Inflation, Interest Rates, Game Theory

Today's inflation number came in at 1.2 percent for the month of September, making the year-over-year change to consumer prices a hefty 4.7 percent. The core rate of inflation, which excludes food and energy, came in at a benign 0.1 percent for September with a similarly benign annual rate of 2.0 percent.

There it is again - 2 percent inflation!


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Not passing through ... benign ... long term inflation expectations remain contained ... non-inflationary growth ...

Just remember all that when you fill up your gas tank and pay to heat your home this winter.

Economists say that the core rate of inflation is more important than the actual rate of inflation because it provides a better indication as to where future inflation is headed, and serves as a better tool to formulate monetary policy.

While this may be true, the continued emphasis on core inflation has got to be a real slap in the face to middle and lower income individuals who find recent rises in their energy costs taking a proportionally bigger bite out of their income.

When our favorite CNBC star, Mark Haines, once again remarked on the stupidity of "core" inflation, Economist Drew Matus commented, "We're talking economics here, not common sense".

Enough said.

Interest Rates

Like central bankers, the conundrum that is long-term interest rates seems to respond to changes in the core rate of inflation as well. Yields dropped precipitously at the announcement of another in a long series of benign core inflation reports.

Generally, long bond prices have been falling a bit lately, causing yields and interest rates to move up. But, somehow it seems that long-term rates won't rise much.

Why would they?

Regardless of what inflation measure is used or what it indicates, who has an interest in long-term rates rising?

Who would sell off bonds in large quantities, knowing the impact that those actions might have on the world economy - rising mortgage rates in America, an abrupt end to the housing boom, the end of wealth-effect driven consumer spending, the end of the Asian manufacturing and export boom ...

Why would bondholders do something so foolish as to sell?

So what if inflation is 4.7 percent and U.S. Treasuries pay only 4.4 percent over ten years? Better to have no real return than to have no return at all, some might say. And, when a central bank is on the receiving end of said return, does the size of the return really matter? After all, central banks operate their country's printing presses and therefore have unique capabilities in compensating for poor returns on their investments.

Come to think of it, why do central banks need to worry about the return on their investment at all?

Game Theory

Currency and interest rate policies, as well as international trade relations, appear to have turned into the largest real-time game theory experiment the world has ever seen.

Game theory is a branch of applied mathematics that studies strategic situations where players choose different actions in an attempt to maximize their returns. Although similar to decision theory, game theory studies decisions that are made in an environment where various players interact. In other words, game theory studies choice of optimal behavior when costs and benefits of each option are not fixed, but depend upon the choices of other individuals.

This thought is spurred by the recent Nobel Prize winners for economics - two elderly gentlemen who have done something in the field of game theory about which we know little, and seek to understand even less - the above excerpt encompasses all that we ever desire to understand about game theory:

Individuals acting based on what they expect others to do.

So, why would Japan or China sell bonds? Why would pension funds sell bonds? What would they do with the proceeds?

Buyers of Treasuries must understand that as long as interest rates are kept low, things will continue as they are - good for U.S. housing, good for U.S. consumption, good for Asian exports.

Similarly, they must believe that this can go on indefinitely - that Americans will continue doing what they have been doing ... forever.

This is where a problem may lie.

No one wants to do anything to spoil the party, so things keep getting a little more out-of-control until someone gets drunk enough to dive into the shallow end of the pool and cracks their skull. Then someone calls the paramedics so they can come and try to patch things back together before the drunk dies.

Or, maybe not.

Maybe someone comes to their senses and shuts down the party.

Read more...

Talk, Talk, Talk, Talk

If you're really serious, how about a half-point Fed Funds rate hike at the next meeting or an interim quarter-point adjustment? Or, better yet, how about some regulation for the mortgage and home equity lenders? All these speeches, research papers, and guidelines seem to be the equivalent of whipping the housing behemoth with a wet noodle.

Talking Fed Heads were out en masse yesterday - the Federal Reserve website is chock full of speeches:


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That's a lot of talk, but is it doing any good?

Today, there are still many, many people out there taking out risky loans to buy overpriced homes at what many believe is the very peak of a housing bubble. Many of the people buying homes today are not so well informed about the intricacies of home mortgage debt and are content to believe that they are merely realizing their dream of homeownership.

For these homebuyers, realizing this dream may well turn into a nightmare in the years ahead, something that could be prevented now, but all the Federal Reserve seems to do is talk.

Let's take a closer look at the speeches.

