Paul Krugman does a good job at analyzing the financial arcane and picturing its deficiencies. This weekend in the New York Times, he said the following:

To understand the gravity of the situation, you have to know what the Fed did last summer, and again last fall. As late as August the favorite buzzword of financial officials was “contained”: problems in subprime mortgages, we were assured, wouldn’t spread to other financial markets or to the economy as a whole. Soon afterward, however, a full-fledged financial panic began. Investors pulled hundreds of billions of dollars out of asset-backed commercial paper, a little-known but important market that has taken over a lot of the work banks used to do. This de facto bank run sent shock waves through the financial system…. The Fed responded by rushing money to banks, and markets partially calmed down, for a little while. But by December the panic was back…. A report released last Friday by JPMorgan Chase was even blunter. It described what’s happening as a “systemic margin call,” in which the whole financial system is facing demands to come up with cash it doesn’t have.

But as we told you a last week, the danger has increased as mortgage lenders see that more borrowers give up when finding out that they owe more than their homes are worth; they simply mail in the keys, rather than try to work out a new payment plan. Some even abandon their homes before other assets:

“It’s the American way of deleveraging,” said Jochen Felsenheimer, a credit strategist at Unicredit in Munich. “First you sell your house, second you sell your car and in the end you also sell your TV set.” (more - 03/06)

The steadily fall of the US Dollar continues to be a matter of concern, at this pace the breaking point isn’t far away. Please, visit a site delivering currency trading charts, and you will see that the dollar index has plummeted from 77 a month ago to below 73 now. And it is not going to get any better since the consumer confidence is at its lowest since 2002, AP reported.

While 8 million households may lose their homes over the next 3 years, Bank CEOs are being blasted for their obscene payouts:

The report comes a day before Rep. Henry Waxman is expected to grill Angelo Mozilo, chief executive officer of Countrywide Financial Corp., former Citigroup CEO Charles Prince and Stan O’Neal, former CEO of Merrill Lynch & Co. In calling the hearing of his Oversight and Government Reform Committee, Waxman, D-Calif., said he’ll examine if their “level of compensation is justified.”… The report said Mozilo received more than $120 million in compensation and stock sales last year. O’Neal left Merrill Lynch in October with $161.5 million in stock, options and retirement benefits, after leaving the brokerage with its biggest-ever quarterly loss and Prince left with a $10 million bonus, $28 million in stock and options and $1.5 million in other perks when he left Citigroup last fall, according to the report. Representatives for the three companies did not immediately comment…

But this is just the tip of the iceberg. Catching all the economic terrorists involved - from real estate agents to appraisers and other middle men - may be proven difficult to achieve. Fraud compounds the housing crisis :

Arthur Prieston, chairman of the Prieston Group, which provides mortgage-fraud insurance and training to lenders, said that “at least 30 percent of the loans out there contain some form of misrepresentation. But because lenders often have to sell off properties quickly to cut their losses, we will never know exactly how much mortgage fraud has been committed,” he added. Prieston estimates that mortgage-fraud losses were around $4.2 billion for 2006, adding that figures for 2007 “will be much higher.” …

In Europe, illusions are too coming to an end.

Report author Michael Ball said: ‘2007 will probably go down in history as the year that the great European house price boom ended. ‘The year started so strongly on a wave of optimism but ended bleakly for housing markets in virtually every country. ‘Purchasers could no longer afford to buy at ever-rising interest rates. Housing markets either froze as a result or prices started to slide.’..

In economics everything follows the demand and supply. We can see now why it is extremely dangerous to corrupt people’s mind, to trick them into believing that the ’sky is the limit’.

While central banks give us the (false) impression that they flood the markets with as much commercial paper as needed to counter the global liquidity crisis, the real credit squeeze is coming. Not many have noticed this extremely relevant internet headline: Global debt markets fall 45% in fourth quarter - amid fears of rising defaults and widespread economic fallout from the credit-market turmoil.

Easy money has the same effect as cocaine addiction. When the consumption of drugs decreases dramatically, there is a withdrawal. In monetary terms, it is called a ‘contraction’ aka: recession or worse the ‘D’ word. The problem is that the system being itself a ‘debt pyramid’, the dominoes start falling one after another. That is precisely why central banks are not able to print money as fast as it should. In banking jargon, the unexpected consequences are also called ‘moral hazards’.
Additionally there are new worries for the Banks: credit cards and commercial construction loans may be the next trouble spots as strained financial markets constrain credit, CNBC explained as of 03/04. This is precisely why, early this week, Bernanke’s speech mirrored the groundwork for nationalization of Fannie Mae, Freddie Mac! So there we go: in other terms what we’re seeing is a ‘backdoor bank bailout‘ as defined by Dean Baker, and of course financed by the taxpayers.
One way or another - and as usual - the taxpayers are caught in a ‘bind’. Again they will pay for the lack of transparency and/or frivolous regulations. And this will translate into more loss of purchasing power.

