Will Collapsing Bubble ‘Bog Down The Economy’?
Several readers suggested a topic that many newspapers are reporting on after yesterdays GDP numbers. “It is official. The economy is grinding to a halt while inflation is jumping. Stagflation part II coming to a neighborhood near you.”
Another replied, “My take on this is that the actual inflation (increase in the money supply) happened while the interest rates were so low, and the housing boom is the main source of the inflation. The increase in prices we see now is a direct result of the increase in the money supply that was a result of the easy credit on housing.”
“It would have been much better to ‘take our medicine’ without creating this housing boom first which just increased the imbalances. I am expecting deflation; others on this blog expect more inflation or hyperinflation. If housing prices drop significantly this will be deflationary and people will have to cut back on their spending and generally think about saving money wich will be deflationary. I am expecting all classes of investments to drop, even gold, although perhaps I am wrong there.”
And another said, “I am of the inflationary persuasion with regard to the economy. If the hedonic figures are removed from the CPI (eg. the Cavalier that you purchased for $10,000 in 2001 now costs $14,000 - that is not inflation; per the government, the car has improved by $4000). IMHO the Fed will tighten to try to stop inflation, but then will open the flood gates to stimulate the economy then hyper inflation.”
And finally, “I think we’ve been in a stagflationary period for a long, long time, from the 70s on, in varying degrees.”
The LA Times. “The cooling housing market may be undercutting overall consumer spending as fewer people count on rising home equity to finance trips to the mall. Consumer spending grew by only 2.5% in the second quarter, down from 4.8% in the first quarter, according to the Commerce Department report Friday.”
“‘People were selling part of their house to finance dinner at Olive Garden,’ said Dirk van Dijk, at Zacks Investment Research. ‘You can play that game as long as the price of housing is going up. You take that away and it becomes a scary proposition.’”
The Washington Post. “Some retailers and industry experts say the cooling housing market is directly related to weak performance in home furnishings. Fewer houses sold means fewer to decorate, and slumping sales for retailers. ‘The softening in the housing market is definitely having an impact on what consumers perceive they need to buy,’ said Janet Hoffman.”
“Stanis Furniture, based in Fairfax, is closing its second location, in Chantilly. Mastercraft Interiors is liquidating its four stores after filing for bankruptcy in May. Brown’s Wood Stuff closed two of its three Virginia stores. Even Georgetown’s home design hot spot Cady’s Alley has taken a hit, with upscale retailers Hollis & Knight and the Ambiente Collection going dark.”
The New York Times. “The housing industry, which largely carried the American economy through the tribulations of the 2000 stock-market crash, a recession and climbing oil prices, has lost its vigor in recent months and now has begun to bog down the broader economy.”
“‘It hasn’t slowed down a little bit, it has slowed down a lot,’ said Doug McCraw, a developer who has scrapped his plans for a 205-unit condominium tower in a neighborhood just north of downtown Fort Lauderdale, FL.”
“The biggest risk, economists say, is that the optimism that fed the real-estate boom will reverse dramatically. Just as rising housing prices during the boom added to Americans’ sense of wealth and well-being, the reverse could dampen sentiment and lead consumers to pull back on their purchases.”
“Going forward, many economists say, the biggest question is whether the orderly real-estate slowdown the Fed has engineered thus far will continue. ‘Outside the threat of surging energy prices,’ economist mark Zandi said, ‘the most significant threat to the expansion is that the housing correction turns into a housing crash.’”
“When the American economy fell into recession five years ago, it was the strength of the housing market that kept the downturn short and mild. Home sales kept rising throughout the downturn, and then took off when the recession began. But now home sales are falling and the number of unsold homes is at the highest level ever.”
“To be sure, over the 12 months through June more than 6 million single-family existing homes and 1.2 million new homes were sold. It is conceivable that the market will stabilize at levels that look weak only when compared to last year’s extraordinary numbers. But with sales weakening and the number of available homes rising, those who warned of a housing bubble must be wondering if their fears are finally becoming reality.”
This flurry of reporting brings two things to mind. First, wasn’t it just a few weeks ago that economists were saying home prices were only at risk if there was a recession? Second, was counting on Olive Garden meals financed by a home loan ever a sound economic plan?
IMO, these papers should be asking the Fed and others why this turn of events wasn’t entirely predictable.
My jaw dropped at the Olive Garden comment.
I can see taking out a HELOC for necessary home improvements but OLIVE GARDEN?
Unbelievable.
Well I don’t think that’s literally what they’re doing, but many people manage to convince themselves that getting a HELOC to pay off their credit cards (which is effectively the same thing) represents fiscal prudence, instead of the stupidly living beyond their means that it is.
“convince themselves”???
I guess you have not heard those myriad ads about how to get out of credit card debt by consolidating into a home equity loan?
No, I agree that’s what they’re doing. My point, poorly expressed, is that they’ve convinced themselves that getting a HELOC is getting themselves OUT of debt, not putting up the house.
…then running up more debt on cc’s
BKs are coming back with a vengence. . .
And of course I’m torn between who needs a smackdown more, those who can’t live within their means, or those who continue to lend them more money.
“My point, poorly expressed, is that they’ve convinced themselves that getting a HELOC is getting themselves OUT of debt, not putting up the house.”
And my point, possibly also poorly expressed, is that the advertisements on the radio suggested that transforming credit card debt into home mortgage debt is some kind of a solution to the problem of spending beyond one’s means.
A couple with whom we go out to ballgames from time to time bought a condo in January. According to my wife, they bring home around 65k combined. Their car dies in springtime, and he goes out and gets an Acura TL. Used, but still above where he should be thinking. Anyway, one day a couple of months ago the guy says to me: “I’ll be glad when I never have to make a car payment again” Curious, I pressed for clarification on the matter. Apparently, he was of the belief that he’d soon have enough equity in the condo to pay off the car loan. Needless to say, I was absolutely dumbfounded. Even IF the interest rate was lower on the mortgage than the auto loan (though my car loan is just a spit over 4%), a 23 second calculation will tell you that it does not pencil out to take out a 30 year loan on a USED car. This dude clearly thinks that, A) any equity gain is free money - and, B) that he might actually have equity!
Of course, we are talking about a person who bought in January of 2006. A condo!
I did a 20,000 home equity loan with a WM fixed 6.5%, not a heloc. Used most of the loan to pay off all my hi-rate credit cards. This is the only loan on my inherited house so far: i am extremely wary of borrowing any more against my home. Would rather live on rice and beans and buy stuff at 99 cents store than throw money away on stupid expensive consumer stuff paid with HELOC’s or CC”s. which in my view are not all that much different.
My reasons for running up such a large CC debt were mostly medical and for expenses incurred in running a trucking business, not for spending on Extravagant big-ticket consumer items. Took me 10 years to get to $16,000 in CC debt, which is far better i think that a lot of folks out there.
Don’t they offer unlimited breadsticks at the Olive Garden? That’s similar to the HELOC mania…. unlimited.
Borrow money to eat at bleeding Olive Garden? We’re talking about salt disguised as pasta. Like Mr. T, I pity da fool who mortgaged his home to sashay on up to the corporate salt lick! Lickety-lickety-lick: mmmm, I’ll gladly pay you interest on a 20-year ARM for Box Restaurant food today!
I should put together a list of all the crazy reasons things I’ve seen MEW used for. You really have no idea how bad it’s become. The Olive Gardnen comment is not exaggeration.
Please do! I’d love to hear more of these stories…
The best stories will come out in a few years when the next RTC is formed. Wouldn’t surprise me if investigators find the names of cartoon characters financing pre-construction condos.
One of those benefits of getting older is (hopefully) becoming observant about how the economy behaves, and understanding where you are in the business cycle.
Doesn’t everyone remember the summer of 2000, when the headlines were trotting out stories of manufacturing layoffs, while simultaneously trumpeting the “increased productivity” of “the new economy”?
Always beware of “deflective news reporting”. IE, “things are going sour in some historical sectors, but Y and Z will make up for it.” That’s what we’re hearing now, as the housing bubble pops in the light of day. It’s “just” housing - in “some” markets… it’s only a percent or so off our growth…
Move along, people. No recession to see here! Move along, now. Everything’s fine.
We are seeing record productivity… but it’s not creating jobs like it used to. According the “The End of Work” by Jeremy Rifkin, 75% of jobs consist of simple repetative tasks. Productivity is rising because those tasks are being automated.
