Cheap Credit Caused the Crunch


Consumers and Investors can measure the current economic problems by counting the number of times they hear the term “credit crunch.”

We are being told that it is very difficult to get a big mortgage, that deals are falling through, that innocent home buyers are in a sorry state.  A big bank has raised its rate on jumbo mortgages from 6.8% to 8.0%.  Lenders are demanding documentation of borrowers’ income and assets.  What’s next?  A 10% down payment?  Mortgage insurance?

For several years now, people have been buying homes, no-money-down, on the supposition that high prices would go higher.  Some folks even bought several homes, planning to sell the extra ones when prices went higher.  Now the age-old question is heard:  “Sell to whom?”

This is the market that Bear Stearns’ (a major investment company on Wall Street) chief financial officer calls the worst he’s seen in 22 years.  This time period spans all the other credit and stock market disasters in recent history – and here they are:

  • the market meltdown of 1987
  • the savings and loan collapse of 1989
  • the Gulf War market of 1991
  • the Orange County bankruptcy of 1994
  • the Asian Contagion of 1998
  • the demise of Long-Term Capital Management of 1998
  • the post Sept. 11 market of 2001
  • and , the Enron-Tyco-WorldCom accounting scandals of 2001-2002

 Good Luck!

Freeze Your Credit


Identity theft is one of the fastest growing financial crimes.

Nearly 10 million Americans fall victim each year. The Identity Theft Resource Center reported in 2005, on average, an ID theft victim of new account and other fraud spent 60 hours resolving problems brought on by ID theft, those victims of existing accounts spent an average of 15 hours resolving problems. A 2003 Federal Trade Commission study found that identity theft also costs U.S. businesses nearly $48 billion annually, and consumers an additional $5 billion per year.

A security freeze lets consumers stop thieves from getting credit in their names.

A security freeze locks, or freezes, access to the consumer credit report and credit score. Without this information, a business will not issue new credit to a thief. When the consumer wants to get new credit, he or she uses a PIN to unlock access to the credit file. These states give consumers this important weapon to prevent identity theft:

Consumers Union’s Guide to State Security Freeze Laws Continue reading

Buy Gold – GLD


streetTRACKS® Gold Shares

Objective Designed to track the price of gold (net of Trust expenses)

Structure Continuously offered investment trust

Symbol GLD

Exchange New York Stock Exchange Continue reading

Fed will print Money!

A Little Economic History

Why the Fed has no other Alternative but to print Money!

The entire economic expansion of the US in the 19th century was a deflationary boom. Declining prices led to strong real income gains. As time went by, workers could buy with their incomes a larger and larger basket of goods because prices for consumer goods and commodities declined.

I other words, whereas inflation is the equivalent of a loss of purchasing power of money, in deflationary times the purchasing power of money increases. In deflation my 100 dollars today are worth more in a year’s time since they will buy a larger basket of goods and assets, whose prices are declining. In my opinion, there is, therefore, nothing wrong about deflation. So why is the US Fed so concerned about deflation that Mr. Bernanke even suggested dropping US dollar bills from a helicopter in order to combat it?

There is one condition under which deflation is a disaster and this is when total credit market debt is high as a percentage of the economy.carrying_alot_of_debt_md_wht.gif

When debts are as large as there are now, deflating prices and especially deflating asset prices would wreck havoc in the economic system and lead to massive defaults and bankruptcies. I may add that, as can be seen from,between 1950 and 1980 the debt to GDP remained largely constant.


But after 1980, and in particular after Mr. Greenspan became Fed chairman
in 1987, debt to GDP exploded. Therefore, it is not deflation that is the
problem, but the preceding debt inflation for which the Fed’s expansionary
monetary policies are fully responsible. So, having created a monetary and
debt monster, the Fed embarked starting 2001 in a huge money printing
operation in order to avoid deflation.

Rio Tinto Offer for Alcan


Rio Tinto (LSE: RIO)(ASX: RIO)(NYSE: RTP) has received US antitrust clearance for the proposed acquisition of Alcan by a subsidiary of Rio Tinto.

Receipt of this, and other regulatory clearances, is a condition to Rio Tinto’s offer to acquire the outstanding shares in Alcan.

About Rio Tinto

Rio Tinto is a leading international mining group headquartered in the UK, combining Rio Tinto plc, a London listed company, and Rio Tinto Limited, which is listed on the Australian Securities Exchange.

Rio Tinto’s business is finding, mining, and processing mineral resources. Major products are aluminium, copper, diamonds, energy (coal and uranium), gold, industrial minerals (borax, titanium dioxide, salt, talc) and iron ore. Activities span the world but are strongly represented in Australia and North America with significant businesses in South America, Asia, Europe and southern Africa. Continue reading

Glut of homes hits 16-year high


Sales slip but supply of homes on the market jumps to 9.6 months, pushing prices down for 12th straight month.

