn became the new comps for the neghborhoods, future area homebuyers would not know they were purchased with "funny" money. Liquidity follows inflation and soon the race was on. Last year 40% of the homes sold in CA were to investors & as second homes.
b. Easy credit flowed to anyone who wanted it, not just those previously excluded from it. I know several people who refi'd., taking out every dime of equity to buy second homes because prices were rising and they were offered ridiculously low teaser rates by their friendly r.e. brokers who swore could be rolled over yearly. This was a money machine and it benefitted more than the poor few who Mr. Goolsbee would like us to be concerned for.

(2) Another obvious yet unquestioned point is that real U.S. home prices have increased only slightly (.4%) from 1890 - 2004 (Shiller). This calls me to question the viability of housing as investment. From 1975 - 1995 real prices increased .5%/yr for a total 10%, yet from '95-2004 they increased more than 40%. In CA home prices tripled from 1997 to 2005. First time buyers can't explain that meteoric rise.
For the new housing-as-investment paradigm to work home prices must continue to rise enough to provide the wealth needed to spur the spending to fund workers' increased income to pay for the mortgages to pay for the increasing price of houses .... AG acknowledged this when he recently chirped-in that all the lending failures we've recently seen would disappear if prices increased just 10%. What happens if we see just a 10% price retracement? Why shouldn't we expect this?

Way beyond these two concerns, my real peeve is how shortsighted this housing-is-investment "scheme" was from the start. CA contributes more than 13% of our GDP. Recent California home price increases probably created a trillion dollars in new wealth, an extraordinary number that's contributed enormously (in the short-term) to our "growing" national economy. But, it's transitory.

3) At current inflated price levels there are no more buyers on the sidelines to buy & clear signs credit will finally be tougher to get than signing your name. As mortgage rates are repriced over the next three years to reflect repayment risk, way too many of those who've bought won't have the income needed to pay the mortgage. And that's a problem.

Fewer than 15% of ALL CA famililies can afford a median priced home here. Last year almost 40% of CA homes bought were purchased as second homes or investments. I interpret this to mean there are MANY extended in this folly. Young median income couples (whose salaries barely rose during the same period) are now priced out of the housing market in CA and other bubble states. This should be of national interest as these states comprise some 40% of national housing sales). So, what would Mr. Goolsbee like to see us do?

(4) It seems obvious the engineers of our post-stock-bubble paradigm envisioned houses as mini-banks. Like depositors withdrawing large summs of money from banks, only a few homeowners should be expected to sell at any time. So, unless there is a rush to sell there should always be plenty of buyers. Wrong again.

Why didn't they consider the huge number of boomers who have no guaranteed pensions & next to no savings apart from their home equity. Isn't it reasonable to expect they'll line up as they start to see recent profits retrace, especially because of the huge $500,000. Gov't. tax exclusion? What else will they live on? And what will happen to prices when sellers get scared when they see there are so few buyers? And, what effect will the new lower home prices have on mtg. holders who bought since '04? And, what pct. of the economy is dependent upon the consumer? And, how many consumers own homes?

(5) For most of the period examined by Girardi, Rosen & Willen, housing prices grew at long-term trend growth rate, not at a skyrocking 40%+ rate much of our country has seen in the last seven years. More importantly, when they did the study we were in the midst of our meteoric prise rise. The new housing-as-investment paradigm had yet to be stress-tested. We're seeing the beginnings of this now with a lot more to come. (The bubble states have yet to enact the CSBS non-traditional mtg. Guidelines. And, in CA we're still being besieged daily with r.e. lending infomercials offering 100+% loans to those with "low or no credit".)

There's no question the game's changed, everyone knows this. There's no longer any doubt how this will play out, only the degree of severity. Personally, I'd like to know why so many people who know better signed on to such a short-sighted, poorly-conceived & worse-implemented sham. Dean Baker was screaming loudly way back in 2003. If wealth distribution was the objective, there were many better & more equitable ways. If political pay-off & greed were the motives, we should at the least pause to reflect on our frailties.

It's astonishing thing to me that no one's arguing how the dumbing down of America has affected our receptiveness to sophomoric arguments. Maybe we've moved to far from the depression for our own good.

Posted by: bailey | March 31, 2007 at 03:44 PM

Bravo, Bailey.

I'd like to add that since housing, if I remember correctly, has historically been about 40% of living costs, but cost-of-living indices use not home prices bu "owner's equivalent rent", the 15% annual price increases of the last five or so years have not been reflected in the official inflation metrics (ironically, exactly because the red-hot inflation in the housing market depressed the rental market).

This means that the true rate of rise in the cost of living has been several percentage points higher than the published CPI.

Posted by: jm | March 31, 2007 at 04:41 PM

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March 29, 2007

Some Uncomfortable History

It hasn't been a good week.  From new home sales to residential housing prices to durable goods, you have to dig pretty hard to unearth a little positive spin.  So, it's as good a time as any to conjure up  comparisons to the last recession -- which, as reported at Economist's View and at Calculated Risk, is exactly what Evan Koenig does in an article published on the Dallas Fed website.  Evan concludes:

There are several disturbing similarities between the U.S. economy's recent behavior and its behavior in 2000–01, but also some reassuring differences.

There is nothing amiss in Evan's analysis, but I like to make the comparison in a slightly different way.  Let's conjecture that, if a recession is in the cards, it will arrive sometime next quarter -- say, July.  To me, then, the best comparison is made by considering what the data looked like in December 2000, three months before the business cycle peak in March 2001.  If we do this, the reassuring news looks considerably less so.  For example, Evan says:

In 2000–01, consumption spending’s contribution to GDP growth fell by about 2 percentage points. Over the past couple of years, in contrast, consumption’s growth contribution has held comparatively steady.   

True, but here is a variation on a type of picture I have shown here before:




The blue line represents the data known as December 2000 -- that is, data through the third quarter of that year.  The yellow line illustrates what happened next -- which was, of course, a recession.  And the red line is the data we are looking at today, through the fourth quarter of 2006.  Reassuring would be if the blue line was clearly signaling some sort of weakness that the red line is not.  Reassuring is not what I see.