This housing crash will be catastrophic becuase the next “Jobless Recovery” will make this one look like the roaring ’20s. The fact that median wages have been dropping while housing prices have doubled means the correction will have to be more severe to get us back to normal.
I hate to use the hackneyed phrase Paradigm Shift but we could be staring one in the face in 2007.
Kinda like “Hitchhiker’s Guide”. What will we do with the “useless third?”
“The fact that median wages have been dropping while housing prices have doubled means the correction will have to be more severe to get us back to normal.”
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We are not going to get back to normal in our lifetimes. Foreign labor is paid a fraction of what our labor is paid. Wonder what the problem is at GM? China pays 60 cents an hour for work that GM pays $16. India is taking the good jobs in the IT sector. Airlines are cutting the pay of their pilots, flight attendants, and ground crews. Auto suppliers are cutting pay to their workers. Not a little, but a lot.
There is no question but that our standard of living is falling and will fall considerably further.
You can see the effect upon the economy in the stock prices of retail companies. They have tailed off significantly in recent weeks.
Falling home prices seriously exacerbate the problem. Cutting off the MEW will prevent the usual level of consumption. Was it last year that Americans consumed 6% more than their incomes?
Although home sellers have generally resisted dropping their prices, they won’t be able to much longer. By year end, home prices will be decidely down.
Next year will be historic. Tighten your seat belts.
The amazing thing about the maddness that has possessed the masses of individuals that engaged in the HELOC and spent the RE/ATM money on consumables that last less than a few hours is that this type of maddness is not just confined to RE.
I just learned a few days ago that my wife’s ex obtained a interest only (I/O) loan on an automobile for his daughter (i.e. my step daughter) and placed the minimum California auto insurance on the financed automobile. During the past two years I paid in CASH the amount of the loan as a gift to the step-daughter. My step daughter was invloved in an accident about a month ago and the auto was total loss, fortunately not a scratch to the step daughter.
My wife’s ex is now complaining that he still owes the principal on the auto loan. Apparently he took the money intended for the step-daughters auto loan and also ate at the Olive Garden along side of the RE HELOC folks.
I truly believe that the maddness that has overtaken the RE world is far more entrenched and systemic that most people can even contemplate. It will be a very unpleasent day when they all wake up at once.
Chuck,
I think your post is suggestive of our government’s pressing need to keep the credit risk problem hidden from view under the rug as neatly and as long as possible.
I rent the lower level of a house from a “flipper” who lives upstairs. We did not know that she was a flipper when we moved in. She passed herself as a “business woman” but it soon became obvious.
Using Zillow, we found the house was bought for 320K in 2001. She took out a HELOC to put the usual Home Depot Happy Face upgrades (steel, granite, etc.). She does not work. Her mailbox is overflowing. She has many fictitious company names (we have to sort thru her mail to get ours since she just lets it build up in the mailbox).
She says she doesn’t pick up her mail because she has no money to pay the bills. She has no savings and her credit cards are maxed out. She paces upstairs constantly. She has pinned everything on “the house”. She says her house is worth $900K and expects it to go up over a million….soon.
When I tell her about the “bubble” she says “oh no, do you know how many rich people are moving to Seattle? And lots of foreign investors too…”
This summer is the “top” in Seattle RE, if she sold now she could at least walk away in the green. But her belief that her house is a “goldmine” makes her the proverbial monkey who won’t let go of the marbles in the jar even as danger approaches…
We are moving soon as she drives us crazy with her constant pacing and strange “panic attacks”. She will probably screw us on the damage deposit (since she is broke and probably can’t pay us back) but at this point we just want out.
If our flipper is a typical case then there are a lot of people “living on the edge” who are gonna lose it all.
This is the difficulty with those on these bubble-boards who blithely say “I’ll just rent from the flipper fools until prices become reasonable.” Flippers won’t make good landlords.
Good landlords, which we try to be, pay $ 556 for a new stove/oven when the old one goes on the fritz and is sparking dangerously per the appliance repair man, which our tenant’s did this weekend ( we got a solid-top one because eventually we will switch it out to our home when the tenant’s lease is up in 2 years ), and spent $ 50 on 5 new Wallside windows to replace 20 year old ones which were rotting out. Plus, have our handyman go up and check out a leaking laundry tub and possible damage to the wall behind it. All this week. Cashed out flippers can’t afford to do things like that. We like to maintain our property. We don’t do things like this every day, or we couldn’t afford to be landlords. But, crap happens and you have to take care of it. All comes off against our other income anyway, plus depreciation is a beautiful thing, but still….
Silverback,
I have been wondering about depreciation because a friend (who is not a landloard) keeps telling us that depreciation makes it so that it doesn’t really matter if you buy an overpriced house to rent out and can’t rent it out for enough to cover costs. As far as I can see every dollar you take in depreciation to avoid taxes today will become a dollar you have to pay taxes on (but maybe less taxes–capitol gains) when you sell the house, assuming that you don’t end up selling the house for less than you bought it for. Am I right or is there something I don’t understand?
“I truly believe that the maddness that has overtaken the RE world is far more entrenched and systemic that most people can even contemplate. It will be a very unpleasent day when they all wake up at once.”
Unpleasant and then some.
The combination of violently deranged government, angry fundamentalism, inflamed nativism, long-simmering cultural hostility, middle class jobs decline and the rude yanking of the MEW pacifier from grown-up babies’ mouths won’t exactly lead to a new Enlightenment.
Think Berlin, ca. 1930s.
Be careful when reading economic reports from newspapers. Experience has taught me (and many others) that newspapers do a terrible job of reporting on economic issues. They’re so bad at it that Dean Baker has dedicated a blog (beatthepress.blogspot.com) to pointing out the simple mistakes they make. There are plenty of good econblogs out there from Econobrowser, Angry Bear, Marginal Revolution.
Well, there’s always the option of…soup, salad, bread.
With all respect, You really think that over-indulged American people would settle for soup, salad & bread? I believe most people in this society can not control their spendings and are not capable of saving money.
Most people want nothing short of instantaneous gratifications and are not capable to say NO to themselves.
WE NEED A GOOD RECESSION IN THIS COUNTRY.
Settle down. I agree completely. The irony of my comment is rooted in the complusive behavior of Americans…credit as a way of life for most of these people…and then if they can’t pay off credit cards, loans, etc…they want to become victims and scream for the government to bail them out.
They can’t be satisfied with soup, salad, bread…they feel entitled to the most, the best, the biggest, anything that is more than their neighbor….it’s a sickness that truly is the psychology behind this big mess.
That’s why it’s hard to convert socialists to capitalists or Iraqis to lovers of democracy. Freedom from the government isn’t just an idea, it’s a way of thinking. Hayek says basically the same thing in his last book; Socialism is a sickness that affects the way people see the world.
Heh: you wouldn’t know socialism if it came up and gave you a public works job to keep you from starving in the midst of a depression brought on by capitalism. As for converting Iraqis to “lovers of democracy,” well, that’s a hard one, you know; maybe if you stopped torturing and murdering them first?
I agree instantaneous gratification, and this culture that keeps that going. I am just beginning to see the light. I sold my CA home (bought in 1990) listed 9/05 sold 10/05 (we had only two people look at the house and were very fortunate that one of them bought), and now rent. What I see is simply this: We are conditioned by our environment (TV, Internet, Advertising, Government, etc.) to spend and keep spending. The spending keeps people in debt and keeps them working. By working 40, 50,60+ hours a week who has time or energy to see what is really going on and break the spending habit. If people do stop spending then the only outcome is a collapse of the system. We are in so deep it is hard to see a positive outcome. I get satisfaction reading these boards and a sick satisfaction reading about other peoples demise (must be some psyco. term for it) but the smart people here (I am not one) need to start some real planning so all of us don’t get swept up by the coming financial tsunami.
“WE NEED A GOOD RECESSION IN THIS COUNTRY.”
Could not agree more. The house of cards is about as high as it can be built and is starting to quiver….the sooner and faster it all comes down the sooner we can start picking up the pieces and moving forward. America has what I call the “Fat Roman Syndrome”. We have been the top dog for some time, we have become soft and lazy as a people, and are generally non-competitive in the global economy. There is very real downward pressure on American wages…..because we are simply not worth it any more.
I think the coming economic “downturn” is going to be “different this time”. The Depression still saw an America full of European immigrants with the backbone to weather the storm and come out stronger.
I think the country’s current “backbone” is quite a bit weaker than it used to be….
Well you could add also insects to the menu. They are quite excellent. Chineese and Thai cooks have real succulent receipes for them. 80% protein and no fat! Now that would make a real change from dull globalized American fast food junk food.
