‘What’s The Best Way To Resolve The Housing Bubble?’
Several readers suggested topics related to housing bubble outcomes. “A question I’ve had for some time is this… will Joe Public: * Who bought a house for $500,000, with $0 (or negligable) down ARM & Now finds finds himself underwater to the tune of $100,000 with a increasing payment.”
“Two choices: 1) Live poor, probably very poor, for many years paying more for something he could buy back for less. 2) Walk. Jingle-mail. Now his credit is ruined for 7 years.”
“Joe will walk, and although I am a moral person, I’d walk to. Here’s my logic, I walk now and I can live good, not poor. After 7 years I’ll actually have a downpayment and can start over. The two choices/paths probably meet up in 7 years, except #1 means hard, poor, living, while #2 is no real pain. (A subtopic is would those with non-recourse loans - helocs, refies? - would they walk to? How have the BK laws limited them?)”
One added, “The credit is not really ‘ruined’ for 7 years. After one year, the chargeoff has less effect and as time goes by, even less. It’s not that bad and without access to credit, Joe might actually learn to live within his means. It could be a good thing!”
Another said, “Topic: Who should be holding the bag? Who should pay? Also maybe we can have a topic on the best constructive ways the correction needed could take place.’
One looked at the size of the problem. “Do folks even realize how much a trillion dollars is? Who is going to pay? We’ve just been banking on the the fact that deficits don’t matter. Brilliant logic.”
“Let’s take our national debt of roughly 8.5 trillion. Divide that by half of our approximate population (an extremely conservative estimate of people actually producing things). That comes out to roughly 60k. I’d say that the actual percentage of people who even make 60k a year is very small. Back to the question of who is going to pay. It should be pretty obvious we, as a country, should have been asking this question 30 years ago when we went to a fiat currency with fractional reserve lending.”
“The only way it wouldn’t end badly is if the bankers holding the strings were the most honest and trustworthy people none to man. How are we doing so far?”
Another reader is looking for solutions, “I would like to see a weekend topic re: What would be the best way for this housing bubble to resolve? Best for the economy and the regular people of this country (and others) who will eventually pay in one way or another for this crazy run-up. I also would like to hear more from the bright folks here about how the next 20 years could be approached as far as dwindling energy reserves start to take effect - in regards to housing.”
“I would like to see some great ideas for the next generation. we may have an opportunity to change things for the better with this selfish bubble business finally ending.”
From a reader in construction, “I think some trends you are going to see in the future are, 1. More homes built or re-mod to have the family stay longer in one home. Also your parents in their old age will not be able to afford a free standing home with all the fees etc. and again will make it better [cheaper] for family to stay together. This will be somewhat forced because the banks in coming years will go back to old lending standards.”
“2. Fuel prices go up, think the airlines are going to be hit big time, days of going from CA to east coast for some weekend bingo party for $300 will be gone. I think in 20 years train travel will get bigger. Best cost per ton per mile there is.”
“3. Homes will have to be built or re-tooled to have more than one energy system, what I mean is your lighting will have to be split into 110 service and a battery service to help when rolling black outs happen.”
I believe some fellow at the Fed wrote a paper recently that asked, is the US already bankrupt, reasoning that there is no way its citizens could ever pay off the debt. As for bail-outs, the resolution trust corp. handled more of a controlled liquidation. I wonder if we’ll see the return of giant public works schemes to jump start the economy. In Texas, after the last bust, we saw a super-conducting super-collider and that plan for a bullet train down I 35.
I believe the bills will be paid in inflated dollars, at least those owed by the federal govt. I believe efforts by the Fed to control inflation over the past 25 years have in effect acted like a pressure cooker. Effects like the housing bubble are signs of serious instability in the financial system, and ultimately, faced with fewer and fewer options (already happening) the fed will have no choice but to allow inflation to run amok. Other serious pressures are the offshoring of high skill professional jobs as well as low level jobs and this has had the effect of masking inflation, by holding wages down and prices on WalMart type goods for a time, but not at a high long term cost.
Perhaps a mars mission or some huge scale NASA project so we can retain our technology, but I see little support among the civilian population. Something I would like to see is a project which covers the roofs of every building, apartment and house in America with Solar Panels. This would provide huge employment and solve our energy crisis at the same time…
I am completely surprised that the lawyers are not suing the mortgage companies over the deceptive mortgage practices. this could be a multimillion dollar class action against some of the biggest mortgage lenders. they should have no problem recruiting people up side down, pre-foreclosure, post-foreclosure.
Value of U.S. household holdings of real estate:
1/1/1996: $8 trillion
1/1/2001: $12 trillion
1/1/2006: $21.6 trillion
Let’s be generous and say it should revert to $16 trillion (still think that’s too high…and yes, I know that a 50% increase on $8T is > $12T, but the “RE as an asset” trend was alive pre 2001).
Source (WSJ): http://tinyurl.com/qgnqc
How to best handle a $5-6 trillion drop in RE values?
Diversify out of USD-denominated assets.
Invest in law firms.
Learn to say, “Would you like to biggie-size that?”
Buy loads of ammo and a water purifier.
Move to Zimbabue.
Isn’t total US Capital worth in the $50-100T range? If so a drop of $5T isn’t horrible but will cause a belt tightening and probably a recession. There is plenty of equity left in the 50+ folks houses to pay their kids mortgages.
Bubble Beach - If your net worth was $100,000 and you lost $10k on an investment, wouldn’t you think that was a substantial loss? Not catastrophic, but it would change the way I did things, especially if it was most of my liquid worth.
