LIBOR Rates Show Stress

Curve Watchers Anonymous is once again watching the yield curve and mortgage rates. In addition, it has close eyes on LIBOR rates.

Although the moves are small, yields are rising on the short end and falling on the long end. In addition 10 year yields have broken 4.00.



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Mortgage Rates Stubbornly High

Curve watchers continue to point out that mortgage rates on 30-yr fixed and 1 year arms are above where they were a year ago in spite of 75 basis points in cuts by the Fed.



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LIBOR Rates More Telling Than Yield Curve

LIBOR rates are where the sings of stress are. Let's take a look.



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The above charts thanks to Bloomberg.

LIBOR rates are lower than they were a year ago, but take a look at the spreads between LIBOR and the Fed Funds Rate.

Six months ago the spread between the 1 month LIBOR and the Fed Funds Rate was a mere 7 basis points. The spread between the 3 month LIBOR and the Fed Funds Rate was a mere 11 basis points.

Today, the spreads are 30 basis points and 55 basis points respectively. They are also headed the wrong way compared to a month ago.

This is a sign that banks are reluctant to lend overnight to one another. They are holding onto to cash and treasuries which is driving up costs of overnight lending. Real cash is in short supply.

The situation is worse in Europe with the ECB set to pump cash into money markets over liquidity concerns. Another sign of stress is talk about intervention in the Euro to help exports.

I discussed those topics over the weekend in European Credit Markets Deteriorate Dramatically and Currency Twilight Zone. Inquiring minds may wish to take a look.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com
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Bold Thinking or Complete Nonsense?

Robert Shiller is proposing it's Time for Bold Thinking on Housing.

Shiller's article starts out with the idea that housing prices may decline 30% or more just as they did from 1925-1933. On that I agree. After some history about what happened under FDR, Shiller completely dove off the deep end with proposals to "fix" the problem.

For example please consider:

In light of modern financial theory, this would also be a good time to think about the nature of the implicit subsidies given to government-sponsored enterprises like Fannie Mae and Freddie Mac and whether they provide enough incentives for them to properly manage their own risks as guarantors of mortgages.

We should think about whether the F.H.A. should be encouraged to take on a bigger role that might compete with activities of the subprime lenders that have grown so rapidly over the last decade.

We might create a new consumer-oriented regulatory authority, like the Financial Products Safety Commission that Elizabeth Warren, a professor at Harvard Law School, has been advocating. It would monitor financial products for consumers and draft regulations to prevent practices like the recent widespread issuance of adjustable-rate mortgages to low-income borrowers who couldn’t afford the rate resets.

Shiller goes on to say:

Beyond that, we should think creatively about how to use vastly improved tools for risk management and apply them to mortgages. For example, I and my colleague Allan Weiss (now C.E.O. of Index Capital Advisors) proposed in 1994 to make home equity insurance — insurance on the market value of a home — part of a home mortgage contract. Had our proposal been put into place on a large scale, it would have gone a long way toward ameliorating the current crisis and reducing the need for personal bankruptcies.

All the immediately preceding proposal does is shift risk from one entity to another. On the surface, homeowners would be protected but who is protecting the insurance company?

One good look at the complete collapse of Ambac (ABK) and MBIA (MBI) should be enough to highlight the problem: Insurance is only good if the insurer can pay out.

In this case, anyone insuring the value of houses would have long ago failed, putting the burden right back on the homeowner. That is the seen. The unseen is belief that such a scheme could possibly work would likely have led to an even bigger bubble than we saw.

Root Causes Of The Housing Bubble

• 1) The Creation of GSEs
  
  Does anyone even remember the mission of the GSEs. It is to promote "affordable housing". Now there are proposals in Congress and supported by Bernanke to allow Fannie Mae (FNM) and Freddie Mac (FRE) to make loans up to $1,000,000. Is this affordable housing or complete insanity?
  
  
• 2) Government sponsorship of the ownership society
  
  Government sponsorship and promotion of housing including some 300 odd programs to make "housing affordable" have had the opposite effect. Government has no business promoting housing over renting or making people feel like second class citizens for not owning a home.
  
  
• 3) The Greenspan Fed slashing interest rates to 1%
  
  Banks mistakenly assumed the difference between the rate at which they borrowed and lent would cover problems. In addition, banks have repeatedly learned
  that the Fed would bail out their mistakes. This led to extreme reckless lending including Citigroup (C) CEO Chuck Prince dancing like a fool in summer of 2007 right as everything was starting to collapse.
  