Maybe after having read the next paragraphs will you concede the time has come for a major political clean up.

(AP-03/06) Federal Reserve: Homeowner Equity Falls Below 50%… Moody’s Economy.com estimates that 8.8 million homeowners, or about 10.3% of homes, will have zero or negative equity by the end of the month. Even more disturbing, about 13.8 million households, or 15.9%, will be “upside down” if prices fall 20% from their peak… Homeowners’ percentage of equity slipped to a revised lower 49.6% in the second quarter of 2007, the central bank reported in its quarterly U.S. Flow of Funds Accounts, and declined further to 47.9% in the fourth quarter — the third straight quarter it was under 50%. That marks the first time homeowners’ debt on their houses exceeds their equity since the Fed started tracking the data in 1945….

In the same time, we ought to tell you about the latest Federal Reserve Report which is indeed very factual and cannot be dismissed:

(MarketWatch - 03/06) … Considering the impact of higher prices, a bigger debt burden and sagging home prices, Americans were poorer at the end of 2007 than they were the year before, the Federal Reserve reported Thursday. Fed reports household net worth down 3.6% in fourth quarter or $533 billion …

…. The real credit squeeze has started.

If you thought that the subprime mess was the biggest threat, here is another one: the pay-option loans. Here below, you can read the CNBC article explainnig how the “game” works.

Countrywide Financial Corp. has seen mortgage defaults rise as the housing market went from boom to bust, but the nation’s largest home loan provider says it could have more trouble ahead with a particularly risky slate of loans _ pay-option adjustable rate mortgages…. Pay-option loans give borrowers the option to make a lower payment but can result in the unpaid portion being added to the principal balance. They also have the potential to provide high yields to investors who purchased the loans from lenders during the housing boom… As of the end of December, Countrywide had nearly $29 billion in pay-option loans, with about $26 billion of the total having grown beyond their original loan amount, the company said in a filing late Friday with the Securities and Exchange Commission… MORE: 03/04

Another headline in the New York Times caught our attention: States and Cities Start Rebelling on Bond Ratings:

A growing number of states and cities say yes. If they are right, billions of taxpayers’ dollars — money that could be used to build schools, pave roads and repair bridges — are being siphoned off in the financial markets, where the recent tumult has driven up borrowing costs for many communities…. A growing number of states and cities say Wall Street ratings firms assign municipal borrowers inappropriately low credit scores, costing taxpayers billions of dollars… States and cities rarely dishonor their debts. The bonds they sell to investors are generally tax-free and much safer than those issued by corporations. But some officials complain that ratings firms assign municipal borrowers low credit scores compared with corporations. Taxpayers ultimately pay the price, the officials say, in the form of higher fees and interest costs on public debt….

Um-um… who says that low credit scores are inappropriate? Considering the national debt, all we can say: it is about time to put an end to debt-multiplex. Maybe if the rating agencies had sounded the alarm a long while ago, we wouldn’t be there… we told you so a while back: ratings agencies are next to be investigated.
Meanwhile American consumers’ bankruptcy filings were up 15% in February. The February number was 37 percent higher than in the same month a year ago, according to the Bankruptcy Institute.

Wait, it is getting worse: a telegraph.uk columnist acknowledges that the Federal Reserve’s rescue has failed:

The verdict is in. The Fed’s emergency rate cuts in January have failed to halt the downward spiral towards a full-blown debt deflation. Much more drastic action will be needed… The debt markets are freezing ever deeper, a full eight months into the crunch. Contagion is spreading into the safest pockets of the US credit universe… UBS says the cost of the credit debacle will reach $600bn. “Leveraged risk is a cancer in this market.”

