Markets are euphoric today because the price of crude oil has fallen a few dollars. Ignored in the general rejoicing, apparently, is the record low (16) reported in the NAHB homebuilder confidence index. Basically this says that no-one is showing up to look at new houses, let alone buy them. Shouldn’t be surprising, but don’t lose sight of the fact that this is the big asset class - real estate. I looked at the CMBX indices last night, and , sure enough, spreads are rising in all the commercial mortgage indices as well. Many are at record highs, especially the low quality ones. This reflects the massive overbuilding in commercial real estate, especially retail. We haven’t heard much from this sector, but we will soon.

Wells Fargo reported a decent quarter this morning. Bulls pumped the shares 25%, claiming that WFC was home safe, while ignoring the one-time effect of changing the charge-off date for equity lines from 4 months to 6 months delinquency as of April 1st.

The Soviet experiment showed beyond reasonable doubt that, even with no restriction on authority and compulsion, one could not successfully control an economy. Today, the Soviets are mocked. How could anyone think that you could control an entire economy?

Today people expect the Fed, with limited authority over the monetary base, bank regulations and interest rates, to succeed where Gosplan failed. And they see no contradiction in doing so. Amazing. What is especially amazing is that even Mr Bernanke, who is an economic historian, appears to believe that he can steer the economy. Yet the evidence is clear that government attempts at economic management always increase entropy.

The stock market thrashes around under the control of the program traders; it is expiration week, after all. The economic news is poor - producer prices up 9.2% year-over-year, nominal retail sales up 0.1%, which means a fall in real terms. The SEC is restricting short-selling of shares of the GSEs and the brokers, which is another sign of panic - and by the way, shows the SEC’s real mission of protecting the industry from its customers. Financial stocks are up a bit, but the real energy continues to be focused on the over-loved and over-priced technology stocks, which are still well above their March lows (as represented by the Nasdaq 100, anyway). Oil fell today, although it needs to fall a lot more to make any economic difference.

The market is still ludicrously overpriced. Must be that dark energy holding it up, countering the force of gravity. Do dark pools contain dark energy?

Edit: And for a chuckle. Well half a chuckle, half a sigh. Recession-Plagued Nation Demands New Bubble To Invest In. A little too close to the truth, I fear.

I must say, watching the market action this morning, that it is remarkable (which would be why I’m remarking on it) how little concern people have about the ongoing disintegration of the financial system. Over the weekend, the second largest mortgage lender (Indymac) was taken over by the FDIC, and the government nationalized mortgage lending for all practical purposes. Somehow, this is seen as a good thing for investors. I suppose it is a de jure recognition of a situation that has existed de facto ever since the collapse of the mortgage securitization market, but even so I hardly think that it is a cause for optimism. I could understand a buying spree if the market had priced in a collapse of mortgage lending, but that it clearly not the case.

Apple did good business with the 3G iPhone, apparently, so people still have money for toys. One wonders for how much longer.

In another sad echo of the past, the SEC is starting a witch-hunt in order to eliminate bearish rumors. Any and all bullish false statements are OK, of course.

Well it turned out that the Friday denial by the Fed was a lie, as the announcement this evening is that the Fed board approved discount window lending to Fannie and Freddie. How anyone has an confidence in any statement of the government, especially the Fed, when they are willing to just flatly lie is beyond me. Paulson is also asking for a bigger line of credit with the Treasury for the GSEs, and authority to buy equity in them. As Gretchen Morgenson says in the NYT, “Bill Coming Due“.

Because the federal government established the companies, investors view them as backed, at least implicitly, by taxpayers. And that implied guarantee is what drove Fannie and Freddie’s business models.

The advantages the companies gained from this unique arrangement were huge. They had to keep less cash on hand than traditional lenders, for example. They also made more money on their mortgages than lenders because they paid less to borrow money in the bond market. These profits enriched Fannie and Freddie shareholders over the years and bestowed significant wealth on the companies’ executives.

Now it looks as if the bill for that largess is coming due. Of course, it will be borne by the usual bagholders: United States taxpayers. You and me.

Anyhow, futures are being bought on speculation that this is all good, and will make things “better”. Nonsense. It is panic. It is just another in the endless series of “bailouts.” If I held shares in the GSEs, which I don’t,  I would be looking at any rally as an opportunity to become an ex-shareholder. These bailouts would not be happening if there were any capital left in the GSEs after a proper and honest accounting. And by the way, if I had any bank deposits not covered by FDIC insurance, I would be remedying that exposure forthwith. Real estate in its various forms accounts for something like 60% of bank lending, and the losses are going to be staggering. Not just residential mortgages, but the developer loans with their capitalized interest and the wild and wooly “covenant-lite” corporate lending that has been going on. The nasty thing about these loans is that they can drag on without technical default for a long time, but when they do fail eventually they will provide little or no recovery.

The great deleveraging is well underway. Jim the Realtor has posted a good piece by Brad Inman of Inman News. He outlines the consequences of the credit crunch that is now unfolding. His conclusion is that the housing market will be starved for capital. And he is right.

Remember, the economy has been dragged into modest growth with the weakest increase in employment since forever by an enormous injection of new credit. Total credit market debt has grown from $38 trillion in 2004 to $50 trillion in Q1 2008, a one-third increase. That growth is in the process of reversing itself. Figure out the likely consequences. Bailouts will keep the institutions operating. They won’t stop the deleveraging.