My Mortgage Blog

On the same morning the newest Euro-can clunked along came news that American 3rd Quarter GDP jumped 2.5% -- not far above forecast, but the shape of the gain was a stunning surprise. The strength was in the consumer, a 2.4% increase in household spending. Common distortions were absent: no weird upside-downs in trade accounts, and inventories if anything understated GDP. Inflation also waned.
    
The Euro-can got all the ink, but in any cross-weaving flow of economic data, the most important thread is always US data. The report distributed concussions evenly among all of those who had bet on a new recession; and banged an especially embarrassing knot on the head of the respected Economic Cycle Research Institute. The ECRI had never in its history false-called a recession; two weeks ago it said that the US was either rapidly falling into recession or was already in one.      
    
The Count Dracula of economics, Nouriel Roubini, brushing up his Transylvania accent for Halloween, expects a revision all the way down to 1%. The strong consumer does not at all crossfoot with September personal income gaining a mere point-one percent (nor the .1% decline in August), but a 2.5% GDP announcement -- right, wrong, temporary or revised -- if you had bought 10-year T-notes down to 1.70%, and shorted stocks, you got caught in a huge panic running to the other side of the boat.
    
The 10-year soared to 2.40%; although back now to 2.30% will take a lot of ugly news to do much better. Mortgages near 4.375% have ended the refi party altogether. Snide churls needle the Fed, saying so much for the Fed's sell-short, buy-long Twist to knock down long-term rates -- but, good grief, nobody stops an avalanche.
    
Economic data is always ambiguous, if only because instantly superseded by guesses at the next reports. Policy-making, on the other hand, tends to turn corners and stay turned. This week brought a turn in housing policy for the first time since meltdown six years ago. On Monday, October 24, Larry Summers wrote for the Financial Times the most compelling policy piece yet, noting among other things that Fannie and Freddie were created as counter-cyclical agencies, but during the Bubble aftermath have acted to make the cycle worse. Only anti-government diehards now fight re-mobilizing the GSEs. Sadly, there are a lot of those.
    
A mass-refi proposal for underwaters, HARP2, rolled out this week over the objection of the GSEs' regulator, FHFA, and its director, Edward DeMarco. We'll see. Borrower qualification requirements will not appear for three more weeks, and DeMarco, the top-termite of bureaucrats, all mandibles and no brain, has managed to undermine every previous initiative. Mr. Obama jumped on the bandwagon at the last instant, having offered not one single housing idea in the last 18 months. He does deserve great credit for this week's student-loan proposal; please, more like that, sir.
    
Back to Europe, and a scorecard for colonials to follow the action. On Thursday, July 21 the EU announced a modified European Financial Stability Facility including a private-sector 21% haircut of Greek debt. Markets had a splendid day, no follow-through the Friday following, and on the next Monday began an eight-week freefall.
    
The breakthrough deal announced Thursday has no market follow-through Friday. Monday may be as entertaining as July 25, or may take a while; whichever, this new can-kick will have a short roll. It has not one new pfennig in cash or guarantee. The private-sector write-down of Greek debt (voluntary: "You, you, you, and you") will be 50%, but limited to the e210 billion in private/bank hands, leaving at full-phony market value e140 billion held by the ECB. Thus the net debt relief to Greece leaves 67% outstanding, which on the market is worth 40%, and the Greeks can't pay even that.
    
The EFSF is to lever-up from e440 billion to e1 trillion, method not specified, but aided by new private and foreign capital. European ministers are off to China, expecting it to throw in e100 billion, a deal so good that the Germans have passed on it.
Thursday's report took GDP back to its pre-recession starting point for the first time, a marker showing how far we have come, and how far we have to go.