The next problem?

Two interesting and related stories from Bloomberg's website.

For Dean Nessen, the choice of a mortgage was easy. By agreeing to pay only interest for three years, the self-employed salesman didn't have to show proof of income and landed a rate of 6.25 percent.

Now, four years later, Nessen's industrial coatings business has gone belly up and his rate has jumped to 10.6 percent. He can't afford the payments and may have to move his family out of their home in Commerce Township, Michigan.

About 3 million U.S. borrowers have Alt-A mortgages totaling $1 trillion, compared with $855 billion of subprime loans outstanding, according to Inside Mortgage Finance, a trade publication in Bethesda, Maryland. Of the Alt-A borrowers, 70 percent may have exaggerated their income, said David Olson, president of mortgage research firm Wholesale Access in Columbia, Maryland.

Meanwhile, back at the ranch.....

Borrowing from the Fed's discount window hit record levels in six of the past eight weeks, and reached $23.5 billion as of Sept. 10, Fed data show. By comparison, lending averaged just $779 million a week in the three months after New York Fed President Timothy Geithner urged banks to use the program.

My view.

1) The problems created by Greenspan's cheap money era will keep coming.

2) These problems will be solved one at a time because no one has any idea of their size and complexity. This is the only sensible thing to do. Any idea that Washington can come up with a comprehensive plan is plain and unadulterated hogwash. They had all the regulatory institutions in place and yet they let this mess happen.

3) The Fed is doing the only job they can do: give away money to distressed financial institutions to keep them afloat. Forget about the ridiculous notion that "they set interest rates". The markets do. Not the Fed.

4) The rate on 13-week Treasury bills is sagging, finishing at 1.44%. The markets are driving short-term interest rates lower.

My gut feeling? Well, I think that all this sense of panic, the on-going printing presses of the Fed, Treasury, and Congress will be good news for the markets. I still believe there is money to be made in the next 12-months and that the equity markets are close to an important bottom.

However, as in 2000-2002, it is very important to select and focus on the right sectors.

All this money will create the next set of problems, which will be solved when we get there by creating new ridiculously complex regulatory institutions that will strangle the economy even more.

More, much more when you subscribe to The Peter Dag Portfolio on https://www.peterdag.com/.

George Dagnino, PhD
Editor, The Peter Dag Portfolio
Since 1977