What about employment?

It is striking that while goods-producing job growth has slowed by about as much as it did in 2000, service-providing job growth has held up much better than it did in the lead-up to the 2001 recession.

To the pictures:





If you are working at, you might find some comfort in the downward drift of employment growth leading into 2000.  But there certainly was not much hint of what was about to unfold. So to me those are pretty scary pictures.  In fact, just about every graph I look at gives me the willies:






Sleep tight.

UPDATE:  Kash does a similar experiment, in prose, for the 1990-91 recession.

March 29, 2007 in Data Releases, Housing, This, That, and the Other | Permalink


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» Fed Watch: Fed Still Looking Through the Slowdown – Should You? from Economist's View
Tim's email says he is a bit contrarian in this one. Agree or disagree, I'm sure he'd like to hear you reactions: Tim Duy: Fed Still Looking Through the Slowdown – Should You?: The spate of weak data has been [Read More]

Tracked on Apr 2, 2007 7:16:52 PM


and you should add ISM, chicago leading....

Posted by: miju | March 30, 2007 at 07:34 AM

What did Newton say: Make no hypothesis??

Turn that Recession date upside down on your charts...So that every down move was an up move...

Would you be any more or less worried??

Of course a Recession by July is possible.. but looking at the current data.. doesn't give one any support one way or the other..

So it's all based on your "beliefs" about some other priors...

Well enough.. so no pretty charts...be a Man Like Mr. Gspan... give me a number

25% ? 50%?

or for the masses.. tell me your odds which are more meaningful..

25%='s 3:1 against if you've forgotten the math

Posted by: SJONAS | March 30, 2007 at 07:36 AM

Ahh, Stan, you are tough customer. And you are, of course, right. The broader point is that we still can't reliably predict what will occur three or more months out -- both because the data is incomplete in real time and because the dynamics are just impossible to decipher.

But, am I mistaken or did you just question my manhood? Ok, I'll confess -- I'm a mouse. This blog does occupy a tiny, tiny corner of the world, and I try to be careful about indicating that the views expressed here are my own and should not be attributed to any of my employers. But my bosses would be really unhappy if by some tragic miracle some enterprising individual pegs me as that one "Fed official" who claims that the probability of recession is X% -- information, in any event, that would be a pure guess. So let me say this: Recession is still the less probable outcome -- after all, I think my rep is probably on the Little Mary Sunshine side of the scale. However, I'll also admit that I'm a little more concerned about the downside risks than I was, let's say six months ago. And I just wasn't comforted by any of Evan's pictures.

Posted by: Dave Altig | March 30, 2007 at 08:21 AM

It is still good analysis.

Posted by: spencer | March 30, 2007 at 09:17 AM

ECRI has gone out on a limb to say no recession this year. It will be interesting to see whose method is more reliable -- ECRI or Paul Kasriel

Posted by: BR | March 30, 2007 at 10:11 AM

YES, it is! )

Posted by: bailey | March 30, 2007 at 10:34 AM


I would be very interested your 'take' on Paul Kasriel's latest Econtrarian. (Follow BR's link above)

Kasriel says, "Recession Imminent ... barring upward revisions in the LEI [Leading Economic Indicators] and KRWI [Kasriel Recession-Warning Indicator]and sharp increases in the immediate months ahead, both indicators will be signaling that a recession is on the horizon".

Kasriel's indicators seem to preform better than the typical sniping that "economists have predicted 9 out of the last 5 recessions".

Posted by: Dave Iverson | March 30, 2007 at 11:49 AM

An excellent and, I believe, balanced analysis. I think it's always a good idea to look back at the data people had at the time, versus what we know now.

One other variable that might be of interest is corporate profits. The revisions to that series over the last recession are quite remarkable (see this picture).

Posted by: menzie chinn | March 30, 2007 at 01:02 PM

So many to side with here, I feel swamped in this sea of general agreement (of real men of course and not squeakers) about the looming possibility of a recession.

Time to mouse up and nibble on this:

"Recession is still the less probable outcome -- after all, I think my rep is probably on the Little Mary Sunshine side of the scale." (Yes, heavy on the 'Little' as some of us detect movement to what gardeners refer to as 'deep shade'.)

and point out that the Midwest might already be there (in Recession), that young families that could not count upon their own salaries to meet standard mortgage requirements are already there, and that Blackstone principals (but possibly not the new investors in their IPO) will never be there.

Posted by: calmo | March 30, 2007 at 03:05 PM

Very fine graphs! Seems like the predictable path -- down -- to me. Glad I've got everything short on the S&P 500.

Posted by: jg | March 30, 2007 at 03:26 PM

I wouldn't bet on a recession for the next 6 months because of strength in ECRI which is currently at cycle highs
and Wright model still at 46% probability (scroll down)

Posted by: BR | March 30, 2007 at 11:49 PM

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March 27, 2007

The Bottom Moves

Here, according to CME housing futures based on S&P/Case-Shiller home prices indexes, was the outlook for prices in the "big ten" markets as of last month:




Here's where we stand today:




Gotta hate that.

March 27, 2007 in Housing | Permalink


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Not me. And, not an entire generation of yound adults hoping for an opportunity to buy into the American dream.
What I do hate is the casual indifference of the Bush Administration, the FED & Congress to the systemic risk of a "billion contracts a year worth more than $628 trillion."
I hope at some point we'll pause long enough to give serious consideration to just how large these numbers are (even at 1%) & how small the number of significant players is.

Posted by: bailey | March 28, 2007 at 01:34 PM

How reliable are those futures now? There was a criticism that volume was very light. If this results in resources being allocated to more productive uses, it should be welcomed -- so why do you hate it, Dr. Altig? Those of us young adults in Orange County, CA (with all of its supposed wealth) on the sidelines welcome this trend -- although the odds are that we may have to wait several years for this to play out. As the Irvine mayor remarked today on bloomberg:
'This isn't Beverly Hills,' Krom (Mayor) said. 'It's not a community where everybody is living next door to a millionaire. Many people couldn't afford to move back into their homes today.'"

