September 18, 2007

On Helicopters and Moral Hazard

HP'ers now we know what The Fed is going to do to counter the inevitable housing crash. They're going to cut rates aggressively, all the way to zero if they have to (and they'll have to), and they're going to destroy our currency and prop up our dollar-denominated stock prices.

Killing the dollar also solves the trade imbalance, even though inflation will rage, and devalues the present value of retirement obligations (indexed at bogus inflation rates).


Invest accordingly. Wall Street has their man installed at The Fed, and don't fight it, and especially don't fight oil, gold, international stocks and multinationals who get the majority of their profits from overseas markets. Should be no surprises for HP'ers from here on out, after today's shocker which really wasn't that shocking.

Moral hazard in finance

Financial bail-outs of lending institutions by governments, central banks or other institutions can encourage risky lending in the future, if those that take the risks come to believe that they will not have to carry the full burden of losses.

Lending institutions need to take risks by making loans, and usually the most risky loans have the potential for making the highest return. A moral hazard arises if lending institutions believe that they can make risky loans that will pay handsomely if the investment turns out well but they will not have to fully pay for losses if the investment turns out badly.

Bernanke on Helicopters and Deflation


Sustained deflation can be highly destructive to a modern economy and should be strongly resisted.

Moreover, as I have discussed today, a variety of policy responses are available should deflation appear to be taking hold. Because some of these alternative policy tools are relatively less familiar, they may raise practical problems of implementation and of calibration of their likely economic effects.

I hope to have persuaded you that the Federal Reserve and other economic policymakers would be far from helpless in the face of deflation, even should the federal funds rate hit its zero bound.

47 comments:

Sheeple said...

So there it is...

Wall st has their man installed.

Buy stocks, gold, real estate, and debit.

Dump the dollar, even Greenspan said to diversify currencies in his 60 minutes interview.

Oh wait, he also said I should get a arm mortgage

keith said...

Housing and real estate will still crash for many reasons, biggest one is that the toxic loan financing is gone and gone forever

Second biggest reason is the fundamentals - it's significantly cheaper to rent than "buy", and values will drop until that equilibrium is restored

You'll have real estate deflation while you have commodity and imports inflation. You'll also have wage stagnation, recession, consumer spending pullback, and rising unemployment.

It'll be an interesting mix, but the known part of the equation is Fed behavior. Invest accordingly.

FlyingMonkeyWarrior said...

LOL @ Devestment.
Now, back to tomorrows news in Japan, about the USD.
do ya think they understate things just a tad?
********************

Dollar May Extend Drop Versus Euro as Fed Cuts Rate Half-Point

By Min Zeng
snip;

Sept. 19 (Bloomberg) -- The dollar may extend a decline against the euro after the Federal Reserve cut its benchmark interest rate for the first time in four years, dimming the allure of the U.S. currency.


snip;
``Growth and interest-rate differentials are both turning against the dollar,'' said Samarjit Shankar, director of global strategy for the Global Markets group in Boston at Bank of New York Mellon. ``This confirms the dollar bears' view. We are easily running toward $1.4 now. Probably within a week.''

snip;

The New York Board of Trade's Dollar Index comparing the U.S. currency against six primary peers, including the euro and yen, touched 79.157 yesterday, the lowest since September 1992.

snip;

``It's about the Fed's easing cycle,'' said Adam Boyton, a senior currency strategist in New York at Deutsche Bank AG, before the Fed decision. ``The Fed will cut the rate more than once, which paints a bearish picture for the dollar.''

Anonymous said...

Invest accordingly, and remember, you cant buy a pizza in America with Euros.

``Lowering the funds rate overall doesn't boost housing,'' said Lee Hoskins, a former Cleveland Fed president and now senior fellow at the Pacific Research Institute in San Francisco. ``All this does is delay the day in which these wealth losses will finally be worked out in the marketplace, so I don't regard this as a particularly good move.''

keith said...

just saw schiff on CNBC - reaffirmed he's not short stocks, is long oil stocks, gold, foreign stocks and short the dollar

perfect advice I'd say going forward

Anonymous said...

And rent!

Anonymous said...

Sheeple said...
So there it is...

