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April 12, 1991
Despite reports of slowing inflation, and imminent Fed easing, mortgage rates are higher at this week's end than last.
In this morning's release, the Consumer Price Index fell .1% in March, while the "core" rate rose a mere .1%. Yesterday's Producer Price Index fell .3%, and the core rate climbed only .2%. These reports are unqualified good news.
The trouble in the bond market this week was caused by our old nemesis, the budget deficit. The Treasury auctioned $8.5 billion in 7year notes on Wednesday, and bids were scarce. It's tough for the markets to get carried away with inflation optimism while the Treasury is selling an average of a billion dollars in new debt every day this year.
The mostasked question around here (after will my loan be approved, and will rates go lower) is whether the banking and insurance industries are about to follow the S&Ls into a financial black hole.
A sizeable insurance domino, Executive Life, went thump yesterday. And the Treasury wants to bail out the FDIC with loans made by the Federal Reserve $75 billion, to start.
The Executive Life story will make good reading for several months. The company will be unable to perform on nearly $50 billion in life insurance, and many more dollars in "guaranteed" investment contracts. It's default will swamp various insurance bailout funds.
The entertaining part is that Executive Life's main buddy used to be Mike Milken, whose junk bond empire will be Executive's scapegoat.
There will be howls of pain from wounded innocents, who will demand to know why they weren't warned, and why Executive wasn't stopped. You won't hear much about analysts who warned about Executive continuously for six years, nor about the innocents who selected Executive because of fat payouts fatter than any prudent firm could pay.
On the banking front, the FDIC bailout plan is supposed to avoid a taxpayer bailout. However, the loan from the Fed to the FDIC has a small flaw. The Fed doesn't have any money except what is on deposit at the Treasury (which belongs to Štaxpayers).
Regulatory shell games and selfinflicted insurance wounds aside, banking and insurance are probably going to be fine. Both are more capable and better capitalized than the S&Ls were. Most encouraging of all, the national epidemic of silly real estate loans ended two years ago, and we can see the end of the resulting foreclosure pipeline.
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