News Channel Mortgage

Another guest post from MG who went from Wharton to Wall St. to real estate to Blown Mortgage.

Just how much money has the Fed, aided and abetted by the Treasury, spent this year? Numbers are all over the place, but it could be around $3.8 trillion. They spent $650 billion in the last six weeks alone. And it’s all money they don’t have, by the way. And it has yet to be financed; that’s ahead of us.

The $700 billion authorized by Congress—to buy illiquid securities from banks—has been spent. Not on illiquid assets, though. It’s been spent on: capital infusions to large US banks, whether they want it or not; regional banks, they’ve all want it; US insurance companies, whether they “need” it or not; and on short-term funding including commercial paper for US industrial GE. This week’s brand-new recipients of the Fed’s largesse are the central banks of emerging market countries, plus the central banks of New Zealand, Australia and the EU. Yes, that’s right, further direct lending from the Fed to foreign central banks. The only thing this group has in common is credit risk so high that only the Fed will lend to them.

This bill, the Emergency Economic Stabilization Act of 2008, was passed by Congress less than a month ago and they are about to go back to the well for another $600 billion.

On Oct. 30 Bloomberg reported that the Fed “agreed to provide $30 billion each to the central banks of Brazil, Mexico, South Korea and Singapore, expanding its effort to unfreeze money markets to emerging nations. The Fed also created a $15 billion swap line with its New Zealand counterpart and removed limits this month on four existing swap lines, including one with the European Central Bank. The Fed set up a $10 billion arrangement with Australia’s central bank last month and then tripled it to $30 billion.
“The swap lines will help unclog the liquidity pipeline and that action is boosting markets even more than” the Fed’s rate cut, said Venkatraman Anantha-Nageswaran, head of research at Bank Julius Baer & Co. in Singapore. “It’s a step in the right direction and prevents things from getting worse.”
Worse than what; these actions reveal a previously unthinkable level of desperation.

Last week banks borrowed $368 billion per day, up from $188 billion per day the week before (source: Federal Reserve Bank of St. Louis via http://www.itulip.com/forums/showthread.php?p=52281#post52281).

Ordinarily, an increase in the money supply of this magnitude would be highly inflationary. However, the magic of the multiplier effect doesn’t happen until the money is lent out. So far, there’s little evidence that this has happened. Banks continue to hoard cash to cover anticipated losses and writedowns. Take a look at the Baltic Dry Index, which is a proxy for international shipping and manufacturing. Its recent cliff dive is partially due to shippers’ inability to get banks to accept letters of credit from other banks. Individuals have stopped out-of-control consumption. Take a look at this month’s Consumer Confidence Index. It’s at 38, the lowest level on record.

Try as the Fed might, deflationary forces remain stronger than the inflationary kind.

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The markets continued their gut wrenching swings today before finally falling down into the red following a huge rally yesterday in which the Dow gained hundreds of points. For it’s part, the Fed came out today and took some drastic measures of it’s own. It cut a short-term interest rate by a half-percentage point, while at the same time issuing a rather doom and gloom outlook for the economy in the near future. This doesn’t seem all that surprising, given that unemployment remains high, consumer confidence remains low, and the ongoing tightness of the credit markets despite hundreds of billions of dollars being pumped into the system.

The cut itself put the federal funds rate at one percent, which matches the lowest level for the overnight bank lending rate…ever. Of course it wasn’t all that long ago that the Fed took a similar action, the last time being June 2003 and 2004. If the market sentiment for today is any indication, we can take the rate cut’s impact as “meh.”

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Today’s reverse crash resulted in the Dow up $889.35 to close at $9,065.12. From peak to recent trough, the Dow has moved from its all-time high of $14,164 on October 9, 2007 to a low of $8,176 on October 27, 2008. That’s a decline of $5,988 or 42%. It earned back about 10% of that today.

So, let’s try to figure out what caused all this exuberance and determine if it’ll hold.

Over the weekend it was reported that emerging markets’ debt, currencies, and stocks are crashing, a series of events that the US will be relatively unscathed by, for a change. **not much bearing on the Dow unless there’s more to this story, but go on**

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Another guest post from MG who went from Wharton to Wall St. to real estate to Blown Mortgage.

Despite hard times, what possibly could happen here in the land of the free and home of the brave? Hasn’t the US always stood for and protected the civil rights of the individual. No, it hasn’t.

