Mortgage rates are about the same as they have been averaging: 6.25 percent for basic conforming loans.

All other markets are in frantic action, a perfect mirror of the struggle between two groups for accurate perception of the economy. One crowd is plugged into the global economy, technology and stock-market optimism; to them, business has never been better. The second crowd is the bond/bank bunch: we weren’t there at the time, but things look a lot like the run in to the 1930s.

Both are correct. However, only one will stay correct. The first camp’s strength may pull us through — or not.

The struggle has continued since August, and today was the best yet. In the single datum most important to markets each month, October payrolls grew by 160,000, a big, surprising “Camp One” victory. Economic strength should relieve the anxiety driving money to bonds, and on the way out, drive interest rates up. Not today! A whole new wave of “Camp Two” panic overtook the markets, though it was mostly limited to short-term rates. In a classic case of panic, 90-day T-bills fell 0.25 percent this morning, down below 3.6 percent.

Civilians are justified in asking what the hell is going on, and who — if anyone — is in charge. The last 48 hours say that nobody is in charge, and there’s hell to pay.

The Fed’s statement after Wednesday’s meeting must have made sense to the governors at the time, but in today’s light is an absurd document. “…Strains in financial markets have eased somewhat…” Uh-huh: the next day the stock market dropped 2.6 percent of value, and the day after that the world ran to cash.

Misinformation abounds: the Federal Reserve did NOT cut its rate to 4.5 percent unnecessarily, just because the markets wanted it to; the Fed spends its life disappointing markets. The Fed cut the rate to put a net under the economy in case Camp Two is right. The Fed’s closing sentence, “…After this action, the upside risks to inflation roughly balance the downside risks to growth,” seems more a reflection of Fed governors being broken among Camps One and Two than an accurate statement of risk. Sure there’s inflation risk out there, $96 oil and all, but the Camp Two risks are entirely deflationary.

That “balanced” line is supposed to mean no cuts ahead. Yet, the short-Treasury market has plunged a full percentage below the Fed. Anticipation of more cuts? Some, but mostly fear that credit loss is running out of control.

The triggers for the stock plunge and the new flight to quality were these events since the Fed’s meeting:

  • A brilliant piece by Greg Ip in the Wall Street Journal described the Fed’s efforts in August to figure out what was happening to the financial system and revealed that the Fed did intercede with Countrywide’s creditors in August to prevent a fire-sale of collateral. Apparently it was one of several interventions; there is no control, just a heap of Band-Aids.

  • This Thursday item triggered the stock dive: Citibank’s capital may be so impaired, deep loss recognition ahead, SIV maneuver failing, that it will suspend its dividend, and its CEO may not survive this weekend.

  • The deepest stock losses were those exposed to Camp Two’s risks. Companies that sell credit risk insurance on bonds (AMBAC, MBIA, ACA) and on mortgages (PMI, MGIC) have now lost as much as two-thirds of their value. The second stage effect is that those who bought insurance now feel at risk, and they are.

  • Today’s Wall Street Journal reveals that Merrill Lynch has been hiding credit losses by fraudulently “parking” losing deals by the billions with hedge funds.

With a nod to Camp One friends (pull us through, guys!), I think the last 48 hours make it clear that credit losses are systemic and too large to recognize. It is too late for daylight, proper valuation, and workout. It is firewall time — on the way to bailout.

The good news is that lower mortgage rates will put a mattress under “Bubble Zone” housing, and help housing in the rest of the country to lead a recovery.

Lou Barnes is a mortgage broker and nationally syndicated columnist based in Boulder, Colo. He can be reached at

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