As the carnage in the housing markets spreads from sub-prime, to Alt-A, and into prime (and it is, because there are a lot of Prime ARMs, plus when real estate prices crash 30% to 50%, which they are going to, a lot of "prime" borrowers are going to be underwater, holding mortgages that cost more than their houses) there's going to be a lot of screaming and moaning and whining about bailing everyone out. In fact, it's already begun, with Senator Dodd (whom I like) saying inane things like:

Congress "may need to do something much more quickly to provide some protection or you could end up with a lot of poverty and blight," Dodd said. Federal aid of a few billion dollars "may be a lot less costly" than $164 billion in lost wealth, he said...

...Dodd reaffirmed a plan to introduce a bill that would combat predatory lending. "There is a difference between a subprime lender and a predator, and I don't want to lose the subprime lender" he said.

"Finally the federal regulators are beginning to indicate that they want to start requiring similar standards to be used for prime and subprime lending," Dodd said, referring to the new guidelines.

"I am a strong advocate of subprime lending," Dodd said. "I don't want that word to become a pejorative as junk bonds did."

Ok, first of all, subprime lending is predatory lending and subprime mortgages are junk. Period. ARM's are traps. Variable rate mortgages were crap when they were offered. No documentation loans (ie. just tell me what your income is) are crap. Subprime loans are designed to give loans to people who can't pay them back or who can't prove they can pay them back. Period - if they could pay them back, or prove they can pay them back, they wouldn't be subprime borrowers.

As for Dodd's 164 billion of lost wealth, the US would be far better off losing it. Real estate wealth is weighing down the country's competitiveness. Every dollar more a house is "worth" means that it costs more in property taxes; means that you need to earn more to pay your mortgage; and for those who don't have a house already means they never will have one, unlesss perhaps, like Japanese families, they're willing to take on multi-generational mortgages.

More After the Jump

Cross-posted from Tort Deform

I recently read Walter Olson’s (Senior Fellow at the Manhattan Institute) op-ed in Times of London. There’s a lot in there that I’d like to spend time discussing, but I’ll just focus on this one misleading representation.

In his overview of the state of civil litigation in America, Olson describes the Katrina homeowners insurance lawsuits in the following manner:

I am very new to this site and unsophisticated in economics. However, I've been following the subprime situation and am wondering if anyone could help me. My husband has received a job offer in a mid-sized city where housing is less expensive and is more appealing in terms of general "quality of life" issues.
We moved to the DC area in the summer of 2005 and purchased a townhouse at the peak of the bubble here. Since that time, the market has slowed and we realize that we will likely have to accept an offer at, or less than what we paid. I believe that the housing market will continue to decline given this subprime situation. My question is: would it be best to sell now and move to a more favorable market or ride it out for a few years?

. . . and don't look down.

. . . America is in decline: because it's easier use cash flow as collateral to borrow Yen at .25% and then buy US treasuries at 4% and pocket the 3.75% as pure profit and then leverage out the money in treasuries 10 times and do it all again. (Yes, I am aware I am over-simplifying how a hedge fund works, still, my my point stands.)

So, what happens if you have a bad week in the market?

No worries, just sell some assets, except this time they are stores that employ hundreds of people.

This ain't good news. New Century has halted making news loans, isn't taking new applications and got this write-up from JPMorgan Chase:

``A bankruptcy filing or liquidation may well be announced in the next week or two,'' JPMorgan Chase & Co. analyst Andrew Wessel wrote in a report to clients yesterday.

It'll get worse before it gets better. And you know that old saw about a conservative is a liberal that got mugged? Well, here's one for this decade and the next: a liberal is a conservative that got foreclosed.

Believe it, cause it's going to happen.

. . . in case you were wondering, slowed this month and came in under the expected 100,000 new jobs.

Ian- just a quick reminder that about 150K is the break even point to keep up with population growth

Tomorrow the big employment numbers come out and on the heels of today's poor retail sales it might be enough to knock some more sense back into the markets.