True. The fact that much of this real estate gain was “at the margin” may result in very significant belt tightening. In addition, expectations of an every growing asset (+10%/year for RE) fuel further consumption (leased cars, etc.) that is simply not warrented based on productivity.
in the Netherlands we have some preview of what can happen.
About 700.000 people (that’s about one for every ten Dutch households) ‘invested’ in the stock market at the end of the nineties through a system that actually was a lease construction for stocks; most participants claim they did not know/understand this. It looked like the easy way to get rich, and many people got rich pre-2000. But when the stock market started to decline (of course, just when the maximum number of people had signed up for) people ended up loosing far more than their monthly payments. Some people lost their home; of course they were not ‘investing’, they were speculating. The construction is in several ways similar to what is happening now in the mortgage market, except that the mortgage market is at least 10x bigger and the amount of capital involved is also many times bigger (and in the Netherlands, even the potential downside risk by % is bigger).
Now comes the interesting part: a few years ago law suits were started, several big consumer organisations were formed (representing certain groups of these stocks investors), government gets involved (most of all to protect the financial company that sold the lease plans ?) and lawyers smell big money. The solution presented by a government committee would bail out all the ‘FB’s’, but people who have the money or income to pay their own debts are out of luck.
I think the case will continue in court for many years, although politicians will probably try to enforce a solution outside the court. When the case is finally decided in favour of the investors and against the company, the company will fold and many people will keep their debts. If government gets their way, there will probably be a massive bailout of stupid speculators (effectively financed in this case by other speculators with more capital) setting the stage for similar lawsuits in the housing market. All this is a shape of things to come for the housing market in 5-10 years.
“I am completely surprised that the lawyers are not suing the mortgage companies over the deceptive mortgage practices”
A very difficult lawsuit to file. There are multiple documents signed by the borrower(s) stating the terms of the loan, the tyope of loan and conditions of the loan. There very well may be fraud, but with signed consent forms from the borrower - there is plausible deniability.
It has not gone far enough to be lucrative. But you can be sure that litigation plans are being drawn up and targets identified.
As everyone has stated, 2007 will be interesting.
Politicians and lawyers are already doing just that. Really. Run a Google on “unfair mortgage” and see what pops up.
Private lawyers won’t go up against a team of corporate lawyers. They know the bad guys have unlimited funds and can just wait you out.
in the Netherlands with the stocks lease plans it worked the other way round. Although the bad guys have huge funds, private lawyers have been tracking down and organising their potential customers (they number in the hundred thousands). Many of these cases are very similar and that makes it easy to bring these cases to court with limited cost and risk for the individuals. I would not be surprised if in the end this results in bankruptcy for the corporation that organised it; only if politians get involved (they are trying to stop the lawsuits, some of them depend on these corporations for nice jobs) the corporation might get lucky.
I’m glad to have found this blog (Atrios). Don’t know where to jump in, but “inflated dollars” sounds like a good place. Remember the 70’s? There was also then a huge run up in home prices. Someone said that printing lots and lots of dollars was the way the gov’t ended up paying off the Vietnam war debt. I couldn’t afford to get into the housing market myself, say, ca 1980, but my general impression is that things did stay pretty flat for the first half of the 80’s. And then I was in Japan for that whole decade, while among other things, the value of the yen vs. the dollar doubled (wow, my student loan burden suddenly shrank by half!) And so, gosh, then suddenly Japan was buying up so much of US companies and real estate, there was real dismay here. (China will be buying more and more of us during this round?) And there was that pesky Savings and Loan Crisis in the later 80’s that GW’s uncle was so deeply involved in. Japan’s real estate market was going bubble-ishous. I remember at one point, ca 1988, someone in Japan sort of bragging that the real estate in Ginza (the posh shopping and entertainment district of Tokyo) was valuated at more than all the real estate in California (or something like that). Then, of course, that bubble burst around the time of the First Gulf War, and Japan’s economy went south for the next 12 or 15 years. Still? Only six or 7 years ago everyone was so worried about “deflation.” Japan, for one, had negative interest rates. And everyone said the root of the problem as to why Japan couldn’t turn things around was that the banks (and banking practices) lacked transparency, and they just simply could not own up to all their bad (real estate) loans.
I’ve been trying to fathom all of this for quite some time. What’s different here, and now, if anything. Is it that the US really is the engine of the international economy? and so therefore can do as it pleases because no one can say boo about it? I am really looking for a strategy to adopt in order to recoup my losses from the stock market bubble bursting and then subsequently not being in on the real estate boom. For one thing, I’m thinking that if the dollar is going to start buying less and less and less generally (not just real estate) (and as someone said above) that consumers really are going to start being interested in more quality rather than (Walmart) quantity, then it is only logical that the price of US assets such as companies and corporations are going to start inflating in order to stay even with everything else, especially foreign demand for them. What would stop this scenario from happening?
Some California developer (can’t remember the name) is down there in SW and SE Dallas county now “snapping up” property. Typical hubris of those who think they know better than the locals. As much as I personally liked it down there, white flight headed the other way and I doubt that will change any time soon.
kolitkoff
I was in Texas at the time. I remember seeing one empty strip mall after another, the partially built neighborhoods with paved streets and abandoned construction materials, and the next door neighbor losing their house, etc. But aside from the oil and real estate bust, the long term outlook for Texas was still fairly good - it was young, dynamic, and a lot of people were still moving into the area. Even moreso as houses became cheaper. It seemed to me like things got back to normal after just a few years.
I see a lot of places now that have had a massive real estate bubble, but don’t have the fairly good long-term outlook that Texas had in the 80s. E.g. I’m personally familiar with places that have seen home prices skyrocket, yet have declining populations and wealth producing industries. Hence, I’m much more pessimistic about the outcome.
