Three More Years of Goldilocks?

"There was some revealing information in the three-year forecast published by the Federal Reserve this week. It looks like Ben Bernanke & Co. are dissing high oil and gold prices and the sagging dollar as influences on future inflation. Instead they basically see 2 percent inflation — both headline and core — in 2008, 2009, and 2010. The Fed also sees Goldilocks-type economic growth — not too hot, not too cold — for the next three years."

Kudlow is right. Enron had a market cap of $70B disappear in a year, bring down Arther Anderson, and catalyze the egregiously interventionist Sarbanes-Oxley. We had 9/11 during this same stretch and went to war in Afghanistan. The subprime debacle isn't all that much bigger than the Enron/AA collapse, and the regulatory knee jerk can't be all that much worse than Sarb-Ox. Plus, I don't understand the simple math. I've seen one estimate that the losses could reach $400B. If there are 2 million home foreclosures, which is at the very high end of all estimates that I've seen, that works out to a loss of $200K per loan. I know these bankers have been stupid and reckless, but who are they lending to that they could lose that much per transaction? I must say that I'm at a loss even to understand what these folks are talking about. I think this whole subprime thing may rival global warming for being over-hyped and under-documented.

Global warming is based on a theory that has as of yet to prove itself by accurately predicting anything.

Kudlow and his fellow “Goldilocks” prognosticators have been wrong at every turn of this sub-prime meltdown in the last 12 months. They said it would be small - less than $100 billion. They said it would be constrained to over-heated housing markets only. They said that any problems would not spill over into the other debt markets.

They have been wrong at every turn. Every single one of these predictions that we’re in a happy medium and that the sub-prime issue was “overblown” has turned out to be crushed under another write-down, another disclosure of the “AAA” sub-prime debt turning up in yet another unforeseen portfolio in with yet more unforeseen coupling, covenants and leverage. Now we see that Freddie Mac is infected with the sub-prime slime, and they were constrained from lending to sub-prime borrowers. So how did they get infected? They bought sub-prime debt in the secondary market. Idiots. So much for the “Fannie and Freddie won’t be affected by sub-prime” argument.

The simplest truth of the sub-prime issue is this: it has spread far, far beyond where anyone has predicted it would. Not even the biggest doom-n-gloomers on sub-prime would have predicted that Citigroup would sell off 5% of the equity to an Arab state to get a piddling $7.5 billion and have to pay 11% on that money. No one predicted that. As of this very morning, this has occurred. This is in indication of how desperate Citi is to obtain cash to bail out their posteriors from the swamp in which they now find themselves.

The subprime debacle isn't all that much bigger than the Enron/AA collapse, and the regulatory knee jerk can't be all that much worse than Sarb-Ox. Plus, I don't understand the simple math. I've seen one estimate that the losses could reach $400B. If there are 2 million home foreclosures, which is at the very high end of all estimates that I've seen, that works out to a loss of $200K per loan. I know these bankers have been stupid and reckless, but who are they lending to that they could lose that much per transaction?

The subprime problem is just a smokescreen to disguise the larger systemic financial problems that are the result of the risks incurred by a financial system that knows it will always be bailed out by the taxpayer.

My natural instinct is to be pessimistic. However throughout history, the optimist is usually correct.

So I’m inclined to agree with the Fed, lower rates are not needed at this time.

Besides, with the dollar dropping I expect to see foreigners investing in the U.S. which will prop up our Real Estate market. And a lower dollar makes it less profitable to send jobs overseas, which will also tend to prop up Real Estate.

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