Thursday, February 22, 2007

Finally Heads Are Falling

Bobby Mehta's head is maybe only one of the first to go. He is responsible for the heavy subprime portfolio at Household International, now owned by HSBC Holdings, one of the biggest banks of the world.

[Thanks to for the image.]

Bloomberg's Jon Menon and Ben Livesey tell us about this shake-up.

According to the article, another company, New Century, "expects a fourth-quarter loss in part because of new-loan defaults." Their stock declined 58% from a year ago. Other similar companies have also felt the squeeze and have lost stock value.

I like the fact that the authors threw in this little line in the middle of nowhere:

"The U.S. Federal Reserve raised its benchmark rate to 5.25 percent last year from 1 percent in 2004."

They are right. This is a crucial piece of this whole housing bubble puzzle, and not for the reason you would think. You're probably thinking that, without that rise in interest rates, borrowers would not be in such a fix today. But the truth of the matter is that, without the Fed's past extremely loose monetary policy, those borrowers would never have been able to borrow in the first place, in my opinion.

I will even go so far as to say that the Fed didn't have to lower interest rates at all in 2001, that all that was really needed was reassurance, i.e. jawboning. The country might have tuckered under for a few months, but we would have come back out. There is too much momentum in this country to let ourselves be cowed by an event like 9/11. The US economy is a freight train with no brakes.

Just look at New York real estate. It began its upward climb immediately without too much long-term incentive offering from sellers and landlords.

That Fed dip down to 1 percent -- plus the Japanese and Chinese manipulations along the same lines -- these are the actions at the origin of all our problems.

What would have avoided this whole thing? A gold standard, or something like it.

I guess it's time to pull out the old mantra:

You can take the gold out of the standard, but you can't take the standard out of gold.

(For more reading on the subject of the gold standard, see my previous posts, especially this one.)

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