By Chris Isidore, senior writer

NEW YORK ( — Homeowners trying to sell last month faced the biggest glut of homes on the market in about 16 years, as declining sales and growing problems in the mortgage market helped push home prices down for the 12th straight month.

The National Association of Realtors said sales by homeowners slipped to an annual rate of 5.75 million last month, down 0.2 percent from the revised 5.76 million pace in June. Economists surveyed by had forecast the sales rate would fall to 5.7 million in the latest reading.

Not only did sales slip but the number of homes for sale jumped 5.1 percent, the group said, meaning there is now a 9.6-month supply of homes for sale, up from 9.1-months in the June reading. It was the biggest supply of homes by that measure since October 1991.

Foreclosure rescue scams

“Forget ‘location, location, location.’ The most important factor in today’s real estate market is ‘supply, supply, supply,'” said Mike Larson, a real estate analyst at with independent research firm Weiss Research.

“We are literally swimming in an ocean of homes for sale. In fact, at 4.59 million units, we have the most raw inventory for sale in history,” he said. “Until we work through this extremely large inventory glut, we’re not going to see any momentum in home prices.”

Even the Realtors’ own economist admitted that problems in the mortgage market will continue to take a toll on home sales.

“Home sales probably would be rising in the absence of the mortgage liquidity issues of the past two months,” said Lawrence Yun, the trade group’s senior economist.

A $200,000 ‘loss’ — and happy with it

“Some buyers with contracts have been scrambling when loan commitments did not materialize at the last moment, while other potential buyers are simply waiting for the mortgage market to stabilize.”

August has seen problems in the mortgage market cut deeply into the availability of financing for many buyers, particularly those needing subprime mortgages due to credit rating issues or a jumbo mortgage of more than $417,000.

The existing home sale numbers track sales that closed in the month. Closings typically occur a month or two after buyers lock in financing.

“These are ‘PC’ figures — pre-crunch,” said Larson. “The mortgage credit crunch that began very late in July and picked up steam in August will likely put more downward pressure on home sales and prices this month and into the fall.”

Add curb appeal to sell your home in down market

The report comes after Friday’s government reading that showed new homes selling at a better-than-expected pace. But the reports showed more weakness in prices – which have become a major concern for the U.S. economy as a whole.

The median price of an existing home sold in the month fell 0.6 percent from a year earlier to $228,900. It marked the 12th straight month that prices have been down on that basis, after the June reading was revised lower as well. The July 2006 median price was a record high for that reading, which measures the point at which half the homes sold go for more and half go for less.

Experts have tied weak auto sales at least partly to concerns among consumers about the decline in equity in their homes. Some fear that weakness in home values and reduced access to home equity lines of credit could soon affect a broader range of retail sales.

In addition, the downturn in housing has also fed investor concern about mortgage-backed securities, which in turn has created a credit crunch in financial markets, and sent stocks into a tailspin, as a number of corporate deals have run into financing problems.

Where the growth is – and isn’t

Not surprisingly, results at the nation’s home builders have been among the hardest hit.

While luxury home builder Toll Brothers (Charts, Fortune 500) managed to report a narrow profit last week that topped forecasts of a loss, it still saw earnings fall 85 percent from year-earlier levels. And the six publicly traded builders who are larger than Toll have all reported losses recently.

Lennar (Charts, Fortune 500), the nation’s No. 1 builder, and No. 5 KB Home (Charts, Fortune 500) both reported a loss in the latest quarter. No. 2 home builder D.R. Horton (Charts, Fortune 500) and No. 3 Centex (Charts, Fortune 500) both reported losses far bigger than Wall Street had expected, while No. 6 Pulte Homes (Charts, Fortune 500) and Hovnanian Enterprises (Charts, Fortune 500) have reported losses for the last two quarters and analysts project losses for at least the next year. Top of page

Debt Notes


By Alan Abelson


There are over $1 Trillion of securitized low-grade mortgages outstanding and nearly three-quarters of a trillion dollars worth of mortgages whose adjustable rates are slated to rise over the next year, a heap of them sooner rather than later.  That alone assures an appreciably larger magnitude of pain in the months ahead.

Moreover, as Merrill Lynch’s David Rosenberg astutely reminds us, there’s something like $300 billion in debt sitting on the banks’ balance sheets pledged to fund the last gasp of the M&A boom, commitments made when junk bonds were priced much more attractively.

And we still can look forward, biting our lips as we do, to the doleful impact of hedge funds dumping assets to meet what could easily prove a mighty rush of redemptions.