Try $1trillion, says New York professor Nouriel Roubin. Contagion is moving up the ladder to prime mortgages, commercial property, home equity loans, car loans, credit cards and student loans. We have not even begun Wave Two: the British, Club Med, East European, and Antipodean house busts… Half the eurozone is grinding to a halt. Italy is slipping into recession. Property prices are flat or falling in Ireland, Spain, France, southern Italy and now Germany. French consumer moral is the lowest in 20 years… The greater risk is slump, says Princetown Professor Paul Krugman. “The Fed is studying the Japanese experience with zero rates very closely. The problem is that if they want to cut rates as aggressively as they did in the early 1990s and 2001, they have to go below zero.”… (03/02)

Please bear in mind that Ben Bernanke warned that he expects bank failures. This article on marketwatch.com may soon reveal the cherry on the cake:

Gulf investors may not save Citigroup read… The Kuwait Investment Authority also said in January it would invest $3 billion in Citigroup. Al Ansari said “it would take a lot more money to rescue Citigroup.” A spokesperson for Citi was unable to comment immediately when called Tuesday… (03/04)

Back to business as usual? If you read the article in the New York Times today, you’ll have to think so. Republicans and Democrats sank back into a partisan, ideological clash over whether the government should intervene in the real estate mega-crisis and perhaps even bail out lenders.

In Congress, Democratic lawmakers have begun to push ahead with an agenda aimed at shoring up the housing market with federal money, giving delinquent homeowners more bargaining power with their lenders and having the government buy troubled mortgages. About 20 percent of subprime mortgages, which are made to people with low credit scores or low incomes, are delinquent and in danger of default. Moody’s Economy.com recently estimated that three million subprime borrowers were likely to default over the next several years…

3,000,000 million losing their homes PLUS hundreds of thousands which can afford the monthly payments today but will lose their jobs/homes during the deep recession! Remember a couple of months ago, they were talking of 1,2 million. The New York Times article continues:

… Democrats, knowing that they could not muster 60 votes to pass their bill, charged that Mr. Bush and the Republicans were protecting banks and Wall Street firms while doing little for people trapped in mortgages they cannot afford and houses they cannot sell…. But unlike other Democratic proposals, the idea of a government-funded mortgage buyout has considerable support among banks and mortgage lenders. Lobbyists for the mortgage bankers have circulated a detailed proposal, though company executives said they were merely providing “technical information” requested by Democratic lawmakers…

Amid those enormous conflicts of interest, everybody shows his true colors. The Democrats’ proposal shouldn’t lure anybody. Both parties work for the lobbies while accusing each other of doing the same. In the meantime, nobody is being investigated nor arrested.

Don’t worry, be happy? China is still booming and Sir Alan Greenspan recommends the Gulf States to dump the dollar. America could resemble a ‘Banana republic’ sooner than you think!

ps: updates on the world economic crisis are also available on Danny Schechter’s blog.

Fed chairman signaled another interest rate cute yesterday, while saying that he economic conditions have become distinctly less favorable. Over the span of just eight days in January, Bernanke slashed rates by 1.25 percentage points — the biggest one-month reduction in 25 years!

This move should worry us all. Since it is our cheap money addiction that drove us toward this deep recession, why trying to cure the disease with the same faulty logic?

According to the latest essay of F. William Engdahl, it is crystal clear that the catastrophic meltdown must be attributed to the failure to regulate money and credit creation.

As Lawrence Summers, a prominent Harvard professor, ponders America’s need to find a way to stem foreclosures the Bush administration plans to Veto Foreclosure Bill. Mr Summers does not have the reputation to be an alarmist but here some highlights of what he told the Financial Times as of Feb 25/08:

… All honest analysts accept that policies adopted so far, such as the “teaser freezer” limits on resetting mortgage interest rates and increased federal support for mortgage lending, have had only a marginal impact on what may be the most serious crisis in housing finance since the Depression… It appears house prices are down by 5-10 per cent from their peak, with derivatives markets predicting further declines of about 20 per cent… Price falls of this magnitude are likely to mean more than 10m would have negative equity in their homes…

Without finding ways of writing down mortgage liabilities, new finance will do nothing for the problem group that has negative equity. Direct government intervention in mortgage markets risks creating delays, burdening taxpayers and inhibiting necessary adjustments in house prices…

The rationale is the prevention of costly and inefficient liquidations. It is hard to see why similar protections should not be prudently extended to family homes…

Second, methods need to be found to enable creditors who accept a writedown in the value of their claims to retain an interest in the future appreciation of the
homes on which they have mortgages…

Bankruptcy reform alone could, on some estimates, avert 500,000 foreclosures and, by establishing templates for renegotiation, aid a wider restructuring of mortgage debts.

Alas as the Bush administration showed, there is so much conflicts of interests that even the best intentions may morph into mirages forever. Ben Bernanke knows this and this is why he lowered the interest rates again. How low can they go - and at what price?