  
• 4) SEC sponsorship of rating agencies
  
  I have talked about this on many occasions. A good summary of the issues with links to other article can be found in Time To Break Up The Credit Rating Cartel.

Root Cause Of The Great Depression

Like Bernanke, Shiller seems to have no idea of what caused the great depression. The Cause was an expansion of money and credit leading up to the collapse. Nowhere in Shiller's proposals does he address the cause of the housing bubble or the cause of the depression.

The four points above are really sub-bullets to the greater thesis: Reckless expansion of money and credit eventually leads to collapses.

I am extremely disappointed in the socialist nonsense proposed by Shiller. Instead of addressing the root causes, Shiller wants to try the same failed ideas of still greater government intervention into free markets.

Nonetheless I agree with Shiller on one key idea: It's Time for Bold Thinking. For those who want to try something really different and something that will actually work, I suggest ....

Bold New Thinking

• Abolish The Fed
• Embrace Free Markets Not Socialist Nonsense
• Embrace Austrian Economics
• Recognize Keynesian Claptrap Has Failed Again
• Change How Rating Agencies Are Paid
• Reduce The Role Of Government
• Elect Ron Paul

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com
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Currency Twilight Zone

Questions about reserve currency status are being raised in Bet your bottom dollar tensions will follow.

Europe has finally had enough of America's "benign neglect" dollar policy. As a large economic area, with a floating exchange rate, the eurozone suffers most. Over the past seven years, the single currency has risen by a shocking 82 per cent against the greenback. That's hammered eurozone exports - provoking serious trade disputes between the EU and US, the world's two biggest trading blocks. No wonder French President Nicolas Sarkozy describes America's drooping dollar as "a precursor to economic war".

European leaders last week said the US currency's value now threatens the survival of Airbus - whose cost-base is in euros, but which sells planes in dollars.

But America's currency-related tensions with Europe are as nothing compared to the brewing crisis with China, Russia and the oil-rich Gulf states. As is well known, these countries - and emerging markets in general - used to run big trade deficits. Strong exports and expensive oil means they now boast big surpluses. As a result, their foreign exchange reserves have ballooned, with China controlling $1,400bn, Russia $450bn and the Arab world much more than it admits - the vast majority in dollars.

The greenback's fall, of course, is costing these countries serious money. Until sub-prime, they didn't talk about quitting the dollar - the world's "reserve currency".

But the decline has now gone so far, and the US looks so wounded, that tomorrow's economic superpowers are now "dollar divesting" - despite the fact that doing so will further weaken the currency, undermining their reserve values even more.

Reserve currency status brings America huge power. It puts the dollar constantly in demand, meaning the US can secure cheaper debts and run bigger deficits at everyone else's expense. It means weaker nations "peg" to the dollar, greatly extending America's sphere of influence.

Incredibly, this long-standing system is now unravelling. Rather than keeping their reserves in falling dollars, the new economic titans are stuffing them into "sovereign wealth funds" - which they're using to buy-up debt-distressed Western firms, African oil fields and any other canny investment they can find.

The importance of "dollar divestment" cannot be overstated. At the very least it means the greenback has much further to fall - plunging the US into recession. But it begs a bigger, more alarming, question. How will Washington react to the end of the US hegemony?

Sword of Damocles

Will Europe intervene in the currency markets? That is the question I am asking as Airbus eyes radical moves as euro nears $1.50.

Plane maker Airbus plans to introduce radical measures to prevent the surge in the euro from throttling the company. According to a report in German newspaper Der Spiegel, Airbus chief executive Tom Enders had admitted that the maker of the A380 superjumbo may face "massive losses" as the euro heads toward $1.50.

Mr Enders was also quoted as saying that the euro's strength will put future investments to "the test".

Jean Claude-Juncker, chair of the Eurogroup of finance ministers, said this week that the dramatic rise in the currency since August had begun to inflict damage on vulnerable parts of the 13-nation bloc.

"We deplore the sudden changes in the exchange rates. We will be keeping a very watchful eye on the exchange rate markets,' he told the European Parliament. Mr Juncker is leading an EU troika to Beijing next week to pressure the Chinese authorities into speeding up the glacial pace of yuan revaluation.

