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Orange County gas prices are at $3.75/gallon (for regular grade, county-wide average).

This my predicted “top” for 2008. It doesn’t look like things are slowing down though, so maybe those $4.00 folks will be proven right.

I listened to “left right and center” on NPR last night. They talked about the Presidential candidates’ plans for the credit crisis. That crisis continues to unfold of course, probably in ways most voters and listeners are not aware of. It has become broadly a credit crisis and is not at all isolated in homes or sub-prime mortgages.

And that’s really the rub. Candidates speak to “homes” and “mortgages” in very superficial ways. When they propose fixes for that narrow end of the problem they risk being counterproductive in the broader economy.

The “left” guy said that houses in Santa Monica were “selling for half their value.” Hello, buddy? Maybe that wasn’t their value after all? I’m sure the same guy would favor programs for affordable housing and rent control. He was a parody, of the classic left attempt to twist (enforce) the market to be all things at once.

The “right” guy tried to say as little as possible. That’s probably because he liked the status quo. He did parse out McCain’s statement to include (as McCain said) interventions to support financial infrastructure, but he (the commentator, not McCain) did add “and housing markets.” I think that was probably a dishonest sop to home owners. I don’t think the commentator (or McCain) would intervene to support housing markets.

The sad middle ground, not spoken, is that the financial infrastructure does need to be supported, but we also must let asset bubbles subside. That home in Santa Monica (and my own) must find their current, natural, value. And if support for infrastructure means guarantees for a broader set of institutions, then those institutions must carry a greater burden of oversight.

Oversight and support must go together.

And the government certainly cannot bid up everyone’s homes in value, while at the same time creating affordable housing.

I worry that our debt loving and home buying society might take the wrong moral path, and just attempt to bail itself out. Matthew Kahn has a good response to that:

Don’t Forget the Renters Ben!

I don’t know Ben Bernanke but he doesn’t seem to care much for guys like me. I’m a renter and taxpayer. I would like to see him and Rick Miskin explain in a press conference why home owners need to bailed out and protected from the loans whose terms they chose to accept. I would like to know how many of my tax dollars will go to this bailout of the Bear Stearns. If they like activism, they should go back to their home universities and attend a university wide faculty meeting. What’s the matter with the world that Robert Schiller has predicted? Why can’t prices fall? […]

A quick note, that standard 25# bag of flour I talked about before hit $14.99 a couple weeks ago. That means prices have tripled in the last year.

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.