Friday, September 21, 2007
Candid Admission of the Day
The subprime mortgage losses that triggered uncertainty about structured products more generally have reverberated in broader financial markets, raising concern about the consequences for economic activity. The resulting global financial losses have far exceeded even the most pessimistic estimates of the credit losses on these loans.
This is quite a contrast to Bernanke's previous assurances that the effects of the subprime mortgage debacle would be limited to the financial sector of the economy.
It also goes a long way toward explaining what Kevin Depew describes as the recent "shock and awe" Federal Reserve rate cut to ease the "credit crunch." He reads the costs of the cut in the headlines—
- DOW SOARS 336 POINTS ON FED RATE CUT
- USD [dollar] FALLS TO RECORD LOW
- CRUDE OIL FUTURES RISE TO RECORD AFTER U.S. LOWERS INTEREST RATES
- GOLD SOARS TO HIGHEST SINCE 1980 ON FED RATE CUT
Meanwhile the problem is no longer with subprime mortgages. That mansion you were hoping to move to is suddenly out of reach. Nobody will give you a "jumbo mortgage" at a rate you're willing to pay. And besides, the developer has stopped work and the swimming pool hasn't been installed.
Both the Fed chairman and Treasury secretary indicated qualified support for the Democrats’ plans to increase the $417,000 cap on the value of government-backed mortgages to improve credit conditions in the ‘jumbo loan’ market.
The gap between interest rates on jumbo loans and normal conforming mortgages has increased five-fold in recent months, as risk aversion has pushed borrowing rates up.
Economists fear this trend could impair demand for higher-value homes and worsen the downturn in the US housing market.
Don't sell that gold watch! You may need it later to barter for necessities.
Shades of 1929 (9/15/07)