Remarks by Governor Susan Schmidt Bies
Regulatory Issues
At the National Bankers Association Annual Convention, Beverly Hills, California

Ms. Bies spoke yesterday on three regulatory issues - mortgage lending credit risk, revisions to regulatory capital requirements, and the Home Mortgage Disclosure Act (HMDA). While the second and third topics are of some interest to us, it is the first topic that keeps us on edge.

Of course, when property values rise and the loan business grows increasingly competitive, bank supervisors tend to worry that more-aggressive underwriting may set the stage for future deterioration in credit quality. The federal agencies issued joint guidance on home equity lines of credit, or HELOCs, in May; we are now working on additional guidance on affordability products in the residential mortgage market and on underwriting practices in the commercial real estate market.

Yes, the joint guidance for home equity lending - the heavy hand of five federal agencies coming down hard on lenders not properly assessing their exposure to risk in uncertain times. Apparently the guidance sent to Bryco must have gotten lost in the mail.

Non-traditional, or "affordability," mortgage products are designed to minimize down payments, initial monthly payments, or both. These include option adjustable-rate mortgages, or option ARMs, which allow borrowers to choose among four payment options; interest-only mortgages, which defer principal repayments for up to ten years; and simultaneous second mortgages, which allow buyers to finance up to 100 percent of the value of their homes. Affordability products are growing rapidly but still represent only a small share of outstanding mortgages.

See, they're not "risky loans", they're "affordability mortgage products". And, not "liar loans", but "stated income loans". We note that while representing a small share of outstanding mortgages, these "risky" loans represent a grotesquely large share of recent loan originations in places like California.

Let's not be so quick to dismiss these loans as without tremendous risk.

Let's not be so quick to mix the retired couple with 12 more slips left in their payment booklet with the 28-year old couple that have a combined income of $65,000 who are purchasing a $450,000 condo.

From the point of view of bank supervisors, affordability products do not necessarily pose solvency concerns. Despite the apparent decline in underwriting standards, less than 5 percent of outstanding mortgages have a loan-to-value ratio greater than 90 percent, which means that the vast majority of homeowners have a significant equity cushion; in the event prices fall, only a very small percentage of owners are likely to see their debts exceed the value of their homes.

Again with the misleading numbers and conclusions - this is clearly intended to be interpreted as, "A 'significant' equity cushion is 10 percent, and since 95 percent of all mortgages have at least a 10 percent equity cushion, we'll all be OK".

Please stop!

Anyone who thinks about this for just a minute should realize that this is just false comfort.

With a national year-over-year rise in housing prices of 13.4 percent as of the June 2005 (cited in this speech), anyone owning a home in June 2004 automatically gets this "significant" equity cushion (except, of course, in San Diego).

How reassuring should that really be?

In many parts of the country, with home prices having gone up 200 percent or more over the last ten years, isn't an "automatic" equity cushion of 10 percent really "insignificant"?

[In case you missed it, we explored some equity cushion possibilities here a few days ago.]

When affordability products are offered along with easing of traditional credit underwriting practices, such as income verification and sound property appraisals, these products may pose potentially higher risks of default than traditional mortgages. In August, Standard & Poor's revised its ratings criteria for option-ARM securitizations, increasing the amount of credit enhancement required. The bank regulators are conducting a survey of industry practices with respect to affordability products and are considering guidance on the subject in the near future. We hope to find out whether financial institutions are fully assessing and managing the new risks posed by affordability products.

Somehow this is not very reassuring - "increasing the amount of credit enhancement", "considering guidance on the subject in the near future", and "we hope to find out"?

It seems like Standard and Poors is the only outfit doing anything here, and they're dealing with mortgage backed securities combined with various derivative products, so who knows how that will all work out. But at least they're doing something.

The bankers, on the other hand, need to upgrade both their actions and their verbs - "consider" and "hope" just don't seem to be enough when faced with what the The Economist magazine has called "the biggest financial bubble in history".

Remarks by Chairman Alan Greenspan
Economic Flexibility
Before the National Italian American Foundation, Washington, D.C.

For his part, Alan Greenspan seems to be largely content to reminisce and wax philosophical about all things economic these days. A slacker now, some might say, prone to recycling material from speeches just a couple weeks old, or maybe just too busy packing to go to China. The title of this speech is certainly familiar, but what of its contents?

On looking closer, it is clear that we have seen this speech before. This is a subset of a speech given two weeks ago. We've already commented on the previous speech here, but what is most interesting are the deletions and modifications from the earlier version.