Deflation in the aftermath of the 1929 stock market crash was the result of inadequate money supply. Such is not the case right now. The world is awash in the US dollar and other currencies. Inflation and a weak dollar are what we have to look forward to…
You are using a rear view mirror. Present money supply is the result of low interest rates, irresponsible lending, and confidence that loans will be paid because of rising prices. In the present downturn the risk is massive foreclosures which spiral to reduce prices and confidence. In that invironment credit standards will have to be raised. Note pressure on Fannie and Freddie to reduce exposure. Even if interest rates are lowered lack of confidence and an inability to borrow will continue the spiral of debt destruction. This will destroy money and greatly alter the money supply.
From November 1929 to 1932 the Fed cut rates from 6 1/2% to 1 1/2% and we witnessed deflation. The same thing happened in Japan since 1990.
Present money supply reflects present confidence in price and confidence in the ability of sub prime borrowers and those soon to join that flock to get credit. If you think that bolt is shot do not focus on present money supply but anticipate what is in the future. Defaults on a massive scale and deflation.
Unlike the 1930’s when deflation caused a run on banks the run will be on Fannie and Freddie paper. They have no real insurance. It will take the form of higher interest rates in that sector no matter what the Fed does. The higher rates will be dmanded by borrowers as they understand the risk of these mortgages. An eventual run against the dollar a la Argentina 2002 or Russia 1998 is not out of the question. Again the Fed itself will be forced to raise interest rates even in a bad economy to moderate the collapse of the dollar.
IMHO first hit will be other issuers of MBSs, especially those based of those 20% seconds that enable 100% loans. Then other paper based on non-conforming loans. Then either Fannie or Freddy will look like it’s about to fail and the other one will be “encouraged” to buy it out in exchange for EXPLICIT taxpayer guarantees. You heard it here first.
‘Then either Fannie or Freddy will look like it’s about to fail and the other one will be “encouraged” to buy it out in exchange for EXPLICIT taxpayer guarantees.’
Do you think Fannie would already look like it’s about to fail if they produced financials? I suspect so myself — otherwise, why would they not produce them?
Fannie and Freddie are quasi government agencies, like the big banks. They will never fail. It’s you as a taxpayer, as an entrepreneur, as an individual, that will fail and will ultimately pay the bill for these “enfants de putes”.
They never fail. It’s a riskless business. 100% of the profit for them and 100% of the risk to you the citizen. Real socialism but for the big banks and financial institutions.
IMHO you would be correct if there were not 2.7 trillion dollars floating overseas. That 2.7 trillion dollars is purchase money. aka inflation
The problem is that we make little that they want, and when they try to buy productive assets like oil companies, we throw a hissey fit. The upcomming dollar collapse and loss of the dollar as the world reserve currency is overdetrimined IMHO.
Empire’s never go quitely into the night. There will be more wars and blood shed so the US can attract more money as a safehaven to prop up this economy. This is going to be the most volatile times worldwide, The US can collapse china in no time and same for India and the politician’s will do it in a heartbeat if they do not support our debt binge and the dollar, whether it is in the name of terrosim, WMD, or some new imaginery threat the average stupid american is made to believe and I definitely exclude all people who are on this blog since they made an effort to find the alternate view and seek the truth instead of believing the spin Fox and the like spread. Mark my words, major wars will happen before the dollar collapses and collapse it will.
You can reduce interest rates in the face of a restrictive monetary supply and do nothing to help a deflationary situation, which is what happened in the 30s. The “runs” on MBS paper may occur, but it would occur in conjunctiuon with massive sales of US Treasury debt, causing a massive flood of dollars back into the US and a crashed dollar (INFLATION).
Don’t know about that — Japan tried to print its way out of deflation in the early 1990s, and found out that it was pushing on a string…
Deflationary crashes occur after credit booms, such as the credit boom of the 1920’s. They are caused by easy credit. The world is awash with dollars because of the extreme easy credit available during the last few years. I think it is safe to say that so much and so easy of credit extended to so many has never occurred before in our history. I think of the homeless man with no job or money who bought 5 houses in Florida using his revoked driver’s license as identification. How could standards get any easier than that? When the people who have overextended begin to default in greater numbers, and lenders are forced tighten their lending standards, there will be a contraction of the money supply (which is deflation). Does anyone here think that defaults will not rise to unusual heights? Does anyone here think that lenders will still be handing out such easy credit to everyone who walks in their door when housing prices are dropping and borrowers are defaulting? This inflation we are experiencing now is a result of the housing boom and when housing crashes the opposite, deflation, is what we have to look forward to…
“The world is awash with dollars because of the extreme easy credit available during the last few years. ..”
That is by definition future inflation. Got out of dollars and purchase.
If a bank loans 1000 and the borrower defaults on an asset that then sells for only 500, where did the other 500 go? It is possible that all the deflation is “paper deflation” and could simply evaporate to where there is in fact massive deflation. This is just a thought, not necessary my belief of what will happen.
that would be “paper INFLATION” that will evaporate (not paper deflation)
If I borrow a million dollars and buy a building. Then default and have a judgment levied against me (that I don’t pay). The bank has a million dollar default that it will have to write off. Now, the million dollars I paid the builder that he consequently paid his subcontractors, lumber yards, etc., is still in existence as well as the building.
One could argue that the stockholders of the bank would see their stock decline in value and that is where the money destruction occurs. What if the FED came and bought that mortgage default from the bank as they have indicated they may do? The bank would remain in it’s previous financial condition. I would be unable to get future credit but remain essentially intact and the money is still floating around the world. I see the lending of money tightening and spending declining both of which would constitute a deflationary impulse (as would increased interest rates). However the bulk of the 10 trillion that homeowners borrowed into existence the past 5 years is still in existence, it would appear?
My personal opinion is that there are different enough circumstances this time around (large federal debt, oil issue, amount of petro dollars in existence, crazy fed, crazy president, etc) that I don’t think this can be called accurately. Obviously the country is bankrupt along with a great many of it’s citizens and that can’t end well. How we get to the bottom will take some zigzags and is too tough to call. The dollar is toast at some point though.
“What if the FED came and bought that mortgage default from the bank as they have indicated they may do?”
Can you direct me to where the FED indicated that they would buy up bad loans? The Fed is a group of banks; they exist to make a profit, and they have no obligation to buy bad loans. Why would they commit financial suicide? In the great depression the Fed holdings were something like 90% Teasury bills and bonds; in times of risk they flee to safe havens like everyone else.
Sure Kim, I’ll try to look that up. They changed quite a few rules in the past several years. One of them gave them the ability to buy any asset they wanted.
Also, monetizing that debt would in fact help the bank, not the borrower (who is still obligated) thus fulfilling the goal of stabilization. BTW, lots has changed since 29′. This ain’t your granddad’s depression!
After rereading your post you may be asking where they have indicated that they would buy this debt (not if they had the ability). My contention that they would do this comes from Bernanke and his “helicopter” statement. Let me know if you are still looking for the reference as to the ability of the FED to buy whatever it wants.
I know they CAN buy the debt, I was asking when they had ever said that they WOULD buy it. The Fed in the 1930’s could have bought up bad loan’s, too, but they didn’t want to go bankrupt. I am sure the current Fed is no different in that respect. I believe that Ben’s helicopter statement was refering to attempting to lower interest rates and encouraging easy credit, what they have already been doing, as a matter of fact.
How does the FED go bankrupt? They PRINT the friggin money! They aren’t audited and have no oversight (at least not in this country).
Also, the rule allowing them to purchase any asset they want did not exist in 1930 so doesn’t apply.
Of course I don’t know what BB meant by his helicopter statement anymore than you. Since the FED’s mission is clearly to support the banking industry and because a bunch of banks going BK would clearly be stressful to the industry, I merely connected the dots. Perhaps a poor assumption but it is the contention of several analysts that the FED is currently monetizing the MBS of FMN behind the scenes in an effort to stave off a collapse of that institution. If that is true then doing the same for banks is a foregone conclusion.
“Perhaps a poor assumption but it is the contention of several analysts that the FED is currently monetizing the MBS of FMN behind the scenes in an effort to stave off a collapse of that institution”
If they are you can be sure that they are selecting Fannie’s very best loans to buy, not the risky ones.
It is relevant to think about fractional reserve banking. When a bank “lends”, it doesn’t take dollars out of its pocket and give them to the borrower. Instead it creates dollars out of thin air by making an accounting entry creating a new account for the borrower. So when the home securing the “loan” is taken back and sold for half what was “lent”, the bank is not really out the difference.
