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Wednesday, December 20, 2006

Holding Our Hands

I have been laughing to myself as I read much of the commentary on the latest economic statistics. Sometimes I have the feeling that they are holding our hands to make us feel better, but the clammy grasp of a economist doesn't convey the same benefits as holding your husband's hand. When your husband holds your hand, you are better able to deal with adverse reality. An economist can only make you feel better by holding your hand if he or she is dealing with reality. There's quite a difference.

Now every happily married woman already knew that holding her husband's hand made her feel better, and these latest rounds of economic stats also seem to confirm what we already knew -
Some pressing questions remain. Is MoDo going to have a shrieking fit of hysteria in the NY Times newsroom over the news that holding her husband's hand when under stress makes a woman better able to cope? Will film of the hysterical fit be released on the internet? Will a feminazi fatwa be issued against the study authors? Will I get all my Christmas baking done?

There are also open questions regarding the economy. One of those is whether the Alt-A high-adventure class of mortgages is destined for a meltdown similar to subprime. My guess is yes. If you are sitting with an interest-only/option ARM taken out last year on a house that's now worth eighty or a hundred thousand less than your loan amount, your refinancing options are sharply limited, to say the least.

Another, rather positive economic question regards the cushioning effect of small business on the economic downturn. My feeling is that it will be major. I can't quantify that, and I can't prove it. Also, my viewpoint might be skewed because personally, I'm facing a problem of an overload of business which is escalating rapidly. However, when I talk to other people in knowledge/expertise businesses, they seem to be reporting similar outlooks. Contractors might be pounding on our doors looking for business, but we are all in the position of hunting for people who fit our needs. They are scarce.

A third potential positive question is the role of private capital in cushioning the credit contraction destined to occur in bank lending. This is seen everywhere from the hard-money lending business (and they have dropped their lending margins on average from about 70-75% to 60-65%) to small business lending to large takeover deals. The growth in this type of activity is immense. This parallels the shift in real estate mortgage funding from GSEs to MBS. Let us all hope that the underrating of risk that occurred in mortgage lending doesn't spring up in this market. When losses can't be offloaded, it tends to keep people more honest. The big dealmakers can and do offload their risks, but most of the smaller segment doesn't.

Finally, the outlook for legal firms relating to the mortgage mess couldn't be brighter. The lawsuits should proliferate for the next decade, according to mortgage gossip.

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