Credit Card Brains

I’ve mentioned several times that many condos (especially high rise) are not included in the new home sales and inventory report from the Census Bureau. For those areas with a large number of high rise condos, the supply of housing units could be much higher than the Census Bureau statistics would indicate.

Jennifer Forsyth and Jonathan Karp discuss the condo supply problem in the WSJ: Woes in Condo Market Build As New Supply Floods Cities

More than 4,000 new units will be completed in both Atlanta and Phoenix by the end of the year. Developers in Miami and Fort Lauderdale, Fla., are readying nearly 10,000 total new units in a market already struggling with canyons of unsold condos. San Diego, another hard-hit region, will add 2,500 units, according to estimates provided by Reis Inc., a New York-based real-estate-research firm.

The new building comes on top of unprecedented supply.
…
Lenders of all sizes have $42 billion of condominium debt on their books, according to Foresight Analytics. In just three months — between the third and fourth quarters of last year — the delinquency rate rose to 10% from 5.9%, says the Oakland, Calif., research firm.

If I’m reading this correctly, this is the delinquency rate for condominium construction and development (C&D) loans.

Earlier I linked to the Financial Times story that suggested central banks were discussing buying mortgage back securities (MBS).

Greg Ip at the WSJ writes: Fed Says Not Discussing Coordinated MBS Buying

The U.S. Federal Reserve, responding to press reports, said it is not discussing coordinated purchases of mortgage-backed securities with other central banks.

“The Federal Reserve is not involved in discussions with foreign central banks for coordinated buying of MBS,” a senior Fed official said.

You guys know it’s been a year of weddings for me. From March 07 to March 08, I stood up to four weddings and attended another three. So I FINALLY managed to save some money as a bridesmaid … here’s how.

For the wedding I stood up to last weekend, the bride wanted us to all buy long black dresses. Instead of buying a whole new dress (I don’t own a long black one), I used the floor length skirt I wore to another wedding (it happened to be black) and bought a new top to go with it (the old one had some color sewn into it). The new top cost $30 at Macy’s. I was able to use all the same accessories, too. Since this bride didn’t need us to get our hair done, I did my own hair and nails. And I got a ride home from the reception, so I didn’t stay overnight in Indiana. Voila! I served as a bridesmaid for about $230 (including gifts) instead of the typical $1,000.

Yeah! Finally! I didn’t blow the bank standing up to a wedding…it only took standing up to about 15 previous ones to accumulate all the purses, jewelry, dresses, make-up, shoes, hair tools, specialty undergarments and slips to do it from my own stash of supplies. So… anybody need a bridesmaid? I’m ready to go!

ECRI has finally called the recession.

From Reuters: Leading index shows US economy in recession, ECRI says

The United States is “unambiguously” in a recession … citing a nine-month decline in its weekly measure of the economy.

The Economic Cycle Research Institute, which correctly predicted the 2001 recession at a time when many on Wall Street still maintained a rosy outlook, said their numbers indicate the economic contraction is already under way.

Extending its weakening trend, the firm’s Weekly Leading Index fell to 130.8 in the week of March 14 from 132.1 in the prior week, revised down from 132.2.

“It is exhibiting a pronounced, pervasive and persistent decline that is unambiguously recessionary,” said Lakshman Achuthan, managing director at ECRI.

ECRI may have called the 2001 recession, but they are late to the party on this one.

From Professor Delong: Sounding the Alarm on the Financial Crisis

“Stage III of a financial crisis is when a central bank runs out of ammunition–when pushing interest rates too the floor and swapping out all of its assets does not restore the good equilibrium. Then you face a threefold choice: depression, inflation, or public intervention. Depression is to be avoided. Inflation–resolving the financial crisis by printing enough money to boost the price level far enough that all of a sudden everyone’s incomes and real asset values are high enough to pay off their nominal debts–is generally best avoided too. As John Maynard Keynes wrote more than eighty years ago: “The Individualistic Capitalism of today, precisely because it entrusts saving to the individual investor and production to the individual employer, presumes a stable measuring-rod of value, and cannot be efficient–perhaps cannot survive–without one.”

So if Depression is unthinkable, and inflation is best avoided, this leaves public action. If the good equilibrium has vanished - as it looks like it has - because the supply of risky assets is too large for financial intermediaries to want to hold them given their capital, then the central government has to take action: to boost or to make financial intermediaries boost their capital so that they will demand more risky assets at high prices, and to diminish the supply of risky assets offered on the financial markets by either a) guaranteeing some of them or b) by buying up some of them itself.

It’s time to start thinking. If we don’t want to wind up in a deep depression or a big inflation, it is time to recognize might well run out of ammunition in dealing with this financial crisis, and figure out what kind of government action we want to see, and how we can set in in motion quickly if it becomes necessary.”

I do not believe we’ve reached what Professor DeLong calls Stage III of a financial crisis - and I don’t think the Fed is out of ammunition - but I think DeLong is correct that we should be planning ahead. The Fed can only do so much, and DeLong is arguing we should be prepared if it becomes clear the Fed is ineffective.

Along those lines, Professor Krugman writes: Weird Interest Rates.

Treasury rates have plunged close to zero, even though Fed funds is still 2.25%. Since open-market operations take place in Treasuries, I take this to mean that the Fed may not actually be able to reduce short-term rates much from current levels — which means, in turn, that conventional monetary policy has been taken off the table.

My apology, I Initially used data for the wrong month.