“Reserve requirements affect the potential of the banking system to create transaction deposits. If the reserve requirement is 10%, for example, a bank that receives a $100 deposit may lend out $90 of that deposit. If the borrower then writes a check to someone who deposits the $90, the bank receiving that deposit can lend out $81. As this fractional-reserve banking process continues, the banks can expand the initial deposit of $100 into a maximum of $1,000 of money ($100+$90+81+$72.90+…=$1,000). In contrast, with a 20% reserve requirement, the banking system would be able to expand the initial $100 deposit into a maximum of $500 ($100+$80+$64+$51.20+…=$500). Thus, higher reserve requirements should result in reduced money creation and, in turn, in reduced economic activity.”
http://en.wikipedia.org/wiki/Reserve_requirement
“So when the home securing the “loan” is taken back and sold for half what was “lent”, the bank is not really out the difference.”
This is not true. The bank has to take the difference out of its profits or the accounts will not balance. The interest paid on the loan is a return for the risk of that loss that the bank may have to take if the borrower defaults.
Kim, They create the money out of NOTHING. The loans are not from funds (savings) on deposit they are created out of thin air. You are looking at this all wrong, as if the banking system somehow applies common business practices to its industry. What other industry gets to conjure up money out of thin air? It’s a con game, OK? Did you ever wonder who gets the interest that is paid on the national debt and why? I mean how does one sign up for that particular franchise? Where does the money comes from and how?
BTW, I assume that the FED is taking the absolute WORST loans over from Fannie. The job of the FED is keeping this “game” going as long as possible not playing fair or honest.
“If the american people ever let private banks issue their money, first through inflation then deflation, the banks and corporations that grow up around them will deprive the people of their property until one day their children wake up homeless on the continent their fathers conquered” Thomas Jefferson during the debate over the recharter of the second U.S. bank in 1809. Does this scenario sound familiar??????? Everyone needs to WAKE THE F**K UP when it comes to the FED.
http://www.freedomtofascism.com
I know they create the money from nothing, but they have to put that money back into the nothingness from whence it came, so to speak. Do you believe that when you pay the bank back the money they created out of thin air for the loan that they get to keep the whole amount of the loan for themselves? All they get to keep is the interest, the principal gets deducted from both sides of the ledger and goes back into thin air. When a borrower defaults, the bank takes a loss equal to the unpaid principal. If the Fed buys bad loans that get defaulted on, they have to take the loss, that is why they will not buy those loans. They might buy Fannie’s stronger loans in order to give them some working capitol to squeak by with and to buy them more time, but they are not going to put themselves on the line to save Fannie Mae.
Whether the private banks or the government issue the money the result is always inflation and deflation for a variety of reasons, most of which relate to greed and the use of political power for personal gain. I am not in favor our system which relies on increasing debt for its money supply any more than you are, but you are mistaken in thinking that the banks do not take a loss in the amount that the borrower defaults on. I have seen some internet sites that say they do not, and I assume that is where you are getting your information from, but just because an internet site says it is so does not make it so. You need to do more research on banking from a more reliable source. The library usually has some good books.
The money was spent, but was never earned.
That is correct. The Depression in the 30’s was a deflationary one. The upcoming depression in the 21st century will be a hyperinflationary one.
Poordad is right. This one will be a hyperinflationnary depression, like the one in Germany during the Weimar Republic.
It’s important to point out that inflationary depressions occur in countries that have owed huge amounts money in foreign currencies, such as in Argentina, and Weimar Germany.
However all US debt is denominated in dollars, so the depression/Recession will be deflationary as it was in the 30’s. Japan’s downturn was deflationary because there was virtually no foreign debt owed at all AFAIK. All defaulted loans were in yen.
And you really think that the rest of the world will continue to accept till the end of the world, your funny US monopoly money as a currency reserve ? Personnally I doubt it very much.
“L’argent de papier retourne toujours à sa valeur intrinsèque, c.à.d. ZERO.”Voltaire.”
Remove the currency reserve role your currency plays for the moment, and we will see quite a different picture unfolding.
It’s a quite arrogant and typically american to think that your paper currency is different from others. For the moment Asia is using your currency, because they can squash your manufacturing sector. But it will not last.
Better hope it lasts. Else, there will be no one left strong enough to fight back the Germans. For the third time.
Well this time, I think your Germans will speaking mandarin.
Will be speaking mandarin or cantoneese.
I think the party is over. I forgot also that the rest of the world can also liquidater the dollar as currency reserve for political reasons. Stop being soo arrogant with the rest of the world. Anyways in the next 10 years, we will be back to type of gold standard based on a basket of commodities and gold.
LANGKAWI, Malaysia — Former Prime Minister Tun Dr. Mahathir Mohamad on Saturday urged countries to stop using the U.S. dollar in their international trade in order to pressure Washington to end its support for Israel’s savage attack on Lebanon. He said the oppression and cruelty of Israel against the Lebanese and Palestinians would not end so long as the United States continued to support and give aid to the Jewish regime. “Switching out of the U.S. dollar to using other currencies such as the euro and yen or gold will somewhat weaken the United States and put pressure on it,” he told reporters after visiting several development projects here.
He was asked to comment on the fierce land, sea, and air bombardment of Lebanon in the past few weeks which had destroyed much of southern Lebanon and killed more than 600 Lebanese. Dr. Mahathir said Israel would not have dared to attack Lebanon without the financial and arms support given to it by America.He said Israel was definitely wrong in attacking Lebanon but the bigger wrong was committed by the U.S. in supporting the Israeli action. “If the world is sincere in helping the Lebanese and Palestinians, they should reject the use of the dollar in international trade.
“When the demand for the dollar falls, America will be weakened and it will lack the ability to act as a bully in the global stage,” he said.He said the suggestion to stop using the dollar in international trade would be difficult to implement because many countries relied on it and they were also afraid of offending the United States.
Even the Organisation of Islamic Conference (OIC) did not have the courage to take on the US because its members were divided in their stand, with some supporting the US while others were opposed.”We cannot hope for OIC to do anything. Only when the Western world acts, then the OIC might follow suit,” he said.
Argentina certainly owed dollars (or currency linked to dollars), but if I remember my history correctly Weimar Germany’s WW1 reparations were denominated in Marks. Didn’t they actually pay them off during the hyperinflation at some ludicrous rate.
anyone read the IMF asset bubble study? things will be bad. bad bad.
What is IMF???
IMF = International Monetary Fund
IMF means INTERNATIONAL MAFIOSIS FEDERATION.
Imbéciles Mongols Fédéralistes Fédérastres.
No seriously. It means International Monetary Fund.
It’s a fund made to bail out mismanaged countries, but in reality it’s a mostly a fund used to bail out stupid, greedy and dumb banks that lend money to these same countries.
And guess what? It’s the taxpayers of the world that pay for that f—ken fund to bail out a bunch of f—-ken bankers ! Yeah I hate banks and bankers, specially those at working at the World Bank or at the IMF.
Thanks for mentioning this — posted several times before, but still the best academic study of the issue I have read judging from the standpoint of balancing rigor and readability, IMO…
(CAUTION: PDF FILE)
http://www.imf.org/external/pubs/ft/weo/2003/01/pdf/chapter2.pdf
And you know what? These studies don’t change a thing. It’s really interesting indeed. But it changes nothing. I remenber when Robert Schiller published his book “Irrational Exuberance.” I didn’t change a squat. It’s not useless, but it’s almost useless, specially when you deal with the mob and the masses. Sad, sad, sad.
Time to take our medicine. RE here is Reno is flatter than a pancake. Expecting it to get much worse. These RE gurus have no idea what’s coming. Freddie and Fannie might as well bend over and…
….take it in the Fannie?
Good one!
They had a “housing bubble” segment on NBC’s “Today Show”…It dosn’t get more main stream than that!
http://www.imf.org/external/pubs/ft/weo/2003/01/pdf/chapter2.pdf
interestingly enough, I searched for this study a few different ways and came across this blog a few times!
Mea culpa — I have posted it about every two months since I began reading here
As I see it in my little econ101 brain, the macro intention of the fed is that by loosening the money supply, producers will be able to invest in productivity improvements that allow more income to be returned to both investors (who will be able to invest even further) and workers (who will be able to buy the new production). The problems this go around are two-fold. Most of the new, inflated M3 has inflated housing prices. The only way that this money reaches the rest of the economy is through HELOCs, which merely swap later consumption for present consumption, and the construction industry. But of course new construction represents only a fraction of total housing capitalization, so that
I don’t know where the rest of this went.
