Ghosts and goblins descended upon us way back in mid-September, deviling civilians and bankers alike in a rolling Halloween that will not end with the dawn. This is the wrong year to sneak up and shout, "BOO!!" That might finish somebody off altogether.
As confusing and frightening as this interval is, there is progress — a lot of it, and less damage than the leapfroggers of doom would have it. "You think this is bad? Lemme tell you how really bad …" "Oh yeah? That’s nothing; wait’ll you hear this. …"
First, keep track of time. Lehman and AIG died on Sept. 15, just seven weeks ago, and the global credit system shut down 48 hours later. Four precious weeks were lost while Treasury fumbled for a plan. Only three weeks ago we followed the world to the obvious — capital! — and this week shot the actual cash into banks.
The current economy: July-Sept GDP contracted 0.3 percent, a surprise to nobody. However, you’d have to listen hard to know that there is still no spike in layoffs, steady at 479,000 last week. Unemployment will rise, but always peaks after recessions end.
Then the Fed. While the Treasury was tangled in its underpants, the Fed and all the central banks in the world were a blur of effective action. This week’s 0.5 percent cut in the cost of money merely confirmed prior cash-hosing, and now they have results to show.
The most deadly problem was to get interbank lending going again: LIBOR (the London Interbank Offered Rate) had spiked to a no-transaction 5 percent. At first gradually, after the capital plan adoption, by today real progress: Overnight LIBOR has plunged to 0.41 percent, with the one-month down to 2.58 percent and even the one-year down to 3.28 percent (a huge relief to ARM re-setters). Still a ways to go: Short-month LIBOR should fall another 1 percent, and will.
To understand during the months ahead, to measure healing, or just to give you something to do while the media and Web bogeymen in hockey masks try to scare you to death, look for stories about changes in credit spreads rippling outward from LIBOR.
Everybody understands that credit must begin to flow. Even the White House this week reminded bankers that their job is to make loans (just a press secretary, but that beat nothing). However, the jump-start ahead requires borrowers, too. It may help you control the quaking in your boots to know that big-time fancy-pants borrowers and governments all over the world are more scared than you are, selling every IOU they have in all-out panic, no matter how much they lose in the process. (Don’t join them.)
Confusing, but key: The lower that LIBOR goes, the more it induces borrowing and risk taking. Down is good. Meanwhile, all the money in the world wants U.S. Treasurys, still the ultimate planetary safe haven (no, Dorothy, not gold or euros): a one-month T-bill today pays 0.08 percent, and 90-days pays 0.4 percent. Down is bad! Up will mean that panic is fading.
Other markets are easier. The yield on every IOU on the globe is measured relative to Treasurys — that’s the meaning behind all this "300 over … 800 over." Spreads today reflect panic, not real risk of default. Top-quality tax-free munis trade 2 percent over taxable Treasurys; even in the Great Depression muni defaults were rare. GE just paid 400 basis points over to sell some bonds. Look for any sign of contracting spreads.
Which leads to mortgages. Holders of the $3.5 billion in Fannie/Freddie/Ginnie MBS not owned by Fannie and Freddie have been dumping in waves all year long, here and internationally either to raise cash or to buy Treasurys. I fear that the numbers are too big for government intervention to offset, but sooner or later as risk-taking and common sense return, mortgage spreads will come in, and consumer rates will fall.
Relentlessly anti-partisan, I have avoided election commentary. However, as an Obama win seems likely, risk (too many Democrats) will also bring reward. Thanks to the wise and gracious decision by President Bush, the transition to a new administration will begin immediately, and we will have a new Treasury Secretary-designate at a desk in the Department, on a phone, cattle-prod in hand by the end of next week. Whether N.Y. Fed President Tim Geithner (hope) or another, we’ll benefit from a level of energy and urgency not seen in that building in 75 years.
Lou Barnes is a mortgage broker and nationally syndicated columnist based in Boulder, Colo. He can be reached at firstname.lastname@example.org.
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