Externalities and the Environment
Rudy Penner Is too Smart too Spend His Time Playing Budget Three-Card Monte

The Financial Crisis Rolls Forward, Oddly Decoupled from Production and Employment

Paul Jackson of Housing Wire:

JP Morgan’s Dimon: Prime Mortgages Look “Terrible”: While second quarter earnings Thursday from JP Morgan Chase & Co. (JPM: 40.80 +13.52%) beat analyst expectations... executives at the company sounded a strong warning bell over growing trouble in the nation’s mortgage market....

JP Morgan’s no-nonsense CEO Jamie Dimon was clearly trying to temper investors’ newfound enthusiasm with a dose of market reality. “Our expectation is for the economic environment to continue to be weak – and to likely get weaker – and for the capital markets to remain under stress,” he said in a press statement. “We remain conscious that since substantial risks still remain on our balance sheet, these factors will likely affect our business for the remainder of the year or longer.”...

“Prime looks terrible,” he told analysts on the call. “And we’re sorry, and there’s nothing else we can say.” The company currently holds $34.4 billion of jumbo mortgages, along with $2.5 billion of Alt-A mortgages. Net charge-offs among prime loans in the second quarter rose to $104 million, more than double the $50 million recorded just one quarter earlier. JP Morgan jumped in headlong into jumbos and Alt-A mortgages during 2007 — obviously an ill-timed bet, given where the market has headed. “We were wrong, we obviously wish we hadn’t done it,” Dimon told analysts. “We’re very early in the loss curve.”

Home equity loans are also proving to be problematic; JP Morgan holds $95.1 billion in the category, and saw net charge-offs rise to $511 million in Q2 from $447 one quarter earlier. High CLTV seconds in particular are “performing poorly,” according to the company’s investor presentation. Chief financial officer Michael Cavanagh suggested that roughly 10 percent of the seconds on JP Morgan’s books are currently underwater — meaning that the borrower owes more on their combined mortgages than their home is worth. “That could be headed to 20 [percent],” he said on the earnings call. “We can’t predict how homeowners will react when they go into negative equity. We’re assuming they won’t act well, but it’s possible things aren’t as bad as we expect”...

I still do not understand why the real side of the economy is doing so well in relative terms. The worst financial distress since the Great Depression ought to trigger the worst downturn in demand, production, and employment since the Great Depression. It hasn't--at least not so far.