Posted by: BR | March 28, 2007 at 04:44 PM

My daughter and son-in-law who sold their house near Boston last year and are living with me while they watch the drop in home prices will be glad to see these numbers.

Posted by: spencer | March 28, 2007 at 05:03 PM

Dave reconsiders his post and thinks he might be growing horns..which he hates even more.
A couple of ill chosen words and the readership is ready to roast him.

Posted by: calmo | March 28, 2007 at 09:38 PM

Market maven Marc Faber (Dr. Doom) reduced this year's U.S. prospects to its basis this a.m. When financial stocks retrace 20%, he opined, the pressure their CEOs will put on BB to ease will prove unbearable. We'll see.
I think it's fair to say, yesterday the clock started running on the FED's BB era. I wish him the very best.

Posted by: bailey | March 29, 2007 at 10:23 AM

BR -- Fair enough. My glib "gotta hate that" comment, however, was referring to the notion that the more positive forecasts (or wishes) for the second half of the year have been in part conditioned on the belief that the process of reallocating resources from the housing sector would be winding down by midyear, or just beyond. So I'm not really happy to see that these markets are suggesting the process will be more drawn out. You may be right that Case-Shiller market may be too thin to be very reliable. And it's quite possible --probable, in fact -- that we are picking up increasing risk premia. For the moment, however, I don't take a lot of comfort in that.

Posted by: Dave Altig | March 30, 2007 at 08:00 AM

Dr. Altig,
Goldman Sachs expects the housing sector correction to complete in 2008.

Posted by: BR | March 30, 2007 at 10:02 AM

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Misguided Criticism

I defer to no one in my abiding respect for the gang at Angry Bear, but contributor cactus is testing the waters in the deep end by offering up an affirmative answer to the question "Did Alan Greenspan Illegally Manipulate Presidential Election?".  Though I know of no particular provision in the Federal Reserve Act that could be called into play to support a claim of illegality, I'll leave that one to the lawyers and stick to the economics of the claim.

Here, then, is the starting point for the cactus conspiracy (henceforth, the CC):

... we’d expect Greenspan to favor Republicans over Democrats – all else being equal, we’d expect to see unusually tight money when an incumbent Democratic president ran for re-election or a sitting Democratic VP ran for President, and unusually loose money when an incumbent Republican ran for re-election or a sitting Republican VP ran for President. However, not all elections are close, so the Uncle Alan would feel more of an urge to meddle when elections are close...

Therefore, in the five elections that took place under Greenspan’s watch, we’d expect the most meddling in 1992 and 1996 (when the Republican candidate clearly lost in a competitive election), followed by 2000 (when the Republican candidate lost the popular vote but only by a smidge).

The CC proceeds by a little too conveniently redefining the terms of monetary policy manipulation:

And where we would look to see evidence of the Fed’s behavior? Well, the Fed could move the fed funds rate or it can move M1 (cash and its equivalents). M1 has several advantages over the fed funds rate: nobody really pays attention to M1 whereas every change in the fed funds rate is literally national news, the Fed can move M1 every day if it chooses, and its effect is more widely dispersed throughout the economy. For a subtle guy like Big Al, M1 is the tool of choice.

If this is so, "Big Al" would have been very subtle indeed -- offering up an "it all depends on what the meaning of money is" subterfuge -- or he would have been a liar.  Let me quote myself, quoting the man:

... at least for the time being, M2 has been downgraded as a reliable indicator of financial conditions in the economy, and no single variable has yet been identified to take its place.

That was 1993.  (You can find it in print versions of the Chairman's testimony associated with the July Monetary Policy Report to Congress.)  Fast forward to 2000, and this footnote in the July Monetary Policy Report of that year:

At its June meeting, the FOMC did not establish ranges for growth of money and debt in 2000 and 2001. The legal requirement to establish and to announce such ranges had expired, and owing to uncertainties about the behavior of the velocities of debt and money, these ranges for many years have not provided useful benchmarks for the conduct of monetary policy.

The Committee did qualify things with this...

Nevertheless, the FOMC believes that the behavior of money and credit will continue to have value for gauging economic and financial conditions, and this report discusses recent developments in money and credit in some detail.

... but the days of money measures playing a central operational role in the conduct of monetary policy are, for now, gone.

Even if we play along and take the whole money growth thing seriously, there are two problems with cactus's use of real M1 growth to make his point.  First, if you want to look at the monetary aggregate the Fed really controls you would look at nominal monetary base.  Second, and more critically for bringing the conversation back to reality, financial innovations -- like the invention of sweep accounts -- knocked both M1 and monetary base growth out of contention as stable indicators of the stance of monetary policy.  So if we must look at money, M2 really would be the choice -- and here the CC is a little hard to spin:




According to M2 growth, monetary policy was actually tightening up during the election year 1992 and did not look particularly tight in 2000.  But I have no inclination to offer that up as evidence of anything.  Like Mr. Greenspan suggested in the passage cited above, for most of the decade monetary aggregates just weren't giving up the their secrets. And as for the secret agendas of Alan Greenspan and company, the Taylor rule is out there for all to see -- it really isn't any more complicated, or nefarious, than that.

UPDATE:  cactus has some additional thoughts -- here and here.

March 27, 2007 in Federal Reserve and Monetary Policy | Permalink


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Good post. I put my 2 cents into the comments over there and made the same point about financial innovation. I wouldn't want to use M1 in the '90s to predict anything.

Posted by: William Polley | March 28, 2007 at 01:13 AM

I agree with you on this one. To claim that Greenspan used monetary policy to influence the 1992 election stands in sharp contrast to the view held by some (including me) that Greenspan could have (and perhaps should have) pursued easier monetary policies during the early 1990's. Maybe Cactus has confused 1972 with 1992?