Louis Gallois, head of EADS, said: "My main concern for the future is the weakness of the US dollar. "It is a sword of Damocles hanging over our heads and it is a fantastic handicap against our only competitor in commercial aircraft," he said, alluding to Boeing.

"It's becoming unbearable. The euro zone doesn't really have anyone in charge of exchange rates, and I think this is a huge omission when we face other monetary regions which are managed. We have to react to this slide in the dollar...We must find additional savings of roughly €1bn by 2010, 2011," he said.

Exchange Rate Twilight Zone

I have to laugh at this comment "The euro zone doesn't really have anyone in charge of exchange rates."

Is every country supposed to have a currency czar dictating the value of its currency? Exactly how is this supposed to work? The following example should clarify the picture.

Twilight Zone Picture

• Japan sells Yen to buy dollars
• China sells Renminbi to buy dollars
• Oil producers sell dollars to buy Euros
• Europe sells Euros to buy dollars
• Europe sells Euros to buy Yen
• Europe sells Euros to buy Renminbi

Notice the first three are happening already. As a result, dollar reserves in both Japan and China have been massively rising.

Intervention action by Europe to strengthen the dollar would lead to an accumulation of dollars problem in Europe compounding the problem of accumulation of dollar reserves by China and Japan. A further complication is the oil producers are dumping dollars in mass to exchange for Euros.

Obviously the top three points are a mess in and of themselves. Intervention by the EU would make matters worse and I have left out potential reactions by Japan, China and the UK as well, should the ECB attempt intervention.

Exchange Controls Are Not The Answer

The above should make it very clear that exchange controls are not the answer. However, that is not stopping the question: Will Europe impose exchange controls to head off disaster?

The die is now cast. As the euro brushes $1.50 against the dollar, it is already too late to stop the eurozone hurtling into a full-fledged economic and political crisis. We now have to start asking whether the EU itself will survive in its current form.

As Airbus chief Thomas Enders warned in a speech to the Hamburg workers last night, Europe's champion plane-maker - the symbol of European unification, in the words or ex-French president Jacques Chirac -- is now facing a "life-threatening" crisis.

Mr Enders said the company's business model is "no longer viable", and "massive losses" are on the horizon. So much for all those currency hedges that analysts like to cite. Have they ever tried to buy a currency hedge? They would discover how expensive these instruments are. Hedges cannot protect a company with $220bn in delivery contracts priced in dollars, when the euro/sterling cost-base is leaping into the stratosphere.

One thing is sure, President Nicolas Sarkozy will not let Airbus go bankrupt, nor see decimation of the French industrial core, without an almighty fight against those countries deemed to be engaging in a beggar-thy-neighbour strategy of currency devaluation - benign neglect in Washington, less benign in Beijing.

He will have allies soon enough, once the housing bubbles collapse in Spain and across the Med. Mr Zapatero will not be in power for long in Madrid. Mr Prodi is on borrowed time in Rome. A new political order will soon take hold in much of Europe, bringing in a new wave of prickly national populists.

So, how will they fight? Will Mr Sarkozy and his allies resort to 1970s-style exchange controls to stem the rise of the euro?

Any decision would be taken by EU finance ministers under qualified majority voting. Britain would have no veto, even though the effects of such a move on the City of London would be catastrophic - and trigger the certain withdrawal of Britain from the EU (and good riddance, some might say in Paris).

My Comment: Talk of the EU breaking up is misguided even as the problems facing the EU are dramatically understated.

Portfolio inflows into the eurozone reached a record EUR46.2bn in September. China, Asian wealth funds, Petrodollar sheikdoms, and now even Nigeria, have all joined a stampede into euros, utterly disregarding the underlying reality that Europe is in no better shape the United States itself. It is in worse shape, though this is disguised by the cycle. It is much worse in terms of economic dynamism and demographics.

EU industrial orders fell 1.6pc in September. Spanish, French, South Italian, and Irish house prices are already all falling.

The European Covered Bond Council suspended trading in covered bonds this week because the spike in spreads had become disorderly, and three-month Euribor rates have gone through the roof again, and that is the rate that sets Spanish and Irish mortgages. Bond issuance in Europe is frozen.

France is in the grip of a national strike costing EUR2bn a day. The railways are paralyzed. The country's 5.2m public workers are staging walk-outs.