We don't mean to psychoanalyze the Fed Chairman, oh wait, yes we do ... but, the changes are very interesting. After minor modifications to the introduction, we find that the entire section about "too much stability breeds instability" is gone. That was the best part of the previous version; in it were these timeless utterances:

... history cautions that extended periods of low concern about credit risk have invariably been followed by reversal, with an attendant fall in the prices of risky assets.
...
Relying on policymakers to perceive when speculative asset bubbles have developed and then to implement timely policies to address successfully these misalignments in asset prices is simply not realistic. As the Federal Open Market Committee (FOMC) transcripts of the mid-1990s duly note, we at the Fed were uncomfortable with a stock market that appeared as early as 1996 to disconnect from its moorings.

But, by far, the most intriguing comparison between these two speeches is depicted in the screenshot below. Software developers often use what's called a "diff" tool (difference tool) to compare two text files - so it can be quickly observed what has changed from one version to the next. Using this tool on the last section of these two speeches reveals some interesting changes, indicated in red - the original version of the speech is on the left, the new version on the right.


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We're not sure what to make of this - a few new thoughts on regret, job destruction, and speculative excess, with an entire new paragraph about ... community colleges. The education theme will likely be one that we hear more of in the final few months of Mr. Greenspan's term - that is his hole card. That is what comes out when fingers begin pointing in his direction. It's an easy retort:

We, as a country, need to better educate ourselves so we can compete with low-cost and well-educated competition across the Pacific.

The reality that monetary policy over the last 18 years has contributed in a big way to Americans having become a nation of borrowing and spending gluttons, who have unrealistic expectations of the future and a distorted perception of their current place in the world - this isn't relevant.

We just need better education.

Remarks by Governor Donald L. Kohn
Globalization, Inflation, and Monetary Policy
At the James R. Wilson Lecture Series, The College of Wooster, Wooster, Ohio

This speech is a generally interesting look at some of the history behind globalization, as well as its current impact on thinking at the Fed. It is noteworthy that Mr. Kohn faults economists and central bankers for largely ignoring the downward pressure that globalization has had on consumer prices:

I have been struck recently by the contrast between the views reported in the media and views among academic economists on this issue of globalization and inflation. The media tend to concentrate on the increasing availability of cheap goods and competitive pressures on labor compensation as a continuing, pervasive check on inflationary tendencies in industrial economies. In contrast, just two weeks ago, I attended a conference of leading academic and central bank researchers on inflation hosted by the Federal Reserve Board, at which globalization was hardly mentioned. One modeler had tacked an import price variable onto the equations explaining U.S. inflation, but the rest simply ignored any developments beyond our borders.

The reason that this is noteworthy is that in his discussion of employment, he completely disregards the impact that globalization has had on job creation in America. This impact, particularly evident in the last few years, concerns the types of jobs being created, which have been increasingly skewed toward the real estate sector - a sector which has been subsidized to a large degree by the generosity of overseas trading partners who continue to lend us money.

But globalization-related job losses, even with rather generous estimates, are modest compared with the massive amount of job destruction and creation that takes place continuously in the United States in the normal course of the economy. As a result, the aggregate labor market readily absorbs such disruptions as those from trade, leaving overall employment little affected. That we now have an unemployment rate as low as 5 percent, and have sustained that rate without an appreciable pickup of underlying inflation, is evidence that our economy's ability to provide jobs on a sustained basis has not been impaired.

It is not just the quantity of the jobs that the Fed should be concerned about, but the quality of the jobs. To simply declare victory at achieving a 5 percent unemployment rate, according to the dubious household survey, does a disservice to all those currently employed in construction and related fields, amid the constant warnings about imminent corrections in the housing market by others at the Federal Reserve.

Remarks by Governor Mark W. Olson
Update on the U.S. Economy and Fiscal Outlook
At the Fraser Institute Roundtable Luncheon, Vancouver, British Columbia, Canada

Don't plan to read this one - too long and rambling we hear.

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A Snow Boat to China

U.S. Treasury Secretary John Snow has been dispatched to China, soon to be joined by Fed Chairman Alan Greenspan, for meetings of the U.S.-China Joint Economic Commission to talk about currency policy and trade relations between the two economic powers. The trip comes during a time of rising American trade deficits and continued calls for China to move beyond the 2% currency adjustment announced in July.

