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Merill Wants its Bubble Back Too



March 16, 2007 – Comments (3)


Original here.


It looks like a fairly innocuous comment: a note from a Merrill Lynch (NYSE: MER) analyst predicting a high probability of housing-market-induced recession unless the Fed cuts interest rates.


I'm going to file this under, "Please! Gimme back my bubble!" It joins similar pleas from the mortgage bankers and, of course, the six-percenters.


Let us note, however, that Merrill is hardly a disinterested party. If the economy and the markets tank, so does Merrill's gravy train. But it's not only exposed to secondary fallout. Merrill Lynch actually provided some of the "liquidity" that has inflated the housing bubble over the past few years, and it's even bought into the front lines the subprime game, acquiring lenders.


So yes, a housing-led recession would be ugly for Merrill, and for all of us. But you know what would be uglier yet? A Fed that set monetary policy in a vain attempt to avoid an inevitable and much-needed correction. I doubt that a rate cut would even matter for mortgages. It's recently become quite clear that the mechanism pushing down mortgage rates was not the Fed's lending rate, but the willingness of mortgage backers to accept overly risky loans. That party is over.


Economic medicine may be bitter, but from time to time, it's necessary.



At the time of publication, Seth Jayson had no positions in any company mentioned here. See his latest blog commentary here. View his stock holdings and Fool profile here. Fool rules are here



3 Comments – Post Your Own

#1) On March 16, 2007 at 5:04 PM, vitalfoolish (< 20) wrote:

Well said.

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#2) On March 19, 2007 at 11:15 AM, Greshm (85.91) wrote:


In case you haven't seen the Buttonwood column in the current issue of The Economist. Below is the tail-end of my latest CAPS blog post saving you the rest of my verbosity. 

Fellow miscreant, Greshm.

For those wishing to read more, here's an excellent introduction--a very quick read--via the current issue of The Economist.  I'm pretty sure non-subscribers will be able to view this at least for some days or weeks.  If anyone attempts the link and can not view the article, please post a reply saying so and I will try to find a way to make it available to all.  For individual investors, I think this is strongly recommended reading:


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#3) On March 19, 2007 at 1:27 PM, ifthenelsenull (37.16) wrote:

Excellent link Greshm!  I believe that the savings rate of zero being funded by the house/market ATM is coming to bear also.  Prices are out of wack and cannot continue to remain as such forever.  Sure Merrill wants to postpone the inevitable and who wouldn't.  The longer they have to unwind their position the better.  I would agree absolutely that interest rate reductions aren't the solution because they aren't the cause of the problem.  Above all the correction is here and should continue for quite a while.   

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