Wednesday, March 5, 2008

Wednesday Interesting Articles

Real interest rates are now negative [Mankiw].

"Nothing in economic theory precludes negative real interest rates, or even suggests they should be anomalous. Nominal interest rates cannot be negative, because people would just hold cash instead of bonds,* but real interest rates can be negative. If real interest rates were very negative, investors could start investing in inventories of goods, but this arbitrage is not easy. Storing goods is costly, and many things in the CPI basket, such as services, are not storable at all.

In standard models of asset pricing, negative real interest rates are most likely to arise if growth expectations are particularly low or if uncertainty is particularly high."
Amit has a new post up about Downey [Kinnaras Capital Blog].
" we've covered, DSL's balance sheet greatly overstates its credit quality by ignoring market prices for the homes these mortgages are secured against. Based on Table II, there's about $2B in "extra" collateral value that DSL is implying its loans are secured against when market prices are much lower. NPAs are rapidly accelerating and the bank is facing a very challenging recast schedule. All of these obstacles are stacked against just $1.3B in capital which is why I've maintained my puts against DSL."
Collection of bearish data from [Mish's Global Economic Trend Analysis].

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