President Bush said Thursday the country is not recession-bound and, despite expressing concern about slowing economic growth, rejected for now any additional stimulus efforts. “We acted robustly”…  (Feb 28/08)

The big event of this weekend was in the New York Times and entitled: A ‘Moral Hazard’ for a Housing Bailout: Sorting the Victims From Those Who Volunteered.

A confidential proposal that Bank of America circulated to members of Congress this month provides a stunning glimpse of how quickly the industry has reversed its laissez-faire disdain for second-guessing by the government — now that it is in trouble.

The proposal warns that up to $739 billion in mortgages are at “moderate to high risk” of defaulting over the next five years and that millions of families could lose their homes.

To prevent that, Bank of America suggested creating a Federal Homeowner Preservation Corporation that would buy up billions of dollars in troubled mortgages at a deep discount, forgive debt above the current market value of the homes and use federal loan guarantees to refinance the borrowers at lower rates.

“We believe that any intervention by the federal government will be acceptable only if it is not perceived as a bailout of the bond market,” the financial institution noted… (Feb/23/02)

Finding a solution to this unprecedented crisis is needed… but let’s bear in mind that any intervention will come down to making debts to pay debts…. the problem is just delayed while making the outcome M-U-C-H worse… In real economics, debts that cannot be paid are destroyed.

The world credit situation darkens on a daily basis and you shouldn’t expect to hear the ugly truth from the mainstream media.

For example: German State-Owned Banks on Verge of Collapse, Der Spiegel said today. The German government has had to bail out state-owned banks with taxpayers’ money after their managements recklessly gambled away billions on subprime investments. But if a state-owned bank were to go under, the consequences could be disastrous for the whole economy…. Ortseifen and Matthäus-Maier are perfect examples of the fatal mix of amateurism, greed and political protection that is symptomatic for many of Germany’s state-owned, partially state-owned and public sector banks. It is an environment that can only thrive in the shadow of the state — and that has drained more than €20 billion from the public treasury within the last decade. Until now, the government has always been there to pick up the tab in the end. Fully aware of this safety net, the executives at state-owned banks gambled with their employers’ assets as if there was no tomorrow. Munich-based BayernLB did it with stocks in Singapore, Bankgesellschaft Berlin with real estate investments, and WestLB with holdings in British companies….Anyone who is not responsible for bearing the consequences of the risks he or she takes can easily turn into a gambler. And the bets kept increasing in recent years, getting more and more public-sector banks into financial hot water. Now the banks find themselves lacking the assets they need to weather the turmoil of an international financial crisis.

In Australia, a country that is not even a major economy like Germany, things have gone from bad to worse too.

Australian Banks on Hook for 117 Times Worth according a scary article titled: Bomb ticking for off-balance banks, released by theaustralian.com. A TICKING bomb for the banking sector is its off-balance sheet activities, which at last count stood at $12.9 trillion.

We live in a world in which it is no longer possible to know who is borrowing/lending from to/who.

Today one could read on bloomberg.com: Dresdner Bails Out $19 Billion SIV, Follows Citigroup, HSBC in Fund Rescue. A short while back if you remember well, the Citigroup, Barclays, Merrill Lynch, Morgan Stanley and UBS rescue package found admirers. Here is an excerpt from the NYTimes:

In a $12.5 billion convertible preferred issue, Singapore’s GIC led with $6.88 billion, while the Kuwait Investment Authority kicked in $3 billion. The New Jersey Division of Investment, part of the state treasury department, invested $400 million. Extrapolating from Securities and Exchange Commission documents and other sources, a Los Angeles-based money manager the Capital Group of Companies, Citigroup’s largest institutional shareholder, appears to have invested $1.75 billion, while Saudi Prince Al-waleed bin Talal, the bank’s single biggest individual shareholder, put up $450 million. The former Citigroup chief, Sandy Weill, tossed in an additional $20 million, the same documents appear to indicate…

Don’t let the monetary jargon blur your mind. This means that the countries having accumulated a huge reserve of USDs are now lending to troubles European and American banks. But the problem remains. Debts are still alive and kicking! This is called debt laundering at the expenses of the gullible taxpayers.

Closer to us, Nouriel Roubini predicted (as of Feb 19) that 10 to 15 Million Households will Likely Walk Away from their Homes/Mortgages and that it will Lead to a Systemic Banking Crisis. He continues:

Then, the losses for the financial system from this massive defaults will be of the order of $1 trillion to $2 trillion, a multiple of the $200 to $400 billion of losses currently estimated for mortgage related securities.