…so that less than ~%10 of this money that is injected to the actual economy isn’t ballanced by new debt. And of course with the trade deficit, much of the money that does make it into the rest of the economy ends up buying imported goods and funding Asian productivity improvements.
This sort of “priming the pump” often works when capitol markets have stalled, getting the economy moving again. But this wasn’t the case in 2000-2001. The stock market was still trading at high P/E ratios and interest rates were low by historic standards. Between the Fed shoveling dollars and the tax cuts, huge amounts of debt generated anemic amounts of new investment in productivity improvements.
Sometimes the less than symbol can cut off a post.
ahh….learn something new everyday. Thanks, quite clever of you to figure out that’s what I did.
The woman with 4 kids needs to take birth control! I have two kids and could not imagine the extra expense of two more. Sorry if that offends someone.
Quiet!
We need those kids to pay for social security and medicare! Our national solvency depends on them.
Here in California we have mexicans crossing the border @ 1000 per hour…..soon to become ‘Guest Citizens’ and pay our social security.
We need this kids for fodor for the future military invasions in the middle east
Fodor’s is publishing a guidebook on invading the Middle East?
He meant fodder.
Or Fodder for a future war with China. Seriously folks, The Korean Missle Crisis(the other World Hot Spot) could possibly result in a military faceoff with China(this a a ways down the road of course)but this is a possible scenario among some Military Analysts and think tanks.
Definitely agree with this, and think it’s at least as important as what’s going on in the Middle East. IMHO, we have the makings for WWIII, and I believe it could very well end up on our soil this time.
You will be happy my kids are around when you are old and need someone to clean the drool off your bib…
That is at least 40-50 years away. My comment was toward the woman in the article who can’t afford $hit, yet she continues to have children. If you can’t afford the ones you have - Why have more?
b/c it’s like printing money.
Maybe they are doubting the future viability of our Social Security system. A key reason third world families have many kids is to provide a form of old age self-insurance.
The rich have real estate and the poor have kids.
Having kids makes life more supportable.
Poverty is more easy to share than wealth.
“C’est la vie.”
Was listening to John and Ken show om AM radio and they were howling over the airwaves about the Mexican Family who’s father makes 400 a week as a carpet installer, and his wife who conceived triplets the first time thru fertility pills, conceived a couple more babys to make five total, then decided to have no more. She was apprarantly using protections devices but there was a breakdown(or she didn’t read the labels too well) and she “mistakenly”got pregnant again and popped out quadruplets.
Now this immigrant family has had 9 babies(now kids) all payed thru Medi-cal. One of babies(kids)has a medical problem requiring expensive medical treatments, all payed by medi-cal.
The Husband has been in this country 28 yrs and does not speak a word of english. Wife here 20 years, not a word of english.
30 % of all recent immigrants in California(many of them illegal and the Majority Hispanic) are on medi-cal.
Most of the world’s problems are due to over population. The middle easts population has tripled since 1950. Could that be one of the reasons most are so poor and the are willing to blow themsleves up for some afterlife? The ruling 2% live well and refuse to attack the Koran or bible regarding birth control. They instead finance or participate in low level war with Israel and the US so they can blaime the wars for the misery of their people and stay in power.
It is to many babies stupid.
The USA is becoming over populated and this is the major reason for border control. Immigrant birthrates are around 2.4 per female verses under 2. for whites and blacks. At 2.05 population stays even.
It is true that social security will be hurt if the population doesn’t expand. To bad. The costs to our grand kids quality of life demand that we stop the growth. Perhaps eventually the very planet demands this.
Living standards in America have been falling since 1973. Debt has masked this to a degree. Once the debt bubble breaks our living standard will have to fall even below where it should be without the debt.
If this makes sense check out NPG.org for Negative Population Growth.
Poverty is caused mainly by unjust and corrupt government. We have friends in a former USSR country (next to Afganistan) who are trying to help poor people raise chickens to earn a living and in that country it is common for a farmer to raise a crop and have the government come in and take the whole crop away, and nothing can be done without bribing every government official. If the people of that country had fair government, they could raise their standard of living, regardless of how many children they had. If all those people only had 1 child per family, how would that raise their standard of living with such a corrupt government?
I agree 100%. The environmental impact of 10 Billion people on our weird blue sphere is another matter altogether.
There is a word for this type of government.
“Kleptocracy.” It’s your future and ours in the West.
USSR, Africa, South America, Most of Asia, oh and yes, Washington too, have these problems. But there is still a mystery. Some countries, very corrupt, still manage to have a great economy. You have to conclude that corruption is not the only piece of the puzzle. I cannot understand that some countries still manage to prosper under it. While others litterally implode under it. China is as corrupt as the ex USSR, but on the economic level, it’s working better.
Ya know, I just hate to be the bearer of bad news BUT this administration (and I believe any follow on administration whether Dem or Rep) will NOT secure our border. I’ve tried and tried to get this info out but no one really seems to give a rat’s patootie.
http://www.eagleforum.org/column/2005/july05/05-07-13.html
http://www.humanevents.com/article.php?id=15809
The story of this actually dovetails into what we are talking about here today in so much as there is a new currency called the “amero” which is being discussed as a “euro” type currency combining dollar,Cando and Peso. Some believe this is plan B to when the dollar tanks. Who knows.
What IS painfully obvious is that even with all the posturing about Homeland security, the president WILL NOT take meaningful steps to secure that border. This is the first credible explanation I have found for that fact.
Go ahead and write to your elected officials and ask about the legislation. Be sure to express your outrage that this administration would subvert our constitution and take steps to dissolve our sovereignty without so much as a whisper about it.
auger,
Thank you for your posts. Although I have not commented on them, I AM reading them, as I’m sure many others are. Perhaps it’s because it’s too disturbing.
But, I agree…”they” are up to something. The only way to make the US competitive in a global market (and shore up SS, etc.) is to have low-wage, uneducated, HARD WORKERS enter our system. There is really no other way except isolationism, IMO.
BTW, from what I understand, the population in the US would be declining if not for immigration.
Forced sterilization??!!! Yikes! I understand the argument, but who decides who can have children and who can’t? I think we could accomplish the same goals by creating incentives to have fewer children (only first two are provided free education & can qualify for “welfare” benefits, etc.). Also, perhaps, a financial incentive for those who CHOOSE to become sterilized.
As far as I can tell, the biggest incentives for having fewer children is lots of material possessions and/or good reason to expect that nearly all of them will reach adulthood.
Even if you secure the border, you won’t secure your american way of life if oil runs out or cheap labour from China, Asia and the rest of the world, destroys your industry. Anyways it just proves that countries, including the US empire, don’t count today. Only, and only capital and the people who control it count today. Democracy has died a long time ago. Welcome to plutocracy.
Again, you should pray that China continues to secure our way of life - so that we may continue to secure yours.
“Again, you should pray that China continues to secure our way of life - so that we may continue to secure yours.”
As you will have read in today’s linked articles, our “way of life” is taking out HELOCs to eat at Olive Garden.
That’s something less than sustainable, wouldn’t you say? In fact, it’s going to come to a big, screeching halt.
Time to start working on a better vision for our “way of life” and shelve the cornball WWII nostalgia!
This is what terrifies me more than any hyperinflation/dollar collapse. As a young naive revolutionary in college full to the brim with “ism’s,” I chose to take a senior seminar in geopolitics. What I learned in that class I keep with me to this day.
“Ideology doesn’t make a damn bit of difference,” my professor would say, “it’s all pure math.”
Pictures of third-worlders living in shantytowns with no running water. But they have TV’s. And they see and know and want what every American has, and they want to consume at that level.
Where I live, the ideological ironies are too deep. Hippies willing to bite your head off if you light up a cigarette or drive an SUV, yet they have litters of children holding up their spare change signs.
Too many people + Consuming too much stuff = We all die.
The world needs a “people deflation,” and I’m afraid (I hope?) we might see it within our lifetimes.
Boy, what you don’t know about the middle east and the palestinians could fill the Universe. Try watching the BBC.
No offense taken. I believe forced sterilizations should be the order of the day. Breeding shouldn’t be a right, damn-it! (LOL)
Now you’re in my ballpark. If I wrote what I really think about all that on here, I’d probably be kicked off.
Now I know I’m not the only one who has that opinion.
me, too. Don’t even get me started.
There are some serious books on the topic, but there are limits to how far it can be taken. Just like the housing market needs the first-time buyers to stay afloat, social/economic strata have a similar need.