Wall st has their man installed.

Buy stocks, gold, real estate, and debit.

Dump the dollar, even Greenspan said to diversify currencies in his 60 minutes interview.

Oh wait, he also said I should get a arm mortgage

September 19, 2007 12:21 AM

-----------------

Real estate still won't do well going forward because workers' wages will not be going up at nearly the true rate of inflation. Much of the housing price collapse may be masked by rising inflation, but housing prices will continue collapsing nonetheless.

borkafatty said...

Waiting for the silver explosion to follow Gold...yes I am.

I bet you September 18, 1929 was not as exciting as todays Fed Decision.

Anonymous said...

Anonymous said...
Invest accordingly, and remember, you cant buy a pizza in America with Euros.

--------------------

Yeah, but you can exchange those euros for dollars and buy LOTS of pizza AND beer! The good stuff too, not Swillweiser.

Edgar said...

Yah, devestment got a new attitude!

Anonymous said...

I strongly encourage all HP'ers to give the Federal Reserve some feedback at http://www.federalreserve.gov/feedback.cfm

I did....

Anonymous said...

I told you 50 bps to appease the Masters of Universal Tyranny.

Now all bear folks join the party. Sell Dollars and get into Emerging Markets.

Sheeple said...

Anonymous said...

just trying to force the savers money into their cronys wall st stocks so it can get ripped off with mergers, buyouts and hundred million dollar salaries, or receive less than half the rate of true inflation which does not include the calculations for housing, food , insurance, health care, gas or energy or taxes, all sky rocketing...should have thought typical?

I AM A SHEEP! YOU CANT TALK TO ME THAT WAY!

borkafatty said...

I always wanted to know what it felt like to live like Archy Bunker...Now I can live it...Debt free thank Christ.

I think I'll Sing...........
............................

"Those Were The Days"

Boy, the way Glenn Miller played. Songs that made the Hit Parade.

Guys like us, we had it made. Those were the days.

Didn't need no welfare state. Everybody pulled his weight.

Gee, our old LaSalle ran great. Those were the days.

And you know who you were then. Girls were girls and men were men.

Mister, we could use a man like Herbert Hoover again.

People seemed to be content. Fifty dollars paid the rent.

Freaks were in a circus tent. Those were the days.

Take a little Sunday spin, go to watch the Dodgers win.

Have yourself a dandy day that cost you under a fin.

Hair was short and skirts were long. Kate Smith really sold a song.

I don't know just what went wrong. Those Were The Days.

JimAtLaw said...

Keith, that sounds to me like "bet big on hyperinflation"...?

Anonymous said...

Every bear just went long

That's scary

Anonymous said...

Welcome to Weimar Revisited! Forget about any ‘Moral Hazard,’ and forget about the purchasing power of those hard earned Dollars.

Clearly, that is the message that the Fed is sending to the International community with today’s action. A shocking, potentially reckless move, where will the Bid be found on the greenback, and at what point will foreigners decide that a 4.48% yield on a 10 year Bond doesn’t cover the bet? (Heck, it ticked up a whole basis point today.) Only time will tell, but for now, the Fed’s stark message seems to be re-inflate at all costs.

In pursuing this arguably high-risk path, the Fed is opening the door to a potential Pandora’s Box. Conspiracy theorists may argue that Central Banks are working together, and that despite a lower value for the Greenback, foreign money will continue to be recycled into US Dollars. Yet, what if that is wrong? What if foreign money decides to flee the Dollar market? In that reality, this high stakes gambit by the Fed could blow up in its face, as exiting foreign capital hammers the Dollar and begins to send long term rates sharply higher.

At that point, we face a melt down, as rising long term rates would be another nail in the coffin for the US Residential Market, and could continue to generate chaos in credit markets. A marked departure from the Greenspan gradualism, the Fed appears to be leaving its equilibrium at the political alter of an election year, and at the special interest alter of Wall Street investment banks. How ironic that if presumed foreign cooperation is renounced, the Fed could end up standing alone in a long suffering melt down.

