The lessons of ignoring history are likely to be learned once again... the hard way.
"...rising asset prices provide investors confirming evidence that their strategy is good and everything is fine. This induction problem lulls investors into a sense of confidence, and sets the stage for the shock when events turn down. That nonlinearity causes sudden change only adds to the confusion."
The one undeniable truth about the debt drama in Greece is that each of the conventional narratives - financial, political and historical - has some claim of legitimacy. These facts matter not only because contagion from Greek debt defaults may ripple in dangerous ways through the financial system, but because they are also true for many other members of the Eurozone. The Euro is a fatally-flawed monetary concept and what we now seeing playing out was eminently predictable from the start.
The fact that Moody's and Fitch are beginning to reevaluate student loan ABS is indicative of an underlying shift in the market. Between the proliferation of IBR and the Department of Education's recent move to open the door for debt forgiveness in the wake of the Corinthian collapse, financial markets are beginning to see the writing on the wall. Perhaps Bill Ackman said it best: "there's no way students are going to pay it all back."
The Fed sees no risks of bubble trouble because they are looking at it all from the 2008 perspective. That is completely wrong-headed; if there is a “next one” it will have nothing to do with subprime mortgages, or even mortgages and real estate. Everyone seems to simply assume that the subprime problem ended in 2008, if only by crash. That is true but only of mortgages. Deleveraging is myth as debt has still expanded, and greatly, just not in the same exact places. There are certainly auto and student loans that have exploded exponentially, especially in subprime categories, but if there is another credit bubble now, the third, it is undoubtedly corporate debt.
"Today, six and a half years after the collapse of Lehman, there is a Bigger Short cooking. That Bigger Short is long-term claims on paper money, i.e., bonds."
"You said you weren’t monetizing the debt when you talked to Congress. You said the Fed was going to sell the bonds, but none of them have been sold. They’ve all been rolled over. So how are you claiming victory when you haven’t exited? You haven’t raised rates, you haven’t shrunk the balance sheet. You were wrong in the past. You didn’t see the financial crisis coming. You told us there was no housing bubble. You said subprime was contained. So you were certainly wrong then. So how do you know you’re not wrong now? Is there anything that might change your opinion and get you to rethink and maybe admit that your outlook is wrong?"
To paraphrase H.L. Mencken, anyone who wants the government and Federal Reserve to create a housing recovery, deserves to get it good and hard, like a four by four to the side of their head. Subprime mortgages, subprime auto loans, and subprime student loans driven by preposterously low interest rates are the liquefying foundation of this fake economic recovery. Most rational people would agree that loaning money to people who will eventually default is not a good idea. But it is the underpinning of everything the Fed and government apparatchiks have done to keep this farce going a little while longer. It will not end well – Again.
When student debt and subprime car loans aren't enough, you have to get creative. It now appears Wall Street is set to feed its securitization machine with a new kind of debt: peer-to-peer loans. You read that correctly. Soon enough, the pool of micro loans that are facilitated by sites like LendingClub will be used to create CDOs.
Moody's puts $3 billion in student debt-backed ABS on default watch leading us to wonder when 30% delinquency rates in a market where nearly $1.3 trillion in credit has been extended will finally result in the bursting of what is America's most spectacular debt bubble.
SEC Reaches "Appropriate" Settlement With Freddie Mac Execs Who Will Pay Nothing And Receive No PunishmentSubmitted by Tyler Durden on 04/15/2015 15:25 -0400
Three former Freddie Mac executives who understated the amount of subprime exposure on the GSE's book by a factor of 28 came to terms with the SEC today on a settlement which imposes fees no one has to pay and "limitations on future behavior" that "will not limit [anyone] in any practical way."
Can't Wait To Read Bernanke's Memoirs? Here Are All The Timeless Statements By The Former Fed ChairmanSubmitted by Tyler Durden on 04/09/2015 16:13 -0400
We know it will be next to impossible to wait until October when this book of toner repair and printer cartridge replacement wisdom comes out, here is a sampling of timeless soundbites by the former Fed Chairman and current blogger, that should be enough to hold readers over.
"When I was chairman, more than one legislator accused me and my colleagues on the Fed’s policy-setting Federal Open Market Committee of “throwing seniors under the bus” (to use the words of one senator) by keeping interest rates low. The legislators were concerned about retirees living off their savings and able to obtain only very low rates of return on those savings. I was concerned about those seniors as well."
- Ben Bernanke first blog post
When we parsed the newly released 2009 Fed transcripts yesterday we were too busy looking to uncover things like a previously unreported plan to create a bad bank to look for signs of central planner levity, but fortunately, the research department at Bloomberg was looking for the important stuff. Thanks to their efforts we have the official Fed Chuckle Count for 2009.
Under normal circumstances, after 2008's conflagration of the calamitous collateralizations, we shouldn’t have seen such irrational, reckless, greedy behavior from Wall Street for another generation. But, Wall Street didn’t have to accept the consequences of their actions. They were bailed out and further enriched by their puppets at the Federal Reserve, the lackey politicians they installed in Washington D.C., and on the backs of honest, hard-working, tax paying Americans. The lesson they learned was they could continue to take excessive, reckless, unregulated risks without concern for losses, downside, or consequences.