More Bonds & BS Part III
BondDad at Huffington Post and Barry Ritholtz at The Big Picture weigh in on opposite sides of the debt, bond, CDO, MBS, subprime, derivatives mess.
Naked Capitalism opines on subprime defaults hitting AA & AAA tranches.
"In case it isn't evident, this is a serious revelation. First, it is just about certain that Fitch's models don't differ significantly from those of S&P and Moody's."
Mish's GET digs into the Fitch rating model and exposes its multi faceted flaws.
"Essentially Fitch extrapolated a model of constantly rising home prices forever into the future...
in fact did not even make provisions for a flattening market let alone a reversion to the mean at a time of massively declining lending standards, and with home price appreciation orders of magnitude above affordability indices and rental prices."
Dr. James Hamilton at Econbrowser thinks along the same lines as myself:
"If there has been some mispricing of aggregate risk, then the magnitude of the economic consequences of the housing cycle are going to be greatly amplified.
Indeed, the reason I have been developing increasing concern about this possibility is that it looks to me like we are already seeing evidence of just such effects.
The ongoing woes of the housing market are clearly now reflecting something much more than a simple response to higher interest rates.
But all this has happened without any significant undiversifiable shock, such as an actual recession or broad decline in real-estate values.
What will happen when such a shock finally does arrive?"
The Nattering One muses... me thinks we are about to find out.
Naked Capitalism opines on subprime defaults hitting AA & AAA tranches.
"In case it isn't evident, this is a serious revelation. First, it is just about certain that Fitch's models don't differ significantly from those of S&P and Moody's."
Mish's GET digs into the Fitch rating model and exposes its multi faceted flaws.
"Essentially Fitch extrapolated a model of constantly rising home prices forever into the future...
in fact did not even make provisions for a flattening market let alone a reversion to the mean at a time of massively declining lending standards, and with home price appreciation orders of magnitude above affordability indices and rental prices."
Dr. James Hamilton at Econbrowser thinks along the same lines as myself:
"If there has been some mispricing of aggregate risk, then the magnitude of the economic consequences of the housing cycle are going to be greatly amplified.
Indeed, the reason I have been developing increasing concern about this possibility is that it looks to me like we are already seeing evidence of just such effects.
The ongoing woes of the housing market are clearly now reflecting something much more than a simple response to higher interest rates.
But all this has happened without any significant undiversifiable shock, such as an actual recession or broad decline in real-estate values.
What will happen when such a shock finally does arrive?"
The Nattering One muses... me thinks we are about to find out.
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