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Calculated Risk:

Nobody is going to create a functioning new agency with the relevant expertise and staffing and funding and clear mandate out of thin air fast enough to do what this wants to do, if what we want to do is stave off recession. FHA probably has the expertise to credibly attempt the loan-level workouts, but not enough hands to get saddled with $739 billion worth that has to be dealt with before everybody’s lawns go brown. Ginnie Mae is, in my view, one of the most efficient and quietly professional government agencies ever: they run a highly successful program with a tiny staff. I can’t imagine Ginnie Mae is ready to manage reporting and remittances on a brand-new government-owned pool o’ junk of this size with existing resources.

So of course the whole thing would be outsourced to some private company. I’m sure there’s a financial institution out there willing to write up a proposal for how the government can pay it a management fee to orchestrate the government’s bailout of its last attempt to manage mortgage-lending-related program activities.

This bailout is not a good idea.

I checked the price today on my “standard” 25 pound bag of flour. It’s what I buy when I’m baking a lot of bread, and it’s enough to share around. It always seemed crazy-cheap, at around $5 … maybe as low as $4.79 or as high as $5.25 for years.

Twenty five pounds is a lot of flour, and I suppose that strictly speaking $8.99 is still cheap … but still it shows some serous food price inflation. That’s an 80% jump in the last couple years (I’m not sure exactly when prices moved off $5).

The impact is being felt around the world. The Edmonton Sun reports that Green fuels blamed for boosting grain prices. The Telegraph (United Kingdom) says that High price of wheat threatens pig farms Dispatch Online (South Africa) has a story Warning of ‘significant’ bread price rise.

Oh, a story out of Bismark (North Dakota) says High wheat
prices benefit all. I guess we know which side their bread is buttered on.

Seriously, what’s going on? The story Wheat prices worry breadmakers says wheat prices are up “50 or 60 percent from a year ago.” I think I’m seeing more than that. It’s apparently a combination of the biofuels thing and some bad harvests. From the same story, “2007 was a disastrous year for wheat growers around the globe.”

How high can these prices go? Will the biofuels face a consumer backlash? I guessed they would long before this, but I was wrong.

We’ve been seeing that with securitization home loans are not just passed from one lender to investors, but split and repackaged. This has led to a curious situation. A loan “owner” attempts foreclosure but is rejected by the courts because he cannot prove his position:

Joe Lents hasn’t made a payment on his $1.5 million mortgage since 2002.

That’s when Washington Mutual Inc. first tried to foreclose on his home in Boca Raton, Florida. The Seattle-based lender failed to prove that it owned Lents’s mortgage note and dropped attempts to take his house. Subsequent efforts to foreclose have stalled because no one has produced the paperwork.

“If you’re going to take my house away from me, you better own the note,” said Lents, 63, the former chief executive officer of a now-defunct voice recognition software company.

It would be somewhat bad for the mortgage industry if this situation proved common …

I had been flirting with the ideas of TIPS as a hedge this year. This snippet was therefore a bit painful:

But again, I wonder. TIPS aren’t a great inflation hedge; their yields are adjusted based on CPI, and as we all know, CPI by design is lower than broader measures of inflation. I wonder if they are becoming a dumb money product, and savvier investors worried about inflation are using other investments to hedge inflation exposures. Remember, ten years ago, only the bravest (as well as the most naive) retail investors would trade commodity futures. Now any retail player can get commodity exposures easily through a variety of ETFs and ETNs.

“dumb money?” Oh, my.

Matthew E. Kahn:

I entered the University of Chicago in 1988 intending to become a macroeconomist. I quickly transitioned to another field of study called applied micro. But, I always respected the Chicago Macro Stars. Starting today, I have a new favorite macro-economist. Forget my Chicago days of Lucas and Prescott, Charles Plosser is back. We were taught his real business cycle stuff and those Rochester hits are still somewhere in the back of my mind. Now that he is a voice of reason in Big Ben Bernanke’s War Cabinet, I really like what he is saying. As a Los Angeles renter with some cash in the bank, I am a personal fan of higher interest rates. It looks to me that the Philadelphia Fed’s President is going to slow down Keynesian Ben and help me out.

