Credit crunch

The foreign press is much more open about the horrid state of the U.S. economy:

The verdict is in. The Fed’s emergency rate cuts in January have failed to halt the downward spiral towards a full-blown debt deflation. Much more drastic action will be needed. Yields on two-year US Treasuries plummeted to 1.63pc on Friday in a flight to safety, foretelling financial winter. The debt markets are freezing ever deeper, a full eight months into the crunch. Contagion is spreading into the safest pockets of the US credit universe.

The desperate emergency rate-cutting was a foolish idea anyhow. More of the venom that’s poisoning you isn’t going to help, Americans would have been a lot better off if they’d taken their medicine back in 2001. Instead, more money was pumped in and no amount of hiding the statistics can conceal the fact that running the printing presses until they melt isn’t going to fix anything.

The Fed is like a guy with a hammer trying to steer a car. The car is headed for a cliff, so he frantically pounds on the steering wheel until it breaks. Now, there’s nothing it can do. A friend of mine was cursing the fact that he’s tied into dollars because of his stock options. “They’re so screwed”, he said, in unconscious imitation of what two other executives had concluded just last week.

Don’t plan on moving anytime soon, and if you’re thinking of selling your house, better do it now. Prices are going to continue to go lower, and they’ll do so for longer than anyone thinks. This isn’t necessarily a bad thing if you’re into cash, or better yet, if you’ve been into gold for the last five years. But it is problematic given the size of the debt edifice that has been constructed upon the housing market.

UPDATE – Unsurprisingly, the reaction of state and local governments to this decline in availability and concomitant increase in the price of credit is to try to change the rules in their favor:

A complex system of credit ratings and insurance policies that Wall Street uses to set prices for municipal bonds makes borrowing needlessly expensive for many localities, some officials say. States and cities have begun to fight back, saying they can no longer afford the status quo given the slackening economy and recent market turmoil.