Wharton Professors On Subprime Credit Crisis

The subprime credit crisis isn't over yet, but everybody is coming up with their  analysis on how it came about and what should be done to fix it and prevent it from happening again. Knowledge@Wharton has a series of interviews from Wharton professors about the subprime credit crisis. The cool headed professors are so much better than your typical news reporter. Of all the interviews, I liked the one from Professor Todd Sinai the most.

• Franklin Allen on Past Crises
• Marshall Blume on the Evolving Marketplace
• Richard Herring on Mortgage-backed Securities
• Richard Marston on Risk
• Todd Sinai on Home Values
• Susan Wachter on Securitizations and Deregulation

Have a great 4th of July! I will take a short vacation. When I come back, the 10-year TIPS auction announcement will be out. I will continue my TIPS auction series as the auction unfolds.

Free Garmin Nuvi GPS, Oursourcing, and the Role of Speculators

Here are some links that I found interesting this week.

Free Nuvi with TD Ameritrade deposit (The Financial Engineer) - Open a taxable account with TD Ameritrade, transfer $50,000 and receive a Garmin Nuvi 660 GPS (~$330). I can use a Nuvi. Very tempting to do an in-kind transfer and just hold the positions there for a year. Link to offer.

Economics of Shared Living: Estimated Savings From Having Roommates (My Money Blog) - Renting a larger place with roommates saves money.

OC Register to outsource some editing to India (Business Week) - How do you like your local newspaper edited and laid out by people in India? We should know by now even the traditional white collar jobs are subject to direct competition from abroad.

In Praise of Speculators (My Two Cents) - After bubbles are over, the society is left with some great things, built with speculators' money. Are speculators good or bad?

Misery Index, Zappos and Expensive Loans

I'm catching up with some reading because I've been busy with work lately. Here are some interesting articles I liked:

Hedonically-Adjusted, Well-Spun, Nominal Misery (The Big Picture) - Are the reported inflation and unemployment numbers artificially low compared to what were reported years ago? Maybe. But what can you do about it?

Credit/Debit/ATM Cards and Foreign Exchange (FlyerGuide Wiki) - All you want to know about spending money and getting cash when you are in a foreign country.

Why Zappos Pays New Employees to Quit And You Should Too (Harvard Business) - Zappos sells shoes online. I've always had great service from them. Although their prices are not always the lowest, unless they are much more expensive, I always choose Zappos. Great service is worth a few bucks.

The End of Entitlement (Newsweek) - Be prepared to deal with the new economic reality.

Why Is This Legal? (Credit Slips) - How do we strike the balance between consumer choice and consumer protection? Should expensive loans be illegal? What about other expensive stuff? Should we regulate prices?

In 2028, 1.40% EE bonds will earn 50% in one day (Savings Bond Advisor) - The 1.4% EE bonds are a rip-off. Why is this legal?

A Tale of Two Charts

The S&P/Case-Shiller Home Price Indices came out for February 2008. They showed a year-over-year decline for most cities. The announcement from Standard & Poor's came with the following chart (click on it for a larger size).

The plunge is quite impressive, isn't it? Now look at this second chart.

What do you see? A long rise followed by a small drop. The two charts are actually based on the same underlying data for the same time period. This is another case of when charts lie. The first chart from S&P plots the year-over-year growth *rate*, not the price index itself. I created the second chart from the 10-city composite data from S&P. It plots the 10-city composite price index. Before home prices reached a top in June 2006, the year-over-year growth rate slowed, but the prices were still growing. They were just growing more slowly than before. Lately the prices also dropped. That's for sure. However the growth rate nose-dived much more than the price index itself. If you look at the first chart, you would think the housing market is so bleak. If you look at the second chart, things are not so bad after all. Even with the price drop, the price index is still higher than it was before late 2004. In 20 months since June 2006, it merely gave up the gains of the previous 19 months. The index remains substantially higher than the trendline (red) established before the growth took off in 2000.