I’d like to earn a positive real rate of return on savings in ‘08, but I’m not optimistic.

New Clothes Dryer Could Save Billions

Generally when people offer up miracle devices from backyard and basement tinkering, we’re pretty skeptical. But it’s hard to argue with Michael Brown. Especially when he hooks his “Dryer Miser” up to a Whirlpool dryer, turns it on, and pulls out dry clothes using half as much energy as the exact same dryer without his device.

The device, really, is fairly simple. Instead of using a traditional air-in-contact-with-heating-coils heater, it uses an oil as the heat-transfer medium. The oil is then used to heat the air that gets blown into the drying drum. The heat transfer between the oil and the air is nearly two times more efficient than the air simply being blow across ultra hot heating coils. [...]

The Big Picture reports:

“Since the onset of the subprime crisis last summer, the White House has repeatedly rejected the notion of a government bailout, either for homeowners facing foreclosure or for the banks and mortgage companies that made the now souring loans. “There’s no bailout with government money, none whatsoever,” Treasury Secretary Hank Paulson emphasized. But even as the administration has stuck to its laissez-faire stance in public, behind the scenes a covert bailout has been under way, with a number of public and quasi-public agencies quietly dispensing vast sums to financial institutions saddled with worthless or near worthless mortgage securities. All the while, homeowners at the heart of the problem have been left largely to their own woes. The rescue operation brings to mind John Kenneth Galbraith’s dictum that in the United States, the only respectable form of socialism is socialism for the rich . . .

I don’t like the rich gaming the system (they keep their profits but the government covers their losses), but unfortunately a failed banking system might be even worse.

The critical error was in not regulating more safety and less risk into the banking system (including the shadow banking system) years ago. Now we have to bolt the barn door, and keep the farm from burning down …

I had a funny experience this week. I was at a Lee’s Sandwiches for some tasty Vietnamese Banh Mi, when I looked up at the menu … what?

The sandwiches had jumped to $2.75. That might not sound like much but the whole thing with banh mi is that they are cheap little sandwiches … like hot dogs. Mr. Lee’s had held the line at $1.99 for years (what a deal) before skipping up to $2.25. The leap to $2.75 is a lot.

Anyway, the other thing about Lee’s is that they have internet terminals that you can surf while you wait for your order. I logged in and what headline did I see?

Quote of the Day: Hard to Ignore Soaring Food Prices

Last week, the WSJ observed that 3 major food companies were having “their lunches eaten by soaring commodity prices. Costs at Campbell Soup, J.M. Smucker and Hormel Foods rose faster than sales in the prior quarter ended in October, helping to push their share prices lower at a time when such defensive stocks ought to be in high demand.”

Kind of a double whammy to see the menu jump and then get hit with the headline.

Charlie Rose interviews economist Martin Feldstein.

Martin Feldstein is President and CEO of the National Bureau of Economic Research.

I liked the first 3/4, perhaps because it reinforced my pessimism about the near-term economy. In the last 1/4 Mr. Feldstein gets a little political and I thought I spotted some cheats. For instance he mentions that letting the Bush tax cuts expire would make the rich feel poorer and slow down their earning. He neglects that the rich have the option of booking income now or later. Many of them seeing an expiration on the horizon would book now, giving us a one-time boost in a bad economy.

… and of course with ballooning federal debt we simply can’t cut taxes forever.

Our colleague Susan Webber’s article, “The Dark Side of Optimism” is the cover story in the current issue of The Conference Board Review. It discusses the deep roots of optimism and how it can undermine critical thinking and accurate risk assessment.

Her piece is wide-ranging, looking at psychological research, cognitive biases, cultural icons, military history, and even mythology to explore the manifestations and workings of our collective predisposition to look at the bright side. We hope you’ll find this perspective helpful in both organizational and investment decision-making