Is this a currency bloc that should be now be deemed the ultimate safe-haven, the repository of trust in a dangerous economic world?

My comment: On that I agree. The Euro is horribly overvalued vs. the US dollar. However, attempts at currency controls always fail unless they are in alignment with the current trend. Thus, should the EU attempt currency intervention, the result could easily see Europe swamped by counter action from the oil producing states who want to diversify out of dollars without crashing it.

Exchange controls are the nuclear option, but .... French President Nicolas Sarkozy certainly seems inclined to go this route. ....

The ECB may or may not intervene in the currency markets to cap the euro. But this is a red herring. Europe's retort - if and when it comes - will be far more political, and far more dramatic. We are at one of History's "inflexion points".

One recalls the months leading up to the collapse of the Gold Standard in 1931. That was triggered first by Credit Anstalt in Austria and then by a British naval mutiny in Scotland.

Any bets on what will trigger the collapse of Bretton Woods II? I wager that it will be a decision by the Gulf states to break their dollar pegs, leading to a temporary surge of euro purchases. That will tip Mr Sarkozy over the edge.

Just idle speculation.

While it may be idle speculation as to what the exact trigger is that causes the collapse of Bretton Woods II and with it US dollar hegemony, in due time the US will lose reserve currency status. The sooner it happens the better it will be for everyone.

In the meantime it is clear the US, EU, China, and Japan are all engaged in economic warfare. Mistakes will be costly and the EU would be making a big mistake to retaliate with currency intervention. All such actions would accomplish would be to increase dollar reserves in the EU that it would not know what to do with. Simply put, currency intervention cannot be the solution, given that currency intervention is one of the problems.

The eventual way out is easy to see. What needs to happen is for countries to refuse to finance US debt in dollars. But remember this is the twilight zone. Taking that action would cause non-dollar currencies to rise. Virtually no country wants its currency to rise for fear of losing exports to the now failing model of US consumers buying stuff they do not need and cannot afford. So the band plays on, just as it did on the sinking Titanic.

Life would be much simpler under a gold standard than it is in the currency twilight zone.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com
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US vs. Japan Land Prices: Autumn 2007 Pictorial Update

It's been about a year since my last update, and once again it's time to move the arrow on my Graphical Presentation of the US Housing Bust as compared to Japan Land Prices 1980 - 2005.

• In Spring 2005 it was a Totally New Paradigm
• In Summer 2005 I called a top in as shown in US vs. Japan Land Prices Pictorial Update
• In Autumn 2006 the arrow pointed to the spot shown (now redrawn to match colors).
• In Autumn 2007 there was "Never a Better Time To Buy" as shown below.

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It seemed like a top was coming in Spring 2005 but that top was not confirmed until much later.
Where are we now?
Probably somewhere near that top “Never a Better Time To Buy”
It’s getting progressively harder now to figure out exactly where we are.

Two things are for sure.

• We are clearly off the top.
• We are nowhere close to the bottom.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com
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European Credit Markets Deteriorate Dramatically

Credit markets have deteriorated badly in both the EU and UK.

The ECB is set to pump cash into money markets over liquidity concerns.

Fresh emergency action to pump funds into the money markets was announced on Friday night by the European Central Bank amid renewed fears that liquidity in the credit markets is again starting to dry up. On Friday night, the bank said it would inject an unspecified amount of extra liquidity next week, noting “re-emerging tensions” – and would do so until at least the end of the year.

Earlier, Jean-Claude Trichet, ECB president, had pledged continuing action to keep short-term money market interest rates in line with its main policy rate. The new promise of intervention came as three-month US interbank rates rose for the eighth day in a row to 5.04 per cent, more than half a point higher than the US Fed Funds target rate of 4.5 per cent.

Three-month money usually trades just above the Fed Funds rate which is 4.5 per cent. Europe and UK money markets are showing similar strains. The latest data will knock European policymakers’ confidence that the eurozone can remain relatively immune from the US subprime mortgage crisis, although few economists expect a serious slump.

Few Economists expect a slump. Is this funny or sad?

In the UK the Worse to come, warns Bank chief.

The Bank of England deputy governor has warned that money markets may be set for an even bigger squeeze before the end of the year, as wholesale borrowing rates soared yet higher. Sir John Gieve, the Bank's deputy governor for financial stability, told a hedge fund conference that "there still may be more bad news to come". His words echo those of the Governor, Mervyn King, last week, though credit markets have deteriorated dramatically since.