While Mr. Greenspan continued to hammer on the "flexibility" theme while commenting today in Washington D.C., Mr. Snow has already begun his busy schedule:

Wednesday, October 12 - Shanghai
- Site Visit to Shanghai Stock Exchange
Thursday, October 13 - Sichuan and Chengdu
- Meet with Cessna Officials at Civil Aviation Flight University of China
- Tour of Mulan Market, Xindu District
- Site Visit to Chengdu Rural Credit Union, Xindu District
- Formal Greeting Ceremony, Jin Jang Hotel
Sunday, October 16 - Beijing
- Post G-20 Press Conference, Zheng'An Palace Hotel
- U.S.- China Joint Economic Commission, Opening Remarks, Zheng'An Palace Hotel
Monday, October 17 - Beijing
- U.S.-China Joint Economic Commission, Closing Session, Diaoyutai Guest House
Tuesday, October 18 - Beijing
- Securities Industry Association Remarks, Grand Hyatt Hotel

It looks like the boys might have some free time on Friday and Saturday - what kind of trouble might they get into?

Some other notable news from the area includes these items:

China's Communists Approve Economic Plan
China's Economy Continues to Boom

US expresses concern to China over village incident
US Report Hits China on Rights, Religion

China astronauts blast off into space at ease
China's Space Ambitions Potential Threat to US: Analysts

Pamela Anderson on China Anti-Fur Ads

Lots of building tension in addition to the currency and trade issues to be sure - economic growth consistently in the ten percent range overseen by a Communist government, human rights and religious freedom concerns, another manned space flight, and new Pamela Anderson ads.

If the boys get bored and lonely on Friday and Saturday, they can always wander around town searching for Pamela's familiar face on bus stop advertisements and the latest phone cards.

Much more intriguing than any of the mainstream press accounts about U.S. - China relations is this article which appeared in the China Daily a few days ago. Mr. Lau Nai-keung, a Hong Kong delegate to the Chinese People's Political Consultative Conference, has some very strong opinions about current U.S. - China relations:

I think it is time that we should take a serious look at the possibility that the US is going to take us down towards a worldwide recession in one or two year's time.

It is well known that the US is the world's biggest economy, taking up about 30 per cent of global GDP, but it is now also the world's biggest debtor country.
...
Put it simply, the Americans have been living way beyond their means for much too long. On top of this, the Bush Administration is cutting tax at least three times while fighting an expensive war in Iraq, which has already cost the country US$700 billion, and currently progressing at US$5.6 billion per month. Now the US economy is dependent on the central banks of Japan, China and other nations to invest in US Treasuries and keep American interest rates down. The low rates keep American consumers snapping up imported goods.

Any economist worth his salt knows that this situation is unsustainable. This includes the country's economic guru driver Alan Greenspan, who recently warned his countrymen that the federal budget deficit would hamper the nation's ability to absorb possible shocks from the soaring trade deficit and the housing boom. Now he may have to add two more worries: soaring oil prices and cyclones.

The US is now clearly in huge trouble, economically, socially, politically, and internationally. The Bush Administration bungled big in cyclone Katrina's aftermath in New Orleans, and then a minor rerun from Rita in Houston, and this will trigger the general outburst of people's dissatisfaction with the government, leading to great internal turmoil lasting for many years. In all likelihood, long-term interest rates are going to rise, and the greatest property bubble the world has witnessed is going to burst in the next one to two years.

The countdown is in progress, and there is no way that anybody can do anything to reverse it either by short-term measures such as fiscal and monetary policy, or through long-term reform of tax policy, entitlement programmes and even the entire federal budget. This is as inevitable as gravity, and it will take place under a new and inexperienced chairman of the Federal Reserve Board. I do not want to sound alarmist, but I see very bad omens.
...
To us, the good news is that when the country is in deep trouble, the US will not have the energy to pick on China. Even when it is necessary to start another war to divert people's attention, it would pick one much smaller in size and weaker in strength, like Iran. This will provide a much more amicable environment for China to make good use of its "period of strategic opportunity" till 2020 for the country to pass through a turbulent zone between per capita income of US$1,000-3,000.
...
One thing is for sure, some time in the not too distant future, every central bank and institutional investor is going to dump US dollar and US Treasury bonds... The cheapened dollar will cause a sudden jump in the US inflation, which forces the Fed to jack up interest rates. A giant leap in inflation will cause a severe recession, or perhaps a depression, in the US. These countries' exports to America will dry up, which in turn will spread the global economic downturn like wildfire.

