kevin kirwin's Public Library

In Abidjan, effectively the capital of the Cote d'Ivoire, or Ivory Coast, restaurants have stick- and gun-wielding guards who walk you the fifteen feet or so between your car and the entrance, giving you an eerie taste of what American cities might be like in the future.

... Even in quiet zones none of the governments except the Ivory Coast's maintains the schools, bridges, roads, and police forces in a manner necessary for functional sovereignty.

This week I’m begging your forbearance as we take a bit of a detour into the operational weeds of monetary policy. The geek factor is high, I know, but there truly have been some historic changes afoot over the past months.

To review, effective Nov. 6—as noted in Wednesday’s blog post—the Federal Reserve unwrapped a new approach to its daily operations in overnight interbank markets (in which the federal funds rate is determined). Rather than sending you scurrying down the page, here’s the deal in a nutshell:

1. The federal funds rate is the interest rate at which depository institutions borrow and lend to each other, on an overnight basis, balances (or reserves) deposited with the Fed.

2. The Fed—actually the folks who implement Open Market Operations at the Federal Reserve Bank of New York—manages the federal funds rate to an FOMC-set target by altering the total quantity of reserves available to the banking system.

3. In the old days (pre-October 6 when the Fed first began paying interest on reserves using a different interest-rate regime), these reserves paid no interest. Banks, as a consequence had every incentive to economize on their reserve balances. As a consequence of that fact, depository institutions would respond to an injection of reserves by trying to sell them off. That might work for one bank, but not the banking system as a whole, and in the end the banks would collectively have to be “persuaded” to hold the additional reserve balances. The persuading factor would, of course, be a lower federal funds rate.

4. In the new regime (post-November 6), banks can deposit reserve balances with the Federal Reserve, earning exactly the interest rate they would receive by taking those reserves and lending them out in the federal funds rate market. Beyond some point, then, an increase in reserves should have no impact on the federal funds rate, as banks should simply absorb any injection of reserves into the system. In other words, the Fed can ex

1,550 MW Economic Simplified Boiling Water Reactors (ESBWR) at Grand Gulf. The company however has not yet decided whether it will build the new reactor.

If the company decides to move forward with the new reactor, it could cost an estimated $6.2 billion (at an industry estimate of about $4,000 per kilowatt) and could enter service post 2017.

Reuters quote in story "One MW powers about 500 homes in Mississippi"

Re “Politics of Attack” (editorial, Oct. 8) and “Obama and ’60s Bomber: A Look Into Crossed Paths” (front page, Oct. 4):

As the lead federal prosecutor of the Weathermen in the 1970s (I was then chief of the criminal division in the Eastern District of Michigan and took over the Weathermen prosecution in 1972), I am amazed and outraged that Senator Barack Obama is being linked to William Ayers’s terrorist activities 40 years ago when Mr. Obama was, as he has noted, just a child.

Although I dearly wanted to obtain convictions against all the Weathermen, including Bill Ayers, I am very pleased to learn that he has become a responsible citizen.

Because Senator Obama recently served on a board of a charitable organization with Mr. Ayers cannot possibly link the senator to acts perpetrated by Mr. Ayers so many years ago.

I do take issue with the statement in your news article that the Weathermen indictment was dismissed because of “prosecutorial misconduct.” It was dismissed because of illegal activities, including wiretaps, break-ins and mail interceptions, initiated by John N. Mitchell, attorney general at that time, and W. Mark Felt, an F.B.I. assistant director.

William C. Ibershof

Mill Valley, Calif., Oct. 8, 2008

Scuttle

By the end of 2007, prices had fallen 10% from the peak, and 8.2 million homeowners owed more on their mortgages than their homes were worth.

As of Q2 2008, prices had fallen almost 18% from the peak, and for the graph, I estimated that prices will decline about 22.5% from the peak by the end of 2008. (this seems conservative). This means about 15.4 million households will be underwater or already foreclosed on by the end of 2008.

The last two categories are based on various estimates for the price bottom (peak-to-trough). The 30% decline was suggested by Paul Krugman in December 2007: What it takes). The 35% decline is close to the "severe recession" case presented by JPMorgan last week.

Not every homeowner with negative equity will default, in fact many of these homeowners will only be underwater by a few percent. But if we estimate one half of homeowners with negative equity will eventually default, use a 50% loss severity, and a 35% price decline (23.6 million households with negative equity), and use the median house price from the Census Bureau of $216 thousand, we get $1.3 trillion in mortgage losses for lenders.

I think this is probably high (probably fewer than 50% will default), but this does give a general idea of the potential losses. If we use one third of homeowners, the mortgage losses with a 35% peak-to-trough price decline would be about $840 billion.
Posted by CalculatedRisk at 7:09 PM Comments (244)
Labels: House Prices, Negative