Posted by: pgl | March 28, 2007 at 09:05 AM

good news

thank you for infos

Posted by: barbie oyunları | March 28, 2007 at 09:33 AM

I suggested he look at my version of the Taylor rule -- uses the unemployment rate rather than the gdp gap -- to evaluate Fed policy in election years. this approach strongly implies that in election years the Fed does exactly what the rule or economic fundamentals call for.

Posted by: spencer | March 28, 2007 at 12:38 PM

More paranoid crap from the left. No different than the paranoid crap from the right when Clinton let loose cruise missles against Iraq, on or near the day the Lewinsky scandal was released.

Was Clinton playing politics with Iraq, given what we are doing there now?

The Fed is doing its job, which has been made very difficult with globalization and the financial innovation that is continuing. It won't get any easier.

Posted by: jeff | March 30, 2007 at 02:13 PM

How's the Fed doing now in protecting the value of the dollar and in smoothing out the economic boom/bust cycle? Does the Fed work to stop bubbles and currency devaluation?

Posted by: t gorman | April 12, 2007 at 07:45 PM

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March 26, 2007

Housing, Subprime Mortgages, And The Swap To Watch

Joe Haubrich and Brent Meyer are busy out-blogging me these days, at the Cleveland Fed website.  This time, they go about the business of describing credit default swaps, ABX.HE indexes, and why they are among the sharper tools in the current forecasting box:

... the ABX.HE index... is based on credit default swaps on different tranches of subprime mortgage-backed securities (MBS).

... the ABX.HE index is telling us something about credit default swaps (CDS). A CDS is like a derivative that gives you insurance. For example, a bank may wish to buy protection against default by RiskyCorp (perhaps because they’ve given RiskyCorp a loan). They do this by entering into a contract where they pay another firm (who is selling protection) a fixed amount, periodically, as long as RiskyCorp doesn’t default on its corporate bonds. (In general, the “credit event” might be something else, such as a major downgrade, missed payments, or so forth.) If RiskyCorp does default, the seller of protection makes a payment to the buyer of protection. 

... the ABX.HE is a series of five indexes that track CDSs based on tranches of mortgage-backed securities comprised of subprime mortgages and home equity loans. The tranches differ by their ratings, from AAA (best credit) to BBB-, (least good credit). See MarkiT, which produces the indexes for the real details. For an example of how indexes work, see here.

The prices of the riskier tranches started moving down in late 2006, but the real action started in late 2006, so a closer look is appropriate. There’s not a lot of movement among the top-quality tranches, the AAA and AA, but February (when New Century Financial and HSBC, the number-three and number-two subprime lenders, announced problems) was rough on the lower-rated indexes, with the BBB- dropping from 90.85 to 64.46. That’s a 29 percent drop in only one month. Since then, there’s been a rebound, up over 10 percent, but the market seems to be anticipating continuing large losses in the subprime market.

Here's the picture:




As Joe and Brent note:

... because the CDSs are more standardized and generally more liquid than corporate bonds, you can see why Federal Reserve Vice Chairman Donald Kohn states that “instead of looking to the bond market to measure default risk, we are increasingly turning to the market for credit default swaps”...

Advice taken.

March 26, 2007 in Housing | Permalink


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was that an overshoot, or a "Dead cat", bounce?

Posted by: old ari | March 27, 2007 at 09:04 AM

I think there's way too much investment money floating around for us to take solice from a short-term market reversal. If I were to draw anything from the "evidence" I'd guess tactical "players" bet the FED will do as its told.
Mishkin set a new (& VERY different tone to this debate over the weekend. Let's HOPE BB restates it with emphasis tomorrow - we shouldn't expect any FF rate changes THIS year! Only this will call into question (without exploding it) the incomprehensible financial speculation we've seen.

Posted by: bailey | March 27, 2007 at 11:12 AM

Last month the ABX.HE indexes collapsed February 23rd.

Connect the dots.

That was the date when I shorted the market bigtime.

Posted by: theroxylandr | March 27, 2007 at 12:02 PM

I just noticed Sears is running ads on prime time TV to advertise appliance sales. I wonder why?

Does it imply that appliance sales are running below plan?

Posted by: spencer | March 28, 2007 at 12:41 PM

Very interesting!

UK Home Mortgages Guy

Posted by: UK Home Mortgages | March 31, 2007 at 10:13 PM

Search for in all major search engines simultaneously on the site http://www.iknowall.com.
Simultaneous search on Google, Yahoo and MSN Live Search.

Try http://www.iknowall.com

Posted by: iknowall | June 01, 2007 at 03:39 PM

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March 22, 2007

Did The Fed Do It?

The ISI Group's Andy Laperriere, writing on the opinion page of yesterday's Wall Street Journal, says the answer is yes (at least in part):

Stock markets world-wide have sold off the past few weeks over concerns the collapse of the subprime mortgage industry could prolong and deepen the housing slump and threaten the health of the U.S. economy. Federal Reserve officials and most economists believe the problems in the subprime mortgage market will remain relatively contained, but there is compelling evidence that the failure of subprime loans may be the start of a painful unwinding of a housing bubble that was fueled by easy money and loose lending practices...

The fact that Congress is now holding hearings on the fallout from the second major asset price bubble in the last decade should prompt some broader questions. For example, what role did the Fed's loose monetary policy from 2002-2004 play in fueling the housing bubble? Should the Federal Reserve reexamine its policy of ignoring asset bubbles?

I know that the easy money claim has become something of a meme, but I often find myself pondering this picture:




What's the story here?  That the long string of federal funds rate cuts beginning in January 2001 caused the decline in long-term interest rates -- including mortgage rates -- that commenced a full half-year (at least) before the first move by the FOMC?  That low levels of short-term interest rates have kept long-term rates well below their pre-recession peaks?  Then what to make of the fact that rates at the longer end of the yield curve have barely budged in the face of a 425 basis point rise in the funds rate target?  Maybe it's "long and variable lags"?  Should we then be expecting that big jump in long-term rates any day now?  I guess it's still a conundrum. But maybe, then, we should be a little circumspect about the finger pointing?

OK, here's part of the Laperriere article I can get behind:

It's not the size of foreclosure losses as a share of the economy that matters, it is the effect those losses have on the availability of credit.

