Mortgage Market Updates

The credit market thaw paused this week: Libor fell just a little, mortgages touched 6.00% and rebounded, short-term Treasury rates are still near zero, and corporate and consumer credit is as scarce and expensive as ever.

Massive, global intervention by central banks and national treasuries has been underway for only a month. Just seems longer when you’re having fun. Economic activity is slowing faster than businesses can make down-sizing decisions: only in the last week have unemployment claims risen above the 90-day average (by 25,000 to 516,000). October retail sales dropped 2.8%, the largest decline since the series began in 1992, and the NFIB said small-business sales conditions were the worst since 1980.

In 1933, just after his inauguration, Franklin Roosevelt delivered his first “fireside chat” on the radio. He began, “Tonight I would like to speak to you in simple terms about banking....” Afterwards, Will Rogers said that the terms were so simple that even bankers could understand.

Henry Paulson’s chats are televised. He looks like a man who has just stumbled in and out of a fireplace, puzzled but energetically slapping at embers, and in bold voice and many words trying to convince his audience that he is in charge and all is well.

He is doing a better job than it seems, and it is not his fault that this administration has no voice of leadership. His Wednesday speech abandoning TARP’s extraction of troubled assets shocked many people, but should not have: We are reassured by the WSJ report today that Paulson shifted to capital injection planning before final Congressional passage on October 3. The extraction idea might have worked 15 months ago, but is too late now. More good news: Treasury/Fed teams are working to reopen the non-bank “structured securities” market, essential to modern credit-creation. Yes, those markets ran wild and got us into this mess, but we cannot recover until they re-open.

The disturbing elements in the speech: asked when the Treasury would request from Congress the next $350 billion of TARP (all but $60 billion of the first half is now deployed), Mr. Paulson said, “We have no timeline on that.” Second, he flatly refused to instruct banks to make loans. Paulson did not address the bad news from Fannie and Freddie: in the two months since takeover, their borrowing costs have risen, and they have failed to increase mortgage purchases -- net, zero -- or to relax fees and terms.

We are caught in a transfer-of-power moment worthy of Tom Clancy, and uncertain policy and action are the result. In wartime Congress defers to the Executive Branch; but during a speed-of-light economic emergency, who is in charge? A request now for the rest of the TARP money would instantly ignite a frustrated and fantasizing Congress. The financial authorities are fighting a daily shape-shifting emergency requiring ad hoc responses. Congress naturally slows any policy or action, demands control, and fights internally for power. Only a strong President can bring order.

Congress and way too many other people think that housing markets are key to economic bottom and recovery. That was partly true until September, now completely backwards: the only way to stop prices from falling and to abate foreclosures is to get the economy going, and quickly. All current proposals to mitigate foreclosures will fail; and far worse, the time spent haggling over DOA proposals will starve effective economic action. Same goes, unfortunately, for the auto makers: bankruptcy and downsizing (not closure) are the inevitable result of 30 years’ mismanagement. After that, Federal assistance would be appropriate and useful.

There is only one way out of this or any other recession: restore CREDIT. All modern recessions resulted from the tight credit imposed by an inflation-fighting Fed, and recovery followed release of grip by the Fed. This time the financial system itself has failed, thus far defying the most dramatic monetary ease in the 95-year history of the Fed; we need the rest of the TARP money and a lot more from Congress. Now.

We don’t know how we’ll make it to Inauguration Day, and fear that we’ll have to.

Economic Notes is published weekly by the Economics Department of Crestline Mortgage a division of Universal Lending Corporation as a service to Colorado Real Estate professionals. © 2008, all rights reserved.