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News Link • Economy - Economics USA

The Gods Are Laughing: "In economics, the majority is always wrong"

Meantime, while everyone's focused elsewhere, in the American part of the real world Elizabeth Warren warns that $1.4 trillion in commercial real estate loans that need to be rolled over by 2014 will endanger 3000 smaller US banks. Half the loans are underwater, while the government has hardly any idea how healthy these banks are. Also in an adjacent corner of the field, Fannie Mae and Freddie Mac have announced they will buy up delinquent mortgage loans they have written securities on, to the tune of at first glance $200 billion. Which is in turn of course only the first batch they'll purchase, since it's not exactly as if the rest of their portfolios are seeing better days . You know, just in case you were wondering why they needed that Christmas Eve blank cheque from the Treasury. Remember, their loan portfolio’s are north of $5 trillion, and the latest Case/Shiller prediction calls for another 20-odd percent drop in home prices just this year, so get yourselves ready, party hat and all, to become the proud owners of a $1 trillion or so "worth" heap of failed junk, with more, much more, on the way. Don’t forget that mortgage debt valuations have come down much less than home prices, and while they may never arrive at par, the former has a long way down to go just to catch up. Oh, and that of course still leaves open the question of the manner in, and the extent to, which Fannie and Freddie (plus Ginnie Mae, FHA and FHLB) are exposed to securities written on the failed and failing loans. An indication could possible come from the fact that the Federal Reserve has approved the backstopping of $25 trillion worth of derivatives, another grab-bag of garbage that may soon need to be expanded if and as conditions continue to deteriorate. In short, matters are rapidly getting worse back home while the gazes of the masses linger on the Acropolis. How convenient. On another continent still, questions about China are persistent and growing in number and loudness. The same Hugh Hendry who needed to explain economics to the Stiglitz who got that Fauxbel prize for his mastery of the field, sketches Beijing's (and the world's) core issues in a few lines today: China has become the world's biggest creditor, after amassing nearly $2.3 trillion of foreign exchange claims on us. However, the spectre of a creditor nation running persistent trade surpluses has ominous historical portents. It has happened only twice before, with the US economy in the Twenties and with the Japanese economy in the Eighties. Economics is a cruel master and in both of the previous examples a failure to allow exchange rates to adjust to the new reality created a large speculative pool of credit that, in turn, led to overvalued domestic assets and, eventually, an economic crisis. Never forget that in economics, first can become last.[..]

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