Friday, May 29, 2009
What happened Wednesday
Yesterday, the mortgage market was so volatile that banks and mortgage bankers across the nation issued multiple midday price changes for the worse, leading many to ultimately shut down the ability to lock loans around 1pm PST. This is not uncommon over the past five months, but not that common either. Lenders that maintained the ability to lock loans had rates UP as much as 75bps in a single day. Jumbo GSE money — $417k - $729,750 — has been blown out completely with some lender’s at 8%. I have seen it all in the mortgage world — well, I thought I had.Read the whole thing.
A good friend in the center of all of the mortgage capital markets turmoil said to me yesterday “feels like they [the Fed] have lost the battle…pretty obvious from the start but kind of scary to live through it … today felt like LTCM with respect to liquidity.”
In a related post, Tim Duy addresses the question of the steepest yield curve in history. While it would seem to indicate a failure of the Fed's quantitative easing policy, does it also indicate that we are on the verge of an explosive economic recovery (as a steep yield curve might lead one to believe) or does it indicate a lack of investor confidence in the ability of the US to pay back long dated debt?
The conclusion to his long and very worthwhile post:
Bottom Line: I want to believe that the rapid reversal of Treasury yields is a benign, even positive, event. This is likely the Fed's view; consequently, the will hold steady on policy. Challenging this benign view is that the reversal appears to be lock step with a return to dynamics seen in 2007 and 2008 - exceedingly low US rates encouraging Dollar outflows, stepping up the pace of foreign central bank reserve accumulation and putting upward pressure on key commodity prices. I worry that policymakers have forgotten the external dynamic that was hidden by the crisis induced flight to Dollars last fall. Indeed, capital outflows (indicated by a foreign central bank effort to reverse those flows) would signal that much work still needs to be done to curtail US consumption to bring the global economy back into balance. Policymakers are unprepared for this possibility.Seriously, the whole thing is well worth reading for a better understanding of some of the forces our economy is facing in these unprecedented times.
4 Comments:
By 
, at
Fri May 29, 11:14:00 AM:
I haven't read the links CV but I will later. I can tell you the jump in interest rates is scaring the sh*t out of me as I have to borrow a lot of money to operate. Wonder what will happen to the housing recovery if interest keeps running up like this?
By silvermine, at
Fri May 29, 12:06:00 PM:
The fed is losing, but it doesn't have to mean recovery. There's always stagflation -- you know, the thing that happened in the 70s that Keynesianism says is impossible.
By 
Viking Kaj, at
Fri May 29, 12:56:00 PM:
The whole plan to reinflate the economy is an Indian casino. We should take our lumps and allow assets to find their natural price levels. The net result of all this screwy monetary policy when the Indian casino goes bust is that we will all be living in Brazil.
The only tools the government has are interest rates, spending, and taxes. They've gone for the blunderbuss on the first two, and completely ignored the second.
Could be a good time to get your money out while the dollar is still worth something.
By , at
Fri May 29, 02:56:00 PM:
This is an excellent and timely post! In regards to your comment/question:
"While it would seem to indicate a failure of the Fed's quantitative easing policy, does it also indicate that we are on the verge of an explosive economic recovery (as a steep yield curve might lead one to believe) or does it indicate a lack of investor confidence in the ability of the US to pay back long dated debt?"I have a theory I'd like to try out on the market professionals who might read these comments, like the Charlottesvillain or Dreck, and that is that these conditions need not be mutually exclusive, though applying differently around the world. In past recessions the US pulled the world out of slowdowns and steeping international yield curves could therefore safely be construed to be applying first and foremost to the American economy. That may no longer be true, as the combined power of the various Asian economies may lead the world out of this recession. Therefore, the steeping yield curve reflects their improved prospects. As it relates to our own country I believe the yield curve indicates fear of inflation.
What I guess I'm saying is that our country is not going to improve very darn much in GDP, and we're facing increased inflation, while Asia is going to start cooking a little more rapidly in GDP growth with little inflation.
Can that be right?
