Market: A Tough Nut To Crack
(Conspiracy Nation, 08/16/07) – Going out on a limb, Conspiracy Nation intuits the sense of panic in world markets has begun to subside. This is not investment advice; this is tinfoil hat communications from the planet Zeta.
Laying out the variables is a good beginning. Dick Armey, former House majority leader, summarizes the situation well in today's Investor's Business Daily. 85 percent of all mortgages are not of the sub-prime variety. The rest, the sub-primes, are riskier. The home loans are bundled into mortgage-backed securities. When the housing bubble collapsed, some of the sub-prime mortgages went into foreclosure. This caused investors to re-evaluate their willingness to buy mortgage-backed securities. But, writes Armey, “Let's put this in perspective. For all of the media's hysteria, less than 15 percent of the 44 million mortgages in America are in the subprime sector. As a total of all mortgages, foreclosure rates are 0.6 percent, up slightly from 0.5 percent last year.” (“Let Market, Not Government, Deal With Subprime Mortgage Problem”, p. A13).
Due to the wariness and re-evaluation of mortgage-backed securities, investors stopped buying them. This snowballed into a “credit crunch.” The mortgage-backed securities are not necessarily worthless. In fact, since 85 percent of them are not sub-primes, most of those securities seem basically solid. With house values on the decline, even securities based upon traditional mortgages are likely less substantial – but they are far from being junk bonds.
Assailed from both sides of opinion, lower the rates vs. do not interfere, “Fed” chief Ben Bernanke has taken a middle position for now. On August 10th, the “Federal” Reserve injected billions of dollars of “liquidity” into the market. Since last Friday's massive intervention, the “Fed” has significantly decreased the cash infusions. This, in itself, signals that Bernanke and the “Fed,” since last week, have grown less worried about the situation.
On the horizon next week could be a “Black Swan event” connected with Countrywide, which is hugely involved in mortgages. A Black Swan event, as described by Wikipedia, boils down to something unexpected happening. Already mobilized for a feared Countrywide crisis are the two sides: those against government interference in the markets vs. those who believe some entities are “too big to fail.” Countrywide may surprise both camps and skate through with no problems. However if there is a crisis with Countrywide, these will be the two stances: (1) “Moral Hazard.” This side says when government and/or the “Fed” intervenes, that makes them what in the realm of substance abuse are called “enablers.” In 1998, Long Term Capital Management went on a binge, and Mama Government picked up the empty bottles next morning. This lead to a “moral hazard” with later high-flyers confident Mama Government will pick up the empty bottles. (2) “Too big to fail.” Already, according to Armey (op. cit.), Senator Hillary Clinton has proposed a $2 billion federal intervention. Senator Chuck Schumer reportedly has authored legislation to increase regulation of the mortgage market. “Too big to fail” fears a domino effect unless the government intervenes.
But all this budding brouhaha is subsiding, if the intuitions of this editor are correct. There has been remarkable volatility – wild swings in stock prices. But as previously reported by Conspiracy Nation, rarely if at all mentioned is the quite recent abandonment of the “Uptick Rule.” In July, the SEC scrapped a regulation dating back to the 1930s, which restricted short sellers - who bet on falls in share prices. The so-called "uptick rule" meant that short sellers could only trade following a rise in a share price. This is no longer the case, and helps explain dramatic downward pressures. (“Black Swan Over Wall Street,” http://www.shout.net/~bigred/BlackSwan.html)
In his first major test, Ben Bernanke has not done too badly. The intervention on Friday, August 10th, probably was a bit too massive. However Bernanke pretty much stayed above the market hysteria and seems not to have been unduly influenced by either faction, i.e., “Moral Hazard” vs. “Too Big To Fail.” This evaluation is subject to change, since the situation remains volatile. For now, though, the sense of panic appears to be on the wane.
Conspiracy Nation
http://www.shout.net/~bigred/cn.html