With the theme from the Twilight Zone in the background, Dow dives

The economic euphemisms are drying up. The Dow isn’t buying the fairy tales. Apparently Chicken Little and the Subprime sky falling routine was enough for one bedtime story. People have been talking about “soft landings”, but on what?

New data is looking lousy. The original estimate of a $400 billion loss from the subprimes are now looking more like $600 billion, and there’s been a general run for cover. The Dow lost 315 points. Quoth the New York Times: “…Wall Street’s attention was soon riveted by a report from analysts at UBS that estimated losses to the financial system from securities backed by mortgages and other debts would total $600 billion. Until recently, many analysts had been forecasting losses in the neighborhood of $400 billion — a figure that the dwindling band of optimists in the financial markets once dismissed as vastly overblown.

“There is not any one news item that I can point to,” said Douglas Peta, chief investment strategist at J. W. Seligman & Company in New York. “We know that there is paper out there that we can’t trust. We don’t know exactly who owns it and how much. And we don’t know how they are valuing it.”” Peta’s comments are the crux. “Paper out there we can’t trust” means securities. That’s been the problem. Securities are supposed to have real values, not nominal values. On those securities, which may be worthless, are based loans and investments. These could be anything, anywhere. The real state of play isn’t known, and is going to be very hard to find as people try to make their books look good. Hedge funds contributed to the Dow’s dive as they liquidated stocks to cover bank calls. The exact condition of the hedge funds isn’t known either, and they’re the main drivers of price rises in many markets, particularly the futures market. Somebody’s going to have to find out what sort of shape they’re in, because they hold a lot of capital, and they’ll affect indices severely if they pull out of markets. If they move at a loss, it’s not good news. Now the other big spanner in the works. The capital markets are now genuinely rattled, and looking for money themselves: “For their part, lenders and investors are reluctant to stake their dwindling capital on new ventures or to roll over debts that are coming due because they are unsure if they will get their money back. Defaults and losses continue to rise in many corners of the credit market.

In January, 23.4 percent of outstanding subprime mortgages were either 60 days’ delinquent, in foreclosure or had already had the home repossessed, up 9 percent from December, according to Rod Dubitsky and other analysts at Credit Suisse.” California, meanwhile, now has 10 times as many foreclosed properties as it had this time last year. That’s partly California’s own high pressure housing market pricing at work, but it’s in a very big economy. The process is grimly clear: ““You can almost draw it out in a diagram,” said Bernard Baumohl, managing director at the Economic Outlook Group in Princeton, N.J. “With home prices going down, consumers cut back on spending. If consumers cut back on spending, the economy weakens further. If the economy weakens further, fewer people are able to afford mortgages so home foreclosures increase.”” The one thing everybody agrees about is that employment is the symptom to watch. A downturn in employment will add major pressures to a truly hideous state of things. The US economy is suffering from a cultural crash, as well as a bad fundamental situation. The institutions don’t work properly. The big capital icons are falling to pieces. Even the big S with the two bars through it is devalued, as an idea. Government, for once, has been trying to do something useful, but the load on the Treasury and the Fed is huge. They're footing the bills for this little outbreak of fiscal flower arrangement, and it's not coming cheap. The Fed may also have painted itself into a corner, if it relies on interest rates as the salvation of the economy. Cutting rates does help, in a practical way, but doing things on a percentile basis requires time, and that’s one thing the US economy might not have. You can put on the brakes trying to avoid a crash, but the time frame for slowing is relative to the speed you were traveling before. Businesses work on margins, and some of those margins are very thin. The difference between a solid profit and “a bit better than break even” means that a lot of businesses will hit the wall before any benefits can come through. Added to which if the Fed’s been cutting rates, nobody else has. They’ve been lifting rates, which increases costs on business and consumers, which will directly hit employment in some form. That will ultimately hurt the lenders, so having created the problem, they’re doing another good job of making things worse. The US financial sector is starting to look very like the La Brea Tarpit; everybody in contact with it is stuck with something, and there’s nothing solid underneath them to stop them sinking. The whole concept of the advanced economy works on interactions between business, capital, investment, and consumers. The US economy is so advanced that capital and investment are often a long way removed from business and consumers. Markets dealing in futures commodities, securities, bonds, stocks, derivatives, and banking are effectively separate worlds. They’re rarely exposed to much more than their own margins. Capital was plentiful, investment confidence was high, and whole new big capital sources, like China, were coming onstream. America was riding the crest of a very big wave of capital. The capital markets were experiencing the biggest boom ever. Nobody would have thought that the domestic economy, which is a big, slow moving, low capital intensive, dinosaur, would have the ability to do so much damage. Nor would anyone have believed it had the ability to pull the plug on the big sauna bath of capital, but it did. Suggestion: Freeze lending rates, or cut them if possible. Because it’s already obvious that trying to secure capital by charging prices people can’t afford isn’t going to work.