I remember it well. The Houston market collapsed in 1983 with the oil bust. The big problem, as you noted, were the cheapo strip malls on every corner. While housing prices didn’t recover their pre-1983 levels for about 15 years, they started building new houses again in 1988. The strip malls were slowly absorbed over the past 20 years. Some of them are still derelict. Overall, looking back I am surprised at how quickly it recovered. The Houston real estate market collapsed because the jobs market collapsed, then rebuilt as the oil industry consolidated here. That, and the huge influx of the Two M’s (Michiganders and Mexicans).
Posted ““Joe will walk, and although I am a moral person, I’d walk to. Here’s my logic, I walk now and I can live good, not poor. After 7 years I’ll actually have a downpayment and can start over. The two choices/paths probably meet up in 7 years, except #1 means hard, poor, living, while #2 is no real pain. (A subtopic is would those with non-recourse loans - helocs, refies? - would they walk to? How have the BK laws limited them?)”
“Joe” dose deserve some if not all the fault. Why can’t the Lender share atleast part of the “fault” it does take two to tango? What the hell is the up-side to loaning people money that have no chance of repaying it? I really do not understand this part of the SCAM?
Right on. I make only fixed-rate loans. I don’t check out my clients’ credit ratings. I do rely on the property to support the value of the note, so I have had to be very careful about loan-to-value ratios these past couple of years. My experience has been that a person who thinks he/she can pay $483 per month actually CAN pay $483. Some of my clientele are depression-proof because they are retired. Those who work are mostly nurses, also relatively depression-proof. Most worrisome client has a printing business and owes me a SECOND mortgage (right, I was a dope in this case). Just keeping my cool, the payments have been regular so far. To take back this house, I would have to buy out the first lender and then foreclose. Thank goodness I don’t own any other house right now. Maybe I’ll live in the repo.
Some of my clientele are depression-proof because they are retired.
LOL.
“buy out the first lender and then foreclose”
Is that right? I thought the junior lien holder can foreclose, but takes the property subject to the senior lien.
I believe in economyincrisis.org they make the point that foreing goverment are taking over factories….
If the situation seems alarming now then just wait until the dollar dips down and the entire nation becomes liquidity poor. People will compete for foreign money then.
With regard houses, I think the banks that hold the home loans and the investors who hold the mortgage backed securities should bear a large part of the fallout.
Just like people who bought pets.com stock deserved to lose their money, so do these people.
Unfortunately, many of those MBS buyers are here on this blog. It’s largely pension funds, hedge funds, bond funds, foreign investors/central banks, etc. Most of the people who actually own the money being loaned have no idea where their money is going.
How about nailing the ratings agencies who said a pool of NINA loans was “alt-A” paper and passed it off as fairly low risk? Or the derivatives players who thougth if they played the game, their (our) risk disappeared?
I still say the Fed, OCC, etc. should have been involved a couple of years ago when it was VERY OBVIOUS we had a credit-induced RE mania, at least on the coasts. Lots of fraud already in 2002/2003.
Most of the people who actually own the money being loaned have no idea where their money is going.
That’s their problem. You want a guaranteed investment, you know where to get it - US Savings Bonds / Treasuries, FDIC deposits. Anything else, you’re on your own, fella.
No bailouts on uninsured debt. Period.
But you have no control over where your pension fund has invested your money.
Agree that the lending institutions somehow need to take responsibility, but not sure how to do that without MAJOR ripple effects. For instance, assume that Social Security is done and gone. Then, pension funds fall, one by one. Next, all those 401Ks, IRAs and other retirement accounts collapse due to the recession/depression. What then?
It’s fine to say “no bailout” but how would you protect against major chaos and anarchy (seriously)? What will you do with the bodies of sick and deceased retirees who couldn’t afford food, medicine or shelter? How productive can people be when they are just trying to survive?
In this entitlement generation, nothing will be ever be resolved without a change in behavior resulting from a period of pain and suffering.
What do you mean? Those H3 commercials with the single mother getting pushed around until she snaps and mortgages her life over to GM are great.
I sort of agree, but let’s get real:
1966: My high-schooled Father is able to buy a new house and take care of wife and 2 kids on his salary.
2006: I’m stumbling around in my mid-30s, BS+MS degrees, barely able to pay rent on a not-great SFH (built in 1966 BTW) on a single income.
EB, well… yes, the cost of living is higher these days but those of us who operate on being able to balance our checkbooks each month are made to feel poor by others who have debt-based extravagant lifestyles.
Yes and no, chuen. The real incomes of the middle and lower classes haven’t risen in the past thirty years or so while consumer inflation has steadily driven up the cost of living, and the dollar has declined. These forces together mean that the cost of living has skyrocketed. (Other inflation calculators are here: http://www1.jsc.nasa.gov/bu2/inflate.html ) The calculators show us “$60,000.00 in 1970 had the same buying power as $288,092.78 in 2004″ but I don’t believe that really covers the true losses. Even based upon the cost of living calculation above, you can see that if your father earned $20k in 1970, you’d have needed to be earning $96,030.93 in 2004 just to have a comparable quality of life. Not many people can make that claim.
What distresses so many people is that they *feel* something is wrong but they cannot articulate the problem. People in Generation X know they have the short end of the stick, but their state-sponsored schooling never gave them the fundamental economic education necessary to grasp the issue. This lack of education has also caused them to a) fail to demand appropriate wage adjustments, and b) to buy into manias such as the housing boom to try to connive their way to success.
It’s called Fractional Reserve Banking and you can thank the Federal Reserve Bank for sucking the lifeblood out of this country via steady inflation of the money supply.
