The Economy Guy

Issue: 12/19/07 Wednesday

The market was up and down and up and down today.  I’m feeling seasick.  We are definitely in the light volume season of trading from today all the way to the end of the year.  Moves can and will be exaggerated.  Bonds increased in value slightly as bond players are still trying to figure out what’s really going on with all the money flashing around the world.  The dollar is meeting resistance in its attempt to climb against the Euro.  If the Euro turns around, it is ready to continue its march in strength.  If the dollar finds more strength, it has a couple of cents left in its climb.

Here are details of how the Fed will protect homebuyers.

Key provisions of a Federal Reserve plan to protect home buyers from shady lending practices:

1. Restrictions on penalties for paying off a mortgage early.
2. Requirements to set aside money to pay for property taxes and homeowners’ insurance.
3. Showing proof of income when seeking a home loan.

For both risky and not-so-risky borrowers, the Fed proposed:
- Prohibiting certain types of misleading or deceptive advertising for home mortgages. For instance, it would bar using the term “fixed” to describe a rate that is not truly fixed over the life of the entire loan. It also would require that all applicable rates or payments be disclosed in ads with equal prominence as advertised introductory “teaser” rates.
- Requiring lenders to provide financial disclosures to borrowers early enough for them to use while shopping for a mortgage.

The “protection” for buyers include restrictions on who can qualify for a loan.  Sounds like a little double-talk.  In reality, these restrictions aren’t a big change in lending practices, and don’t really stop those poor loans from being made in the future.  A great example of your government in action.  Unfortunately, it’s the Fed this time.

Here are the results of the first Fed $20B auction.

The Fed announced that the interest rate on the short-term loans will be 4.65 percent, which is slightly less than the 4.75 percent the Fed charges banks on emergency loans through its “discount” window. Banks have been reluctant to use the Fed’s discount window because of the fear that investors will believe they are having trouble getting funds in a normal manner.  The Fed received bids from banks for $61.6 billion worth of loans, an indication the Fed had been successful in achieving its goal of encouraging banks to use the new auction facility.  In its announcement of the auction results, there were 93 bids for the emergency loans. Each bank could submit up to two bids.

The good news is that the auction was oversubscribed by 3 to 1.  The bad news was that somewhere between 47 and 93 banks bid.  This is a small number consider the 1000’s of banks in the country.  The Fed isn’t going to publish which banks got how much money – a sign a fear to be transparent.

Dinner Time Conversation Teasers  (some of you told me you like having this type of diversion)

U.S. military commanders in Iraq didn’t know Turkey was sending warplanes to bomb in northern Iraq until the planes had already crossed the border, said defense and diplomatic officials, who were angered about being left in the dark.  Americans have been providing Turkey with intelligence to go after Kurdish rebels in northern Iraq. And a “coordination center” has been set up in Ankara so Turks, Iraqis and Americans can share information, two officials said Tuesday.  But defense and diplomatic officials in Washington and Baghdad told The Associated Press that U.S. commanders in Iraq knew nothing about Sunday’s attack until it was already under way.

Do you remember that crazy Armenian Resolution that Congress tried to pass, but failed??  Well, here is a follow-on story on how the US military works with its allies.  Here is what you can read into this story – the Turks don’t trust the Iraqi Central Government, so they didn’t give any advance notice of the air raid; the US has set up an intelligence center in Turkey to share knowledge about the PKK (Kurdish rebels) whereabouts and movements; the US still has excellent military relations with the Turks.

Here’s another dinner time story.

Credit rating agency Standard & Poor’s slashed its credit rating for bond insurer ACA Financial Guaranty Corp. to a non-investment grade “CCC” from investment grade “A.” The downgrade of ACA led S&P to cut ratings on nearly 3,000 municipal bonds, which could may spark a municipal borrowing crisis, according to Peter Schiff, chief executive of Euro Pacific Capital.  ”Many municipalities get high credit ratings because their bonds are insured,” said Schiff. “Higher borrowing costs for cities will force them charge higher property taxes, which will increase the strain on consumers. And some cities may be shut out of the credit markets.”

So you thought there weren’t going to be knock-on effects of the sub-prime meltdown???  Here is one that could catch you in the pocket book – a gift from your county property taxing authority.  Cities and counties are run by small time politicians who usually aren’t much different in their inability to get anything done – just like Congress.  Cities and counties were hoping home prices would just keep going up, so they could spend all that extra cash and NOT have to increase your “tax rate.”  Your taxes would go up, but your tax rate wouldn’t – a bittersweet reality for homeowners.  Now cities and counties are going to have to make some hard choices.  I encourage you to hold their feet to the fire, and not allow them to even think about deficit spending.

Here are Wednesday’s closing details:
DJ30 – 13,207 (Down 26 points)
10 year US Treasury Bond – 4.07% (Down 0.05%)
Euro $1.4376
Gold closed at $805 per ounce.  (Down $2)
Oil Closed at $91.24 (Up $1.16)
Gasoline is $2.33 (Up $.03)