Looking back at past interest rate cutting cycles, we see that the trend in the US Dollar has not been anything but ugly. Now, with the US Dollar on the verge of all time record lows against most major currencies, is it possible that today’s aggressive rate cut will be seen as anything but an Admiral Farragut style “Damn the torpedoes, full speed ahead” decree of a global “we don’t care” weak dollar policy?

http://www.financialsense.com/Market/wrapup.htm

Charles said...

Right on Keith!

Seriously how does todays move help the Housing Bulls? The FED don't do Wage inflation :)

Wages haven't been anywhere near in sync with prices since 2004. Now a fresh infusion of liquidity to chase goods and services that creates wealth for who?

Not Joe Blow W2 worker. So who pays for the inflated housing?

Roubini has it right. We'll be at 4.5 bye the end of the year and the recession will continue (it's already started) by mid-late '08 the inflation monster will burst out of the closet and here comes the double digit rates Greenspan spoke of.

Roccman said...

Keith - look bro - you and I have gone round and round about 9-11, Iran, and Peak Oil...

Why are you changing your tune on cash.

I have been a goldbug for years...hell even last week you said cash was king.

What gives bro...looks like I may have rubbed off on you.

I know the dieoff thing is hard to swallow, but you'll get it someday.

fed up said...

I am so FED up! BB has sh!t all over my savings. I am no longer going to support the dollar by keeping all my savings in it. What is the easiest way to put my money in other currencies? Is it easy to open an account in a foreign country like switzerland?

it gets worse...
WASHINGTON - Looking to help homeowners avoid foreclosure, the Democratic-controlled House on Tuesday moved toward expanding federal backing of mortgages well beyond limits favored by the Bush administration.

Anonymous said...

Keith,

This is for you!

http://tinyurl.com/ys7xm4


Merry Housing!

6% Realtor said...

Today was no surprise, don't know why so many are shocked. It's not a smart move by the Fed by they are reacting to panic rather than managing it.
It'll be interesting to see the impact on mortgage rates. In any case it's like putting a bandaid on a severed limb. More pain to come in housing!

cookies and cream said...

Hey Sheeple, nice new digs! Do you enjoy pizza? Or, is that being anti-sheeple? I bet the bushies think pizza was invented by Rush Limbaugh's great grandfather. Baaaaaaah-aaaah.

Anonymous said...

This is the time for a selective tax program: tax the hell out of people who need to be, taxed—people for whom taxation is the only medicine that can work to curb their compulsion to speculate; and give preferential tax breaks to those who are prepared to make long term investments to promote infrastructure and rebuild the productive economy

Anonymous said...

I hate to be a moron but if I have 150k sitting in cds waiting to buy a house is this a risk (I dont understand the devaluation of the dollar)

Mr.Mortgage said...

Your real estate hasn't dropped like this property. Credit crunch and luxury slowdown in LA.
http://thegreatloanblog.blogspot.com

SeattleMoose said...

New World Order....plans right on schedule. Before you can impose a one world currency there has to be some compelling reason to go to such a system. And without chaos/crisis of some kind, there is no reason.

Create crisis, provide solution, and achieve plan.

The only question left is....will be it the Euro or the Dollar? At this point it may seem like the Euro, but sometimes what is the "obvious choice" is a decoy to further seperate the peasants from their hard earned money. Remember, the weaker the dollar gets, the harder it is for Europe to compete in the international market place.

This could be a "gas war" like we used to see in the 70's....except this time it is between the world's two leading currencies.

Anonymous said...

Second biggest reason is the fundamentals - it's significantly cheaper to rent than "buy", and values will drop until that equilibrium is restored

Or rents will rise as inflation takes hold until equilibrium in nominal dollars is restored. In which case homeowners with fixed rate mortgages pay lenders back in cheap dollars and cash is trash.

Anonymous said...

The one thing Helicopter is trying to avoid (inflation) just got worse because long term rates (ie mortgages rates) are going up!

Fed funds doesn't do anything for long term interest rates. This is a short term rate which will cause countries like China to dump U.S. dollars (ie U.S. Treasuries). Countries dumpig dollars will cause long term interest rates to go up!

Nice job Helicopter! You are not helping borrowers! Get out of debt folks! You will be repaying a mortgage with more expensive dollars as long term rates begin climbing.

Anonymous said...