You got it KIA. We are not taught to be critical thinkers, even in most universities.
What distresses so many people is that they *feel* something is wrong but they cannot articulate the problem. People in Generation X know they have the short end of the stick, but their state-sponsored schooling never gave them the fundamental economic education necessary to grasp the issue. This lack of education has also caused them to a) fail to demand appropriate wage adjustments, and b) to buy into manias such as the housing boom to try to connive their way to success.
Bravo. Precisely. I earn a lot of $$$, but really, it is not so good. A single income of 130 and I feel unease. Why? Not because I am uneducated but because I KNOW that my salary is AVERAGE - even though it isn’t. Know what I mean? Because I feel like I am living paycheck to paycheck - or close enough. I should be saving a ton and I am not.
The fact is that we are all conspicious consumers, however, the greater fact is that we cannot buy a fraction of what our parents could - period. The “core inflation” index is a complete fallacy and the common person actually believes they can shoulder that 2% increase yearly. Ha-ha!
I read somewhere that the last year for a gain in standard of living was 1974. Since then, the typical wage earner has lost purchasing ability with the average income YOY.
I agree chuen. My folks bought less ’stuff’ and we ate out infrequently. When a major purchase was made it was planned in advance. Credit was less easy, and big purchased were put off until there was enough money.
Credit is borrowing against the future. At some point the future arrives. The increase in housing costs (PITI) is eating up more and more of our incomes. Inflation is raging and there has been little income gain and savings this century.
The future may be now. The Fed can keep pumping money into the system, but at some point that has to stop, too.
A recession is a way of clearing malinvestments from the economy, and much of the debt created in the past 20 years is for items that can only be considered malinvestments.
Inflation as a way out of debt, as mentioned above, is highly probably. But it will only postpone the pain.
I agree with chuen.
People who live their life with Sex & the City spending habits will not learn unless they *live* their lesson as opposed to some classroom instruction on finances.
Right now, my spouse and I are making big sacrifices (like our parents and grandparents did) in order to buy a home (2 actually). These f*ed borrowers drove up the market and created an artificial demand that kept diligent savers out of a home of our own. Should I feel sorry for them? NO.
Where do these people get off lying about their incomes in order to secure a home loan??? Should they be bailed out? NO.
Misstrial posts “Where do these people get off lying about their incomes in order to secure a home loan??? Should they be bailed out? NO.”
I agree 100%! Where do the banks get off lending the money to deadbeats?
If you know they have debt-based extravagant lifestyles and you know that you live within your means, how can you feel poor? You should feel at peace - you’re not afraid to open your mail!
Most people, herd creatures that we are, evaluate themselves in a comparative way. We look around at where everybody else is, financially, and determine if we are good/average/poor. If everyone else is living high on credit, that usually isn’t obvious to the world, and a saver can (incorrectly) assume that he/she is very poor and can’t get ahead by working an honest job. Enter the “gambler’s” mentality, along with the belief that “if everybody else can do it — and get away with it — why shouldn’t I?”
Credit inflation (which is all that’s maintained our supposed standard of living these past few decades) is a very bad thing, IMHO. It is just another way for the rich to extract more money from the poor.
We need to change our mindset in this country and learn to, once again, shun debt unless it is entirely necessary. Think about what everything would cost if we actually had to pay cash for it!
Yep. Growing up, we were so poor that one day a burglar broke into our house, and we robbed him!
BWAHAHAAHAHA! I slay me….
The best way to keep the economy rolling, imho, is for average consumers to reduce their cost of living. Now, assume for a moment that Joe & Jill Public won’t actually go out of their way to spend less on their monthly bills– as the average consumer savings rate is currently negative, I don’t think this is a bad assumption.
There is going to need to be some sort of massive outpouring of a “do the right thing” sentiment by the private sector– maybe subsidized by tax breaks, government loans, whatever– to reduce their costs, and then pass those cost reductions onto the consumer. Private-sector-induced deflation can probably help.
- Hydrogen/electric-powered transport trucks, to lower the cost of fuel to transport groceries and essential items.
- Cheap (on the order of pennies per watt) solar cells that Edison, Dynegy, whoever comes along one day and bolts onto the roof of your house to provide some relief to their own grid and lowered overall electric bills.
- Customized cable packages from Cox, Time Warner, etc. If I don’t ever want to watch the Lifetime network, don’t make me pay for it. TV over IP will likely force the hand of the providers, so little government intervention is needed here. Lower your overall cable bill by a few bucks a month.
- And of course, the big one: more fuel efficient cars. Even hybrid owners are still paying $60-$100 a month in gas costs. If your monthly gasoline outlay can drop to $20 a month, that will be huge for people.
Here, Here…get your a$$ out of debt, JP!…and cut up those damn credit cards. Simple.
I think I know what is really behind the debt problem. Spending money has become what most people do as a hobby. When they get bored they run to the mall for a fix. Insted of interacting with neighbors and friends they turn to consumption.Until we learn to interact and value people for more than what they have, this will continue to bring down the usa.
You’re right, arizonadude. Have you ever noticed that in the trendiest places, life revolves around shopping and spending money? Manhattan is essentially a giant mall with good (but expensive) restaurants. L.A is like ten thousand suburban strip malls packed in next to each other. Even enjoying the cultural events in these towns almost always costs big bucks. People spend money because in a lot of places there’s just not much else to do.
“Manhattan is essentially a giant mall with good (but expensive) restaurants.”
[responses too numerous to post.]