The Philadelphia Fed Index was released today: Business Outlook Survey.

Click on graph for larger image.

This graph shows the Philly index vs. recessions for the last 40 years. There are a number of times the index was below zero without a recession - so the reading today doesn’t mean the economy is in recession. However it is very likely that the economy is already in recession.

From the release, weaker conditions and higher prices:

Indexes Suggest Continued Weakness

The survey’s broadest measure of manufacturing conditions, the diffusion index of current activity, improved from -24.0 in February to -17.4 in March (see Chart). The index has remained negative for four consecutive months.
…
Firms Report Higher Prices

A notable share of the firms reported higher prices for inputs this month. Sixty-one percent of the manufacturers surveyed reported higher input prices. The prices paid index jumped from 46.6 in February to 54.4 and has increased 18 points since December.
…
Six-Month Outlook Improves But Remains Cautious

The future general activity index rebounded from a reading of -16.9 in February (its lowest since 1990) to -0.5 this month (see Chart). The percentage of firms expecting growth in activity over the next six months (28 percent) was offset by the percentage expecting decreases (29 percent).

From the WSJ: Credit Suisse Expects Quarterly Loss; Revises Down Fourth-Quarter Profit

Credit Suisse Group Thursday poured cold water on hopes that the banking industry was on the mend as it warned that difficult market conditions in March will lead to a first-quarter net loss, erasing gains made in the first two months of the year.

The credit crisis continues.

I got this e-mail today and it made me all nostalgic for simpler times, when I was desperate to just stop spending money and somehow plug the holes in my budget. Also made me miss my friend who moved away from Chicago far too soon after we met. I’m super impressed and kind of flattered that she remembers my financial goal of saving $3k when I first started the site.

Enjoy my personal e-mail chain…I’m sure many of you can relate! We’ve all come a long way!
(Ignore my response. I thought it added personality to the overall post, but then I realized that I just didn’t know how to cut myself off. I guess that’s the benefit of an editor.)

>>>>>>>>>>>>>>
From Natalia, 12:58pm Mar 16th
i just read your blog again and i remember when you set your goal to put 3k into your savings account (thats what i just made my goal, this yEAR!)- now your goal is 30K? you are RICH. congrats on how well you’re doing. you are an inspiration and a true role model (and i thought role models were all supposed to be oldeR?!) … thought i would say hi. hi. holla back when you have a sec.
xox -me

From Nicole, 8:00am Mar 18th
Ahhh… those were the days. I am seriously the farthest thing from a role model, though. Half the time I feel like I can’t even get myself together, let alone help other people do their thing, LOL! (That’s true!) What are you doing now? Who do you work for? Have you been doing any drawings or art lately? …And most importantly, when are you coming back to Chi-town? Maybe this time we can actually get our schedules together for drinks!

>>>>>>>>>>>>>>>>>>

UPDATE: WSJ: Bear Stearns Closes in on Deal To Sell Itself to J.P. Morgan

People familiar with the discussions said all sides were pushing hard to complete an agreement before financial markets in Asia open for Monday trading.

… the company is likely to fetch considerably less on a per-share basis than its stock price of $30 in New York Stock Exchange composite trading Friday at 4 p.m.

The Financial Times reports: Bear races to forge deal with JPMorgan

Bear Stearns … was this weekend fighting against the clock on a deal to sell itself to JPMorgan Chase … “We’re definitely in the mix,” a senior person at JPMorgan said.
…
JPMorgan has been contacting clients to inform them of the coming consolidation.

… people close to the situation said … it was … likely the firm would be acquired as a whole and split later.

My guess is a deal will be reached before the market opens tomorrow.

If you can spare a few minutes from contemplating the Great Bear Stearns Two-Buck Upchuck, an amusing tale from the San Francisco Chronicle, via Atrios.

First, the title: “More in foreclosure choose to walk away.”

Second, the examples. There are two. The first one is one Army Sgt. 1st Class Nicklaus Skaggs of Vacaville. For some reason, that name sounded familiar, so I asked Mr. Google about it. It came up with an article I posted on a couple of weeks ago from the Wall Street Journal, published February 29, which also makes the claim that “walkaways” are an increasing trend. The WSJ piece gives exactly one example: Sgt. Skaggs.

Note to reporters: one borrower does not constitute a “trend.” Also, the same borrower counted twice does not constitute a “growing trend.”

Oh well, the Chronicle also has this guy, who won’t use his name for obvious reasons:

A Discovery Bay man who asked not to be identified said he is “upside down” on his house by about $260,000. Instead of bemoaning the situation, he plans to capitalize on it.

“I refinanced a couple of years ago and pulled out $100,000 and put in a fabulous pool,” he said. “Now I’ve got this fabulous pool and fabulous house, but it’s not worth anything. Why shouldn’t I be building equity over the next four to five years instead of playing catch-up?”

The man said he has not made a mortgage payment for five months.

“I’m playing the bank game,” he said. “I’m playing chicken with them. I already got them to agree to put (the unpaid) payments on the tail end of the loan. What I’m really pushing them to do is to (adjust my mortgage) for the current market value and write off the rest. I’d love (to have it) lopped down to a $450,000 basis rather than $710,000.”

If the bank won’t negotiate, he’ll walk away, the man said.

If ever there were a case for which a lender would go to the considerable trouble of pursuing a deficiency judgment, Mr. Discovery Bay would be it. Playing this kind of “chicken” on a recourse loan? That’s some chutzpah.