Premier Mortgage Group

One line in Perfesser Bernanke’s testimony dominated the week, but in an odd way: it was an anti-forecast. “Uncertainty about the outlook for growth and unemployment… greater than normal….”

The stock market took it as good news (in that NeverNever Land, the only uncertainty is how high it will go), but bond and mortgage people took it the other way, the 10-year T-note briefly 2.88% (a fifteen-month low), mortgages still near 4.50%.

Fed policy is established by six governors appointed by the President and confirmed by Congress, and six of the presidents of twelve regional Feds (voting rotates). The appointed governors tend to be a sharp lot; the regional presidents are an uneven mix of able people and narrow, pinched, country bankers — hard money types who think people should be punished for their mistakes. Several times for each one.

In these deliberations, prediction is power. In two ways: all central banks battle “policy lag,” the six to eighteen months it takes for Fed action to bring full result on an economy that by then may look a hell of a lot different than it did when the action seemed appropriate. Policy lag forces the Fed to pre-emptive measures, trying to get in front of events already taken place. Second: voting governors and Fed staff cannot float ideas just because they sound cool — policy must have solid foundation in the econometric computer models assembled and tweaked in the last 50 years.

Since July 2007, these models might as well have been spittoons. From the onset of unprecedented bank-on-bank wholesale run all the way to the Lehman domino in September 2008, the Fed was behind, sticking to traditional rate cuts and liquidity.

The Fed understood the Lehman disaster, and in the following winter mostly on its own stopped the run by effectively guaranteeing every deposit and liability in the financial system. By March 2009, running against the Fed was silly, and so it stopped.

Since then, many have taken credit for preventing a new depression, the Obama stimulus and bank stress tests in the lead. The stimulus was worth trying, and the tests more sham than substance — the Fed had already done the prevention.

Since spring 2009, the Fed and Administration war on recession has been sitzkrieg. The duds at the Fed are worried that it is too easy, inflation ahead. The enlightened cannot say the duds are wrong: all of the models promise that monetary ease and rates like these will bring recovery. In the last three months the economy has been in obvious slowdown. However, nobody knows if this is a blip or a double-dip, or if a real recovery is underway, or if we’ve entered a flat New Normal stabilizing unevenly.

Of all components of the economy, housing is the one most out of whack. MGIC, the mortgage insurer, on July 1 released its new market-conditions guidance. It rates the 73 biggest metro areas “strong, stable, soft, or weak,” and a similar scale for trend. Of the 73 not one is strong, and only 27 are stable; all the rest soft or weak (24 weak). Of the stable 27, twelve are softening. Of all 73, three are rated “improving” — my backyard, Denver, from soft; Washington DC likewise; and Santa Anna CA from weak.

To illustrate the dud-sharpie divide at the Fed (and elsewhere), and frozen policy, consider Richmond Fed Prez Jeffrey Lacker, in July: “Housing is such a small portion of the economy now, it’s a little less capable of doing damage.”

As wrong as I think these people are, it is possible that one day soon a frightened soul will creep from her bunker for a quick recon outside. Markets always ignite by accident, and often when everyone knows they can’t. All it takes is enough people yelling back down to bunkers, “Hey, Harry! That house you’ve been talking about for ten years… a loan for three hundred grand only costs $1,500 a month! Get outta there. While you’re at it, get some sun.”

I have no idea how close we are to that blessed moment, and the general economic ignition that would quickly follow, but I do know that it’s housing first, then consumer spending and sales volume, and then jobs.

Posted in Market Commentary, Weekly Credit News