This housing tale was a real mania involving fraud and lies at every level.

There are consumers who bought a condo or a house even knowing that the monthly mortgage payments could be hardly met - but thought that the ever increasing estate value would save them eventually. Of course, it didn’t play out this way:

For months, we’ve fretted about the Armageddon that will hit when subprime adjustable rate mortgages start resetting to much higher interest rates. What’s happening is even worse. It turns out that massive interest rate spikes aren’t the problem — many borrowers couldn’t afford these mortgages even at the low, introductory interest rates… (CNN-FEB 20)

Here is our advice - fasten your seat belts if not done yet!

While many people believe that the credit crunch has been contained, the sad fact is that it has cost a globally $7.7 trillion dollars in stock market value since October. Some even say more than that, speaking of $8.6TN. A reason why we shouldn’t expect the mainstream media to air any interviews of desperate borrowers and investors who supplied the funds to fuel a housing boom turned into bust. If they would they would freeze the markets instantly. It is very bad out there. Truth to be told, the subprime losses already outweigh ‘The Great Depression’. While it may not be very obvious at this stage, Wall Street is bracing for a wave of fury over subprimes.

If you remember well, Greenspan was utterly confident in the housing boom and applauding the so-called new financial instruments, telling us that they helped stabilize the market volatility. Back to present, today Bernanke speaks a different language and warns us that broad economy is worsening…

… The Fed chief told senators the “virtual shutdown” of the market for subprime mortgages given to people with blemished credit histories or low incomes — and a reluctance by skittish lenders to make “jumbo” home loans exceeding $417,000 — have aggravated problems in the housing market. “Further cuts in homebuilding and in related activities are likely,” he said….

Though the Fed chairman insists that there is no recession, just a sluggish growth which will be countered by the the impacts of the Fed’s rate cuts and the $168 billion economic stimulus package of tax rebates…. honestly can you believe that? Who is paying for the banks’ bailout and where do you think this stimulus package actually comes from: the treasury… it is all new DEBTS for the taxpayers!! We are merely delaying our day of reckoning and its ensuing fury tsunami.

What we’re seeing is a repeat of the S&L Crisis. Why? Because those who draft the regulations leave loopholes on purposes that suit their interests. Today they want us to believe that they are rescuing the market while in fact they are covering-up their own losses and underlying scandals. There is a book available for free on the net currently and titled: ‘The Bubble That Broke The world’, the story of a investment craze and easy money that led to the infamous 1929 crash. Nothing has changed and real changes will come when economics 101 will be taught in high school.

The cherry on t cake this week was most likely the speech given by Elliot Spitzer. He pointed to Federal agency that made it all worse for unwary borrowers. He explained:

The administration accomplished this feat through an obscure federal agency called the Office of the Comptroller of the Currency, or OCC. The OCC has been in existence since the Civil War. Its mission is to ensure the fiscal soundness of national banks. For 140 years, the OCC examined the books of national banks to make sure they were balanced, an important but uncontroversial function. But a few years ago, for the first time in its history, the OCC was used as a tool against consumers…. In 2003, during the height of the predatory lending crisis, the OCC invoked a clause from the 1863 National Bank Act to issue formal opinions pre-empting all state predatory lending laws, thereby rendering them inoperative against national banks. The OCC also promulgated new rules that prevented states from enforcing any of their own consumer protection laws against national banks. The federal government’s actions were so egregious and so unprecedented that all 50 state attorneys general, and all 50 state banking superintendents, actively fought the new rules.

But the unanimous opposition of the 50 states did not deter, or even slow, the Bush administration in its goal of protecting the banks. In fact, when my office opened an investigation in 2005 of possible discrimination in mortgage lending by a number of banks, including national banks, the OCC filed a federal lawsuit to stop the investigation against the national banks.

Throughout our battles with the OCC and the banks, the mantra of the banks and their defenders was that efforts to curb predatory lending would deny access to credit to the very consumers the states were trying to protect. But the curbs we sought on predatory and unfair lending would have in no way jeopardized access to the legitimate credit market for appropriately priced loans. Instead, they would have stopped the scourge of predatory lending practices that have resulted in countless thousands of consumers losing their homes and put our economy in a precarious position…

All this for the love of money?

Greed is a bottomless pit, which exhausts the person in an endless effort to satisfy the need without ever reaching satisfaction. — Erich Fromm 1900-1980, American Psychologist.

So where does it leave us?

