Tuesday, January 31, 2006

Alan passes troubled Baton to Bernanke

I’m going to try and keep it short today, as it’s my anniversary and my wife will kill me if I stay too long.

Anyway, much change happened today. Borrowing rates were increased a 14th time as Alan passed his troubled baton to the Helicopter man. How will Ben Bernanke fare? If history sets precedent, Bernanke should be worried.

Stephen Roach has this to say about the issue:

History points to a difficult handover. The October 1987 stock-market crash came shortly after Greenspan succeeded Paul Volcker at the Fed. In 1979 Volcker faced problems of inflation and bond-market turbulence when he took over from G William Miller.
“When Greenspan leaves he will take his papers, but he will also take the confidence the markets have built in him,” said Roach. “I think Bernanke will be tested by the markets.

I’ve previously stated that I see numerous problems on the horizon. Which of these do you think, if any, will present Ben Bernanke with a crisis of his own?

(1) Enormous U.S. Trade Deficit
(2) Massive U.S. Debt
(3) Severe Oil supply issues on the horizon
(4) Housing Bubble
(5) Corporate Bankruptcies & Bond Market Problems
(6) Stock Market Bubble
(7) Derivatives Bubble
(8) Tremendous Consumer Debt, Negative savings rate and consumer pullback
(9) Hyperinflation
(10) Continuing Loss of Jobs/Outsourcing
(11) Loss of Central Bank confidence & dollar crisis
(12) Pension Crisis (look at PBGC)

Are there other issues that I missed? What are your thoughts on the matter


41cadillac said...

Percent of Interest only loans:
Jan. to Sept. 2005

Colorado 40.4%
Washington, D.C. 40.2%
Arizona 36.2%
Virginia 35.1%
Nevada 34.6%
California 34.3%
Washington 33.4%
Oregon 30.3%
Maryland 29.8%
Utah 29.3%

contrarian2day said...

very good point... Interest rate resets could be troubling

41cadillac said...

Found the following on: "The Housing Bubble 2".

GetStucco said...
jeffolie said...

Flippers and subprime lenders are DOOMED...

This one of the paragraphs the Fed published on Dec 20th for 60 days to make comments:

... Loans to borrowers who do not demonstrate the capacity to repay, as structured, from sources other than the collateral pledged are generally considered unsafe and unsound. ...


Good find, jeffolie.

This is Fedspeak for "Lenders who hand out free money with bankruptcy strings attached to subprime borrowers, nodoc borrowers, flippers, and investulators, BE DAMNED!"

The important question is whether this merely amounts to CYA rhetoric, or whether the Bernanke Fed will give such pronouncements some teeth.

Just in case anyone at THE BOARD happens to read here, I have penned an open letter to the new boss:

Dear Dr. Bernanke,

You are by all accounts a brilliant economist who sincerely commands my deepest personal admiration, since rather than hiding out in the ivory tower where you could have led a pieceful life of academic seclusion, you have decided to assume the mantle of Fed Chairman during what the recent cover story in The Economist magazine has dubbed "Danger time for America."

You probably recognize the similarity of this cover story to the handwriting on the wall at Belshazzar's Feast, and I am sure you are brainstorming for ways to correct the imbalances our economy is currently experiencing.

I suggest you strongly consider enforcing the lending guidance your institution published for comment on Dec 20th, 2005.

You see, one of the big problems that some of us concerned observers keep reading about is that loan underwriting standards have severely eroded to the point where money is indiscriminately loaned to borrowers who are rather unlikely to ever repay it.

It seems that lenders are driving while blindfold these days -- even worse than driving while looking out the rear-view mirror in my opinion.

To my knowledge, it is within the Fed's mandate to regulate lending practices.

What's more, unlike a measured pace of removal of policy accomodation, which makes headline news in USA Today every six weeks or so, a reversion to enforcement of traditional loan underwriting standards would rate at most a sixth-page story in Section C of the Wall Street Journal, escaping detection by the main-stream press.

You could thus begin the process of restoring economic balance without creating a "kill-the-messenger" backlash against your institution if a near-term correction of the imbalances proved collectively painful.

I wish you great success in your new position.

Your humble and obedient servant,


Out at the peak said...

I'll break down the issues into categories I see fit.

Bernanke's own doing:
(9) Hyperinflation

Unavoidable issues:
(1) Enormous U.S. Trade Deficit
(2) Massive U.S. Debt
(4) Housing Bubble
(8) Consumer Debt/Negative savings rate/consumer pullback

Likely issues:
(3) Severe Oil supply issues on the horizon
(10) Continuing Loss of Jobs/Outsourcing
(11) Loss of Central Bank confidence & dollar crisis
(12) Pension Crisis
(new) Lending regulations

Less likely:
(5) Corporate Bankruptcies & Bond Market Problems
(6) Stock Market Bubble
(7) Derivatives Bubble

Randy, what do you think of Bush's speech about reducing Middle East oil imports by 75% in six years? Even though this is the first Bush idea that I've liked, it poses a problem with PetroDollars. It could debunk USD as the reserve currency unless there are some threatening policies put in place.

(I'd put more effort into this, but I'm not thinking clearly.)