As a planner for a suburban city, I’ve had the opportunity to work with commercial developers on retail shopping centers and most are reluctant to build amenities like outdoor patios, or just places where people can hang out and interact. To them, there is no value for such amenities. They want to meet minimum parking requirements and maximize sales floor area. There are a few who understand that creating places where people can enjoy and relax will lead to them to spend money there as well. Strip malls are built to die.
I agree with you. I have become very disenchanted with the values systems of many people my age (mid 30’s). It seems that keeping up with the Jones’ by spending money and living lavishly (or at least appearing to) is what is most important. I am heading towards something totally different. What is most important to me is spending quality time outdoors breathing clean air and enjoying the simple things. Getting back to the basics really. I am considering low balling on a piece of land in the next few weeks. My future includes growing most of my own produce, building my own home, and spending time in the city only when I feel like it.
Post of the Day from arizonadude!
Thanks for understanding what I’m saying.
AZ dude-
the money people throw around on weekend shopping sprees is staggering - for what? Non-important consumables.
Very short-sighted. However, you all need to know that for some it is an addiction up there with heroin and gambling. It activates the pleasure sensors in the brain.
Solution? Go to the store and fill up your cart with goods. Get the ‘pleasure’ of roaming the racks and finding good buys- then leave the cart in the aisle and LEAVE the store without purchasing anything. Try it!
Good post, Azdude. I feel holidays have gotten out of control too, just odes to conspicuous consumption. I saw halloween stuff in a local supermarket back in August and flipped out! All the little “festivals” around here (So Cal, San Diego) are just booths selling you junk you dont need, and junk food too. I’ll go to a few a year, and wonder what’s the point of these festivals? Most people seem to use these things as an excuse to drink on a beautiful day instead of actually doing something productive.
- My grandparents always said ‘Live UNDER your means’.
Not ‘Live within’ your means.
Sobay posts - My grandparents always said ‘Live UNDER your means’.
Mom said about the same thing “The happiest people lived under thier means”
I grew up with midwest valued parents. My Dad was a lawyer but had only 3 suits and a couple of sport jackets. He had his clothes, his briefcase and a car.
I never saw him buy anything frivolous. No hobbies, other than crossword puzzles. He rarely ate out and if we had an outing for dinner we would plan it for weeks. It was a big deal. My sister and I would talk about what we wanted to order for days. (It was always shrimp in the end)
I recall at one of these dinners my dad pulled out a little card at the end of the meal and I asked what it was. He said,” son this is a credit card from diner’s club”. I said, “you mean we don’t have to pay for food with that!” He said, “son remember this, anytime someone offers you something that seems too good to be true, it will cost you more in the end, and my advice to you is never buy anything you can’t pay for when you buy it.”
Diners Club was a card you could use like AMex but it had to be paid off each month. The business community loved it as people began to go out to eat more and more. Then along came Amex which was very prestigious to own as you had to be wealthy to get one. (Relatively) Then, kaboom a proliferation of all types of cards.
These nightmare’s are responsible for more divorces, family breakups, abuse and distress than any other thing I can think of at the moment. If you have no savings and cannot pay your bills you can have credit. Imagine that! I would suggest to all that we have gone against the basic tenets that formed this country and made it what it was. A solid group of frugal, hardworking immigrants from all over the world looking for a place to be free and safe to pursue the good life.
Now we are a bloated, self-indulgent, broke, worried group of hardworking former immigrants who are about to go through the very thing we were warned about as kids. A depression. My guess is that based upon the obviously well educated people here we are predomnately in our late 40’s to 50’s and we all heard about the depression from parents and relatives. Some of them cruised through it due to job security of one type or another. Others are from families that suffered terribly and literally did not know if they would eat day to day. I had friends I grew up with in the 50’s whose parents were children of these people and I can tell you that even in the 50’s they worked like hell and saved every penny they could. They had very little and perservered in fear of another depression.
These folks had one thing I do not see any longer. They clung to each other as a family. They always ate together and spent the weekends with family activities. NOt soccer mom stuff, I mean family togetherness. Picnics, outtings, working in the yard, fixing a car, a family reunion.
They saved money every day for what? So we could go to college. Remember that? We are saving money for Jack to go to college. Well they educated us and what has occurred? We learned how to do what they wished. We are professionals and make very good livings.
For some reason we thought aquiring things was the reason we are so blessed. I kinda wish I could work in the yard again, don’t you?
sorry about typos…spell check broke
When my father got his first credit card — Amex — I remember him coming home after using the card and immediately sending off a check to cover the purchase… this went on for several months until he received a polite but threatening letter advising him to wait until the end of month statement before remitting payment or lose the card
Great post, Jack. Very insightful and poignant.
Those of us who peruse and/or post on this board are drawn here because of our interest in the developments in the housing market. There is a bigger picture going on here, and most people are aware of it. Namely, that we have become a decadent society and have lost touch with many things that are most important to our true well being. I dunno, it’s easy to spot the problem but more difficult to fix. If I had to pick one single thing which I feel is responsible for alot of it, it would be TELEVISION. A device which can be highly educational and entertaining, but more often than not is a powerful tool in shaping the collective conciousness for the worse, IMHO.
I think its a little more complex then just cutting back on spending. If everyone does that then there will be no demand for goods and thus no need for workers to produce them. I think the big problem is balance. China and the other developing countries need to increase their internal demand for goods closer to their productive capacity. This would reduce their reliance on exports and probably increase their demand for imports at the same time. The short term problem is the standard of living for the average person is so much higher in the USA that ‘the market’ will balance things in the end by massivly reducing the US standard of living, if left to its own devices. We need to a less ‘free’ trade towards a more ‘balanced’ trade system. I think some kind of crawling peg tariffs, based on the trade balance’ with tradeable ‘trading rights’ (like tradeable pollution rights) would be a step in the right directions.
