Worry about the Credit Crisis ... Worry a Lot!

More troubling signs that the credit crisis is far from over. I first heard this on Bloomberg (ah, I wish I had cable like my cousin) - the Port Authority of New Jersey had its interest rates jump from 4% to 20%. Gov. Spitzer was testifying before Congress about this issue. The problem is the concerns over monoline insurers.

First, some background. The monoline insurer business works like this. The Widget Co doesn't have the financial strength to get a decent interest rate on its debt, so it approaches a monoline, say AMBAC, and essentially buys insurance wherein the insurer, with its solid credit rating, serves as collateral in the event Widget Co defaults on its debt. The Widget Co then essentially gets the same credit rating as the insurer.

Monolines used to only insure municipal agency debt, but in the last few years took on more mortgage related debt (ah, there's the good ol' real estate market again). With the meltdown in subprime markets, the financial strength of the monolines come into question. What good is insurance if you think the insurance company may go belly up?

As the graphic presented here from the NY Times shows, the CDS (credit default swaps) market is HUGE, bigger than even the stock market.




John Maudlin discusses this scary scenario:

But what if the above-mentioned monolines are downgraded to junk, as was [ACA Capital] when it could not raise capital? As the downgrades on various mortgage assets and the CDOs continue to increase, the ability of the monolines to deal with the problems is going to come under increasing question. The losses at major banks could be much worse than $122 billion if they are downgraded to the same junk level that ACA was.

I have read somewhere else that in addition to the $250 billion written down in 2007 for subprime, banks and financial firms may write down another $250 billion in CDS. Wow! But that's not the start of it. What if you have your port authority paying 20% on its debt? That's not a recipe for keeping things cheap...

NYT Becomes the New SwiftBoaters

While I disagree with a lot of the New York Times puts out, I have always thought they were a quality paper. Unfortunately, their credibility has taken a big hit with the latest hit job on presumptive Republican nominee, John McCain. Devoid of the normal journalistic standards you'd expect of a top newspaper, it largely cites anonymous sources and is incredibly skimpy on details for an investigative piece.

As the New Republic documents, editor Bill Keller appears to have shared the concerns over the piece. But in the end, he seems to have rolled over and given it the green light. What makes the piece even more suspicious is that others, including Fox's Carl Cameron found nothing in the story when he investigated it last fall. Given Fox's expected bias against McCain, one might imagine the decision not to pursue the story was indicative of the lack of weight.

McCain's lawyer, Bob Bennett points out that he provided the NYT a list of times when McCain voted in opposition to the interests of Iseman's clients, but the paper left that fact out of its piece. What a surprise!

Scary Chart of the Day: Phoenix Real Estate

Courtesy of a very nifty graphing tool at National City, here's an example of the craziness of the speculative real estate boom that occurred in so many places. As someone who loved his time in Phoenix partly because of reasonable real estate prices, all I can do is shake my head ...

Housing Meltdown?

Businessweek recently carried a very negative story on the housing meltdown. A meltdown? If that seems extreme, the authors don't think so. Even for a housing bear like me, some of the predictions and information in the story were surprising and deeply troubling.

Brace yourself: Home prices could sink an additional 25% over the next two or three years, returning values to their 2000 levels in inflation-adjusted terms... Shocking though it might seem, a decline of 25% from here would merely reverse the market's spectacular appreciation during the boom. It would put the national price level right back on its long-term growth trend line, a surprisingly modest 0.4% a year after inflation. There's a recent model for this kind of return to normalcy after the bursting of a financial bubble. The stock market decline that began in 2000 erased most of the gains of the boom of the second half of the 1990s, leaving investors with ordinary-sized returns.

Even more troubling was this excerpt:

For another bearish view, there's what economists refer to as the Mankiw paper. In 1989, long before working in the White House as chief economic adviser or writing his best-selling textbook, Principles of Economics, Harvard University economist N. Gregory Mankiw co-wrote a paper that was startlingly negative on housing. He and David N. Weil predicted that home prices would decline by 47% after inflation over the next 20 years, based on a shrinking pool of potential first-time buyers and an expectation that baby boomers as a group would spend less on housing as they grew older. It could be that Mankiw and Weil were not so much wrong as premature.

