Why Policy Response May Be ... Too Late

An unforgiving mistress, the markets are notorious for not giving people a second-chance, double-tops and double-bottoms notwithstanding.

Whatever life-blood liquidity that a reverse-auction or a 'fixed price government bid' might give to the frozen solid assets clogging balance sheets of "intermediaries" (*cough*), it's always possible that relief will come too late.

LOOKING FOR A BOTTOM

One could surmise that a bottom will come when both house prices and defaults have rounded the corner. An arguably better guess might be when defaults have peaked - it's possible that defaults will peak before home price declines bottom.

Here's one chart of the default rates on sub-prime loans, by vintage.

I don't know how this dataset is calculated, but if one did have a handle on that, you could make informed guesses with a fair amount of confidence. In any case, it could happen in Q4, perhaps before the first voluntary TARP ... event (we don't even know what it is going to be).



As an aside, Greenspan believes that home prices may bottom in 1H09. That looks like a w.a.g. to me, but he might have some analysis to support that conclusion ...

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