(O.T. – sorta): Driving Forces

[USMCBunny]

I don’t post much, just an avid long time reader. Karl Denninger over on the Market Ticker has just posted what I think is a very concise summation of the larger driving forces behind the credit market and thus the housing bubble.

He has posted here before … kinda blunt, but wicked smart, and does a pretty nice job of dumbing things down to a level a military stick monkey can understand.

I’ll try a link here: (my first) – submitted for your consideration..

http://www.tickerforum.org/cgi-ticker/akcs-www?post=33192

Apologies ahead of time if I have abused Rich’s forum or failed to give proper credit to Market Ticker. Let me know if I owe 50 push ups.

[kewp]

Pretty good. However, he makes the same mistake many others did re: the bond graders, i.e. their models are designed to reflect what the bond is worth *now*. Unfortunately for everyone, they lack the ability to forsee the future. The models weren’t ‘flawed’, they just reflected the current market.

I do like his solutions. Something the free market wonks don’t like to admit is that for an economic transaction to be truly ‘free’, it needs to be transparent as well.

Anyways, I don’t envy the Fed’s position. Its either death by deflation via raising interest rates, or death by inflation and lowering them. Unfortunately, since there is nothing anyone can do to prevent the needed deflation I think we are ultimately going to end up with both.

My own opinion is that the best thing for the country is raise interest rates, let all the speculators (and the banks that funded them) go bankrupt and start over clean with whatever is left over. Yeah unemployment will go up, but we’ll make do.

[kewp]

Pretty good. However, he makes the same mistake many others did re: the bond graders, i.e. their models are designed to reflect what the bond is worth *now*. Unfortunately for everyone, they lack the ability to forsee the future. The models weren’t ‘flawed’, they just reflected the current market.

I do like his solutions. Something the free market wonks don’t like to admit is that for an economic transaction to be truly ‘free’, it needs to be transparent as well.

Anyways, I don’t envy the Fed’s position. Its either death by deflation via raising interest rates, or death by inflation and lowering them. Unfortunately, since there is nothing anyone can do to prevent the needed deflation I think we are ultimately going to end up with both.

My own opinion is that the best thing for the country is raise interest rates, let all the speculators (and the banks that funded them) go bankrupt and start over clean with whatever is left over. Yeah unemployment will go up, but we’ll make do.

[kewp]

Pretty good. However, he makes the same mistake many others did re: the bond graders, i.e. their models are designed to reflect what the bond is worth *now*. Unfortunately for everyone, they lack the ability to forsee the future. The models weren’t ‘flawed’, they just reflected the current market.

I do like his solutions. Something the free market wonks don’t like to admit is that for an economic transaction to be truly ‘free’, it needs to be transparent as well.

Anyways, I don’t envy the Fed’s position. Its either death by deflation via raising interest rates, or death by inflation and lowering them. Unfortunately, since there is nothing anyone can do to prevent the needed deflation I think we are ultimately going to end up with both.

My own opinion is that the best thing for the country is raise interest rates, let all the speculators (and the banks that funded them) go bankrupt and start over clean with whatever is left over. Yeah unemployment will go up, but we’ll make do.

[kewp]

Pretty good. However, he makes the same mistake many others did re: the bond graders, i.e. their models are designed to reflect what the bond is worth *now*. Unfortunately for everyone, they lack the ability to forsee the future. The models weren’t ‘flawed’, they just reflected the current market.

I do like his solutions. Something the free market wonks don’t like to admit is that for an economic transaction to be truly ‘free’, it needs to be transparent as well.

Anyways, I don’t envy the Fed’s position. Its either death by deflation via raising interest rates, or death by inflation and lowering them. Unfortunately, since there is nothing anyone can do to prevent the needed deflation I think we are ultimately going to end up with both.

My own opinion is that the best thing for the country is raise interest rates, let all the speculators (and the banks that funded them) go bankrupt and start over clean with whatever is left over. Yeah unemployment will go up, but we’ll make do.

[kewp]

Pretty good. However, he makes the same mistake many others did re: the bond graders, i.e. their models are designed to reflect what the bond is worth *now*. Unfortunately for everyone, they lack the ability to forsee the future. The models weren’t ‘flawed’, they just reflected the current market.

I do like his solutions. Something the free market wonks don’t like to admit is that for an economic transaction to be truly ‘free’, it needs to be transparent as well.

Anyways, I don’t envy the Fed’s position. Its either death by deflation via raising interest rates, or death by inflation and lowering them. Unfortunately, since there is nothing anyone can do to prevent the needed deflation I think we are ultimately going to end up with both.

My own opinion is that the best thing for the country is raise interest rates, let all the speculators (and the banks that funded them) go bankrupt and start over clean with whatever is left over. Yeah unemployment will go up, but we’ll make do.

[USMCBunny]

Kewp,

I think a lot of major players are going to use the “could not forsee” ploy as best they can over the next year. Aren’t Mozilla and and a host of other super bonusing CEO’s getting put to a hearing as we speak?

Perhaps the Bond Market, which I know very little about, could not mathematically forsee the coming contraction, but I bet the regulators could have and should have.