Then again, the nineties were a decade dedicated to inflating markets, so you can never tell.

Regardless I'm sticking with what I've been saying the last week: this is a throwback rally that won't last but a few more days and then we'll get back to testing the lows of last week.

. . . the American Dream but what we have today is more like a beta release with a boatload of bugs?

"Nothing is priceless," indeed.

More on the new American Dream here.

. . . I had Bonddad himself on the show last week and in light of this post and this post it's worthwhile to listen to what we discussed once again. Markets, carry trade, the Yen and whatnot, all explained in less than 16 minutes, plus we crack a few jokes.

. . . the Yen carry trade is unwinding and the usual suspects think it's just a dip. I could be wrong, but I'm glad I'm not responsible for millions of dollars anymore.

First off, Saut says the same thing Hale and I spoke of last Wednesday, mainly that this started when Japan hiked its overnight rates week before last:

“We think Tuesday’s Tumble was set up a few weeks ago when Japan raised interest rates, thus signaling it was ending its zero interest rate policy of over a decade. While we got into a few heated discussions with various panglossian pundits on CNBC that Japan’s rate-ratchet would be gradual, we argued that while we agreed it will indeed be gradual that was NOT the point. The point was the direction of Japanese interest rates and that direction is now UP. Given the massive amounts of hedge fund money feeding at the Japanese carry-trade trough, we warned that the environment calls for even increased caution. Recall that for years the hedge funds have been borrowing a million bucks in Japan at virtually zero percent interest rates, levering that money ten, twenty, or even thirty to one and taking that ten, twenty, or thirty million dollars and buying something that either yielded more than the cost of the borrowed funds, or was going “up” in price, be it New Zealand bonds, gold, Brazil stocks, or in this case Chinese stocks. As long as the purchased vehicle was going ‘up’ in price, and the Japanese yen held steady or better yet declined, it was nirvana and highly profitable. Yet when Japan raised interest rates, the Japanese yen went into a bottoming pattern, in our opinion. We spoke repeatedly about the yen’s bottoming sequence . . .

Now, I know some of you don't like Saut at Raymond James, but he's been right for a long time now:

Well, all day Friday we told accounts, “Never on a Friday” meaning that markets typically don’t bottom on a Friday once they get into one of these sorts of downside skeins. Indeed, participants tend to not want to hold “long positions” over the weekend, fearing that investors will brood about their weekly losses and therefore show-up the beginning of the following week in sell-mode. And that, dear readers, is what gives us the trading sequence whereby stocks bottom in the Monday/Tuesday timeframe leading to the perfunctory three- to five-session throwback rally. From there another pullback should be in order and that is when it will become more apparent if this is something more than just a 5% - 8% correction.

Never mind me, read the whole thing.

. . . for a housing led slump in 2008. Interesting interview for the econogeeks, like me, out there.

Meanwhile Bill Gross at PIMCO talks about a flight to quality, a rather common refrain indeed, but what happens if the quality looses its, er, quality?

. . . Bill Gross' monthly Investment Outlook is up on the PIMCO site. He's not got quite the performance of Warren Buffett, of course he just does bonds, but he's the kind of fellow who surrounds himself with smart people, who listens closely and is not afraid to call a contrary bet. He's also smart enough to keep his mouth shut when he clients money is on the line, see PIMCO's unwinding of Argentine debt before the collapse for a great example. Regardless, he's always worth a read.

. . . and you read Warren Buffett's letters every year, you'll be wanting to read the latest. Always enlightening. There is something to be said for Buffett's stodgy, old-line version of investing, one I largely follow myself. The again, he's beaten the S&P 500+dividends by an average of 11% every year since 1965. I doubt you'll find a mutual fund on the planet with results like that.