The three-month London interbank offered rate for sterling, known as BBA Libor, rose to a two-month high of 6.49pc, indicating that banks are unwilling or unable to lend to each other.

Analyst Jamie Dannhauser said: "The possibility of a severe credit squeeze is real and after today's preliminary money numbers for October it may already be under way."

He said the figures also suggested that the banks were unable or unwilling to securitise any assets at all last month, as it became all but impossible to sell mortgage debt to investors.

Unable Or Unwilling

Now where have I see that phrase before?
It sounds vaguely familiar.
Oh wait, I remember.

• Bank Borrowing Costs Rise
• Economic Chicken vs. Mutually Assured Destruction
• Interview with Paul Kasriel

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com
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Credit Crunch Hits Commercial Real Estate

The evidence of weakening commercial real estate is now crystal clear. Deterioration first showed up in the tranches of Commercial Mortgage Backed Credit Default Swap Benchmark CMBX Indices. I talked about this in Commercial Real Estate Heads South.

Since then additional evidence has turned up. For example, the MIT Center for Real Estate is reporting it Third Quarter 2007 Transactions-Based Index (TBI), and the results are not pretty.

CRE Transactions-Based Index (TBI) 2007 Quarter 3



Results for the 3rd quarter of 2007 are highlighted by a negative 2.5% capital return for the properties sold in the NCREIF database. This is the first negative quarterly price change in the TBI since the third quarter of 2003, when prices fell 2.4 percent.

The investment total returns for all properties also registered a decline of 1.7 percent.

BusinessWeek notes that prices haven’t declined as steeply since the fourth quarter of 2001, when they dropped 3.9% after the 9/11 terrorist attacks.

“The fall in our index is the first solid, quantitative evidence that the subprime mortgage debacle, which hit the broader capital markets in August, may be spreading to the commercial property markets,” David Geltner, the center’s director, said in a release accompanying the index report.

Moody's/REAL Commercial Property Price Index CPPI Drops

Moody's is reporting Credit woes hit US commercial real estate.

U.S. commercial real estate values fell 1.2 percent in September as the credit crunch took a toll, and more declines could be in store, Moody's Investors Service said on Monday. September's drop is based on the first full month of data since the credit crunch picked up steam in August and could mark a turning point in the once strong commercial real estate market, Moody's said in a report.

While the Moody's/REAL Commercial Property Price Index, or CPPI, monthly aggregate index across all property types fell from August to September, the index is still up by about 12 percent compared with the same period last year and over 16 percent over the last two years.

Given the current capital market environment, one-quarter blips in prices are probably not isolated, Moody's said. Moody's monthly commercial property price index is based on repeat sales of the same assets at different times.

The number of transactions also dipped 20 percent in September and by 30 percent from a peak in June, Moody's said. For the third quarter, commercial real estate prices increased 0.9 percent, but office prices dropped 0.5 percent and apartments by 1 percent, Moody's said.

My Comment: The problem with this methodology is that it does not recognize gains quick enough on the lay up or losses quick enough on the way down. Losses are much larger than reported here. The direction is what's important and that direction is down.

Moody's report could be an early sign that the commercial property sector is being affected by the increasing reluctance of lenders to offer credit to anything that is real-estate related. A drop in prices of commercial property could eventually result in an increase in default rates on commercial real estate loans and on commercial mortgage-backed securities, which have so far been relatively low.

Commercial borrowers are more sophisticated than residential borrowers and therefore less likely to be surprised by rising loan terms and payments, while the generally strong commercial property market is also a mitigating factor, Moody's said.

My Comment: Talk of mitigating factors is pure nonsense. We heard the exact same arguments when residential real estate initially headed south.

As for "commercial borrowers being more sophisticated", that sophistication led to enormous leverage, speculation, and sources of funds not generally available to residential borrowers, and the impacts of that have yet to be felt on bank lending. Punishment is coming and it will be enormous.

The Blackstone and 666 Fifth Avenue deals should be proof. I talked about those deals in Commercial Real Estate Black Hole.

Tight Oil And Weak Commercial Real Estate

Joe Duarte is right there with me with Nasty Trend Ahead For Commercial Real Estate.