Like I said.   

March 22, 2007 in Federal Reserve and Monetary Policy, Housing | Permalink


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» Long-term bondrates from The Theroxylandr in Flame
Im arguing with macroblog about about this picture: He said: Whats the story here? That the long string of federal funds rate cuts beginning in January 2001 caused the decline in long-term interest rates including mortgage rates... [Read More]

Tracked on Mar 23, 2007 1:02:51 PM

» What Conundrum? from Economist's View
Mohamed A. El-Erian of the Harvard Business School and Noble laureate in economics Michael Spence say there's nothing puzzling or hard to understand about global imbalances, declining risk spreads, flattened yield curves, and declining market volatilit... [Read More]

Tracked on Mar 24, 2007 7:27:28 AM


I feel a kindred spirit with this:

"Then what to make of the fact that rates at the longer end of the yield curve have barely budged in the face of a 425 basis point rise in the funds rate target? Maybe it's "long and variable lags"? Should we then be expecting that big jump in long-term rates any day now? I guess it's still a conundrum."

Let's just say that the tightening/loosening wasn't affecting the mortgage people and skip the hoopla about the "long and variable lags" which will firm up any day now once the foreign tap runs dry.
The Fed control over the money supply is so precarious in this globalized economy that even they don't want to hike or drop the FF rate for fear of the recent pattern of indifference continuing...cementing in the minds of some skeptics that they have only a fraction of the control they pretend to have.

Posted by: calmo | March 23, 2007 at 01:44 AM

The Fed's main impact was on ARMs, of course. The housing bubble was fueled by increased demand coming from two groups:

1) New home buyers who normally wouldn't have been able to afford homes

2) Speculators

The Fed provided fuel for a fire that had already started burning as home prices recovered from the 90's housing recession.

Posted by: Wab | March 23, 2007 at 04:10 AM

perhaps you could overlay average home prices and arm originations on the same chart...what kind of picture would that give us?

Posted by: jopo | March 23, 2007 at 07:47 AM

This morning's L.A.Times asserts the FED had all the authority it needed to stop the Mtg. lending abuses we've seen.
Writer Jonathon Peterson writes in "Fallout hits lenders on Capital Hill", 'The FED has the authority to set rules prohibiting "unfair or deceptive" practices by (ALL) lenders under the Home Ownership & Equity protection Act of 1994.' (Caps & emphasis mine)
IF this is true, mea culpa - What a doofus am I! For two years I've argued for single body regulatory control of our financial sector, with the FED at the helm.
(Link follows. Quote's four paragraphs from end.)

Posted by: bailey | March 23, 2007 at 10:41 AM

Should we then be expecting that big jump in long-term rates any day now?

Absolutely not!

The long-term rates are trending down until they go under 1%, like Japan is today.

It somehow happened that Japan managed to be 15 years ahead of the rest of developed world. We are all going into long deflationary period. Japan is waiting us there.

Maybe Japan will be the first of us to jump out of sub-1% zone? It could be. First in - first out...

Posted by: theroxylandr | March 23, 2007 at 12:53 PM

Then what to make of the fact that rates at the longer end of the yield curve have barely budged in the face of a 425 basis point rise in the funds rate target? Maybe it's "long and variable lags"?

You're realy missing the most important piece; the Fed's low rates made lending money at 5.5% really really really profitable, so lenders bent over backwards to push that paper out the door as fast as they could.

Qualifications and risk be damned.

Posted by: eightnine2718281828mu5 | March 23, 2007 at 10:22 PM

Check out David Lereah's comment in the article posted on my blog!

Please, for your own good, read my blog about the current housing data released
by the NAR on Friday. I've posted an article from the Wall Street Journal (Which
you can't get unless you pay otherwise) and some
of my own comments... The data are hugely misleading due to the seasonal adjustment
that is made.

The biggest story should be the 7.6% drop in median house prices since July
2006... That's enormous... imagine you bought then with a $20K down payment
and now you have to move... Where'd my money go?

That's the danger of buying at the top.

Check out my blog to learn more... I spend the time writing because I think
people need to know what the data they are fed actually mean, so they can think
for themselves! Please read!


Posted by: eternitus | March 24, 2007 at 04:53 PM

I was reviewing the chart you provided on Interest Rates from 1984 to the present. In the context of current discussion on risky varible rate mortgages. Consider two folks that got mortgages in 1984, one a conventional 30 year fixed and one a "risky" flexible rate mortgage. Who made the best choice?

Posted by: Frank | April 01, 2007 at 01:02 PM

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March 21, 2007

Construction and Employment

Brent Meyer and Tim Dunne write all about it in the electronic version of the Cleveland Fed's Economic Trends:

The slowdown in residential construction activity has had a muted impact on employment in the construction sector. Employment held steady in 2006, hovering around 7.7 million jobs, though employment in construction bears watching as there was a net decline of 62 thousand jobs last month. Still, on a year-over-year basis, construction employment is down only 0.2 percent from February 2006.

... Of all those employed in construction industries, only 43.2 percent work in residential construction, while 43.8 percent work in nonresidential building construction and 13.0 percent work in heavy and civil engineering construction. Of those employed in residential construction industries, about 30 percent work for general building contractors and the rest work in specialty trades (for example, roofing, plumbing, and concrete contractors).

The changes in recent employment look markedly different for nonresidential and residential building industries. On a year-over-year basis, employment in residential construction contracted by 133 thousand jobs, or -3.9 percent of residential construction jobs. Outside of residential construction, employment grew by 116 thousand jobs, or 2.7 percent of nonresidential construction employment.



There is a "but":

On a cautionary note, the MIT Center for Real Estate reported that the demand for office properties remained strong at the end of 2006, but there was some weakening demand in the apartment, retail, and industrial property sectors based on their models. This weakening demand could affect workers employed by companies that do multifamily housing and private nonresidential construction going forward.

For more information -- and plenty more good pictures -- read the whole thing.  And while you are visiting virtual Cleveland, check out Joe Haubrich and Brent Meyer's answer to the question "What's Up with the Yield Curve?"

