From the Washington Post…..

This decade’s housing boom rendered the agency irrelevant. Americans raced to aggressive lenders, seduced by easy credit and loans with no upfront costs. But the subprime mortgage market has crashed and borrowers are flocking back to the FHA, which has become the only option for those who lack hefty down payments or stellar credit. The agency’s historic role in backing mortgages is more crucial now than at any time since its founding.

With the surge in new loans, however, comes a new threat. Many borrowers are defaulting as quickly as they take out the loans. In the past year alone, the number of borrowers who failed to make more than a single payment before defaulting on FHA-backed mortgages has nearly tripled, far outpacing the agency’s overall growth in new loans, according to a Washington Post analysis of federal data.

From the end of the article…..

“Even if the market eventually gets these guys, they shouldn’t have to wait for the market to do it,” said Brian Chappelle, a former FHA official who is now a banking industry consultant. “The most frequent question I get asked by the groups I talk to is: ‘Is FHA going to implode?’ . . . They haven’t seen HUD do anything significant in the past two years to tighten up its lending.”

The entire article ought to put a lie to idea that more regulation would prevent another housing mess like the one we are in. Two years on in hosing crisis that was caused by bad underwriting and a government agency is still being taken to the cleaners by loan originators. You would have thought that if government regulators where any good they would have caught a clue by now.

Every so often, Calculated Risk posts a chart that has been created by dshort showing how the stock market has been doing compared to other historical bear markets. Given the recent falls, I thought that people might want to look at the most recent chart.

From the Times….

The loan-financing arm of Toyota, Japan’s biggest industrial giant, is understood to have approached a state-backed fund for as much as $2 billion in emergency loans.

A request for Government funding from the Japanese giant is expected to trigger a deluge of other demands for capital by other of the country’s struggling industrial companies.

When the article says $2 billion dollars it means dollars not the equivalent value of yen. What this means is that Japan is going to have to sell some T-bonds if it is going to honor this request.

Given the scale of the T-bond market, this is small potatoes. Still, it does demonstrate the mechanism by which T-bond yields could spike even if Japan or China do not decided to deliberately dump dollars as a matter of policy.

From the New York Times…

Criminal correction spending is outpacing budget growth in education, transportation and public assistance, based on state and federal data. Only Medicaid spending grew faster than state corrections spending, which quadrupled in the past two decades, according to the report Monday by the Pew Center on the States, the first breakdown of spending in confinement and supervision in the past seven years.

In that one paragraph you have the problem of demographic aging and cultural break down.

From the AP……

Investors’ despair about financial companies and the recession has brought the Dow Jones industrial average to another unwanted milestone: its first drop below 7,000 in more than 11 years. The market’s slide Monday, which took the Dow down 300 points, was nowhere near the largest it has seen since last fall, but the tumble below 7,000 was nonetheless painful.

The credit crisis and recession have slashed more than half the average’s value since it hit a record high over 14,000 in October 2007. And now many investors fear the market could take a long time to regain the lost 7,000.

From the Times…..

AIG, the fallen US insurer, unveiled a $62 billion loss today — the largest in US corporate history — as it secured a fresh $30 billion bailout package from the Government.

From Marginal Revolution (in regards to AIG bailouts)…..

No one wants to say it, but essentially the Fed has been bailing out European banks.

The inflation-adjusted cost of the Marshall plan has been estimated at about $115 billion in current dollars. If we end up spending $250 billion on AIG, how much of that sum will go to European financial institutions and might it someday exceed the scope of the Marshall plan? (I do not, by the way, think that central banks ought to treat foreign creditors differently.)

He is right that nobody important wants to say it, but blogs have been pointing this out from the beginning. Still, the comparison to the cost of the Marshall plan is an original twist.

This week’s essay of the week is Warren Buffett’s annual shareholder report. Key things to pay attention to are his comments on why bond insurance might make it more likely that municipal bonds will default and how the bail outs have meant that it is easier for firms on the ropes to get capital then relatively healthy companies like his own.

Acme Tool Co. is not especially vulnerable to the current economic climate, supported as we are by a repair industry, and repair being a fact in a cynic’s life and not just a realtor’s dream of an ever-exploding house value. But the collapse of unbounded optimism is sucking quite a lot down the drain with Click Here to continue reading.