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January 30, 2009
Long-term Treasury yields blew up this week, along with mortgage rates. In two weeks, the 10-year T-note has jumped from 2.25% to 2.85%, and mortgages from sub-5.00% to 5.50% (even that costs a 1% fee today), shutting down refinances altogether. Not even the all-time lows had created demand for purchase loans.
There are good odds that this move is temporary; even so, why did it happen?
The arithmetic alone is peculiar. The Fed began on January 5th to buy mortgages at a $100-billion-per-month rate. There is not half that much demand for new purchase loans, and refis are net-neutral in system supply and demand. So, somebody is selling existing loans in greater volume than Fed purchases. China and Japan, big holders of Ginnies, liquidating to raise cash for their own stimulus deals? Probably, but this week’s Treasury auctions found strong foreign demand.
The Grim Reaper theory: every nation on earth is trying to sell a mass of government debt to raise cash to save economies, but there isn’t enough money, rates will have to rise, and higher rates will intercept the stimulus intent. Could be, but I doubt it; there’s a lot of money in the world, and private loan demand has collapsed.
Then the inflationists insist it will be back any minute, and investors will only buy at higher rates. I know some of these people. They are impervious to evidence, utterly focused on the last war, certain they will find weapons of mass inflation.
Inflation is impossible without rising aggregate incomes and tight economic capacity, years away, and even then would require sustained Fed mismanagement. The California unemployment rate last month soared .9% to 9.3%. The 4th Quarter GDP decline at 3.8% understated by half the real damage, as inertia in the economy continued to “produce” inventories that piled up on shelves and docks. New orders for durable goods collapsed 2.6% in December alone. Deflation is the multi-year risk.
This Treasury/Market wreck I think is traceable to three altogether different perps.
First, the Fed. After its meeting this week it said for the third time in three months that it is considering buying long-term Treasurys to push their yields down. Get on with it, or shut up. While you’re at it, would one of your people please tell examiners of community banks to take off the brass knuckles?
Second, the new administration. I know... Obama has had ten days, Geithner three, but the vacuum in financial-system fix is awful to watch. The election was three months ago; this team obviously does not have internal agreement, nor with Congress. Detailed leaks in the press involve a compromise plan: a bad-bank, but numbers are too big to extract all assets; government will insure over the rest of the questionable assets, the sum growing hourly; keep banks in private hands and pray two-part TARP II makes banks look good enough to re-sell common stock and recapitalize.
I will instantly apologize if this approach works, but ol’ Bill Siedman had it right yesterday: this committee horse looks like a camel. Four or five humps. Bad hair.
Mr. Obama had it right, condemning Wall Street: “Shameful.. Show some restraint, discipline... responsibility.” However, he must make the leap that the senior officers in the financial system -- the individual human beings -- are for the most part beyond reform. They have thought their top priority was personal success, and still do.
BofA’s Lewis has destroyed 95% of stockholder value, and his crony board is still behind him. Treasurys and mortgages began to fall apart the day that Citi began to disassemble itself; BofA, Chase, and Wells are all still in pursuit of that failed model. Big bankers everywhere crouch in their bunkers, hoping each morning to find a newly deceased competitor, no strategy but defense. Buy mortgages? Don’t be silly.
The road to reformation of the system begins with one overriding principle: Mr. Banker, your top priority is the good of the society. If you’re not willing to take that oath in an emergency like this, we’ll find someone who will. Today. If that means temporary “nationalization,” get on with it.
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