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Friday, October 28, 2005

Mortgage Credit News - October 28, 2005

Rates rose this week, the 10-year T-note reaching 4.60% at one point, taking low-fee mortgages to 6.25%. (Today’s newspaper headlines, “Mortgages To New High”, refer to Freddie Mac’s lagged-survey discovery of 6.15% last week.)
I assume that mortgages will continue to rise during the Fed’s coming progression: another .25% on Tuesday (to a 4.00% overnight cost of money, 7.00% prime), another .25% on December 13, and another on February 1 -- unless the economy croaks in the meantime.
Economic data are still hurricane-garbled, except for home sales which seem authentically strong. Third quarter GDP gained a terrific 3.8%, but the September one-third of the quarter is just a pleasant guess. Durable goods orders fell hard in September, but there is no way to know if the decline was real or storm-distorted.
Core inflation numbers in the GDP report were benign, but nobody knows if the Fed should be watching core numbers or the vastly higher nominal ones. Core makes sense if you expect a cyclical decline in energy prices ahead; however, if energy prices have taken a one-time ramp-up, no downside volatility coming, then a core inflation rate is a useless abstraction and the Fed has catching-up to do.

Ben Bernanke.
We may have Harriet Miers to thank for the Bernanke era. Only three weeks ago, the White House said that it was “broadening its search” for a new Fed Chairman, looking for someone in agreement with the Administration’s economic policies, and someone with whom the President would have “personal rapport.” Then, suddenly, we got one of the four mainstream guys.
The bond market gave its highest praise: it did nothing -- although the only nasty line about Bernanke came out of the bond market (of course). “Greenspan was a maestro; this guy is a music teacher.” Stocks soared 160 Dow points, indicating relief of fear of a Bush crony, but temporarily forgetting that any non-crony is going to whack the economy.
Bernanke’s first words as nominee were to emphasize the need for continuity, exactly the right thing to have said. Too bad he won’t be able to deliver.
Mr. Bernanke has been a life-long academic, studying monetary policy and building econometric models. He writes very well, and we will enjoy relief from Mr. Greenspan’s worst-anywhere-ever bureaucratic murk. Bernanke is at all accounts a good man, thoughtful, who knows the limits of his knowledge and economic theory.
That’s the good news. Mr. Greenspan’s hands-on experience when he ascended the throne included energy and housing markets, general business as consultant, and the one crucial component toughest for Mr. Bernanke to replace: Mr. Greenspan’s native political skill, sharpened by service in several administrations.
Mr. Greenspan conducted his 18 years as the Wizard of Oz (pay no attention to the fallible man behind the curtain!), and the act has been calming to markets world-wide. I suspect markets will tend toward volatility as they adjust to a different style.
However, Mr. Greenspan’s substance should not be confused with his stage play. Within months of his appointment he won the deep faith of markets by his deft handling of the ’87 stock market crash, followed by correct and courageous resumption of inflation-fighting. After that performance, he could have worn a monk’s habit and chanted in Latin, and still have held the markets’ confidence.
Mr. Bernanke will soon have a similar opportunity to win or dash market confidence: he must contain an inflation problem without crushing the economy. Complicating his life: structural Federal deficits, an unprecedented trade deficit, and no prospect of help from an irresponsible Congress and Administration.
Speaking for the class, good luck to you, Mr. Music Teacher.

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