Most Popular
1. Banking Crisis is Stocks Bull Market Buying Opportunity - Nadeem_Walayat
2.The Crypto Signal for the Precious Metals Market - P_Radomski_CFA
3. One Possible Outcome to a New World Order - Raymond_Matison
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
5. Apple AAPL Stock Trend and Earnings Analysis - Nadeem_Walayat
6.AI, Stocks, and Gold Stocks – Connected After All - P_Radomski_CFA
7.Stock Market CHEAT SHEET - - Nadeem_Walayat
8.US Debt Ceiling Crisis Smoke and Mirrors Circus - Nadeem_Walayat
9.Silver Price May Explode - Avi_Gilburt
10.More US Banks Could Collapse -- A Lot More- EWI
Last 7 days
Stock Market Volatility (VIX) - 25th Mar 24
Stock Market Investor Sentiment - 25th Mar 24
The Federal Reserve Didn't Do Anything But It Had Plenty to Say - 25th Mar 24
Stock Market Breadth - 24th Mar 24
Stock Market Margin Debt Indicator - 24th Mar 24
It’s Easy to Scream Stocks Bubble! - 24th Mar 24
Stocks: What to Make of All This Insider Selling- 24th Mar 24
Money Supply Continues To Fall, Economy Worsens – Investors Don’t Care - 24th Mar 24
Get an Edge in the Crypto Market with Order Flow - 24th Mar 24
US Presidential Election Cycle and Recessions - 18th Mar 24
US Recession Already Happened in 2022! - 18th Mar 24
AI can now remember everything you say - 18th Mar 24
Bitcoin Crypto Mania 2024 - MicroStrategy MSTR Blow off Top! - 14th Mar 24
Bitcoin Gravy Train Trend Forecast 2024 - 11th Mar 24
Gold and the Long-Term Inflation Cycle - 11th Mar 24
Fed’s Next Intertest Rate Move might not align with popular consensus - 11th Mar 24
Two Reasons The Fed Manipulates Interest Rates - 11th Mar 24
US Dollar Trend 2024 - 9th Mar 2024
The Bond Trade and Interest Rates - 9th Mar 2024
Investors Don’t Believe the Gold Rally, Still Prefer General Stocks - 9th Mar 2024
Paper Gold Vs. Real Gold: It's Important to Know the Difference - 9th Mar 2024
Stocks: What This "Record Extreme" Indicator May Be Signaling - 9th Mar 2024
My 3 Favorite Trade Setups - Elliott Wave Course - 9th Mar 2024
Bitcoin Crypto Bubble Mania! - 4th Mar 2024
US Interest Rates - When WIll the Fed Pivot - 1st Mar 2024
S&P Stock Market Real Earnings Yield - 29th Feb 2024
US Unemployment is a Fake Statistic - 29th Feb 2024
U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - 29th Feb 2024
What a Breakdown in Silver Mining Stocks! What an Opportunity! - 29th Feb 2024
Why AI will Soon become SA - Synthetic Intelligence - The Machine Learning Megatrend - 29th Feb 2024
Keep Calm and Carry on Buying Quantum AI Tech Stocks - 19th Feb 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Bernanke Declares Worst of Credit Crisis is Over Before Tsunami Wave Hits

Interest-Rates / Credit Crisis 2008 Jun 12, 2008 - 06:04 AM GMT

By: Mike_Shedlock

Interest-Rates Best Financial Markets Analysis ArticleI have been staring in amusement at Bernanke's latest proclamation: Danger of downturn appears to have faded .
Despite a recent spike in the nation's unemployment rate, the danger that the economy has fallen into a "substantial downturn" appears to have waned, Federal Reserve Chairman Ben Bernanke said Monday.


The Fed's powerful doses of interest rate cuts, the government's $168 billion stimulus package, further progress in the repair of problems in financial and credit markets, a gradual ebbing of the drag from the deep housing slump and still solid demand from abroad for U.S. exports should help the economy over the remainder of this year, he said. Wishful Thinking or Blatant Lie?

Bernanke's statements are like standing in front of a tsunami proclaiming "The Worst Is Over" before the wave even hits the shore.

Professor Depew called Bernanke on his statements in point 1 of Tuesday's Five Things: Bernanke Says There's Never Been a Better Time to Sell Your Gold Jewelry for Cash .

Here's my take: Before we can say the worst is over or the danger has passed, the storm has to reach shore first. With that in mind I thought it might be interesting to look at a few headlines of things that are going to happen but have not happened yet .

