About 9 months ago I predicted that by the end of 2007, the economy, which economists and realtors had been blithefully pronouncing as robust and strong, would be so hammered that we'd finally agree that we were in trouble, rates would drop, and we'd see a drop in rates.l
1. The stock market tanked last week.
2. Countrywide is selling itself off to B of A.
3. The remains of Argent/Ameriquest is going to Citibank
4. ABN-AMRO, National City, Key Corp are selling subprime units.
5. New Century may collapse; facing shutdown after breaking covenants to its financial backers; A California US Attorney's Office is also conducting a federal criminal inquiry into trading and accounting irregularities.
The logic is simple: Mortgage companies lose money when consumers don't meet their obligations. Consumers don't meet their obligations because their personal economics have changed for the worse. Jobs decline, values decline, layoffs occur (I'd be surprised if this coming Friday's Employment report does not show this), the dollar declines.
Bernanke will act reactively to the damage which fed tightening has done to our weak economy. Rates will drop, but how much damage will have occurred before it happens?