As for your last paragraph, I totally agree. I suspect, however, that I agree because I am very well positioned for that scenario (stable job, no debt, lots of savings). I worry those of us who are well positioned for a deflationary event are too few. That MOST voters in this country are the opposite (high debt/ low savings). If so, right or wrong, the politicians that will guide the next steps may well go with popular demand. This is my fear.

I am hoping that it will not matter… that this deflationary contraction is going to happen…no matter what the FED or the Govt does.

Flywestcoast

[USMCBunny]

Kewp,

I think a lot of major players are going to use the “could not forsee” ploy as best they can over the next year. Aren’t Mozilla and and a host of other super bonusing CEO’s getting put to a hearing as we speak?

Perhaps the Bond Market, which I know very little about, could not mathematically forsee the coming contraction, but I bet the regulators could have and should have.

As for your last paragraph, I totally agree. I suspect, however, that I agree because I am very well positioned for that scenario (stable job, no debt, lots of savings). I worry those of us who are well positioned for a deflationary event are too few. That MOST voters in this country are the opposite (high debt/ low savings). If so, right or wrong, the politicians that will guide the next steps may well go with popular demand. This is my fear.

I am hoping that it will not matter… that this deflationary contraction is going to happen…no matter what the FED or the Govt does.

Flywestcoast

[USMCBunny]

Kewp,

I think a lot of major players are going to use the “could not forsee” ploy as best they can over the next year. Aren’t Mozilla and and a host of other super bonusing CEO’s getting put to a hearing as we speak?

Perhaps the Bond Market, which I know very little about, could not mathematically forsee the coming contraction, but I bet the regulators could have and should have.

As for your last paragraph, I totally agree. I suspect, however, that I agree because I am very well positioned for that scenario (stable job, no debt, lots of savings). I worry those of us who are well positioned for a deflationary event are too few. That MOST voters in this country are the opposite (high debt/ low savings). If so, right or wrong, the politicians that will guide the next steps may well go with popular demand. This is my fear.

I am hoping that it will not matter… that this deflationary contraction is going to happen…no matter what the FED or the Govt does.

Flywestcoast

[USMCBunny]

Kewp,

I think a lot of major players are going to use the “could not forsee” ploy as best they can over the next year. Aren’t Mozilla and and a host of other super bonusing CEO’s getting put to a hearing as we speak?

Perhaps the Bond Market, which I know very little about, could not mathematically forsee the coming contraction, but I bet the regulators could have and should have.

As for your last paragraph, I totally agree. I suspect, however, that I agree because I am very well positioned for that scenario (stable job, no debt, lots of savings). I worry those of us who are well positioned for a deflationary event are too few. That MOST voters in this country are the opposite (high debt/ low savings). If so, right or wrong, the politicians that will guide the next steps may well go with popular demand. This is my fear.

I am hoping that it will not matter… that this deflationary contraction is going to happen…no matter what the FED or the Govt does.

Flywestcoast

[USMCBunny]

Kewp,

I think a lot of major players are going to use the “could not forsee” ploy as best they can over the next year. Aren’t Mozilla and and a host of other super bonusing CEO’s getting put to a hearing as we speak?

Perhaps the Bond Market, which I know very little about, could not mathematically forsee the coming contraction, but I bet the regulators could have and should have.

As for your last paragraph, I totally agree. I suspect, however, that I agree because I am very well positioned for that scenario (stable job, no debt, lots of savings). I worry those of us who are well positioned for a deflationary event are too few. That MOST voters in this country are the opposite (high debt/ low savings). If so, right or wrong, the politicians that will guide the next steps may well go with popular demand. This is my fear.

I am hoping that it will not matter… that this deflationary contraction is going to happen…no matter what the FED or the Govt does.

Flywestcoast

[gdcox]

Amazing letter. Impressive.All should read even if there a few mistakes in it.

Some new things in there I did not know, eg:
‘All credit instruments must be subject to “Regulation FD” disclosure requirements. It is outrageous that bond
rating agencies are given details on the mortgages and other instruments inside “CDOs” that are not available in
the prospectus to buyers.’

The author and a poster above are wrong on why the rating agencies got it wrong. The truth is that they had not adjusted their models for the new paradigm of US mortgage lending in the the last five years: eg all those option mortgages, teaser rates with ratchets, prevalent fraud and above all the sudden dominance of mortgages that got packaged with accompanying ‘who cares’ attitude of those who passed the parcel. They were crassly incompetent, but more than that, I don’t think so.

The recommendation of the Denninger’s letter that ‘mark to market’ be enforced for all these mortgage and other packaged securities so we can see the true situation is a bit a Pandora’s box. Why? Because the values on the market for these securities is increasingly being generated by forced sales in a situation where many the usual investors , as Denninger himself observes, have taken their ball and gone home (or rather invested in two year Treasuries, commodities and index-linked bonds) , the bid price in the market can be well below the underlying value of such bonds and other instruments

*** even if such value were determined in a forward looking way by someone like Rich Toscano***.

It would be foolish to force institutions into bankruptcy if the long term/underlying value of these assets (securities such as mortgage backed bonds) is higher than the market price whenever that is recorded. In other words it is healthy for house prices to come down to sustainable levels , but not for the rest of the system to be forced to adjust to a worse situation than that implied a worse outcome in housing than that.