Welcome to 1984 or 1939! A certain Adolf Hitler adopted this solution for the mentally handicapped and the genetically weak. You could also maybe suggest a couple of concentration camps or a couple of bloody wars to control the overflow?
The furniture story really hits home in Bakerfield. It seems that each new “upscale” develpoment in town gets a couple of Home Furnishing stores. I could see half of these places shutting down and the space left unrented for years. Commerical RE in Bakersfield is the next bubble. They are building hundreds of commerical developments around town.
To let you know Hvoanian is advertising their Bakersfield Homes here in Valencia! Desperation.
Really! They are getting very desperate!!
Stagflation is back — makes me feel like I am back in high school again (1970s)…
———————————————————————————————
Economy slows pace as housing cools
Inflation still running high, analysts point out
By Eduardo Porter
NEW YORK TIMES NEWS SERVICE
July 29, 2006
Economic growth braked sharply in the second quarter from its blistering pace in the first, as the housing market cooled and consumer spending pulled back, slowing the economy to a more sustainable rate of expansion.
Still, the government also reported brisk inflation in the quarter, underscoring that slower growth has not yet put a check on rising prices.
The Commerce Department reported that the nation’s gross domestic product grew 2.5 percent in the second quarter, less than half the 5.6 percent expansion it clocked in the first three months of the year. The growth in consumer spending halved, while residential investment suffered its steepest decline in almost six years.
http://www.signonsandiego.com/uniontrib/20060729/news_1b29econ.html
GS, I’m with you in the recession camp (as I would imagine are many others). John Hussman noted several months ago that a good predictor of recession is monthly job growth. His opinion is that growth that averages 100,000/mo for several quarters is bad news. In the last three months, growth (revised) has been approximately 110,000. I get a little confused by all the numbers the Fed Govt spews out each month, but this one I pay special attention to.
BINGO! Jobs and Foreclosures.
I think interst rates and inflation have experienced short-term peaks. notice I said short-term.
now that housing is going down, you can’t complain(as much) about bogus inflation numbers.
Recession is a given; the question now is whether or not it’ll be a depression. IMHO, not only will it be a depression, it’ll be worse than the first.
The U.S. is arguably in far worse shape this time, the world itself is dependent upon the U.S., people’s sense of entitlement is unbelievable, and global finances hinge on financial instruments and trading programs so complicated that only Stephen Hawking could comprehend.
Exactly, TJ!
Well, when Japan’s real estate bubble burst it led to the “Lost Decade” there. To be fair, the economic impact of the bursting bubble here may not be as bad because Japan’s RE bubble was both residential and commercial (here it’s just residential).
On the flip side, this RE bubble seems to have a global reach, so really there’s no telling how bad things could get.
Uncharted waters.
Actually, I think it will be worse here becuase the Japanese had savings and we don’t, and the Japanese had the rest of the world still going strong to prop up their economy, when our economy goes I don’t think the rest of the world will be doing well enough to prop us up.
Right on Kim and the US is no longer the only end user.
…(here it’s just residential)…
We wish. An empty shopping strip formerly anchored by Home Depot and BB&B, Linens’n'Things, etc. will lay that notion to rest.
When you say it is just residential, I think residential just comes first and it will be followed by commercial. The downturn will hit small commerical centers first, ma & pop stores, then the bigger buildings, and so on.
Not necessarily. Mom and pop stores have less overhead and can better negotiate their returns, meaning they are not stuck on certain profit margin as long as the bills get paid they many would consider living in their stores. It is the big operators that have their profits planned and that is how they keep their stock holders going. When they can’t make the money they have no real negotiating room. I believe it is the mom and pop stores that have a better chance of making it. In an emergency they can adjust prices barter etc.
Imagine the debt load of the US kind of like the lungs of a great giant. The giant is walking through a smelly swamp and doesn’t like breathing in the sour air around him. So he exhales, and inhales a little. Exhales, inhales a little.
Eventually he’s out of breath, starved for air, and takes a long, deep draw.
That’s what we’ve done for 20 years with ever decreasing interest rates. We’re reaching the point where there’s no room left to exhale. After we take that breath, we’ll get used to the smell (”reality”) - get used to it - and move on.
Hey Guys. I just got back from Bank of America where I tried to withdraw a measly $600.00 cash, they said I could not withdraw any more than $300.00, because their computers are down for the whole state of Florida. I think that they are trying to “Punt” until Monday which is the 1st of the month when they will get all the govt checks direct deposited. Scary huh? Luckily I have cash in my safety deposit box so I am O.K. I will surely be beefing that up next week. Stores are empty here in Tampa. You heard it here first on Ben’s housing Blog. Oh yeah and they were all hush hush about it-whispering it to me. I guess that a teller yelling, “We have no money in a bank is akin to someone yelling “Fire” in a crowded theater.
Actually, BofA is quite profitable right now, and they’re not as exposed to the mortgage market as other magabanks. However, Ken Lewis does want to grow this side of the business more.
Janni, wow, thanks for sounding the alarm! My money’s in a different bank, but I live in the Tampa area. The computers are down, eh? Banks use that excuse a lot more than any other business. But Bank of America? Watch out for those guys. They just bought out MBNA, to expand their predatory credit card business. They love to send out those promotional checks to get people in even deeper. I can’t believe they have a statewide computer failure. Between home loans and credit cards, you’d think they’d be rolling in the cash.
That is interesting. Good luck getting the cash out of your safety deposit box.
“Good luck getting the cash out of your safety deposit box.”…
Why would this require luck?
There are banking laws on the books such that the government can restrict withdrawals from bank accounts and also from safe deposit boxes during an ‘emergency’. Your bank probably has rules written in the fine print to the same effect.
I foresee lots of “emergencies” in the future. When the big one occurs, you won’t see your money until it’s worthless and/or every good opportunity to use it will have passed.
Yes. There’s a reason all the survivors of the Great Depression have money stashed around various places (NOT in banks). Everyone should have cash available outside of the banking system, and it should be stored in various locations (to prevent against theft by criminals or the govt — as if there would be a difference).
Heck, you don’t have to go back to the depression. In Maryland, in 1985 when there was a run on state-chartered savings and loans the governer mandated maximum weekly withdrawels of $1000/week .
“There are banking laws on the books such that the government can restrict withdrawals from bank accounts and also from safe deposit boxes during an ‘emergency’. ”
Huh? Safe deposit boxes? That doesn’t make any sense. It’s really no different than the Govt. saying I don’t have the right to withdraw cash from underneath my mattress.
VERY TRUE! As a matter of fact, the FED can impose the monitoring of safety deposit boxes on a moment’s notice - using this tactic to enforce any regulation they impose on the withdraw of cash from the system. VERY TRUE!
As a matter of fact I wrote to my senator and asked him his opinion on gold confiscation. He sent me back (I still have the letter) the verbiage that was recently publically stated by the treasure secretary (I think it was him) that the U.S. gov’t can seize ANY asset (including gold) in an emergency. So there you have it. You don’t OWN anything to include your land (Kelo ruling). Still think there is a constitution? The Motherfu*kers running this country think it is theirs, not ours!
Just wait until they pop open a couple of the recently signed Presidential Orders (PO’s) that allow them to place you in quarantine or impose widespread martial law restricting your movements. How ya gonna like that? Been trying to tell you guys this for months!
‘Another replied, “My take on this is that the actual inflation (increase in the money supply) happened while the interest rates were so low, and the housing boom is the main source of the inflation. The increase in prices we see now is a direct result of the increase in the money supply that was a result of the easy credit on housing.”’
Does anyone else detect a lack of perfect foresight in the Fed’s constructing a conceptual levee between housing inflation and consumer price inflation? Levee failure has occurred and is still occurring in the form of home-equity ATM financing (and now bridge loan financing), which transforms housing price inflation into a flood of money to fund frivolous consumer good purchases remiscent of Katrina storm surge flooding NOLA through breached levees. Now that the money flood is registering as consumer price inflation, how will BB manage to pause and still maintain the credibility of his inflation targeting plan?
I would almost argue the reverse. After all the goal of loosening isn’t high asset prices, it’s increased money velocity.
Well, what a remarkable coincidence that when the Fed hit the pedal to the metal with negative real FF rates for a protracted period after the tech stock / dot bomb / Enron collapse / 9/11 attacks, housing rocketed up in price from an already high base to cumulate in the greatest protracted period of housing price inflation in US history.
