Between The Numbers'  Instablog

Mish Shedlock, other than engaging in an online battle of economic punditry with Peter Schiff,  wrote an article at the very end of 2008 attempting to sum up the arguments for and against inflation in the US. His core argument was that the rapid expansion of the Fed's balance sheet was not going to be inflationary in the face of the much larger contraction in credit that is still ongoing. He listed a series of indicators that were meant to be a scorecard of the deflation versus inflation debate, which at the time, they all agreed that the direction was deflation (by his scoring not mine, but I am not arguing with his point).

1) Falling Treasury Yields - at the start of 2009, the 1mo bill yeilded a measly 0.04, rising until in Mid-Feb they were at 0.26. However, a leg down and up in the market later, and they are back down to 0.10 as of the time of this writing. Overall yields for treasurys are still low by historical standards, but not necessarily falling. Edge: Deflation

2) Falling Home Prices - Federal programs, foreclosure moratoriums, and other stop-gap measures have been tried, but prices still continue down. Large "shadow inventory" and huge number of underwater homeowners suggest no near-term recovery. Edge: Deflation

The defeat of all of the propositions in the recent California special election was widely billed as a rebuke of government spending and a rejection of increased taxes to balance the budget. However, a closer look at the amendments suggests a more mixed message, particularly Prop 1E.

I commented earlier about how the previous restructuring offer to bondholders was both unacceptable and indicated a position of bad faith on the part of GM, using political concerns to gift unions a much larger share of the new GM. It seems that the government, having taken a deeper look at GMs books, may agree as well. From the NYT article:

I think the theme of my last three photos was "can you dig up any old photos that make you look as unqualfied as possible to discuss economics and finance?"

This new one is great - you can't tell how old I am at all. Is he 17 at his older cousin's graduation? Is he 25 at his own wedding? Is it a 35 year old at his uncle's funeral? A middle-age man watching his daughter graduate? None of the above, but with a clean shave and some movie makeup? Hard to tell.

The housing crisis of 2008-present took many people by surprise, most concerningly banks, who now face trillions in losses on mortgages, home equity, and related loans. Homeowners, whether able to afford the payments on the mortgage or not, have seen their balance sheets devastated. Zillow estimates that nearly a quarter of the mortgages in the entire US are underwater, with more pain to come as the housing market deteriorates further. The question on many minds is "Could they (banks, homebuyers) have seen this coming?". To answer this, I present a simple case study of my part of the nation.

95747 is large zip code in Roseville, CA, a relatively nice exurb of Sacramento with convienient access via I-80. It contains primarily tract housing by the thousands built by large firms, plus the associated light commercial retail outlets like restaurants and groceries one would expect. These huge tracts were built in the last 10 years, nearly tripling the population of the zip code.

However, while a nice place to live, 95747 is not 90210 (Beverly Hills). Heck, it isn't even Sunnyvale (bedroom community between San Fran and San Jose). It is basically farmland on to which builders created houses with other people's money. It is long 20 miles by car to the central business area (downtown Sacramento), and has no access to public transportation. It is not located near significant industry, nor are the local jobs that would support a $150,000 annual salary plentiful (the reccomended income for a 500K house). Yet, look at the price appreciation of the area (from Zillow):

Mark Sunshine has consistently decried the TALF program and its lack of effectiveness:

seekingalpha.com/artic...

As he points out, a huge fraction of small business lending was securitized. Economic growth will not return without small business able to get financing, and many small businesses that are solvent and profitable can still wither or die without credit. But why has the securitization market essentially ceased to exist ? ($21B in 2009 only) Sure, TALF is not a good solution that presents problems of its own. But a key issue is the behavior of securitization and securitized products before and during the bust.