After the stampede, everybody is going to get hurt, not least the central bank of China, and the Hong Kong Monetary Authority, which are major US creditors and with the US as their number one export market. The recent currency reform of the RMB is most timely, and it is about time we should do something about the Hong Kong dollar. At the same time, China should make extra efforts to rekindle internal consumption, and diversify its market really fast before the great US bubble bursts.

Aside from the question of what exactly an "economic guru driver" is and war costs which seem a bit higher than estimates heard in this part of the world, it is difficult to find fault with this assessment of the current relationship between the two countries.

More and more articles like this appear in the Chinese media these days.

What does the rest of the Chinese government think?

Will they be impressed with the economic team that we have sent?

Will anyone do anything substantive to try to avert the catastrophes postulated above, or will it be continued "baby steps" in currency reforms over there, and more "baby steps" in reigning in borrowing and spending over here?

As Mr. Greenspan once not-so-famously said, "If there's a crisis, we'll all get together and solve it - or hopefully solve it".

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Gold Scoffs at Fed Baby Steps

Another day, another 17-year high for the yellow metal.

With the recent price action of gold, we find ourselves increasingly unable to resist writing regularly about what Keynes called a "barbarous relic". Some time ago, while deriding former Fed vice chairman Alan Blinder for making some particularly dumb statements on CNBC, we coined the phrase "like kryptonite to central bankers" to describe atomic number 79 and its relationship to the hubristic stewards of the world's all-paper currencies.

That was fun.

It's easy to confuse the five-year gold chart with a five-year chart of California real estate prices - both have about doubled in price during that time. They are both getting increasing press coverage as well, but it's fair to say that the similarities end there.

One has been getting poor reviews of late since it seems to have so many conditions attached to it - credit, debt, interest rates, lending standards, crowd psychology. The other just sits there waiting for the world to give it a new, higher price as another day goes by and a bit more shine comes off of the world's western economies.


When this essay was loosed on the world a short time ago, the discussion of the gold price was centered around the $450 mark. Today, very few people mention $450 and "gold price" in the same sentence. Today, the discussion is of $500 and beyond.

We've yet to hear the phrase "gold bubble". It has a strange sound to it, but, strange in a good way.

Lately, what has been so fascinating about atomic number 79 is that it is now charting a course of its own - thinking independently, as it were. Looking at a one year chart of gold, it is clear that in the last few months, it has been thinking about going up.

What is most intriguing about gold's recent rise is that it has started moving independently of the U.S. Dollar. Gold, priced in dollars, used to be the anti-dollar - rising with the Euro, Yen and other currencies of our trading partners, when the dollar fell.

Now, the dollar holds steady or rises against other all-paper currencies, while gold charts its own course - independent and rising steadily against all man-made money. After spending much of the spring and summer pondering its future, gold de-coupled from the dollar after Hurricane Katrina, as seen clearly when comparing the one-year gold chart above and the one-year dollar chart below.


It's not clear where the price of gold will go in the near term, but it is clear where short term interest rates are going - up. Why? There is much talk about inflation these days - about energy prices passing through to "core" inflation. Amidst multiple asset bubbles in recent years, the worst case scenario appears to be unfolding in front of the eyes of the monetary policy makers - prices that they measure are starting to rise.

To combat this menace of inflation, this disease, as some central bankers are now wont to call it, interest rates must be raised! The board members of the Federal Reserve are inflation fighters after all - that is their purpose, their reason for being - to assure price stability (again, stability of prices that they measure, not all prices).

As evidenced in this chart of the Fed Funds rate over the last year, this campaign has kicked into high gear - an all-out assault on the inflation tempest.


This bold move of relentless increases of short-term interest rates is largely responsible for the rise of the dollar against other currencies of the world - preserving the value of the currency is the claim.

But, what does gold think?

Not much, apparently - it continues to rise, despite these bold interest rate moves. Why is gold not cooperating? And, what of other prices - oil, gasoline, medical care, other services - why are they not heeding their masters at the central bank?

In this next chart, a 25 year timeline of Fed Funds rate, we get an inkling of how perhaps the job of containing inflation might be a little more difficult than many thought just a few months ago. The most recent inflation-fighting campaign is circled in red at the lower right.


When viewed in a broader sweep of time, put into its proper historical perspective, maybe these recent rate increases just aren't enough - maybe these rate increases are just baby steps!

And, maybe gold is scoffing at these Federal Reserve baby steps toward interest rate normalization.