- I think its a little more complex then just cutting back on spending.
You are correct. However, balance to me means reserves as in ‘SAVINGS’. After you budgeted correctly and allowed for cash reserves - then spend on perishable goods.
If I could get CHEAP solar - say a setup costs about 2k - I would do it in a heartbeat. But it is not such a great idea for residents of New England. Although if southern (sunny) states went solar, it would free up a ton of energy and glut the mkt, forcing prices down elsewhere.
I agree that we need to get with the picture. I really think the company that makes this available cheaply will clean up –big time. Waiting, waiting, , ,
I love the sentiment, but I doubt the practicality. If I could get solar with a 3 to 5 year payoff, I would do it in a heartbeat!
I do agree that packaged connectivity will lower media and communications costs. Be very carefrul of claimed download speeds. Anyone know of an impartial rating of available services?
The last issue, if your gasoline bill drops by $60 to $80 per month, will you buy a more expensive house? Doubtful. Recent research tends to indicate more consumer spending on electronics and such.
Just wanted to say azdude and chuen are right on, IMHO. We do not spend time with our families (at home, gasp!) because we are trained to go out and consume. Chuen made a very valid point regarding planning and how space is used. Also the comment about fairs & festivals — can’t tell you how many I’ve gone to, expecting some fun, only to find long rows of booths trying to sell things.
We’ve lost the art of just speding time with family, friends and neighbors. If you stay home with your family, people will think you are abusive because you aren’t signing up your kids for all sorts of activities. When I was a kid, we found our own activities, and seemed to have much more fun than the kids of today. Of course, the “nanny state” which forces kids to wear helmets, parents to “helicopter parent” and generally restricts our movements and activities doesn’t help. God forbid people actually enjoy spending time on “free” stuff. Gotta keep the sheeple out spending money.
I made an observation to my mother a couple of months ago about my 8 year old nephew.
I said I didn’t think he had spent, in his whole life, 30 consecutive waking minutes without adult supervision. She though for a minute, then agreed and replied somewhat sadly “it’s not the same today as when you were that age”.
When I was 8 I spent over 30 minutes unsupervised twice every day walking to and from school (with many a delay to investigate the local streams/ponds, hedgerows etc).
I work in high power LED technology, in the coming years you’ll be able to buy LED lighting to replace incandescant bulbs. The power consumption reduction is dramatic with these devices and they can last literally the lifetime of the house. At the same time there are major developments in thin film Solar cells coming down the pipe. These cheap solar cells will complement the LED based lighting as your could run all lighting in your house off a battery you charge during the day with only a small array.
What do you think of Permlight, Inc.?
They are one of our customers & an early adopter, have had some problems with failure rate but that isn’t unusual with 1st product intro’s. Our distributor is Future Electronics. A lot of info is available on the web about performance and cost.
Mo Money — that sounds great. Are there any forecasts yet about the payback period/break-even point for such lighting used as a replacement for incandescent or fluorescent?
Here’s some info:
http://www.albeotech.com/pays.htm
Thx.
I work for a major lighting manufacturer of lighting including LED’s. Although we are getting better at producing higher lumens per watt of electricity, LED’s are still expensive and depending what you are replacing the pay back cna be 4 to 7 years. This does not fit the model for residential use. Commercial use is a better application because labor is a major cost of maintaining lighting systems. As we get better with the LED’s and enduser products that can be substituted for incandescent we are better off replacing incandescent with compact screw in fluorescent products.
Sorry, must disagree. LED based lighting makes perfect sense for residential as well as commercial. Costs are being pushed down continually as brightness and color wavelength increase. LEDs take up much less space, throw off much less heat and with very long lifetimes are perfect for many residential applications where getting to the fixture to replace a bulb is a major undertaking. Screw in Fluorescents are going to go the way of the Dodo.
Fluorescents are going to go the way of the Dodo
Good. People will not look like they have jaundice anymore
Florescents suck. That high-pitched hum has to get on people’s nerves, at least on a sublimenal level.
A relative of mine visited the Thomas Edison Estate in Fort Meyers a few years back and she told me that Edison invented a light bulb that has burned for almost a hundred years. As I understand its on display at the Estate.
Do you know anything about that? Is that true? Just curious.
Veering OT, but it’s a slow day… In business school, of all places, I learned how to radically extend the life of an incandescent bulb — you simply reduce the voltage applied to it by using a rheostat — a dimmer. Works like a champ. In 1990 I bought one of those very large bulbs that screws into a hanging-lamp socket and installed a slide dimmer for it. On the dimmer, I marked with a Sharpie a spot about 85% of full power. By using the dimmer to turn on the bulb, thus avoiding the normal instant-on surge, and by never raising the voltage above the black mark - 85%, that bulb lasted for ten years of daily use and still has not burned out. I highly recommend this use of dimmers in bathrooms where you have banks of expensive decorator bulbs, and for any other bulb that is a royal pain to replace. This does NOT work at all for fluorescents, BTW and might even be dangerous for fluorescents.
I suspect that if in fact there is an Edison bulb like the one you describe, it is powered in generally the same way (very low voltage relative to capacity) and also now protected from surges by some sort of UPS arrangement.
By extending the life of a light bulb out to ten years plus you have made a practical contribution to reduce waste. Pretty cool!
Sorry, it’s the exact opposite. You’re reducing the power to 85% but the light output goes down to 50% or so. In other words, much more of the electricity is going to heat instead of light. Think about it - reduce the power low enough and you get all heat and no light.
If you want to reduce power consumption, just change a 100 watter to a 60 watter, or better go fluorescent.