"Invest accordingly, and remember, you cant buy a pizza in America with Euros."

I wouldn't be too sure about that...

http://tinyurl.com/2svy6q

http://tinyurl.com/2r3s8q

I think a multicurrency account (or perhaps a no leverage forex broker [http://tinyurl.com/3czvcz]) can provide an ATM card (or wire EFT) which one can use to buy food stuffs, etc, w/o holding USDs except for the time of the purchase.

Anonymous said...

Roubini has it right. We'll be at 4.5 bye the end of the year and the recession will continue (it's already started) by mid-late '08 the inflation monster will burst out of the closet and here comes the double digit rates Greenspan spoke of.

September 19, 2007 1:46 AM
---------------

Just in time for a Democrat to get into the W.H.!

With the dollar being crapped on Chindia will no longer buy into it. This will reduce the funding for pet projects (read: universal health care, etc). Causing projects to be abandoned or funded thru higher taxes on the M-C.

The voters may not want another Bush, but they won't be able to afford a Hillary.

Anonymous said...

WASHINGTON - Looking to help homeowners avoid foreclosure, the Democratic-controlled House on Tuesday moved toward expanding federal backing of mortgages well beyond limits favored by the Bush administration.
-----------------------------------

Yep, time to protect those poor hourly Joes making $20/hr by raising the guarantee limit to what, nearly 800k in some areas????? They are protecting and bailing out the lenders, not the borrowers with this.

Anonymous said...

Guess what, bitter renters? There are two ways to equalize the home price/rent equation.

1) prices come down

or

2) rents go up! (and prices stay flat)

It is beginning to look like #2 (in more ways than one!).

Anonymous said...

You renters are a trip.

You say 50% off housing, OC and LA are up. Worst hit areas are down 10%.

You say no bailout, big bailout comes.

You say no interest rate cut, well you know.

You predict DOW under 10,000, it is within striking of 14,000.

Why not just admit you people are wrong every time?

Anonymous said...

keith said...

Housing and real estate will still crash for many reasons, biggest one is that the toxic loan financing is gone and gone forever

Second biggest reason is the fundamentals - it's significantly cheaper to rent than "buy", and values will drop until that equilibrium is restored

=============

BUZZZ. Nope wrong Keith, you don't win the prize tonight.

It may be cheaper to rent. Who cares? People don't want to rent. Renting is like riding the bus, only poor people do it.

It's cheaper to buy a shirt at Walmart for $5 than at Macy's for $50 too, yet Macy's sells a lot of shirts.

You keep posting articles saying home sales are down 10% or 20%. OK. That means 80 to 90% as many sales are happening as before.

Your little movement here was fun to watch, now we need to get back to reality. Have fun with your gold and cash.

Anonymous said...

Check out the LIBOR which is what ARM resets go off of. 3-Month Libor is at 5.24 today. Last month it was 5.50.

So essentially everyone with an adjusting ARM just got a .25% dicount. Might help some at the margin. But if you were going to foreclose at 7%, you will most likely foreclose at 6.75% just as easily.

Anonymous said...

The Fed and Bank of England are not trying to save the real estate markets. They are trying to bail out their bankrupt financial system.

Monetarist policy got us into this mess and their lowering of interest rates will not succeed in saving this system.

LauraVella said...

Anon said:"give preferential tax breaks to those who are prepared to make long term investments to promote infrastructure and rebuild the productive economy"

Great idea. We need to bring back manufacturing to this country.

nose hair said...

Moral hazard - LOL.

We're all Keynsians now.

Gold will shoot to the Moon, until it's use in finance is outlawed. Silver will shine, until they make it's ownership a crime.

Keep track of your debit/identity card citizen. Remember it's use is mandatory for any transaction over $100. Your account at the U.S. Reconciliation Bank is fully insured up to $10 million New Dollars...

Sheeple said...

2) rents go up! (and prices stay flat)

It is beginning to look like #2 (in more ways than one!).


Farmer John Needs to give me a pay raise for this to work.

We'll be at 4.5 bye the end of the year and the recession will continue (it's already started) by mid-late '08 the inflation monster will burst out of the closet and here comes the double digit rates Greenspan spoke of.