According to the Wall Street Journal, Moody's Investor's Service has concluded that "The value of commercial real estate, which nearly doubled in the past seven years, is now starting to decline due to the credit crunch."

The details suggest that trouble is spread throughout the U.S. as "the value of commercial property declined 1.2% in September from the previous month. Particularly hard hit were apartments in the West and office property in most states other than California."

The Journal notes that interest only mortgages have been increasingly popular in commercial real estate, creating the potential for more trouble down the line.

More interesting is this: "Already there are signs of slowing in some markets. Available sublease space swelled to 77 million square feet in the third quarter from 73 million square feet nationwide in the second quarter, the first national increase in five years, according to Grubb & Ellis Co."

Let's see, commercial real estate is on the verge of a decline after a seven year bull market, and global oil production has peaked.

What's most significant is this, commercial real estate is the last holdout bull market sector in real estate to feel the pinch of the subprime mortgage related credit crunch, but its top has arrived just as the oil industry is telling us that prices are about to stay high for the extended future.

When you add the fact that China's government has told banks to stop lending money, you just have to wonder what's around the corner.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com
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Big Discounts, Expanded Hours, More Foreclosures

Despite Economy, Malls and Stores Jammed as Stores Usher in Holiday Shopping Season With Big Discounts, Expanded Hours in Tough Economy.

Malls and stores were jammed for pre-dawn discounts on everything from TVs to toys on the official start of Christmas shopping as consumers shrugged off worries about rising gas prices and falling home values.

The aggressive tactics -- bigger discounts and expanded hours like midnight openings -- apparently worked Friday. Based on early reports, Macy's Inc., Toys "R" Us, K-B Toys Inc. and others that pushed big price cuts, reported bigger crowds for the early morning bargains than a year ago. Target Corp. and Wal-Mart Stores Inc., said they were also pleased with the shopper turnout.

My Comment: It's a bit premature to suggest that anything "worked". The key, at least for stores is whether or not they are making any money, and what happens for the rest of the shopping season. Are stores making up for what they are losing on loss leaders? Somehow I doubt it. The next question is "What is the default rate going to be on this shopping spree."

"I'm really looking for the bargains this year because I'm losing my job; they're moving our plant to Mexico after the first of the year, so I have to be careful," said Tina Dillow of New Richmond, Ohio, who camped out at a Best Buy store near Cincinnati at 3 a.m. because of a great deal on a laptop.

My Comment: Thanks Tina, for the laugh of the day. You are out of a job but were camping out overnight to buy a new laptop. That's a well thought out strategy.

"The tougher economic conditions are driving more shoppers to take advantage of early bird specials," said C. Britt Beemer, chairman of America's Research Group.

Marshal Cohen, chief analyst at NPD Group Inc. agreed, but he noted shoppers were buying selectively.

Best Buy Co. drew more than a thousand shoppers to West Paterson, N.J. and to its Manhattan store for early morning bargains on Sony laptop computers, cut to $399.99 from $749.99, and GPS devices from TomTom for $119.99, from the normal $249.99, according to store managers.

My Comment: Selective buying of loss leaders is not going to do much for store profits.

New Wave of Mortgage Failures Could Create a Nightmare Economic Scenario

As shoppers shop till they drop, Borrowers who took out loans in the first six months of this year are already falling behind on their payments faster than those who took out loans in 2006 as the Nightmare Economic Scenario unfolds.

In the months ahead, millions of adjustable-rate mortgages will reset, leaving many homeowners unable to make their payments. Soaring mortgage default rates this year already have shaken major financial institutions and the fallout from more of them, some experts say, could spread from those already battered banks into the general economy.

"We haven't faced a downturn like this since the Depression," said Bill Gross, chief investment officer of PIMCO, the world's biggest bond fund. He's not suggesting anything like those terrible times -- but, as an expert on the global credit crisis, he speaks with authority.

"Its effect on consumption, its effect on future lending attitudes, could bring us close to the zero line in terms of economic growth," he said. "It does keep me up at night."

Some of the nation's leading economic minds lay out a scenario that is frightening. Not only would the next wave of the mortgage crisis force people out of their homes, it might also spiral throughout the economy.

My Comment: "Might" is not the right word. "Will" is the right word.