Was that due to increased money velocity? Or just the normal laws of asset valuation, which suggest that a lower discount rate (interest rate) implies an increased valuation of an annuitized flow of real services (the service flow being the amenity stream from owner-occupied housing). Now that interest rates have spiked back up, I guess the valuation of housing should revert to the level it held back when rates were last this high — maybe back in 2002, or so?
IMHO the Fed hoped that the cash out would be used for R &D and not frivolously.
I concur. However, I also maintain that this hope was dashed by the flood of money into housing investments. Alan Greenspan became fully cognizant of this during the final year of his tenure as Fed Chair, and he and many other Fed governors have reiterated thinly veiled suggestions since early 2005 that those who gamble in housing will not be given any special protection (e.g., Greenspan puts).
“The fact that mortgage rates remain low by historical standards offers one reason to doubt that a crash will happen. The average rate on a 30-year conventional mortgage was 6.8 percent last week, up from 5.7 percent a year earlier, according to the Fed.”
I always get a good chuckle when this statement is made to support the “no crash” hypothesis.
Gazillions of fiscally responsible folks refinanced their mortgages when rates bottomed, to lock in historically low rates. If my current fixed rate is 4.75%, I need a whole lot of other incentive to give that up and buy a house where my rate will be 6.75%.
And as to first-time buyers, what does this 6.75% rate mean to them? It means a much higher payment than a few years ago, when the entire economy was restructured to function in a lower rate environment, for a house that’s unaffordable anyway.
Historically, the current rates are astronomically high, because the only “history” that really matters is the history of the last few years.
I agree. This is one of these things where what matters is the delta. After all from 4.75-6.75 eqauals a 42% increase in interest.
Ask any buyer if they think rates are at historical lows. They were planning on a 5% rate, and now look.
It would be ok if these “historically low” interest rates were used to buy “historically low” housing prices. Would you buy a 600K home at 5% or the same home for 275K at 8%?
Or even at historically normal prices. 275k mortgage at 8% is a much better bet. Hers’s my simple math:
345,000 home value
2,018 monthly payment (20% down 8% int)
1,254 average monthly interest
350 monthly tax break
316 monthly property tax (at 1.1%)
Interest and taxes paid at the end of 30 yrs = $439,000
or
750,000 home value
4,026 monthly payment (20% down 8% int)
1,943 average monthly interest
550 monthly tax break
688 monthly property tax (at 1.1%)
Interest and taxes paid at the end of 30 yrs = $751,000
It might be okay if people had bought at these historicly high prices and secured historicly low interest. Yes, they’d pay more taxes and they might be screwed if they had to move, but they could have SOME conficence that they could afford the payments. But by buying high and using variable rate financing they’ve virtually guaranteed trouble, unless wage inflation kicks in with a vengence.
I think 9% for a car, and 7% for a house is reasonable. We have room to go before I’ll complain about high rates.
I would like to say this is the best topic that we all could discus. There will be great profits for all of us (since dollars are made during times of change). Together we could help provide each other with ideas on how to survive this downturn.
I am voting for a run on gold!
I don’t think there can be any debate about “whether” we are headed into a recession. The debate is how bad it will be, and how long it lasts.
Get rid of the inverted yield curve, show me a positive national savings rate, and job growth above 400K a month. THEN I’d agree the future looks good. I could accept the high consumer inflation, if the supporting pillars of the economy were better.
I agree, people don’t realize how crappy this “recovery” has been. compared to prior recoveries, even the earlier 90s jobless recovery, this one is not good.
So many agree with you, just like they would have in 1979…
“http://www.howestreet.com/articles/index.php?article_id=2788″
Great piece on the Howe Street site, “the 5 stages of greif”
Housing Bubble Who Cares? The real bubble is in the Sports Trading Card Industry! From the LA Times today:
But the sports memorabilia industry could find it difficult to control supply and demand, said Robert Shiller, a Yale economics professor who published “Irrational Exuberance,” a book that took its name from the phrase made famous by former Federal Reserve chairman Alan Greenspan.
“Alan Greenspan and, now, Ben Bernanke have been charged with managing the scarcity of our currency,” Shiller said, “and some people are pessimistic about their ability to do even that.”
If the powerful Fed chairman can’t control the economy, the concept of a baseball card price bubble shouldn’t surprise anyone. “Fundamental value is so intangible in this industry and speculative bubbles are especially likely,” Shiller said.
When the market in any industry crasher just blame the FED.
Bakersfield market update and dicsussion on current credit problems in our town @:
http://www.kernradio.com/
We can all just thank mr Bubble head himself, ALAN GREENSPAN. He should have just had us go through some ruff patches after the Nazdaq bubble (he created), instead he created another. HOUSING BUBBLE> Thank you MAISTRO> The worst Fed Chairman EVER>
Same result the Soviets had with central planning.
Sometimes I think (puts on tin foil hat) that the boom and bust cycle is actually a “planned thing” by those who pull the strings, can manipulate the economy, and profit from their own manipulations.
Nah…it couldn’t be. This is AMERICA, the country who “sets the bar” for the rest of the world to follow like a shining beacon of….
Forgive me if this point was already made above –
The 2.5 GDP number is REALLY bad. All of the TV pundits are saying “No big deal, GPD was 1.7 a few quarters ago; we did just fine”. But that number was a Katrina-related aberration, as was the subsequent quarter’s 5.6 number. Activity from one quarter was just pushed into the next quarter; combined they averaged 3.6.
But the current 2.5? Throw out the Katrina Q405 number, and this quarter’s result is the lowest since the first quarter of 2003!
And did anybody notice the business investment number? Up only 2.7% (after increasing 13% the previous quarter)? This was the smallest gain since Q204. So much for those arguing that the corporate sector will pick up the slack from the housing sector.
I got so sick of hearing “consumer spending is 2/3 of the economy” over the last few years.
I think the low interest rates mainly borrowed activity from the future. Just like floating a bond borrows from future tax revenue. That’s one reason (among others) why I think the next recession will be a 1980-82 or great depression event. It won’t be on the scale of 90-91 or 01-02.
Business spending would pick up the slack when there is real growth. But if businesses sense that consumer spending becoming exhausted, they will not be expanding and will not be adding staff.
Game over. Recession.
Well, it ABSOLUTELY won’t be like ‘01-’02, which was a really nothing more than a mini business investment recession. During that period, the U.S. consumer still spent.
Liquidity blast?
http://www.xanga.com/russwinter
Love your site, Russ. Thanks!
( They love to send out those promotional checks to get people in even deeper.)
I’ve got one for $5,000 from HSBC sitting right next to me.
Citicards was just **BEGGING** me to use some checks last week. Really, really begging.
I, like many of you, are trying to figure out where my money should be today. I already sold all real estate holdings, but I don’t really feel a lot safer. What if the dollar plunges? Those proceeds can be wiped out. Okay, so I own some metals. But in a deflationary environment I am not confident that gold and silver will hold up well. I also have some CD’s going at 5%, but again, with a plunging dollar that may prove to be a bad bet.
At this point I really don’t know where to be, which is why I am spreading it around. Moving forward I plan on getting into foreign currencies more, probably the yuan, yen and euro. I am thinking about adding some bonds too.
But I would be interested to know where else people think parking money would be a good idea.
I think it’s a good idea to be prepared, at least in your mind, of the possibility of the opposite happening of whatever scenario you think will play out. if you are an inflationist, ponder deflationary effects and vice versa.
good idea.
I agree about spreading your investments. No one mentions municipal bonds (or municipal bond funds). I’ve been dollar cost averaging into my Arizona municipal bond fund since January 2002. It’s a tax avoidance strategy. The downside is if a depression hits and 1/4 of Arizonans are out of work - then tax revenue in Arizona drops and AZ could default on its bonds. I also have CDs and recognize their downside as well. 3 month T-bills are my new thing (new to me) these days. I don’t know about playing currencies, so I stay out of them. You can make (or lose) a lot of money. Borrow 0.25% interest Japanese currency and buy 5% U.S. T-bills. Seems like a piece of cake. I also buy U.S. Series I Savings bonds. There was one person who responded to me a few weeks ago in a temper tantrum about I-bonds. I know there are people who will deride any of my forms of investments and I know there are people who say they agree with the same investments that others deride. So I must be doing well, right? I have stock mutual funds for half my net worth, and am totally agressive, but 20% of them are international funds. For individual stocks, I’m mostly into value stocks with good dividends. I think I have all bases covered. And yes, I will buy another 2 ounces of gold next Friday. I’m a regular gold buyer. I buy during all ups and downs. People laughed at me when I bought at $692 per ounce. They did not laugh when I recently bought at $612.90 per ounce. I don’t care what price. We’re running out of oil folks.