This is more like it...

Anonymous said...

""2) rents go up! (and prices stay flat)

It is beginning to look like #2 (in more ways than one!).
"

Excuse me, but my rent actaully went DOWN 3% THIS YEAR alone (I live in Orange County).

Try getting your head out of your ass for once.

Anonymous said...

"Looking to help homeowners avoid foreclosure, the Democratic-controlled House on Tuesday moved toward expanding federal backing of mortgages well beyond limits favored by the Bush administration."

------------------

Well, perhaps the monkey can veto this crap. It would be one of the very very very few things he will have done right in two stolen terms in office.

Anonymous said...

Anonymous said...
I hate to be a moron but if I have 150k sitting in cds waiting to buy a house is this a risk (I dont understand the devaluation of the dollar)

---------------

Yes, unhedged exposure to the US peso is a HUGE freaking risk!

Anonymous said...

Anonymous said...
Guess what, bitter renters? There are two ways to equalize the home price/rent equation.

1) prices come down

or

2) rents go up! (and prices stay flat)

It is beginning to look like #2 (in more ways than one!).

September 19, 2007 7:12 AM

------------------

The important thing is that wages will NOT go up. The government says inflation is 2%, so the sheeple will be getting 3% raises at the most. That means that home prices will continue to drop, and rents will not be able to go up much.

That McMansion is only "worth" what someone else is willing AND ABLE to pay for it.

Anonymous said...

Anonymous said...
The one thing Helicopter is trying to avoid (inflation) just got worse because long term rates (ie mortgages rates) are going up!

Fed funds doesn't do anything for long term interest rates. This is a short term rate which will cause countries like China to dump U.S. dollars (ie U.S. Treasuries). Countries dumpig dollars will cause long term interest rates to go up!

Nice job Helicopter! You are not helping borrowers! Get out of debt folks! You will be repaying a mortgage with more expensive dollars as long term rates begin climbing.

September 19, 2007 6:39 AM

------------------

Dude, you've got it backwards. The gov. WANTS inflation - it is the easiest way to confiscate the sheeple's money. They just need to convince the sheeple that inflation is under control and they are "working hard" to keep it that way.

As for higher long term interest rates, that is NOT inflation, but rather (normally) the result of increased inflation expectations.

Also, adjustable rate mortgages are usually based on short rates. Fixed rate mortgages are based on long term rates, but this will not affect existing homedebtors. It will, however, decrease the amount of money new prospective suckers are able to borrow, thereby accelerating the housing price declines. Sounds like we've got a silver lining there.

Anonymous said...

Anonymous said...
You renters are a trip.

You say 50% off housing, OC and LA are up. Worst hit areas are down 10%.

You say no bailout, big bailout comes.

You say no interest rate cut, well you know.

You predict DOW under 10,000, it is within striking of 14,000.

Why not just admit you people are wrong every time?

September 19, 2007 12:37 PM

---------------------

Dopes,

Actually LA/OC is down 4.1% YOY, not including inflation. See:

www.macromarkets.com

...and fix that oral-rectal inversion problem. As for 50% off, have patience... it's coming. In bubble epicenters like LA/OC, it may well be more than 50% in inflation adjusted terms before it's all said and done. Sucks to be an upside-down homedebting Dopes like you.

The bailout just means the housing crash will happen a bit more slowly. Prices will reach fundamental value (and likely go below it) in due time.

The interest rate cut just means that inflation adjusted prices will be falling much much faster than nominal prices. That's OK with any of us that have diversified out of the dollar and into inflation-sensitive investments.

The stock market going higher simply reflects the helicopter drops of money and the fact that a share of a stock in a company that does not go out of business is a better long term store of value than an FRN which is an unbacked IOU.

DaveO said...

I love this article. It says a lot about the problem: http://tinyurl.com/32q2uv

My favorite part:
"If the US was not a spoiled brat it would realize that the only way to get out of this bind and preserve the value of the dollar is to accept the inevitability of a consumer-led recession. Households would consume less and start saving....But the baby boomers seem to imagine that recessions and business cycles have been abolished, that they do not need to save for retirement, close as it is now, and that they deserve that second home and third car."