I will make that comment on Denninger’s web site.

Graham

[gdcox]

Amazing letter. Impressive.All should read even if there a few mistakes in it.

Some new things in there I did not know, eg:
‘All credit instruments must be subject to “Regulation FD” disclosure requirements. It is outrageous that bond
rating agencies are given details on the mortgages and other instruments inside “CDOs” that are not available in
the prospectus to buyers.’

The author and a poster above are wrong on why the rating agencies got it wrong. The truth is that they had not adjusted their models for the new paradigm of US mortgage lending in the the last five years: eg all those option mortgages, teaser rates with ratchets, prevalent fraud and above all the sudden dominance of mortgages that got packaged with accompanying ‘who cares’ attitude of those who passed the parcel. They were crassly incompetent, but more than that, I don’t think so.

The recommendation of the Denninger’s letter that ‘mark to market’ be enforced for all these mortgage and other packaged securities so we can see the true situation is a bit a Pandora’s box. Why? Because the values on the market for these securities is increasingly being generated by forced sales in a situation where many the usual investors , as Denninger himself observes, have taken their ball and gone home (or rather invested in two year Treasuries, commodities and index-linked bonds) , the bid price in the market can be well below the underlying value of such bonds and other instruments

*** even if such value were determined in a forward looking way by someone like Rich Toscano***.

It would be foolish to force institutions into bankruptcy if the long term/underlying value of these assets (securities such as mortgage backed bonds) is higher than the market price whenever that is recorded. In other words it is healthy for house prices to come down to sustainable levels , but not for the rest of the system to be forced to adjust to a worse situation than that implied a worse outcome in housing than that.

I will make that comment on Denninger’s web site.

Graham

[gdcox]

Amazing letter. Impressive.All should read even if there a few mistakes in it.

Some new things in there I did not know, eg:
‘All credit instruments must be subject to “Regulation FD” disclosure requirements. It is outrageous that bond
rating agencies are given details on the mortgages and other instruments inside “CDOs” that are not available in
the prospectus to buyers.’

The author and a poster above are wrong on why the rating agencies got it wrong. The truth is that they had not adjusted their models for the new paradigm of US mortgage lending in the the last five years: eg all those option mortgages, teaser rates with ratchets, prevalent fraud and above all the sudden dominance of mortgages that got packaged with accompanying ‘who cares’ attitude of those who passed the parcel. They were crassly incompetent, but more than that, I don’t think so.

The recommendation of the Denninger’s letter that ‘mark to market’ be enforced for all these mortgage and other packaged securities so we can see the true situation is a bit a Pandora’s box. Why? Because the values on the market for these securities is increasingly being generated by forced sales in a situation where many the usual investors , as Denninger himself observes, have taken their ball and gone home (or rather invested in two year Treasuries, commodities and index-linked bonds) , the bid price in the market can be well below the underlying value of such bonds and other instruments

*** even if such value were determined in a forward looking way by someone like Rich Toscano***.

It would be foolish to force institutions into bankruptcy if the long term/underlying value of these assets (securities such as mortgage backed bonds) is higher than the market price whenever that is recorded. In other words it is healthy for house prices to come down to sustainable levels , but not for the rest of the system to be forced to adjust to a worse situation than that implied a worse outcome in housing than that.

I will make that comment on Denninger’s web site.

Graham

[gdcox]

Amazing letter. Impressive.All should read even if there a few mistakes in it.

Some new things in there I did not know, eg:
‘All credit instruments must be subject to “Regulation FD” disclosure requirements. It is outrageous that bond
rating agencies are given details on the mortgages and other instruments inside “CDOs” that are not available in
the prospectus to buyers.’

The author and a poster above are wrong on why the rating agencies got it wrong. The truth is that they had not adjusted their models for the new paradigm of US mortgage lending in the the last five years: eg all those option mortgages, teaser rates with ratchets, prevalent fraud and above all the sudden dominance of mortgages that got packaged with accompanying ‘who cares’ attitude of those who passed the parcel. They were crassly incompetent, but more than that, I don’t think so.

The recommendation of the Denninger’s letter that ‘mark to market’ be enforced for all these mortgage and other packaged securities so we can see the true situation is a bit a Pandora’s box. Why? Because the values on the market for these securities is increasingly being generated by forced sales in a situation where many the usual investors , as Denninger himself observes, have taken their ball and gone home (or rather invested in two year Treasuries, commodities and index-linked bonds) , the bid price in the market can be well below the underlying value of such bonds and other instruments

*** even if such value were determined in a forward looking way by someone like Rich Toscano***.

It would be foolish to force institutions into bankruptcy if the long term/underlying value of these assets (securities such as mortgage backed bonds) is higher than the market price whenever that is recorded. In other words it is healthy for house prices to come down to sustainable levels , but not for the rest of the system to be forced to adjust to a worse situation than that implied a worse outcome in housing than that.

I will make that comment on Denninger’s web site.

Graham

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