Bank Failures

Bigger U.S. bank failures may be coming – FDIC
Future U.S. bank failures linked to the downturn in the real estate market may include "institutions of greater size" than in the recent past, Federal Deposit Insurance Corp Chairman Sheila Bair said on Thursday. I talked about the expected wave of bank failures in Too Late To Stop Bank Failures .

Monoline Fallout

Citi, Merrill, UBS Face Monoline Losses, Whitney Says

We have yet to see the fallout from the downfall of the monolines (Ambac (ABK) and MBIA (MBI)) but we will.

$500 Billion Option ARM Crisis Coming Up

Option Arms - The Next Real Estate Crisis
By April, 2009, hundreds of thousands of option ARM mortgages will begin resetting, bringing on a fresh wave of foreclosures.



According to Credit Suisse (CS), monthly option recasts are expected to accelerate starting in April, 2009, from $5 billion to a peak of about $10 billion in January, 2010. Today, outstanding option ARM loans in the U.S. total about $500 billion, about 60% of which were sold to California homeowners, according to Credit Suisse. Option ARMs were especially popular in the state, where they were heavily marketed during the boom by such companies as Countrywide Financial (CFC), Washington Mutual (WM), and Wachovia (WB).

"Most of the public is thinking that the subprime thing is over, but this is another thing waiting," [said Chandrajit Bhattacharya, vice-president and mortgage strategist at Credit Suisse Securities]. By the way, that article is not contrary to what I presented in Greenspan Conundrum In Reverse . The problems with Pay Option ARMs are negative amortization, falling home prices, and payment shock. Those are far bigger problem right now than the risk of rising interest rates on regular ARMs that are about to reset.

Bernanke has minimized the fallout from ARM resets by slashing interest rates. Negative amortization, falling home prices, and payment shock problems are another matter altogether. I have expected an acceleration of Pay Option ARM problems for quite some time. The storm is about to hit.

Additional Problems

  • A rising unemployment rate. I expect 6% by the end of the year and 7% or higher in 2009-2010.
  • An imploding commercial real estate.
  • Rising junk bond defaults.
  • Rising numbers of foreclosures and bankruptcies.
  • Rising credit card defaults.

Economic Picture Worsening

The economic picture is worsening across the board. And not just in the US but in the UK and Europe as well. A housing bust is now underway in the UK. Inquiring minds may wish to consider UK Housing Market Seizes Up .

In the meantime, Until Things That Have Not Happened Yet Do Happen , it defies credibility to suggest that danger has faded.

Impact of the Highly Improbable

The above is a discussion of "the known". There is also a huge risk factor from a Black Swan Event .

Last May, Taleb published The Black Swan: The Impact of the Highly Improbable. It said, among many other things, that most economists, and almost all bankers, are subhuman and very, very dangerous. They live in a fantasy world in which the future can be controlled by sophisticated mathematical models and elaborate risk-management systems. Bankers and economists scorned and raged at Taleb. He didn't understand, they said. A few months later, the full global implications of the sub-prime-driven credit crunch became clear. The world banking system still teeters on the edge of meltdown. Taleb had been vindicated. β€œIt was my greatest vindication. But to me that wasn't a black swan; it was a white swan. I knew it would happen and I said so. It was a black swan to Ben Bernanke [the chairman of the Federal Reserve]. I wouldn't use him to drive my car. These guys are dangerous. They're not qualified in their own field.”

In December he lectured bankers at Société Générale, France's second biggest bank. He told them they were sitting on a mountain of risks – a menagerie of black swans. They didn't believe him. Six weeks later the rogue trader and black swan Jérôme Kerviel landed them with $7.2 billion of losses.

So not only is there the risk of the known, there is also risk of the unknown. Bernanke and Paulson have factored neither into their Pollyannaish statements. Talk from both of them is getting more ridiculous by the minute.

 

By Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Click Here To Scroll Thru My Recent Post List

Mike Shedlock / Mish is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance, low volatility, regardless of market direction. Visit http://www.sitkapacific.com/ to learn more about wealth management for investors seeking strong performance with low volatility. You are currently viewing my global economics blog which has commentary 7-10 times a week. I am a "professor" on Minyanville. My Minyanville Profile can be viewed at: http://www.minyanville.com/gazette/bios.htm?bio=87 I do weekly live radio on KFNX the Charles Goyette show every Wednesday. When not writing about stocks or the economy I spends a great deal of time on photography. I have over 80 magazine and book cover credits. Some of my Wisconsin and gardening images can be seen at www.michaelshedlock.com.

© 2008 Mike Shedlock, All Rights Reserved

Mike Shedlock Archive

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in