Ouch! Not looking good for real estate outlook! True, in recent years, the easy availability of credit would support greater leveraging of household budgets (in contrast, in the 20s and 30s, most houses put something like 50% down!), but if the credit crisis is more than short-term, then we just may see this Mankiw prediction come good after all!

Earmarks Galore!

Courtesy of Taxpayers for Common Sense, we now know just how much pork each member of Congress took home.

Presidential Candidates
Hillary Clinton $342,403,455
Barack Obama $ 91,421,220
John McCain $ 0

Prominent Congressman (no party bias - just the ones I'm familiar with)
John Murtha $176,397,200
Steny Hoyer $139,128,759
Nancy Pelosi $ 94,332,500
Paul Sarbanes $ 71,045,900

Prominent Senators
Dick Durbin $335,181,200
Chuck Grassley $323,628,520
Trent Lott $311,013,500
Chuck Schumer $309,691,055
Harry Reid $305,289,470
Diane Feinstein $295,872,430
Russ Feingold $ 0
Claire McCaskill $ 0

So much for all the talk about eliminating pork in Washington!

Quote of the Day: The Mac on the O

Republican presidential candidate John McCain on his likely Democratic counterpart Barack Obama:

To encourage a country with only rhetoric rather than sound and proven ideas that trust in the strength and courage of free people is not a promise of hope. It is a platitude.

Green Tip of the Day: Kill Vampire Electricity

Bankrate.com reports:

Many appliances use electricity even when they're turned off. It's called a phantom load, or vampire electricity, and as much as 75 percent of the electricity used by home electronics and small appliances is used while they're turned off. The Ohio Consumers Council estimates that it costs consumers $40 to $100 a year.

So Much for Obama Girl

So I just watched on CNN that Obama Girl, the woman who made it big with her YouTube hit professing her crush on Barack, did not vote. Why? She claimed she was too sick to drive across the bridge to vote in Jersey. Not sick enough though to attend an election watching party that night.

How typical! Obama has to worry about the young people flocking to his campaign - how many are the serious political activists who dot campuses, and how many are just ditsy sorostitutes embracing the next big fad?

Why Huck Won't Be Veep

I've always thought the notion of Mike Huckabee running with McCain as a vice-president was a little foolish. Sure, Huck brings evangelicals and the South, but it takes more than cold electoral calculus to make a good ticket. For one, few candidates like assistants who can take attention from them, and Huck sure can. But also, Huckabee brings very little in terms of qualifications or experience, and one could argue that McCain needs a policy wonk. More confirmation from this story on Politico:

In 2005, he sat down with Stephen Moore of the Wall Street Journal, and said: "I'm going to be honest; I know a lot less about economics than I do about military and foreign policy issues. I still need to be educated." On the campaign trail, he's also suggested he'd look for a vice presidential running mate with strong economic credentials to balance weaknesses of his own.

If not for the baggage from his run, Mitt Romney would be the ideal man to do that. Of course, Mitt would blow the center McCain strives for, and also is more charismatic than the Mac, so you can rule him out.

What Mac needs ... hold your horror ... is a Dick Cheney type veep. Policy wonk, no political ambitions. Ok, maybe not someone quite so polarizing ...

Bye Bye Mitt!

Mitt Romney has left the building. Goodbye! It's sad to see a candidate that could have been something stumble. I didn't support him ... in many ways, I thought he was like that other man from his state that ran for President - John Kerry. Both were brilliant enough to be president, but both had serious credibility issues. People trusted Bush and McCain, even if they didn't really have the best resume.

In the end, Mitt made a calculated gamble. Here was a man who had created phenomenally successful businesses, resurrected a broken Olympics, and introduced universal health care as governor. What better qualifications could you expect in a presidential candidate? But he chose to steer from the data-driven non-ideologue that is his strength to what he perceived to be what the Republican party was looking for. But this isn't 2000 and people aren't looking for another George Bush.

To be fair, maybe his campaign was doomed anyway. In this time of economic angst, I don't know if any candidate could run with a claim of running businesses. Populism is in the air, as you can tell from Huckabee's strong showing in a party that worships the free market. But by running a more sincere campaign, Romney could have managed to get on as a veep, something that simply can't happen now!

Vid of the Day: Jon Stewart on HRC's Hallmark Special

Watch to the end - it's pretty funny how it ends!