Economics Update

First, it appears that the current credit crisis is now being recognized by some media outlets, such as the New York Times, as not being limited to subprime borrowers. Of course the story misses the fact that it's not just mortgages, and the story that they use to illustrate the problem is a, "a computer engineer at Lockheed Martin who makes a six-figure income and had a stellar credit score in 2004, when he refinanced his home in Northern California to take cash out to pay for his daughter’s college tuition", who is the last person we should think of bailing out.

He understood the issue, and took the loan anyway.

As to the general, and ongoing, credit meltdown, we have yet another New York Times story, this leading off with Sailfish Capital Partners, a hedge fund that is being liquidated.

The pair, both fixed-income specialists, quickly raised $1 billion for their flagship multi-strategy fixed-income fund, according to investor documents. Assets grew steadily, reaching $1.2 billion by the end of 2005 and $1.5 billion by the end of 2006, when the fund returned more than 12 percent. In July, the fund sat atop almost $2 billion, and exhibited relatively low volatility — a key factor for institutional investors.

But July proved treacherous. As the credit markets seized up, Sailfish owned seemingly safe top-rated investments, including mortgage investments, that suddenly plummeted in value.

Illiquidity will get worse, and this is one of what will be many stories,

And then we have Warren Buffet offering to buy the good assets of the bond inurers and so give them a capital injection (see also Also here).

Basically, he wants to buy the good stuff for pennies, and leave the sh%$pile for the monoliners to deal for later. Buffet ain't dumb, this is thinking vulture capitalism.

We are starting to see adulatory coverage of the (very boring, but generally safe)municipal bond market, though I wonder what happens to resale value of the bonds if the monoliners go belly up before Jimmy Warren Buffet gets his hands on those assets.

Finally, we have the federal budget deficit more than doubling, which means that we have to borrow even more foreign money and more downward pressure on the dollar.