The already severe housing slump would be exacerbated by even more empty homes on the market, causing prices to plunge by up to 40 percent in once-hot real estate spots such as California, Nevada and Florida. Builders like Chicago's Neumann Homes, which filed for bankruptcy protection this month, could go under. The top 10 global banks, which repackage loans into exotic securities such as collateralized debt obligations, or CDOs, could suffer far greater write-offs than the $75 billion already taken this year.

My Comment: "Could" is the wrong word. "Will" is the right word. For more on what the amount is likely to be, please see How Much Will The Credit Crunch Cost?

Massive job losses would curtail consumer spending that makes up two-thirds of the economy. The Labor Department estimates almost 100,000 financial services jobs related to credit and lending in the U.S. have already been lost, from local bank loan officers to traders dealing in mortgage-backed securities. Thousands of Americans who work in the housing industry could find themselves on the dole. And there's no telling how that would affect car dealers, retailers and others dependent on consumer paychecks.

My Comment: Of course there's a way to tell how it will affect car sales, etc. Car sales are going to plunge. This will put companies like General Motors who cannot make a profit now in dire straights. For more on GM please see Desperation at GMAC and Implications of GM's non-cash writeoff.

Based on historical models, zero growth in the U.S. gross domestic product would take the current unemployment rate to 6.4 percent. That would wipe out about 3 million jobs from the economy, according to the Washington-based Economic Policy Institute.

By comparison, in the last big downturn between 2001-03 some 2 million jobs were lost, according to the Labor Department. The dot-com bust early this decade decimated the technology sector, while the Sept. 11, 2001, terror attacks hurt the transportation and allied industries. Economists said the country was officially in recession from March to November of 2001, but the aftermath stretched to 2003.

My Comment: The housing boom was of unprecedented size. The buts will be similar. Thus the historical models on unemployment rate are far too conservative. Expect the unemployment rate to way overshoot current projections.

There is increasing evidence that another downturn has begun.

Borrowers who took out loans in the first six months of this year are already falling behind on their payments faster than those who took out loans in 2006, according to a report from Arlington, Va.-based investment bank Friedman, Billings Ramsey. That's making it even harder for would-be buyers to get new mortgages -- a frightening prospect for home builders with projects going begging on the market, and for homeowners desperate to unload property to avoid defaulting on their loans.

Meanwhile, the number of U.S. homes in foreclosure is expected to keep soaring after more than doubling during the third quarter from a year earlier, to 446,726 homes nationwide, according to Irvine, Calif.-based RealtyTrac Inc. That's one foreclosure filing for every 196 households in the nation, a 34 percent jump from just three months earlier.

Such data suggests more Americans could lose their homes than ever before, and those in peril are people who never thought they'd welsh on a mortgage payment. They come from a broad swath -- teachers, pharmacists, and civil servants who were lured by enticing mortgage terms.

My Comment: The best thing for most of these people is to lose their home and start all over. There is nothing worse than being a debt slave forever. Competent financial counselors should be encouraging people to walk away. I talked about this in Sign Waving Demonstrators Picket Countrywide Financial.

Sen. Charles Schumer, D-N.Y., a key member of Senate finance and banking committees, said borrowers are the ones who need relief. The playbook to bail out the economy would not be applied to the banks and mortgage originators, but money could be funneled through non-profit organizations to homeowners that need help, he said in an interview with The Associated Press.

"There is a worst-case scenario because housing is the linchpin of our economy, and more foreclosures make prices go down, that creates more foreclosures, and creates a vicious cycle," Schumer said. "You add that to the other weakness in the economy -- on one end is the home sector and the other is the financial sector -- and it could create a real problem."

He also believes Federal Reserve Chairman Ben Bernanke should do more to help the economy. Bernanke said in recent comments he has no direct plans to bail out the mortgage industry, but to instead offer relief through cheap interest rates and further liquidity injections into the banking system.

My Comment: Sen. Charles Schumer is a complete fool. 1% interest rates caused the problem. 1% interest rates will not be the solution.

"We all know that more hits from these subprime loans are coming, but are having a devil of a time figuring out how it will happen or how to stop it," said Lawler, who was once chief economist for Fannie Mae.

"We've never been in this situation before."

Indeed we have never been in this situation before because never before in history has the Congress, the Fed, and central bankers worldwide acted as recklessly as they have and still continue to act. Judging from what Schumer wants to do, we are going to keep at it until the whole economic system collapses.

Happy Shopping

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com
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