The non-crisis fizzles on

The non-crisis anxiety over subprime mortgages continues to fizzle on, despite the fact that there is no evidence of any significant contagion effect that might affect the rest of the economy or financial markets in general.

The crazy idea that the Fed should cut interest rates to deal with the so-called "crisis" remains absurd. As of this moment, fed funds futures are indicating only a 2% chance of a rate cut in March, which is the same as zero. Futures are indicating only an 20% chance of a rate cut in May, which is also essentially equivalent to zero. Futures are in fact indicating a 50% chance of a rate cut in June, but a coin-flip three months in the future is hardly an affirmation of any immediate crisis.

There is no "liquidity" problem in the overall economy or in financial markets in general. There isn't even a liquidity problem in the overall mortgage market. The only liquidity problems are with specific subprime companies. Whether thosed companies get bailed out at fire sale prices or go the bankruptcy (followed by fire sale) route remains to be seen, but there is nothing to do on this front for the Fed, other than to continue to encourage reasonable lending standards. Some Wall Street firms have already taken a "haircut" (loss) on the shakiest portions of their subprime business and may take a bit more of a haircut, but there is no evidence that they pose any systemic risk. Those taking haircuts are probably completely balanced by those who have profited by betting against subprime mortgages.

At some point in here, even some of the shakier bundles of subprime mortgage bonds will find an equilibrium price that is attractive to some hedge funds. Even at "record levels of foreclosures", bonds can be very attractively priced to account for those foreclosure rates.

The media loves to chat up the potential for disaster, or I should say the media loves to create the impression that there is potential for disaster when the hard facts do not argue for disaster. And there is no shortgage of pundits, cynics, and other forms of perma-bears always willing to talk up the potential for disaster even on the sunniest of days. Shame on all of them, but that's life in the big city.

All of that said, the fizzling could fizzle on for a while longer. As I wrote recently, March and April are the critical turning point months for the economy and March could be quite volatile and look rather unappealing or mixed until we finally start to see real light at the end of the tunnel in the April timeframe. It is this mixed level of good and bad news that gets a lot of people confused and susceptible to the doom and gloom prognostications of the perma-bears.

-- Jack Krupansky