The Oil Drum

As Warren Buffet said, when the tide goes out, we find out who has been skinny dipping. It is becoming increasingly evident that a lot of the financial sector has been a virtual nudist colony.

My forecast for the indefinite future: deflationary trends in the auto/housing/finance sector, with inflationary trends in food & energy prices.

Stoneleigh, thanks for providing this forum and the interesting posts. The following is from ATOL and is an interesting analysis (imo) of what Bernanke said to the CATO Institute last Wednesday. It appears that Ben wants to steer the Fed away from the Greenspan tradition of proping up securities markets by interest rate cuts...But at what costs to Ben and equities values? Why do I have the feeling that Ben left out more than he said? Perhaps Bernanke has figured out a way to pawn off the worthless sub-prime mortgage bundles to the elderly on pensions and Social Security, in lieu of cost of living increases? At this point nothing would surprise me.

http://www.atimes.com/atimes/Global_Economy/IK17Dj03.html

...snip...'The first major change elucidated by Bernanke refers to a new emphasis on what is called “overall” inflation, in the place of a previously greater focus on what is called “ core” inflation.

The distinction between core and overall inflation is simple to understand. Overall inflation is a measure of price increases in that place economists are rarely concerned about, the real world. It’s what you feel when you get a haircut, go out to dinner, and especially these days, fill your car with gas.

But, traditionally, overall inflation has not been the preferred inflation gauge for economists. In its stead, they have favored looking at something called “core” inflation, defined as price changes for retail goods excluding food and energy.'...snip...

'But the drawback of core inflation is that, in times such as these, with food and energy prices rising rapidly, the Fed loses credibility when it says that core inflation only rose 0.2% in October, and consumers then compare what they hear from their leaders with what they see on their supermarket check out tape and on the price signboards of gasoline stations, which are currently now America’s real inflation index.

Therefore, Bernanke is now saying that the Fed is going to tip the scales a bit back towards reality.

"Ultimately, households and businesses care about the overall, or 'headline' rate of inflation; therefore, the FOMC [Federal Open Market Committee] should refer to an overall inflation rate when evaluating whether the committee has met its mandated objectives over the long run. For that reason, the committee has decided to publish projections for overall inflation as well as core inflation. In its policy statements and elsewhere, the committee makes frequent reference to core inflation because, in light of the volatility of food and energy prices, core inflation can be a useful short-run indicator of the underlying trend in inflation. However, at longer horizons, where monetary policy has the greatest control over inflation, the overall inflation rate is the appropriate gauge of whether inflation is at a rate consistent with the dual mandate.”'...snip...

A black hole - to be or not to be?

Yes!:

'The mortgage black hole is, I think, worse than anyone saw,' said Tony James, president of Blackstone, the big private equity firm. 'Deeper, darker, scarier. [The banks] are now looking at new reserves and my sense…is they don't have a clear picture of how this will play out and confidence is low.'"

No!:

The subprime market, parts of it will get worse before it gets better," he said. This reflects the fact that some of the most lax underwriting for mortgages occurred in 2005 and 2006, and many of these loans are still operating under low introductory rates, he said. As they reset, more defaults are likely.

Still, Paulson said the mortgage problems aren't a "black hole" and the U.S. economy will weather the turbulence and continue to grow.

Head on into the liquidity trap.

And so few see it coming.

The Economist ponders the odds of a US recession: America's vulnerable economy.