March 21, 2007 in Housing, Labor Markets | Permalink


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It seems a safe bet that a one significant fraction of the demand for office space has been from the mortgage and real estate brokers and construction companies directly engaged in the real estate bubble, and another has been from wholesalers, retailers, and transportation companies converting mortgage equity withdrawal cash into imported consumer goods.

Have any other industries (except perhaps health care) been net absorbers of office space in the last few years?

Posted by: jm | March 21, 2007 at 11:05 PM

During a housing slowdown, builders still finish the homes they already started and continue to build on the housing developments in-progress. If they don't finish what they already started, the undeveloped lots will reduce the value of the homes they already built and homebuyers may sue them for that.

So, construction activity continues after a slowdown and construction jobs are a lagged indicator of the direction of the housing market.

Posted by: Oracle of Cleveland | March 22, 2007 at 07:20 AM

anybody got some yodels?

Posted by: Mikey C | March 22, 2007 at 03:20 PM

Right you are Oracle, but not all residential construction is comprised of new sub-divisions, and phases can be postponed, yes?
I'm surprised at the graph showing the smaller portion of residential construction workers and also that total. Of the famous 12M undocumented aliens, I read that something like a quarter of them were working in residential construction (the othe side being highly regulated and requiring certifications). I wonder if the ~3M are included in that peak 3.5M residential workers or, like the illegal employers, just ignoring their status. Hard to believe that only a small fraction of legal workers were doing residential construction.
The BLS amended their benchmarks by 1M to address some of this problem, but only recently, yes?

Posted by: calmo | March 23, 2007 at 02:02 AM

I am not sure why is this decline of employment in construction but it looks really awkard when looking the employment in other fields.Maybe more researches would make the case clearer.

Posted by: Cara Fletcher | July 11, 2007 at 11:09 AM

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March 20, 2007

Where The Risk Is

And so it appears that the moment of truth is near, when we will finally see beyond the immediate fate of the housing market and determine the magnitude of the collateral damage (no pun intended).  I think that there is a consensus that, if the worst is to come, some sort of substantial disruption to financial markets will be in the middle of it all.  Nouriel Roubini covers about every inch of territory you can on this theme, even managing to juxtapose Alan Greenspan and Ben Bernanke with foreign-policy neo-conservatives.  In somewhat more measured tones, Kash Mansori and Calculated Risk have begun to fret about the potential for spillover into the commercial banking sector.  Says Kash:

In my previous post I explained why I think that the quantity of bad mortgages in the US economy may actually be enough to significantly affect the non-performance and write-off rates for the US banking system as a whole. Yesterday, Calculated Risk followed this up with a discussion of why he thinks that the health of commercial real estate loan portfolios may soon suffer the same fate that residential loan portfolios are currently experiencing.

Some of that is not speculation, as this story from own neck of the woods so clearly shows:

The quaking U.S. market for subprime mortgage loans is rattling National City Corp. too.

The parent of National City Bank of Pennsylvania has decided it won't try to sell $1.6 billion in subprime loans after all, due to "adverse market conditions," National City said in a securities filing Thursday. The loans "are currently not saleable at what management considers an acceptable price," the bank said.

Instead, Cleveland-based National City took a write-down of $11 million in February, and sometime this month will return to its portfolio the loans it had intended to sell. "A further write-down is likely," the filing said. Spokeswoman Kristen Adams would not elaborate...

Additionally, National City expects to add "on the order of $50 million" to its reserves for possible loan losses, the filing said.

But here's how the story ends:

National City shares closed yesterday at $35.99, up 30 cents.

Hmm.  Frankly, I just don't think the traditional banking sector is where be the dragons.  Instead, I worry about the answers to three questions: 1. Will a growing perception of risk begin to choke off lending to investment projects that are otherwise economically viable?  2. Will a growing perception of risk cause businesses to forgo or defer an increasingly large quantity of investment projects?  3.  Have hedge funds, private equity funds, and specialty financial corporations become such important parts of the credit channel that there is scant relief to be found from a relatively unscathed traditional banking sector?

To question 1, we have this, from Bloomberg:

Risk premiums on investment-grade corporate bonds are at their highest level in more than three months on concern rising delinquencies by subprime borrowers will slow the U.S. economy...

"This period of volatility is likely to continue as long as there is divided opinion about the magnitude and resulting financial impact of the subprime problem,'' said Edward Marrinan, head of North American credit strategy at JPMorgan Chase & Co. in New York. "Subprime risks and accompanying fears of a spillover into the broader consumer sector are the catalysts for the heightened volatility currently exhibited by all risky asset classes,'' he said in an interview...

The 7-basis-point increase in investment-grade spreads is the index's worst three-week performance since the period ending May 20, 2005, Merrill data show. The increase means a company would pay $70,000 more in annual interest for every $100 million borrowed.

We might hold on to the belief that firms are partially insulated from rising borrowing costs (or restrictions on loan availability) due to the fact the corporate cash-flow to investment ratio remains relatively high...




... but there are two problems with seeking shelter in that picture.  First, we have data only through the third quarter of 2006, which is pretty stale information at this point.  Second, and more importantly, a high cash-flow to investment ratio may itself be a symptom of business's unwillingness to commit to fixed investment spending.

To question number 3, I have no idea what the answer is.  And I wish I did.

March 20, 2007 in Housing, Interest Rates, Saving, Capital, and Investment | Permalink


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"Hmm. Frankly, I just don't think the traditional banking sector is where be the dragons."

Fannie Mae got some attention from Bernanke recently, like his noisy predecessor, asking for more constraints...as if there were dragons, no? It has been a few years since this company has filed an annual statement and a special privilege to still be allowed a listing on the market.
Kasriel years ago (03?) warned of banks' record exposure even then to income streams from mortgages or mortgage related activities. So there could be many little dragons waiting for those moments when few are buying new mortgages --not to mention the defaulters.

