Dazed and Confused

Listening to the talking heads and the gibberish coming from Capital Hill has me concerned about the future of the U.S. The talking heads preach doom and gloom and the boys and girls in DC believe that a one time (small) tax rebate will fix what three years of poor monetary policy has done to the economy.

Noticeably absent from media criticsm have been borrowers. No one blames the borrowers. Granted, some borrowers were duped by unscrupulous or incompetent mortage brokers, but come on people. A home is the biggest purchase a person is likely to make. It is usually one's primary means of shelter. Doesnt it make sense that one would be certain they can afford the hoem they are purchasing.

Fair criticsim can be heaped upon the Fed and the banks and Wall Street and the Bush administration, but what about borrowers?

The call is for a Fed bailout. Well, unfortunately, borrowers, lenders and investors who made poor decisions will receive Fed assistance. The Fed will risk creating a moral hazard with borrowers in order to avoid turmoil in the banking system (it does not want a repeat of the 1930s).

With LIBOR back at normal spreads versus T-bills and Fed Funds, why is the Fed concerned about liquidity? Because the big banks and brokers are whispering dire warnings in its ear. It would be irresponsible for the big financial institutions to exaggerate their problems.

We do not think the large banks and brokers are exaggerating. This means that their exposure to subprime is larger than most could have imagined this time last year. In the future we will have an explanation of CDOs and why "AAA" vehicles are now nuclear waste.