You can make charts tell whatever story you want. It depends on your perspective. Extending the decline in the second chart back to the trendline will be interesting.

Fed Opens the Vault

Make it 3 for 3. Yesterday I said the Fed might come out with an emergency cut after the stock market dropped below the previous low. Well they didn't do exactly that but they pulled out something else. They are going to open their vault and let banks borrow against the mortgage backed bonds they own. The banks have plenty of those but their values keep falling. This move is going to stabilize the market for a while until the market becomes desperate again. The Dow shot up 400 points! We shall see if it really works.

The Fed Is Losing It

It happened twice already. Whenever I updated my "how low can it go" table (8/16/07, 1/21/08), the Fed came out the very next day with an emergency interest rate cut. Today I read on Yahoo! some speculation that the Fed might do another emergency rate cut. So I'm not going to update that table again. I never understood why emergency cuts are necessary. I heard that the monetary policy has a 12-18 month lag. With that kind of lag, I don't understand why waiting 1 more week for the regular meeting wasn't an option and they had to do it right away. Unless the emergency was an anticipated fall in the stock market. Right now the options market is forecasting an equal chance for a 50 basis points cut and a 75 basis points cut from the scheduled FOMC meeting on March 18. I won't be surprised if they do it tomorrow for another "emergency" because the stock market fell.

* Source: Federal Reserve Bank of Cleveland. Data as of March 7, 2008. Today's Fed Funds rate is 3.00%.

If the Fed wants to influence the stock market, it's not working very well. Every time they cut the rate, the stock market got a temporary relief. After a few days, the effect wore off. After cutting the Fed Funds rate twice in January -- an emergency shocker 75 basis points cut followed by a 50 basis points cut -- the stock market is back to where it was prior to the cuts and perhaps even a little lower. Meanwhile inflation is getting out of control.

My message to the Fed: stop messing with the stock market and get back to fighting inflation.

This article on Bloomberg said the market lost confidence in the Fed's ability to control inflation, as evidenced by the real yield on 5-year TIPS falling to negative. I have those 5-year TIPS. They rose a lot in value in a very short time. Originally my plan is not holding them unless the real yield is at least 1.5%. I'm going to hold on to them for now. I'll buy some stock funds first and worry about the bonds later.

What a Recession Feels Like

I rented from Netflix the documentary Roger & Me by Michael Moore. This is the first film by Michael Moore which made his name. Whether or not you agree with Michael Moore's liberal point of view, the film offered a good reminder of what a recession feels like.

In case you haven't seen it (the film was out nearly 20 years ago in 1989), it's about the impact of General Motors' closing of several auto assembly plants in Flint, Michigan. Michael Moore, a native of Flint, wanted to bring then GM chairman Roger Smith to Flint and show him the devastation of 30,000 laid off GM workers. The film showed how his repeated efforts failed to get Smith to come to Flint and how the workers and the town coped with the event.

Oh boy it's depressing. Workers got laid off. They got evicted from their apartments when they couldn't pay their rent. They took up other odd jobs. Even fast food restaurants wouldn't hire former GM workers because they were not good enough at working in fast food. The wife of a laid off worker became Amway saleswoman doing "color reading" for her customers. She later confessed in great horror that she had read herself into the wrong color! The scene of a former worker raising rabbits for a living and killing and skinning one on camera for meat and fur is absolutely shocking. I cringed and closed my eyes. Don't let your kids watch that scene.

The film stuck me on a nerve because I worked in an auto plant before. The workers in the film looked very familiar to me. The so-called blue collar workers  are hardworking and they care a lot about their families. Sadly, the site I worked in also closed a few years after I left. I wonder what happened to them.

The film reminded me of what a recession feels like. People lose their jobs and they can't find a new one. Are we in a recession now? I don't think so.

Have you been in a recession? What did it feel like to you? Do you think we are in a recession now based on your past experience?