Alan Greenspan stoked the dotcom bubble with low interest rates, all the while blowing smoke about productivity and the new Economy.

Barely had that bubble burst than he was stoking the real estate bubble with low interest rates, blowing smoke about financial innovation and new collateralised instruments.

Barely has that bubble burst than Greenspan’s equally inept successor Ben Bernanke has further slashed interest rates, financing rampant, margin-fuelled speculation in commodity futures, creating a crude oil price bubble.

There’s no way the oil price is due to supply and demand fundamentals. Demand did not spike suddenly, nor did supply plunge. It’s a bubble. It will burst. The price of oil will plunge when it does. Commodity traders will queue up behind mortgage lenders.You read it here first.

The age of bubbles. Exciting time to be alive.

Bank of America – $13B / ~10% of equity
Countrywide – $2.0B / ~14% of equity
Citigroup – $39.4B / ~31% of equity
JPMorgan Chase – $6B / ~5% of equity
National City – $8.7B / ~72% of equity
SunTrust – $.7B / ~4% of equity
US Bank – $.5B / ~2% of equity
Wachovia – $14.6B / ~21% of equity
Wells Fargo – $1.6B / ~3% of equity
Fannie Mae – $8.9B / ~22% of equity
Freddie Mac – $6.5B / ~25% of equity
E-Trade – $1.75B / ~40% of equity
Ambac – $1.5B / ~25% of equity
CIT Group – $1.5B / ~21% of equity
MBIA - $1.1B / ~16% of equity
WaMu – $12B

Via Econbrowser: Fast and Easy Fannie

From page 102 of Fannie’s 2007 Annual Report, as of the end of 2007, the enterprise had leveraged $44 B in stockholders’ equity with $796 B in short- and long-term debt to acquire $761 B in mortgages either held outright or intended for resale or trading. I read that as an equity cushion against a 5.8% loss on the mortgages held directly (44/761 = 0.058). But in addition (page 1), Fannie has guaranteed $2.1 trillion in separate mortgage-backed securities it has sold to outside investors, for a ratio of core capital to total book of business of 1.6%.

From the beginning, my conception of a really big financial meltdown would be one that pulls one of the GSEs into insolvency. Please tell me why it can’t happen.

Click to Enlarge:

A Primer On Gasoline Prices

The State of California operates its own
reformulated gasoline program with more stringent requirements than
Federally-mandated clean gasolines. In addition to the higher cost of
cleaner fuel, there is a combined State and local sales and use tax of
7.25 percent on top of an 18.4 cent-per-gallon Federal excise tax and
an 18.0 cent-per-gallon State excise tax. Refinery margins have also
been higher due in large part to price volatility in the region.

California
prices are more variable than others because there are relatively few
supply sources of its unique blend of gasoline outside the State.
California refineries need to be running near their fullest
capabilities in order to meet the State’s fuel demands. If more than
one of its refineries experiences operating difficulties at the same
time, California’s gasoline supply may become very tight and the prices
soar. Supplies could be obtained from some Gulf Coast and foreign
refineries; however, California’s substantial distance from those
refineries is such that any unusual increase in demand or reduction in
supply results in a large price response in the market before relief
supplies can be delivered. The farther away the necessary relief
supplies are, the higher and longer the price spike will be.


California was one of the first States to ban the gasoline additive
methyl tertiary butyl ether (MTBE) after it was detected in ground
water. Ethanol, a non-petroleum product usually made from corn, is
being used in place of MTBE. Gasoline without MTBE is more expensive to
produce and requires refineries to change the way they produce and
distribute gasoline. Some supply dislocations and price surges occurred
in the summer of 2003 as the State moved away from MTBE. Similar
problems have also occurred in past fuel transitions.

$945 billion estimate of losses to the financial sector. From the IMF’s Global Financial Stability Report

Click to Enlarge

It’s Hard to Thaw a Frozen Market – New York Times

PIMCO Bonds – Global Central Bank Focus- March 2008 “Not Good Times”

Interfluidity :: Credit Crisis for Kindergarteners

EconWeekly: How the Fed took the money out of monetary policy

Old Pros Size Up the Game – WSJ.com

The Market for Lemons

Interest Rate Parity, Money Market Basis Swaps, and Cross-Currency Basis Swaps

Via Foreign Affairs – Arctic Meltdown – Scott G. Borgerson. The opening up of Arctic means big for international shipping industry with huge political ramifications.

Black gold | Free exchange | Economist.com

the relationship between market uncertainty, currency fluctuations, and inflation. Economic weakness is pushing the Federal Reserve to lower interest rates. This helps push the dollar downward, which contributes to increasing prices for dollar-denominated commodities. Flight to security also pushes up commodities, and it’s therefore no surprise that gold, silver, copper, oil, and all sorts of other things are shooting upward. (See this, too, for discussion of the connection between Fed policy, negative real interest rates, and commodities prices).

You want the truth?
You can’t handle the truth!

In a sense, a central bank’s relationship with asset markets is like that of a man who claims he is going to the ballet to make himself happy, not to make his wife happy. But then he sheepishly adds that if his wife is not happy, he cannot be happy.

• K. Rogoff

Chinese Yuan will appreciate very strongly in the coming months and years. Why? Because thats the main tool by which the Chinese central bank will fight inflation in China. The National Bureau of Statistics in China says that the consumer price index has increased by around 7 percent in January from a year earlier. The yuan will rally to 6.70 per dollar by the end of 2008, according to the median estimate of 26 analysts surveyed by Bloomberg News. Forward contracts show traders are betting on a 12 percent advance in the yuan to 6.3150 in the next 12 months.

Van Eck Global has launched currency exchange-traded notes offering exposure to the Chinese renminbi and also the Indian rupee. The Market Vectors – Chinese Renminbi/USD ETN (NYSE Arca: CNY) is the first exchange-traded products to offer exposure to the Yuan.

The notes are designed to go up in value when the Yuan/Rupee appreciates against the U.S. dollar, and down when the dollar strengthens. The ETNs are underwritten by Morgan Stanley, and Van Eck is the agent. The notes charge 0.55% in annual fees.

Buy them in tax-sheltered accounts. Marc Faber and Jim Rogers have been bullish on the Yuan for sometime. There is consensus that the Yuan is undervalued and will need to rise in the months and years ahead. With no real attractive bull markets in US equities, this trade can garner good returns.

Lowering the discount rate on Sunday night. Way to go, Obi Wan Ben (Bernanke).

Instead of waiting 48 hours to announce this at the end of the FOMC
meeting, you do so early so the whole world will panic. And panic they
are.

Via Zubin Jelveh:

Time to bet on the spread narrowing between Crude Oil and Gasoline?

Via PIMCO:

Via The Capital Spectator: