by Calculated Risk on 4/11/2010 11:24:00 AM

From the BBC: Greece is offered 30bn euros loan

Leaders of the 16 eurozone nations have agreed to fund up to 30bn euros in emergency loans for debt-hit Greece, if the country wants the cash.

The price of the loans will be fixed using IMF formulas, and be about 5%.

Luxembourg Prime Minister Jean-Claude Juncker, speaking for eurozone finance ministers, said there were no elements of subsidy in the loan proposal.

"The total amount put up by the eurozone member states for the first year will reach 30bn euros," he said.
...
Mr Juncker added that the financing would be "completed and co-financed" by the International Monetary Fund.

by Calculated Risk on 4/11/2010 09:20:00 AM

From Bloomberg: Germany Said to Accept EU Loan Compromise for Greece

Germany is prepared to give Greece loans at below-market interest rates ... a European government official said.

The loans would be priced above the rate charged by the International Monetary Fund, which would also participate in a European Union-led rescue ...

The European Commission said in an e-mailed statement that there will be a news conference today in Brussels at about 4 p.m. local time

by Calculated Risk on 4/10/2010 10:46:00 PM

From Robert Shiller in the NY Times: Don’t Bet the Farm on the Housing Recovery

MUCH hope has been pinned on the recovery in home prices that began about a year ago. A long-lasting housing recovery might provide a balm to households, mortgage lenders and the entire United States economy. But will the recovery be sustained?

Alas, the evidence is equivocal at best.

The most obvious reason for hope is that, unlike stock prices, home prices tend to show a great deal of momentum.

Momentum only goes so far. And I think it is likely that prices will fall further in many bubble areas later this year as more distressed properties hit the market.

Shiller also argues prices might fall:

Consider some leading indicators. The National Association of Home Builders index of traffic of prospective home buyers measures the number of people who are just starting to think about buying. In the past, it has predicted market turning points: the index peaked in June 2005, 10 months before the 2006 peak in home prices, and bottomed in November 2008, six months before the 2009 bottom in prices.

The index’s current signals are negative. After peaking again in September 2009, it has been falling steadily, suggesting that home prices may have reached another downward turning point.

Usually I graph the total NAHB Housing Market Index. Here is a graph of the NAHB traffic of prospective buyers and two home prices indexes: the Case-Shiller Composite 10 (seasonally adjusted) and First American Corelogic's LoanPerformance HPI (NSA).

Click on graph for larger image in new window.

Although Shiller is correct about traffic index peaking in 2005 and declining sharply in 2006 (when prices started to fall), I think this isn't a reliable indicator of future house price movements. I think a better indicator that prices were about to decline in 2006 was the rapid rise in inventories in the 2nd half of 2005 and into 2006 - and I think we should watch inventory levels again this year.

I think the NAHB does provide hints about housing starts.

This second graph compares the NAHB HMI (left scale) with single family housing starts (right scale). This includes the March release for the HMI and the February data for starts.

This shows that the HMI and single family starts mostly move generally in the same direction - although there is plenty of noise month-to-month.

For house prices, I think we need to watch inventory levels - especially distressed inventory.

Shiller concludes:

Recent polls show that economic forecasters are largely bullish about the housing market for the next year or two. But one wonders about the basis for such a positive forecast.

Momentum may be on the forecasts’ side. But until there is evidence that the fundamental thinking about housing has shifted in an optimistic direction, we cannot trust that momentum to continue.

by Calculated Risk on 4/10/2010 05:17:00 PM

From Professor Hamilton at Econbrowser: Do rising oil prices threaten the economic recovery?

Ten of the 11 recessions in the United States since World War II have been preceded by a sharp increase in the price of crude petroleum. Oil had been holding around $80/barrel over the last month, but traded as high as $87 last week, leading the Financial Times to ask whether oil could give the "kiss of death to recovery." Here is how I would answer that question.

See Hamilton's post for his analysis with several graphs. He concludes:

$87 oil is certainly not helping the recovery. But I would be very surprised if it proves to be the kiss of death.

And with the opposite view from the Financial Times article:

Olivier Jakob, of Swiss consultant Petromatrix, said in a note that the “recovery of 2009 was fuelled with crude oil at $62 a barrel, not at $90 a barrel or $100 a barrel. We fear that the latest run on WTI will be the kiss of death for a global economy that was trying to avoid the possibility of a double-dip recession.”
excerpted with permission

I tend to agree with Dr. Hamilton. However I also vehicle watch miles driven from the Department of Transportation (DOT), and the DOT recently reported that vehicle miles driven in January were down from January 2009:

Travel on all roads and streets changed by -1.6% (-3.7 billion vehicle miles) for January 2010 as compared with January 2009. Travel for the month is estimated to be 222.8 billion vehicle miles.

Here is a repeat of the graph I posted last month:

Click on graph for larger image in new window.

This graph shows the percent change from the same month of the previous year as reported by the DOT.

As the DOT noted, miles driven in January 2010 were down -1.6% compared to January 2009, and miles driven have declined 2.9% compared to January 2008, and are down 4.7% compared to January 2007.

If miles driven continues to decline, I'll be more concerned about oil prices.

by Calculated Risk on 4/10/2010 01:01:00 PM

From Adam Davidson, Chana Joffe-Walt and Jacob Goldstein at Planet Money: The Friday Podcast: New York Fed Chief, Bubble Fighter

And here is the transcript of the interview: New York Fed Chief: We Should 'Try To Identify Bubbles'. An excerpt:

MR. DUDLEY: I mean, my view is not so much that we are going to prevent all asset bubbles. I think that's unrealistic. But what we might be able to do is prevent the asset bubbles from being quite so big and maybe preventing the consequences of the asset bubbles from when they burst being quite so bad.

So imagine in the last few years if, let's say, a much tougher approach had been taken to subprime underwriting. So we basically said, you can't have no-doc loans. You have to have restrictions on loan-to-value ratios. You have to make sure the subprime loans that the people actually can afford them once their teaser rates periods end.

Q: Crazy ideas. Why would you want to do any of that?

MR. DUDLEY: If you had done all those things -- if you had done all those things, I would speculate that -- if all those had been in place, there would have been less credit that had flowed into the housing sector, housing prices would have gone up less far and when the whole situation reversed, we'd see a less severe decline in housing prices, less stress on the financial system and therefore less stress on the macro-economy.

So it seems to me that, you know, obviously, hindsight is 20-20. But it seems to me with the benefit of hindsight, it seems like things could have been done to restrain the asset price movements in a way that would have generated a more stable financial system and a more stable macro-economy.

There were quite a few people arguing that the regulators should tighten standards in 2004 and 2005. And I don't think Dudley should focus on subprime mortgage - there were weak underwriting standards in Prime and Alt-A residential mortgages, commercial real estate, and many other areas.

Oh, and one final excerpt (based on Bear Stearns assets):

Q: So just one very last question. We actually called one of the REO properties, a mall in Oklahoma that's in default. And I don't know how to say this other than as inarticulately as, it just blows my mind to think that we could call a mall in Oklahoma and realize their owner is the Fed. Just how do you feel when you think about that? It's such a weird thing.
...
MR. DUDLEY: I did not expect as president of the New York Federal Reserve that I'd be having to worry about a mall in Oklahoma City.