This is hysterical:

. . . and the US markets follow right along. Dow Jones was down 500 points at one point, now it's trying for a rally, only down 350 points or so. Market closed down -416.02, Big Board volume was 2.3 billion shares. I remember when 600 million shares a day was a record breaker.

I've long had a concern about China I've never voiced or written about, so here goes. Back in 1929 the United States was the premier emerging market economy of the day, Europe, especially the UK and Germany being the more mature economies. Today China is the premier emerging market economy, much like the US was in the 1920s. Remember, we were the world's manufacturer at the time. What happened when our domestic stock markets broke south?

Exactly, all hell broke loose. Now, I'm sure there are 10 million reasons why my idea above is no good, but still, on a day like today, when China holds more than 1 trillion in US debt, it's worth pondering what happens if the Chinese economy sneezes, much less catches a cold.

Bonddad's take here.

Iraq poised to hand control of oil fields to foreign firms

Baghdad under pressure from Britain to pass a law giving multinationals rights to the country's reserves

Heather Stewart, economics correspondent

Sunday February 25, 2007
The Observer

Baghdad is under pressure from Britain and the US to pass an oil law which would hand long-term control of Iraq's energy assets to foreign multinationals, according to campaigners.

Iraqi trades unions have called for the country's oil reserves - the second-largest in the world - to be kept in public hands. But a leaked draft of the oil law, seen by The Observer, would see the government sign away the right to exploit its untapped fields in so-called exploration contracts, which could then be extended for more than 30 years.

Ecological, environmental, neuro-economics and resource depletion and climate change.

The US as leading currency
manipulator
February 15, 2007
By Henry C K Liu

“For decades, the United States, a self-professed evangelist for free trade, has been paranoid about other nations manipulating the exchange value of their currencies for trade advantage with counterproductive distortions in global free trade. Such apprehension has even been institutionalized into law.”

more

-----

I can't pretend to understand everything Mr. Liu describes in this article, but it makes sense to me that America's trade deficit is not the fault of China. Runaway military spending coupled with a lack of savings and incredibly easy credit, in league with the overpriced real estate market has to be having a major effect on the economy. Not to mention the loss of US manufacturing jobs that have been outsourced to China by US industralists. Generous tax cuts to corporations are at odds with the state of the US economy.

. . . in favor of a war tax. Cliff is too, but with a nice 'Joe Lieberman' twist to it.

Texas, by these standards, would be a third world country if we seceded from the union.

* Percentage of Uninsured Children 1st

* Income Inequality Between the Rich and the Poor 2nd

* Percentage of Population without Health Insurance 1st

* Scholastic Assessment Test (SAT) Scores 47th

* Percentage of Population over 25 with a High School Diploma 50th

* Percentage of Non-Elderly Women with Health Insurance 50th

* Rate of Women Aged 40+ Who Receive Mammograms 44th

* Rate of Women Aged 18+ Who Receive Pap Smears 47th

* Cervical Cancer Rate 5th

* Women's Voter Registration 43rd

* Women's Voter Turnout 49th

* Percentage of Eligible Voters that Vote 44th

Everything is bigger in Texas, even failure.

94-3? That looks like a veto proof minimum wage raise if I ever saw one. About time!

Wonder what Bush'll do? Sign it like the chump he is or be a man and veto it, standing up for Cheney's his principles?

Don't get me wrong, I think it is a great idea to increase the minimum wage. I'm just curious what Bush will do.

. . . than Henry Blodgett or Mary Meeker, right?

Rudimentary level:

Strong Dollars/Weak Dollars

Essay

-----

Intermediate difficulty:

Japan’s malaise was made in United States

My comments:

I recently read that Japan needs to increase production of their vehicles, produced by companies in the United States. When Japan increases their production, they are competing with the Big 3. Increases in sales of Japanese cars cause the Big 3 to lay off American workers who pay union wages. Aren’t the Japanese USA based companies non-union?

. . . who voted against an increase in the minimum wage.