The End Of The lunnel

(('rtrtlitttrLtl lt ()tIt l)dor I | ) rcgiunal banks arc.jLrst bcuinning tcl lccl thc pain. Follolr ing thc collapse ol tlrc nrortgagc-backccl sccuritics nlrrkct. thc srnallcr guvs uho clicl not participatc in thc madncss sccrnccl lcss r r.rlncrablc. Untbrtunately this is not trLrc. Thcv are faced u'ith clerclo1.l cr britlqc loans. traditional rnorlsalc l)oft1i)lios (rcmember thosc'.)). anrl cornnrcrcial developmcnts tlrat vr'ill nrean .'rtite clouns. "ualklru'lrys." lnrl clefaults -galorc. Thc lccLrlut()l's urL) s\\'ooprng in or.t nrolc antl nrorc lrlrpless banks thut clon't hur c thc cupital to adeqLrate-lr l'Lr nrl thcil loun loss rcscr\cs. \\'hcn thcir cupilul rutios drop bc)ori E'.i or'9'r look orrt lil- lt brtnch o1' scriotts-looLins !u\ \ in suits clcsccntling ott srnull tos ns anrl e itics I'ronr Orcgon to \\'csl \'ir'9iniu on ir Satuldal, . \'oLr e urr conlirnr thcir iclentill rrltt'rt lllr'-t ,rltl.t l)i//lt. lrr !o bcfilrc hclrl ing lirr thc locul bank. ('['nrc storl'.)

With all this goin-u on. \'ou ntav nonclcr w'hy I arn (rlildll ) optir.nistic. First. I anr u chronic contrarian. I lorik lirr. things thut rnost pcoplc clon't scc. Thc abovc-quoted statistic is thc stalt- rn_s point. For thosc r'rho clrrr nlrkc it thlough the f irst two tluar.tcr.s ol '0t) ilnd man) \\'on't tlrcrc is u gootl possibilitr tlic bull nnlkct llc urc all pin ing lirr u ill stlrt in thc sccorrcl hall' ol' l(X)() lnr.l suthcl sterrnr in 10 10. lclcl ing 1o iilr lrll tinrc bu|n-bunrcr lilr con stfuetiolr lrr mhcr'. Aguin. I arn not lrrlccusting u big incrcasc in starts. I uoulrl bc Irlppr to scc l.l rtrillion in l0l0 lltcr l llut 1009 ut ulound 9.5().0(X). []ut uc hlrc hatl \trolts ntarkcts bclirlc at l.l rlillion starts. It'\ lull uborrt supplr.

With thc colr\tlnt trontbarclntcnt ol' nceirtivc hcadlines. it's easr to lirrccl ruborrt scr clal inrportant l'acts:

[-ilst: The Dleaclecl Bug. TItc pinc bcctlc is not *aiting tirl thc rrlrr.kc( lir irnprovc. It has inlcstcd r rrlLttllr rrll of the primc tirlbclllncl in thc IJ.(. intet'ior ancl is hcuiling sor.rtlr. F-r cn the B.C. !()\clnr)lr'nl ltlr..-irr'r ul) (,tl thc cight-ycar cvcle l'ietion. rrnrl is finallr nrovirtg irtto post rrpoclrlr ptic moclc lrt its usuul qlucill plrcc. Thc cr clc on lt\ cnrgc is thr-cc 1'cirls llont inlcction 1o uscless or-pr-otrlcrnutic lirr' eon\tIucti()n ILrnrbcr' Pr-0rluction. (|t e rLlr \ iu-\ lr bit duc to locul clirnatic eontlitions)

Sceonrl: Thc singlc llrrrill builclcrs hlLr c in llo\t e ases lintitecl the ntsclvcs to pLrr'posc-bnilt hor-rsing or ve rv snrall startcr honrc clcr clOpnrents. Anothcr vcar of this shoLrlcl crcutc pcnt ul) tlcnrancl lor neu horncs

Third: The bigucst l'lr rn thc oint nrcnt is the knock on cl1cct ol rrurs :ire ittrcttl(,li\'\ irr llre t'ri.trrt-! rlirl ket. Hcrc rn Portluntl rr c e rrrr]d Ilrr c skalc(l the u olst cl1ce ts brrt I'or orrr' bclovcd contlo spccttlat()r\. \\ Ito surl cl lctl the nurrkct rr ith thoLrsunrls ol clrptics. Aguir). thcsc trr.c in thc l)ll)( ('\\ trl "lt'ttl-rirrll." \'l('irlill:' ll)r)lL' rcntlrl surpluscs in thc l)roccs\. 'l-ltt' re lrl tlt ii e t ol llr )ll\' lt'ir'! \ ill llris s1u!te is rrnsoltl invclllof\ and thc eontirtLrorrs ltcltlitions to this ntassi\c pilc ri ith lll thc lcscts. fureclosurcs lrnrl ri ulkuulLr s. Br.rt once this proccs\ hls lun its coLrrsc and the ungocl lr cr istinc inr cntorics have been eithcrlcntctl. clcrrolishcd or solcl. thcn thc sculcitr ol ncu honres n'ill takc holrl. 'l'lris u ill si-gnal the bottonr ol tltc liccl'all in honre prrcc-s us r,rcll. -fhis sccnario nrtrr c-,ccccl nr\ tinrclinc. but gir cn cr-lrrcnt cir-cuntstance\. Idon't thnrk so. Which brings rlrc to nr\ llrst elrrcul. tlrc (shr-rcldt--r. shukc ) qor crrrnrcnl. C'on gress. throu-lh thc prrslr-yrLrll ol irrtcr- est groups, is doing its best to ruin the recovery of the credit markets. Short-sighted industries are screaming for bailouts when they should realize that the market needs to make its own way through this mess. Any move to ease the pain by government fiat is by definition a market distortion, with either short- or long-term unintended consequences. Note corn-based ethanol.

Lower short-term rates from the Fed should help many homeowners struggling with ARM resets. But no matter what the Fed or Congress do, many who are making payments on a house with negative equity will walk away anyway. It is basic human nature and no congressional fix will change that.

The bond markets are signaling higher long-term rates. But if, as I believe, the oil and food markets are being puffed up by speculators, inflationary expectations should ease in the coming months. But long-term rates will move a bit higher. Once the current panic, with its accompanying "flight to quality," cools down and oil corrects to a more sustainable cost, we will still be faced with the reality of higher energy prices. The 30-year mortgage interest rate shouldn't move beyond the high 6Vo,low 7Vo range and credit markets won't stay frozen forever.

In conclusion, if Barney Frank manages to get his housing monstrosity through Congress next year, get a new day job if any are available. If not, look for great rewards at the end of a long, dark tunnel.

- Mr. Krier is a 3)-year veteran of the lumber industry. Formerly president of Stora Enso Timber U.5., he is now president of JLK Global Inc., Tigard, Or. You can contact him at john@jlkglobal.com.

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