Perhaps gold views recent short-term rate increases as a small, and too-slow-in-coming, downpayment for what ultimately must be paid to keep the all-paper currencies alive and well a bit longer - to control the inflation virus that now appears to be spreading.

Gold wasn't born yesterday.

It will be around long after the asset bubbles and all-paper currencies have succumbed to whatever fate lie ahead.

Gold is in not going anywhere, although it may be losing its patience.

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Equity Cushion Possibilities

The Rodriguezes seem like a nice family. They were featured in an article in yesterday's L.A. Times about homeowners who have run up sizeable balances on their home equity lines of credit, and now, faced with increasing short term interest rates, are refinancing this debt into new primary mortgages.

The sequence of events described in this story have no doubt played out many, many thousands of times around the country over the last year - homeowner taps equity and gets cash, homeowner gets easy interest-only monthly payment, homeowner repeats until monthly payments at new higher interest rates become bothersome, homeowner refinances.

Yesterday's story tells of how the Rodriguezes bought a $500,000 home in 2001, then racked up $155,000 on a home equity line of credit, then refinanced into a new fixed-rate first mortgage on the same home now valued at $800,000.

What was the money used for?

The 48-year-old mother of two had used the money for two new cars, kitchen renovations, investment in a family business and to help her oldest daughter through law school.

This is a success story in that the Rodriguezes are no longer exposed to rising short term rates and they still have a sizeable equity "cushion", as Fed Chairman Alan Greenspan calls it. But, what about the future?

With all the real estate "bubble" talk, it is natural to wonder what their future holds - to ponder what scenarios lie in wait, now that the ink is dry on their new loan - to wonder about the future of their equity "cushion".

Let's take a look at what the Rodriguezes have done and what they may think lies ahead for them - not from a monthly payment point of view (everyone knows that monthly payments go down after you refinance), but from an assets and liabilities point of view.

Using the data provided in this story we trace the last four years of home value and home debt, and project the future, as the Rodriguezes perhaps envision it.


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Not bad! That's a nice equity "cushion" today, and the "cushion" in 2010 looks even better - the $155,000 withdrawal seems insignificant, almost as if it never happened. And, with a modest five or six percent per year appreciation (as recent surveys have indicated most homeowners expect), and with no new debt, things look even better five years out.

But what happens if the boom goes bust and in the years to come they are forced to tap their equity again - for some emergency or otherwise unforeseeable expenses?

What happens if prices decline like they did ten, fifteen years ago? In Southern California prices declined a total of 20 to 25 percent between 1990 and 1996 as can be seen here. In some areas, the decline was much greater - around 40 percent in some locales. And, this was after a run-up that was roughly a doubling of prices from the previous bottom - this time home prices have tripled since the real estate bottom in the mid 1990s.

The S&L bust that contributed to the previous decline may prove to have been fairly tame compared to what lies ahead - with all the wacky loans of recent years (interest-only, negative amortization, no-doc, etc.), and mounting questions of derivatives, the GSEs, and other possible surprises.

Chris Thornberg of UCLA Anderson Forecast notoriety thinks that homes may be overvalued by as much as 40 or 45 percent. What would that look like on a chart?

Let's see.

Let's look at an alternative scenario, one not nearly as rosy as the first one, regarding the Rodriguezes equity "cushion".


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In this scenario, a 40 percent decline over a period of five years (surely, a future that very few Southern California homeowners are contemplating), the "cushion" appears to have gone flat. And, a couple more trips back to tap their equity in modest amounts has kept the debt at stubborn 2005 levels.

In this version of the Rodriguezes future, they may look back in a few years and regret having spent that $155,000 in the early part of the decade - perhaps coming to understand that they were duped into thinking that they had become blessed by enduring wealth.

In this scenario, like many others, the Rodriguezes may come to find that their wealth was ephemeral - that within the long sweep of real estate price trends, they were just caught up in a fleeting real estate enabled "wealth effect" like everybody else.

It is hard to resist the lure of so much home equity, just sitting there, begging to be used.

We will see - we wish the Rodriguezes well, they are not alone.

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The Selection Process Is Complete

Tom Toles does some excellent cartoon work for the Washington Post, setting his sights with some regularity on Alan Greenspan, as we saw here a while back. On Friday, he had an excellent cartoon on the subject of the selection process for a new Fed Chief, taking a view even more irreverent than that found on the pages of this blog.


Barry Ritholtz, over at The Big Picture, has posted this cartoon as well, along with Stephen Roach's Friday commentary, and a few words of his own.

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