In fact, the United States has a long tradition of violating civil rights and even the constitution itself. Going back to the first depression, which our current condition is likened to, FDR, at the beginning of his first of four terms, declared a national emergency and closed the banks. Spooked by the economy, people had been turning in their gold certificates for physical gold. With some exceptions, all gold was confiscated and all gold certificates had to be turned in for paper currency backed by trust in the US. When the banks reopened, all safe deposit boxes were sealed. Boxes could be opened only in the presence of an IRS agent. **I didn’t know that**

Ok, that was a long time ago.

In April 1971, in response to demands for gold from foreign powers, Nixon, unilaterally and without consulting foreign governments, broke the Bretton Woods agreement. He took the US off the gold standard and replaced “redeemable in gold” with the “full faith and credit of the USA.” **clears throat**

From Reuters on October 7: The Group of Seven is no longer effective and should be replaced by a steering group that includes new emerging economic powers like China, India and Brazil, World Bank President Robert Zoellick said.” Further evidence of the US’s decline in international influence and prestige, the Treasury has bowed to pressure and will allow the IMF to examine its accounts. **gulps**

Just yesterday, October 21 on the Fed’s website: “The Federal Reserve Board on Tuesday announced the creation of the Money Market Investor Funding Facility (MMIFF), which will . . . provide liquidity to U.S. money-market investors. The MMIFF complements the previously-announced Commercial Paper Funding Facility . . . as well as the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility. The Federal Reserve will provide up to $540 billion in loans to help relieve pressure on money-market mutual funds beset by redemptions. ” On the surface, this sounds great; no more breaking the buck and suspending withdrawals from money-market funds. Finally, a bailout for average folks. **sigh of relief**

However, the motive was not to protect citizens. More likely it was to protect China, which has about $5bn stuck in US money-market accounts, other governmental agencies and institutional investors.

And then there’s Argentina, which, at its peak, was among the wealthiest countries in the world. Bloomberg reported yesterday that “Argentine bond yields soared above 24% and stocks sank the most in a decade on speculation the government will seize private pension funds and use the assets to stave off the second default this decade.” Among the reasons for merging US commercial banks and investment banks is to collect deposits, which can now be lent out with no reserve requirements.** starts sweating**

How about the privatizing of Fannie Mae and Freddie Mac, effectively nationalizing the US mortgage market, and the propping up of and bailing out some of the largest banks, and subsidizing the largest US insurance company. And we have just gotten started; there is so much more to come. States and municipalities have barely begun with the multi-billion dollar bailout of California. The industrials are next and have started with bailout money for General Motors and Ford. **mops brow**

At what point do we acknowledge that the US is no longer a democracy with free markets, but has embraced socialism? I think I better change the title of this post to, “It has Happened Here.”

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Remember the saying “if all you have is a hammer, everything looks like a nail“?

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The FOMC cut the Funds Rate another 0.25% to 2.00% based on an 8-2 vote.  Remember, this does not mean that the 30 year fixed rate is now 0.25% lower.   This does mean that if you have a HELOC that is attached to Prime (and it’s not fixed), your rate will go down 0.25%.  Prime will be reduced to 5.00%. 

The FOMC also reduced the Discount Rate 0.25% to 2.25%. 

The Fed Statement regarding today’s rate cuts will have a more dramatic impact mortgage rates (mortgage backed securities).

“Recent information indicates that economic activity remains weak. Household and business spending has been subdued and labor markets have softened further. Financial markets remain under considerable stress, and tight credit conditions and the deepening housing contraction are likely to weigh on economic growth over the next few quarters….

The Committee expects inflation to moderate in coming quarters, reflecting a projected leveling-out of energy and other commodity prices…”

The 0.25% rate cut was highly anticipated and all ready priced into the market.   We’ll see how bonds react once the markets have a chance to absorb the statement and Fed actions today.    This week will remain very volatile with rates…tomorrow is loaded with economic indicators and Friday, we have the big daddy:  The Jobs Report.

• Fed Funds Rate now at 4.25%
• Surprise! Fed Cuts Funds Rate by 0.75%
• Friday’s Rates for Leap Day
• Fed Funds Rate now at 3%
• Friday’s Rate Sheet

It was Charles Mackay, the 19th-century Scottish journalist, who observed that men go mad in herds but only come to their senses one by one. We are only at the beginning of the financial world coming to its senses after the bursting of the biggest credit bubble the world has seen. Everyone seems to acknowledge [...]