Economist Myron Scholes: Worst Crisis since WWII

Good morning everyone. I wanted to mention Myron Scholes comments this morning. This guy won a Nobel Prize in economics in 1997 and is considered to be one of the better economists out there. Here are Myron's thoughts from Bloomberg:

"May 16 (Bloomberg) -- Myron Scholes, chairman of Platinum Grove Asset Management LP and 1997 winner of the Nobel Prize in economics, said the worst of the crisis in credit markets may not be over.

``From my perspective, I think that we don't know if the storm has passed or if we are still in the eye of the storm,'' Scholes said in an interview with Bloomberg Radio yesterday. ``Are there other shoes to drop and new events or new shocks that will come to the fore?''

Scholes's warning reflects financial markets that Federal Reserve Chairman Ben S. Bernanke this week said remain ``far from normal.'' Financial institutions have been reluctant to lend to each other, driving up bank borrowing costs, since a flight from risk in August sparked by defaults on subprime mortgages.

``In my view, this is probably as bad or worse than the 1989-1990 crisis and may even rival the worst crisis we've seen since the end of the Second World War,'' Scholes said. Former Fed Chairman Alan Greenspan has also said the turmoil is the most ``wrenching'' since the war."

Quick take/Market News:

Interesting thoughts from a very smart guy. Notice that more and more thought leaders are coming to this conclusion. This could change investor sentiment in coming weeks.

Oil hit $127 a barrel on a Goldman Sachs report speculating that oil will go to $141 a barrel based on Global demand.

Consumer confidence just rocked the markets as it hit a 28 year low of 59.5. Wow that's a bad number. Could be a very red day today.


Latest Housing Stupidity

Fannie Mae came out with this new down payment plan in distressed areas:

"May 16 (Bloomberg) -- Fannie Mae, the largest U.S. mortgage- finance provider, will stop requiring bigger down payments in regions where home prices are dropping, responding to criticism from consumer and industry groups who said the company is exacerbating the housing slump."

Huh? We also had this news this morning on building permits:

"Building permits, a sign of future construction, rose 4.9 percent to a 978,000 pace, reflecting gains in both single- and multifamily units.

Economists Forecasts

Economists forecast starts would fall to an annual pace of 939,000, according to the median 73 projections in a Bloomberg News survey. Estimates ranged from 875,000 to 1 million.

Building permits were projected to fall to a 915,000 annual rate, according to the Bloomberg survey.

Starts increased in three of four regions, led by a 24 percent jump in the Midwest. Construction rose 19 percent in the West and 3.6 percent in the South. Starts dropped 13 percent in the Northeast.

Toll Brothers Inc., the largest U.S. luxury-home builder, said May 13 that revenue declined for an eighth straight quarter and that most housing markets remain depressed.

The number of potential buyers at its developments was the ``worst we've ever seen,'' Chief Executive Officer Robert Toll said on a conference call.

A jump in foreclosures, as values fall and adjustable-rate mortgage costs rise, is adding to concern. Foreclosure filings climbed 65 percent and bank seizures more than doubled in April compared with a year earlier, according to figures issued this week by RealtyTrac Inc."


My take:

Ok so let me get this straight. Fannie Mae is going to lower down payment requirements in distressed areas. For what reason? So its easier for buyers to make the biggest financial mistake of their lives? Why in the hell would Fannie make it easier to get into a house that's dropping in value?

This will do nothing but destabilize the housing market. Lending standards need to tighten so prices come down and people can afford the houses they purchase.

All this will do is provide a temporary bump in housing activity that will keep prices at levels that are unaffordable.

Many of these buyers will end up walking away down the road when they realize they are so far underwater. Remember everyone, housing prices are accelerating to the downside. This is equivalent of Fannie offering low priced tickets to climb aboard the Titanic for a boat ride.

The time to do this is when prices have bottomed. We are no where near this point. Stupid stupid stupid.

Now lets get to the building permits. We now have eleven months of inventory which is the highest in history, and what do the builders do? Increase their permits to build. What sense does that make?

Bob Toll says at the bottom of the article noted that the number of potential buyers is the worst he has ever seen!! Why are they building more houses? Stupid stupid stupid!

I had a banker once tell me that builders only know how to do one thing. BUILD! He explained to me that as long as they get financing they will build because its what they do.

However, they are shooting themselves in the foot by building more homes because its only going to put more pressure on housing prices.


Bottom line:

All of these housing solutions are doing nothing but delaying the inevitable pain. Houses MUST come down in value and the banks MUST take their losses before this economy can move forward.