But I wonder how muni-bonds will do when prop tax revenues are down. They are/have been spending at max capacity, based on bubble pricing. IMHO, AZ municipalities are especially vulnerable.
A very large percentage of municipal bonds defaulted during the 30’s, about 30% of them, I think. It could easily happen again.
Cities can’t default, can they? I mean, they can always borrow money, right? It’s not like they can ever have bad credit, is it? For example, I live in San Diego, and…
Aw, crap.
i too would like the same advice. any takers?
We have practically all of our money in 3 month treasuries. A bit in a bear market fund. I think that 90% of all stocks, at least, will tank, and it is safer for time being to keep your money out of them. When you say you worry about the dollar plunging, I assume you mean hyperinflation. Well, probably gold in a moderate amount is the best hedge against that, if you are really worried about it. If you think that housing will go down in dollar terms and are planning to put your money mostly back into housing or RE then Treasuries are probably your safest bet.
Ok I’ll bite,
Oil Companies are reporting record profits. Oil companies will deploy this cash into searching for more oil. Politicaly they have little choice but use thier profits this way. look for companies that make oil refineries, oil exploration, deep sea drilling, etc.
I also like CD’s but thats because I dislike inverted yield curves which often precede recessions. I think big Oil will still spend thier cash on exploration reguardless of a recession or no.
Not investment advice.
I like swiss francs, and if I could get one, maybe a swiss bank account. I’m also a huge gold/commodities bug, but I think the best thing to do will be to have assets overseas in safer countries.
http://www.swissquote.ch/index_d.html
Thanks, I’ll have to look at that more closely.
“forced sterilization” ? What your gene’s don’t stink?
The actual increase of growth of the US population ended around 1974 ( UN demographic report 2002). Very soon real and dramatic population declines will happen in Japan, Germany and is already happening in Russia. This is going to cause huge problems with the social programs in Europe. The US is one of the few countries that is maintaining 2.1 kids/adults ratio thanks in part to immigration.
In about 40 years there really will be no one to buy that overpriced real estate. We have just socialized so much we feel we have the right, since it’s our money, to make these kind of judgements.
The most prolific will inherit the earth. (I’m not Morman, but that’s why their religion is spreading so fast)
“The most prolific will inherit the earth.”
No: The shrewdest and most ruthless inherit the earth. Before America, the world power was England. Before that, you had heydays of other teeny-tiny nations like The Netherlands, Spain, etc. It’s not the most populace nation that wins. It’s the nation that’s able to control the most people, by whatever clever/evil/bullying means necessary.
Precisely. And the most prolific will till the earth for the shrewdest and most ruthless. The proof of this is the small percentage of people that own 90% of the wealth.
I believe the rapid growth of Mormonism is driven more by their missionary army which has invaded every corner of the globe where they are permitted, than their relatively high birth rate. However, I have not seen any statistics on this — it is merely my hunch, as I don’t believe population growth could be sufficient to constitute the key factor behind the rapid growth of this church.
Perhaps Mormans will be the West’s weapon against Islam.
“Perhaps Mormans will be the West’s weapon against Islam.”
Nope, it’ll be the Mexicans…Christian Mexicans.
I’m not sure I’d rule out England even today. Of course they are no longer the military power. But London is a world class financial center. From that point-of-view, they are a very, very savy group. I’d bet on the financial side they have their hooks in almost everything going on in the world.
Got a question about foreign investment in the US. I keep hearing about it, but am not quite sure what the implications are. I remember during the 1980s, people had their boxers in a bunch about the Japanese investment in this country and how they were going to own us and like that and we’d be speaking Japanese and working for the Japanese. Turns out, those investments really soured, as I recall. And I’m still speaking English. These days, I’m hearing about foreign investment, China and like that. About mortgage paper being owned by interests outside the US and how this country could get foreclosed and blah, blah. What’s this all about? Is there any real danger here? What’s the worst that could happen?
> What’s the worst that could happen?
To separate this from war and pestilence: What’s the worst that could happen economically?
If the world looses trust in the dollar, we would have massive inflation for imported goods. Because we don’t make many things anymore, you would have to pay more or don’t buy it. Oil prices in dollar would increase a lot - the following decrease of American oil consumption would be taken up by China, India etc. and the price of oil in dollars would stay high, in opposite of the 1980s, leading to high unemployment and low tax revenue. The government, however, couldn’t borrow that money from outside anymore and would have to pay higher interest. High unemployment, high deficits, high inflation - how is that for a starter? One consequence would be a long-term decrease of the standard of living and following that, more intense political fighting who can keep what he has and who can’t. It payed for the US to have the world’s reserve currency, but this bonus might disappear in the coming crisis. I hope that debts for consumption will be seen as a fool’s tool.
But there will always be politicians willing to tell people that it wasn’t their fault, it was (the GWOT/the Chinese/the Trilaterilists/the Mexicans/the Rich/those Welfare Moms)
There’s plenty bad that can happen, as far as china owning us because we owe them so much money, as long as the money is dollars they can’t own us because uncle sam is the only entity on earth that can make dollars, if we owe china one trillion dollars then the federal government can print a one trillion dollar bill and pay it, of course then we all may as well use the green paper in our wallets to wipe our behinds with because it will be more valuable as toilet paper. Because china has put so much of their new “wealth” into US bonds (dollars) we would decimate all that wealth by devaluing the dollar.
Actually, I think North Korea can make U.S. dollars, too.
Puts me in mind of a joke from one of Jay Leno’s recent monologues, about how Iran was going to boycott US products. Leno said, “Oh, wow, you really got us there. I got news for you, Iran, we don’t MAKE anything in this country anymore”.
Movies? Airplanes? Software? PC-processors?
medical drugs
Medical drugs could maybe be bought by Iran from India, because India doesn’t accept many patent protections for drugs. From India, Iran cdoes buy a lot of movies, too, from Bollywood.
Regarding hyperinflationary concerns: I keep being put in mind of the old saying about the people being about 2 missed meals away from a revolution. We may not be collectively capable of a decent revolution in the US anymore, but I think New Orleans/Katrina proved well enough that it’s definitely only a meal or two to anarchy.
I don’t think politicians are masochists, so I have to believe that TPTB would do just about anything to avoid hyperinflation. Install a socialist state. Default on our foreign debts. Pretty much anything beats the Mad Max scenario.
If I’m wrong, then shame on us all for not throwing ourselves headlong into hock, using every possible leverage to buy crap on time and damn the interest rate, even. If I can pay off my McMortgage with Monopoly money, why not?
I think, and yes I have a vested interest in HOPING that the “why not” is not some shrouded mystery fathomable solely to Patriotic Bear and a few other brighter bulbs than myself, here.
I don’t necesarily disagree with you but I think its too late, people talk about inflation in the 70’s and early 80’s but there is one huge difference. The baby boomers were still 25-35 years away from social security/medicare, now they are 25-35 months from becoming eligible at age 62 and if the country goes into recession many will claim their benefits the second they turn 62 out of necessity to boost their income.
Last couple of years the fed deficit has shrunk a little due to higher tax receipts, presumably with a slowing economy (recession possible) those receipts will shrink but the non-discretionary portion of the fed budget (war-social security-medicare-medicaid) is doing nothing but shooting up. I think a 600 billion dollar annual deficit before the decade is out can be expected and uncle sam will need to pay 8-12 percent a year on its t-bills and bonds to finance that. I shudder at the consequences of that.
I vaguely recall that at the start of his term, Bush did not like Greenspan much and that there was talk of replacing him ( correct me if I’m wrong but I know I saw something about it on tv). After 9/11 they seemed to get along quite well. Bush was not very popular after the elections and knew that after the initial shock had somewhat subsided after 9/11 his populairity would sink with the economy. Interest rates were brought down which gave a boost to the economy in a way creating initially deflation because payments were much much lower with the low interest rates. As spending and affordability shot up, so did prices and here we are. Now we are back to the 6.8% rates with homes that have more than doubled in price. It is no longer a matter of right or wrong or want or need, but a matter of pure and simple affordability. If homes were already expensive last year when the interest rates were 5.5% how can anyone afford them now? I also think that sellers who don’t really need to sell have their homes put on the MLS at such ridiculous high rates to discourage people in the same building who do need to sell to lower their rates too much thereby lowering the CMA on their property. I have my money in CD and Euros and also don’t know what to do with it…