My dad taught me a neat trick for extending the life of a lightbulb and lowering our energy bill. He yelled at me every time I left a light turned on.
Use a thick filament. Lasts forever, but inefficient.
“Use a thick filament. Lasts forever, but inefficient.”
That’s correct. The specialty bulb that has lasted more than ten years was a decorator bulb almost certainly designed to last longer than the average lamp bulb. So far, I’ve run a dimmer with a dozen clear specialty bulbs in the bathroom, up and down all day, and only one has burned out. But Mo Money’s lighting is the way to go when it is widely available and, I’d think, especially for brand-new houses.
I would be prepared to bet a relatively large sum of money that when high-power LCD’s are commercialised for the home they will be available socket-compatible and roughly size-compatible with standard incandescent bulbs, just like the compact flouro’s you can get today. Even if they don’t have to be.
There’s tremendous design inertia in an item like a light bulb.
It is true and they have been on in the house since he lived there.
Direct current…..not alternating. Interesting chapter in our history, and the influence/confluence of corporate (in this case a utility) interests …… Don’t know about 100 yrs, but know DC runs a bulb for a very long time…..hardly a way to sell lightbulbs…
Mo Money,
Do you have any super efficient broad spectrum white LEDs. I am using Nichia’s NSPLR70ASS and NSPAR70ASS parts currently.
http://www.nichia.com/product/led-lamp-flux.html
I am only getting about 21 to 35 lumens per watt with these guys. As I am using solar power to drive them any efficiency gain is appreciated.
Oliver
Depends on your application for sure, “Warm White” is the holy grail for all of us LED guys. We have applications labs set up for people just like you. We use customer feedback so don’t be shy about using this link.
http://www.lumiledsfuture.com/
Mo Money,
Thanks for the response. I tried to buy one of the sample Lumileds kits from Future about two months ago. After spending a couple weeks getting qualified to buy (with a Credit card no less), I placed my order only to be told they were out of stock for 3 months.
At that point I gave up, and I chose the Nichia parts because they sent samples quickly and then went out of there way to get my first orders fulfilled quickly. I did like the looks of some of the parts you guys are making, and I should try them in the future.
I guess Nichia won that round just because it sales process was better not that its technology was better.
Are you working up in their Bay Area facility? If so maybe I could drop by sometime and see some of the stuff in person.
Oliver
That’s helpful, but for most of us in the hot lands, air conditioning is the biggest chunk of our electric bills. I think advances in super-efficient air conditioning would provide a larger payout.
yes, in most countries building/heating/cooling the home and transportation are far more important for energy consumption. The cost of heating / cooling a home can be drastically cut by good (often more ‘traditional’) design and construction, but if everyone wants a McMansion there is not much you can do. Size of the home is probably the major factor in energy consumption (same with the cars …).
>I think advances in super-efficient air conditioning would provide a larger payout.
Like, say, building homes that aren’t just crappy sheetrock and siding?
Geothermal heat pumps (www.geoexchange.org/about/how.htm) are available now. They use a closed loop underground containing fluid.
…
Geoexchange works differently than conventional heat pumps that use the outdoor air as their heat source or heat sink. Geoexchange systems don’t have to work as hard (which means they use less energy) because they draw heat from a source whose temperature is moderate. The temperature of the ground or groundwater a few feet beneath the Earth’s surface remains relatively constant throughout the year, even though the outdoor air temperature may fluctuate greatly with the change of seasons. At a depth of approximately six feet, for example, the temperature of soil in most of the world’s regions remains stable between 45 F and 70 F. This is why well water drawn from below ground tastes so cool even on the hottest summer days…
http://www.epsltd.co.uk/
Environmental Process Systems, a UK-based company, has some very promising next-generation industrial and residential chilling technologies. In Europe and the UK, where energy is far most costly than here, they’ve invested much more heavily in green, cost-effective technologies.
..why is it we don’t even have a solar box heater for the water heater of every house south of Lat35º. ?? a simple box with 10′ of coiled copper tube could reduce waterheater useable by 1/2….Too easy I guess. Found it funny that the holder of the patent for NiCad batteries used in electric cars is Exxon…
Consider switching to am Instant On (tankless) water heater, no reserve tank is used. These have been used for years in Europe. Most of the energy used in a standard tank water heater is to keep the water in the tank hot.
1st, check out the LED light bulbs on eBay. I’m planning to order some direct from China, to see if I can convert half my lighting to 12vdc at very low current. In the future, solar powered lighting using LED would be no big deal, and you could easily run thru outages.
Ice Energy corp makes a unit called the ice bear, which uses large AC compressor during the morning hours to freeze a huge chunk of ice. Then you can cool a McMansion during the day using the stored energy in the ice. Seems like a neat solution, although I think it has been around before them (I would probably try to build my own). It said 300 watts are needed to run the coolant pump and blower to cool the house during the day. This could be easily handled by a few solar panels during the day. If half the households move to that, it would cut down peak summer demand.
We really need more nuclear plants, and less natural gas turbine generators and coal slurry. That is one real solution.
Also, credit card companies will offer those who just came out of bankruptcy brand new cards, often within a month. The same companies that just lost money on you. There is a PBS Frontline regarding credit cards, as well as a book called “Credit Card Nation.” There is a new documentary coming out but it is still stuck in film fests.
They do that because you can’t declare BK again so they figure they got you…perverted logic as you can’t get blood from a stone ,but guess they’ll follow you until you start working again sometime..truly indentured…
Installing solar cells would be cheaper. Coverting from 12v to 120v (or vice versa) is easy these days with modern electronics.
