Economics Update

According to "reliable sources", Ben Bernanke thinks that the downturn will be very severe, and that's why there was the very large, unscheduled rate cuts.

Additionally, as reported by Calculated risk the market is expecting another 50 basis point rate cut at the regular meeting next week.

This would leave the Fed at a 3% discount rate, and I think that beyond that point, they are pushing on a string. Monetary controls of the economy are pretty much at their limits now.

In the real estate world, Merrill Lynch is saying that nationwide U.S. home prices could decline 25% to 30% over the next three years.

I think that they are optimistic.

Then we have student loan giant Sallie Mae reporting a $1.6 billion quarterly loss, which raises the obvious question, "How the hell do you lose money on GSLs?" These are government guaranteed loans, and the fact that borrowing costs have shot up so much that they cannot profit on them is ...ominous.

There are indications that Bank of America's deal to buy Countrywide may be getting into trouble. At least that what the market is saying, literally. BoA is offering the equivalent of $7.1058, but Countrywide is trading at $5.54.

This spread is a measure of the market's opinion that the deal won't actually be consummated, this spread implies that "there is roughly a 77.9 percent consensus among Wall Street's risk arb desks and their hedge fund brethren that the deal goes through at the agreed upon terms. That also means that more than 22 percent of risk arbitrageurs don't think the deal will go through".

You also have Capital One taking a major earnings hit, both from the closing of its GreenPoint Mortgage arm, and from higher credit card losses.

Finally, you have talks between New York Insurance Superintendent Eric Dinallo and major US banks about a bailout of bond insurers. There is an implication that there will be some sort of government involvement, if not outright government sponsorship of such a bailout.