China makes a splash recently about not adding to its US foreign reserves. That kindness of strangers might ebb a little, but if the consumer weakness materializes as some think in the months ahead, that trade picture might improve with decreasing Imports like we saw last quarter. This doesn't look like a dragon, but finding more private foreign investors to fund the deficits (esp that agency paper) and maintain the US status as "the best place to invest"--as the largest housing boom in history is fracturing, might be the largest dragon.

Posted by: calmo | March 21, 2007 at 01:03 AM

How's this for positive? I think the FED wording this a.m. was as strong as I could've hoped for. Good job, so far.
NOW, we let's hope Board members, who have a need to attend those week-after "free" luncheons, spend more time eating & less time soothing the heartburn of those who feed them.

Posted by: bailey | March 21, 2007 at 02:23 PM

Bozo re your observations on biz investment. Look at S&P500 free cash flow vs durable goods shiopments (ex defense and aircraft). This will give you a number up to date as of Jan. That biz investment is running at record lows relative to cash flows is no shock. Production platforms are now global in scale and the business investment that would normally occur in the US now occurs overseas. The surge in US direct investment overseas in recent years almost perfectly matches the "unusual" softness in biz investment in the US. That, along with sovereign flows explains why the cost of capital (i.e. bond yields are relatively low).

Posted by: Market God | March 21, 2007 at 09:35 PM

if the consumer weakness materializes as some think in the months ahead, that trade picture might improve with decreasing Imports like we saw last quarter,great lens thanks for sharing will credit this...

Posted by: scoremore | October 11, 2010 at 08:06 AM

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March 19, 2007

Are We Panicking Just A Bit Too Soon?

If there was any doubt about it before, that groaning sound from the residential housing market definitely has our attention now.  A woefully incomplete list of blogger commentary from the past several days would include items at Alpha.Sources blog (here, with some international perspective here), at Angry Bear, at Beat the Press, at The Big Picture, at Bizzy Blog, at Brad DeLong's, at Daniel Gross, at Economic Dreams - Economic Nightmares (here and here), at Economics Unbound, at Economist's View (here and here), at Euro Intelligence, at Felix Salmon, at The Housing Bubble Blog (here and here), at Mish's Global Economic Trends Analysis, at the Skeptical Speculator, and at The Street Light.  I won't even bother to list individual items from Calculated Risk or Nouriel Roubini.  Just head on over and start reading.

In the midst of this, let me make one brief plea for a little perspective:  It might be good to remember that this was not entirely unexpected.  Since at least summer I have been giving "economic outlook" speeches with the same basic message:  Weakness in the residential housing market will continue for some time -- the bottom in prices seems unlikely until at least mid-year.  Adjustments of this sort are never easy, there will be some pain, and probably a disruption in the pace of economic expansion as things sort themselves out.  The punch line is always something like, "but things do sort themselves out, and there is no reason to expect that the economy will fail to return to a normal pace of growth after a sluggish quarter or two."

Anything yet make that projection look wrong?  Not within my confidence intervals.  Forecasters, economic pundits, and other human beings are congenital slaves to the latest surprises in the data, so confidence has ebbed and flowed and ebbed again as the news has surprised to the downside, to the upside, and back again.  But would anyone really want to argue that we aren't in the neighborhood of where most informed observers thought we would be about now? 

Trouble, of course, often looks worse when it arrives than it did when we were merely contemplating its arrival.  It is understandable that we feel a little wobbly now that the shake-out among certain mortgage lenders is here at last.  And there are parts of the "soft-landing" scenario that look a bit tenuous at the moment -- I would put the worrisome signs of weakening business investment expenditures, emphasized by pgl at Angry Bear and Jim Hamilton at Econbrowser, at the top of my list.  But for the time being, I'm going to go easy on the panic button. 

March 19, 2007 in Housing, Saving, Capital, and Investment | Permalink


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"Oh, 37 inches to go. Huzzah! At the rate we've been melting, that's good for about one more week!" ~ Professor Fate "You'd better keep it to yourself." ~ The Great Leslie "Oh, of course I'll keep it to myself. Until the water reaches my lower lip, and then I'm gonna mention it to SOMEBODY!" ~ Professor Fate

Posted by: RP | March 20, 2007 at 01:11 AM

It's not too early to panic -- it's too late.

The great glut of condos and McMansions in Chicago and its suburbs is already in place. A large fraction is already vacant, and as the coming recession drops the home ownership rate among the under-30 set from its current record level back towards its early-90s level (as they're forced to move back with the folks, or double up with roommates), the fraction vacant will rise even higher, and prices will plunge.

The pricing structure in the single family home market is also going to crumble, starting from the high end where there's more than a year's worth of inventory.

The effect of this is going to be the same as in Japan -- total destruction of the myth that real estate can only go up, and that young people have to buy as quickly as they can, no matter what the price, or be "priced out forever".

Posted by: jm | March 20, 2007 at 01:39 AM

What's fascinating to me has been the parade of denial the entire time this was unfolding.

Its not that it was so obvious in hindsight, but rather, a handful of people made the timely observation, and were shouted down by the frat boys at the kegger.

Now the hangover has just started, and the recriminations have begun in earnest.

Its all terribly, terribly amusing.

Posted by: Barry Ritholtz | March 20, 2007 at 05:45 AM

Nicely said Barry, but I think we can be even more direct.

David's been coming down hard on bears predicting this for months /years.

And now he's trying to take CREDIT ?

Amusing is one way to put it. Frightening that people like him get to be in govt. service is another way.