Oh yes, the SEC Probes Dozens of Subprime Lenders, teaming with the FBI, the regulator wants to determine whether the crisis is criminal. To know whether we should hold our breath, let’s make a quick reality check… how many people involved in the Enron or the Worldcom cases are in jail today?

Any one familiar with our work will easily remember that we told you - at the moment of the release of our documentary - that the impact of so much predatory lending would affect the practically everything. So we weren’t much surprised to read in the NYTimes as of 01/12 that the Mortgage Crisis Spreads Past Subprime Loans.

Until recently, people with good credit, who tend to pay their bills on time and manage their finances well, were viewed as a bulwark against the economic strains posed by rising defaults among borrowers with blemished, or subprime, credit. “This collapse in housing value is sucking in all borrowers,” said Mark Zandi, chief economist at Moody’s…

Was the ‘housing miracle’ synonymous with the Myth of Homeownership for all?

While it is understandable that stabilizing the economy ought to be a priority, we have concerns when reading headlines such as this one: The Six U.S. Banks Plan to Step Up Efforts to Avoid Foreclosures. Here is an excerpt:

Feb. 11 (Bloomberg) — Bank of America Corp., Citigroup Inc. and four other lenders will announce new steps tomorrow to help borrowers in danger of default stay in their homes, according to three people familiar with the plans. The banks will start “Project Lifeline,'’ offering, on a case-by-case basis, a 30-day freeze on foreclosures while loan modifications are considered, two people said on condition of anonymity. The companies met with Treasury officials over the past week to discuss ways to encourage homeowners to get in touch with their mortgage servicers, one person familiar with the deliberations said…

Where will the money be coming from?… The taxpayers again!

Yesterday, as of Feb. 6, CNN had a simple explanation for the stock market mixed outcome: many investors, still uneasy about the economy, cashed in earlier gains after a Federal Reserve official suggested that rising inflation could prevent the central bank from making further interest rate cuts.

What does it mean? It means that stock market players have not forgotten the era of cheap money and its ensuing boom. If the fed’s rates were going back to 1%, we’re willing to bet that we’d have DOW 20,000 by now… Sweet nostalgia! They still think that it only takes to print more money to make the recession go away while forgetting what got them into this mess in the first place - with the help of the three major credit rating firms, the real culprits.

As to wonder when the those credit rating agencies will be downgraded. Alex Wallenwein has investigated:

Somewhere in the distant past, in the early 1970s, they were paid by the investors who needed to tap them for their information so investors could make educated judgments on investment risks. That is no longer so. Now, they serve two masters at the same time - but only one master really gets the benefit: the one who pays them.

So there we have it: that are monstrous conflicts of interest that made confidence in credit run amok.

The problem is not a liquidity crisis per se but too much money flooding the market and whose value is getting more and more worthless because too much money is purchasing goods and services. But once a currency is close to junk, we easily can imagine the amount of banknotes that are needed to achieve the same results. So indeed, more money is needed to help the system stay afloat.

2007 may come to associated with the start of the “big” credit crunch. 2008 has begun with a number of “unresolved” items. Hope of an early resolution seems to be fading. In the words of Lily Tomlin, the American comedian: “Things are going to get a lot worse before they are going to get worse.” … Satyajit Das - 03.02.2008

Bank woes are ‘poetic justice’ Buffett said:

“I wouldn’t quite call it a credit crunch. Funds are available,” Buffett said during a question and answer session at a business event. “Money is available, and it’s really quite cheap because of the lowering of rates that has taken place.” … He added: “What has happened is a repricing of risk and an unavailability of what I might call ‘dumb money,’ of which there was plenty around a year ago.”

While ‘dumb money’ is about to engulf the planet slowly but surely, US Homeowners Confound Predictions.

But the downgrades have also left policymakers and analysts scrambling to determine what has gone so badly wrong. As this search intensifies, some economists are starting to suspect that the answer lies in a striking recent change in American household choices – a shift that could have important implications for policymakers and investors alike…. In particular, it seems that mathematical models used to predict future default rates, based on past patterns of losses, have gone wrong because they did not adjust to reflect shifts in household behaviour. Or, to put it another way, financiers have been tripped up because they ignored one of the most basic rules of investment, which is usually found in product literature: the past is not always a guide to the future… “There has been a failure in some of the key assumptions which supported our analysis and modelling,” Mr McDaniel admits. “The information quality deteriorated in a way that was not appreciated by Moody’s or others.” Mortgage borrowers, in other words, did not behave as expected…

To be continued