It is Saturday morning. SO is fed up with MoneySense News Hour, so I have had plenty of time to read John Mauldin’ s August 17, 2007 newsletter. Important take-aways this week:
The Panic of 2007 is not a problem caused by lack of liquidity. It is a problem caused by lack of credibility. Morgan could (and did) provide liquidity. Buffett can (and should) provide credibility.
And someone of similar stature needs to step in at S&P and Fitch. (Can Volker be summoned into the trenches yet one more time?) This is not about whether some person or group at the ratings agencies necessarily did anything wrong, although more than a few lawyers will suggest just that. This is about restoring credibility to the ratings and markets as soon as possible.
Addressing the problem and moving forward is important. This is certainly a mess that has caused so serious damage. The question is – were they incompetent or in conspiracy. It might not make a difference to John, but it is a fundamental question about the underlying ethics of the nation, or at least the folks involved in the money part. Even with strong individuals with impeccable reputations, will that be enough to restore the “faith”? Who needs to be convinced to get this back on the rails?
Securitized mortgages – reset
The SEC has announced that they will allow mortgage lenders to work out resetting mortgages with borrowers in cases where there is an obvious default about to happen. In many cases, that will mean extending the lower coupon rate another year. That may just put off the problem, but it will keep a home off the market and allow for a more orderly solution.
Yes, well… Orderly is good. Not kicking everyone out of the “homes” they can’t afford will play well in the press. But will encourage the home builders to keep building homes? Overall, we’ll see.
I think we are in for a return of the Muddle Through Economy rather than the End of the World. Credit markets will get back to normal, as there is a lot of money that needs to find a home. It is just looking for a credible home and one that will feature higher risk premiums and spreads.
Like John, I think we will muddle through, somehow. I’m waiting for some innovative, who-would-have-thought-of-that solution to come out of left field – reminiscent of option ARMs and negative amortization that popped up when it looked like we were about to run out of people to buy houses. Hopefully, it won’t result in the toxic waste and downstream mess that created, but I wouldn’t rule it out. Just prolong the agony in the name of fixing the problem in some politically correct way – that will really make SO crazy.