Posted by: RN | March 20, 2007 at 08:56 AM

I'm with Dave A. on this one, it is too early to "panic". Let's wait until the regulatory actions enacted to correct the abuses are actually implemented, THEN let's panic.
Everyone knows CA's economic influence on our national economy, it's huge. Aside from the FED 10/14/06 Non-traditional Mtg. "Guidance" to its national banks and the recent desintigration of our most agressive subprime originators, credit in CA remains VERY easy & VERY cheap. 100% mtgs. & no doc loans are readily available to all but those with terrible credit. Why has CA yet to sign on to CSBS non-traditional guidelines FOUR MONTHS after they were issued? Anyone who's interested need only check the percentage of CA mtgs. regulated by other than FED. bank guidelines. CLEARLY, CA has caved to r.e. pressure to get in one more selling season. This wouldn't be possible if Freddie-Mac, a Gov't. sponsored Enterprise, hadn't delayed implementation of its new loan guidelines until Sept. (Its rationalization qualifies for a mastercard commercial - it's priceless!)
Meanwhile, last week I received THREE MORE credit card invites offering me 0% interest on balance transfers & purchases for the next 15 months.
Meanwhile, we listen to Republican leaders of industry grovel for FED intervention to insure recent policy changes don't hurt the poor folk.
Meanwhile, ....

Posted by: bailey | March 20, 2007 at 10:59 AM

I agree with Dave on this one. There are reasons to be concerned for sure, but we aren't at the "I told you so" point yet. Overall, the job market continues to create jobs, and interest rates have remained low. Sanguine, maybe, but hitting the panic button is a little premature.

That said, I believe that inflation is a concern, and will forestall any Fed action in the near future, and that liquidity issues in the residential mortgage market may impinge on the demand side, and reduce absorption of housing units.

Posted by: Nathan | March 20, 2007 at 01:11 PM

I think that Dave A's point might have a bit to do with this little interchange between Agent J and Agent K (from movie: "Men In Black"):
"Agent K: We do not discharge our weapons in view of the public!

"Agent J: Man, we ain't got time for this cover-up bullshit! In case you've forgotten, there's an Arquillian battle cruiser--

"Agent K: There's always an Arquillian battle cruiser or a Correllian death ray or a plague intended to wipe out all life on this miserable little planet, and the only way these people can get on with their lives is that they do Not KNOW about it!"
It seems to me that we have been living on the edge of catastrophe for quite some time, one way or another. Just ask my wife. She has had to live with my negativism since the last housing bust, the Japanese supremacy moment, and so on. Maybe that's just the way it is, AND the way it is going to be.

OR maybe Keynes/Minsky (and others) had (have) some insight into the workings of complex systems that have not YET been worked into our thinking/policy development re: central banking.

If so, then we have a lot to think about and talk about re: useful roles for government AND for markets, as the bubbles continue to froth, and particularly in the aftermath of any crashes close at hand or further away. None of us gets to but prognosticate as to "future".

Posted by: Dave Iverson | March 20, 2007 at 02:20 PM

Well, Dave, I am at the "I told you so" point. :)

Posted by: Oracle of Cleveland | March 20, 2007 at 03:27 PM

Something funny about this "Panic Button" and the advice not to use it without due care and attention...is it our quest for law and order at all times even and especially those chaotic moments where we think we can redirect people into submission by posting "Use restraint when pushing the Panic Button".

Dave points out that the blogs are pretty noisy, but the MSM is pretty quiet. Too quiet, yes? [Way too quiet for us bloggers who feel the MSM is concealing, not helping.] So there are 2 buttons apparently: the troublesome Panic Button which we might never have the presence of mind to use, at least not properly...and the Arise Button which we know did not work so well when it came to saving those pies from the rats.

Posted by: calmo | March 20, 2007 at 05:00 PM

RN -- What is that you think I am trying to take credit for? All I said is that (a) the consensus expectation for some time has been that housing-market woes would, in fact, leave a mark, but not send the economy into a full-blown tailspin; and (b) from everything we know, the hard-landing scenario still amounts to *speculation* about what will unfold. Maybe it will unfold soon, but the data just simply does not support the view that a broad-based crash has arrived.

As for being "hard on bears predicting this", what exactly, is "this"? Let's suppose real GDP growth comes in somewhere between 1 and 2 percent for the first quarter, which seems pretty reasonable at this point. Is that lower than I would have predicted, say 6 months ago? Yes. Is it within the range that I would have bet against? No. Is this what the "bears" mean by "hard landing"? If so, I concede.

Posted by: Dave Altig | March 20, 2007 at 05:15 PM

I also side with Doctor Dave. He must now do whatever it takes to contain inflation, even if that means declining to acknowledge a sectoral collapse that threatens years of economic dislocation. The Fed did what it could do by raising rates subject to the constraints of the most recklessly corrupt administration in living memory. To resist the realty-financial complex would have been institutional suicide - look what happened to poor Franklin Raines. With an emasculated administration it's finally possible to lance the giant boil. Just step back, there's going to be lots of pus.

Posted by: creon | March 21, 2007 at 01:30 PM

Do I detect a little political bias in creon's post?

"The Fed did what it could do by raising rates subject to the constraints of the most recklessly corrupt administration in living memory." (So short now this memory bit. Consider Scooter's appeal. You forgot?)

Or this:

"With an emasculated administration it's finally possible to lance the giant boil. Just step back, there's going to be lots of pus."

And as squeamish as I am, I wouldn't mind seeing this corruption laid out by Waxman and spread to the entire country prime time...but that's dreaming.
I am hoping that this "emasculation" has not infected the Dems, but that is not so clear from where I sit.

Posted by: calmo | March 21, 2007 at 04:22 PM

Hey, that was a purely technical post. The giant boil denotes the bad and fraudulent debt, not the admittedly purulent official corruption. And the salutary effect of emasculation is merely to disband the K Street project, protecting the FOMC from annihilation by real estate interests. To put it in more literal terms, the Fed is now free to burst the carbuncle of malinvestment with the pinching fingernails of monetary restraint, subject to the systemic infection of global spread-product illiquidity.

Posted by: creon | March 21, 2007 at 09:21 PM

> Maybe it will unfold soon, but the data just simply
> does not support the view that a broad-based crash
> has arrived.

I threw the baseball up very hard.

I believe the baseball has escape velocity,
primarily because it has not yet come down,
and the fact that it has slowed down does
not mean it won't escape orbit.

I'm not going to panic until a welt develops
on my forehead.

If you insist.....you're the professor.

Posted by: RP | March 28, 2007 at 08:43 PM

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