read the WSJ

Great editorial in Tuesday's paper from Wesbury about the Fed's job. He does some interesting math suggesting that subprime in a worst case scenario is worth around $73, which would hurt anyone that owned those bonds on leverage but shouldn't impact the overall economy. I see 3 main problems right now:

1. too many houses and too much capacity to build new homes, to sell new homes (realtor's) and to mortgage them (mortgage brokers). This makes the home builders troublesome.

2. too much origination capacity in mortgages -- figure 40% of origination volumes will drop over the next couple of years as the industry adjusts to new realities. That essentially means no more sub prime, alt-A and or jumbo mortgages.

3. too much leverage on the part of investors buying mortgage pools and other exotic, illiquid, hard to value/trade debt instruments. The problem is not in the securities but who owns them and what condition their balance sheet is in. Too many investors used leverage at the wrong time -- the peak instead of the bottom. at the peak leverage means wipe out. at the bottom leverage magnifies the gains.

So the editorial goes over an extreme example where by 50% of subprime loans default and recovery rates (forced sale of homes) amounts to only 50% of the loan values. That works out to a 73 value for the bonds yet most of these securities are no longer trading -- even if a buyer could be found that would accept that "emergency" price, the hedge funds and other leveraged participants couldn't sell at that price because that would wipe out their equity thanks to the leverage amounts.

none of the 3 reasons above is really impacted by the credit worthiness of the borrowers -- its more the creditworthiness of the lenders that has mattered.

Great article on Tuesday at the realmoney.com site (pay part of cramer's world) written by Howard Simons. He points out that any time we have had problem markets in the last couple of years (may 06, feb 07, jul 07) you can usually point to the BOJ doing something stupid -- this time is no exception. The bank of japan has been reducing global liquidity by way of allowing investors to unwind the carry trade of borrowing cheap yen to buy other higher yielding currencies. The Chinese are working to offset this folly so that we can continue to buy their exports. its a fascinating article that basically says who cares what the fed does its the BOJ that matters.