Imagine a house with this type of (LED) lighting, high-efficiency solar panels, tankless water heater, geothermal heating/cooling, exceptional insulation, whole house fan, double-plumbing (greywater recycling as well as rain catchment, etc.) AND if this house were smaller (but well-designed)?
If I find a house like that, I’m in!
Part of me thinks the large energy & utility companies would NOT want homes like this to be built, and would spend buckets of money to prevent this from happening.
Based on my experience with a large bank, originating FHA and VA loans in California from 1989 to 1994 (several billion $ of them over that time), many people will walk away when faced with dropping prices, negative equity and total housing payments significantly higher than rent. FHA and VA loans were the only type of very high to 100% financing available at that time.
I have tried to explain to people the experience of driving around Southern California with pages and pages of foreclosures, but most don’t believe it actually happened, or forgot, or think it is different this time. It is different because of the increased risk of the huge amount of 100%, stated income and Option ARMs.
As far as how to resolve it, there is no way except to let prices move to their economic level, which is much lower than current. If mortgage investors require more sensible lending guidelines, we will move forward in a more orderly manner after the price crash.
- “Let’s take our national debt of roughly 8.5 trillion. Divide that by half of our approximate population (an extremely conservative estimate of people actually producing things).
California is different … and we lead the way for the nation.
- Most importantly, we have an uncountable number of illegals coming into the state every hour - not day.
Cal will guide the country to a soft landing and reduce the budget simply by allowing out sister country to take over. Mexico will conquer California and the USA without one shot being fired.
Even though I am not in the banking industry, I think the logical (though not necessarily ethical) choice many FBs will make will be to walk - especially with negative equity.
Sensible Lender - I always enjoy your posts - very straight forward, and with the voice of experience.
Great points, Sensible Lender. Thank you for that post.
Its such a relief to come here and read thoughtful, coherent views
One looked at the size of the problem. “Do folks even realize how much a trillion dollars is? Who is going to pay? We’ve just been banking on the the fact that deficits don’t matter. Brilliant logic.”
Not sure how and when we get there, but so far as I can see there is only one solution — inflate away the mountains of debt. Higher taxes have been demonized by twenty-five year’s worth of Republican rhetoric to the point where they are politically untenable.
Uh, oh GS, does that mean you’ve switched to the inflationists camp versus deflation?
My crystal ball is too cloudy for me to root myself in any camp. My best guess is near-term recession used to legitimize next year’s inflationary stimulus, which will be sold (like the inflationary stimulus of 2002) as an attempt to fend off deflationary pressures. The critical questions are (1) how the tug-of-war plays out between stealth efforts to monetize the debt and creditor’s countermeasures to preserve wealth, and (2) how all the side bets of speculators / hedge funds / etc. influence the outcome.
yes, definitely a worldwide deflation scare going on right now as a prelude to even more (hyper-)inflation from the FED, ECB and BOJ. Despite all the deflation talk, the money supply is still surging everywhere (although the rate of growth is declining in some areas) and credit is as loose as ever. I don’t think deflation is possible as long as central banking exists.
nhz, I guess you don’t believe the statistics which demonstrate deflationary conditions in Japan from 1990 to the present, then?
some people have the opinion that Japan never had really deflationary conditions. Money supply kept increasing all those years …
I think real deflation can happen, but only after a collapse of the current (central) banking system.
as gs noted a while back, there was some indication in the financial mkt that we may be headed for short-term deflation followed by longer-term serious inflation. gs?
When you ask what could save the housing market and the economy ,you might ask what could of saved us from the stock market crash of 1929 and the Great Depression . We might be to late .
The only thing that might make this market correction less painful is if people view the housing as a long term hold position until wages, rental ,etc catch up with the overshoot in prices that took place . The people who can not afford to hold long term and need to sell will drive the market down with the excess inventory/foreclosures.
The idea of turning flippers into landlords for a short term basis won’t work because you need to be able to hold long term like 5 to 12 years to get beyond this down cycle .
Lending regulations need to tighten along with the risky low down ARM/IO loans which will increase supply and lower demand more . To lower rates and go easy on the underwriting so we get the party kicked up again is not the answer IMHO,(its just a set up for a greater fall ). If the easy lending madness is stopped soon enough we might be able to get away with a recession rather than another Grest Depression .
Also maybe the government will generate some employment if times get hard ,but people will need to get more productive than just selling homes to each other .
But there is no getting around it ,tons of people are going to lose their shirt . Look for taxes being increased for bailouts for banks/funds .Is that fair ? No. Should the Flipper/Greedy ones get off the hook ? No.
Anybody has the recourse of BK ,but that’s harder these days .Tons of people will be set back for years paying for their mistakes .The ones that didn’t make mistakes will have to pay also in one form or another but might be in a position to benefit from a down market at some point .
Check out the reg gas prices in Branson, Mo yesterday. $1.859/gal. Why do the Red necks get all the breaks?. Drop the hammer, lets firm up the dollar, increase the interest rates and have some deflation. I’d like to get decent interest on my savings.
“Why do the Red necks get all the breaks?”
My guess is the “red necks” live in places where the politicians don’t require retarded specialty blends of gasoline that require highly specialized refineries.
Why do you ASSume that someone who doesn’t live on the coast is a redneck?
Gas prices will continue to decline until the November election. Don’t forget… oilmen run our country.
Have you notified the FBI about your incredible discovery? Seems to me that this type of collusion would be highly illegal.
LOL, Lou even thou collusion is illegal (and IMHO not realistic - too many people involved to not be revealed), nevertheless collusion and conspiracies have occurred in the past (fro example: WWII, Manhattan project etc.), and have been very well documented after the fact. Secrets can be held. I do not disregard conspiracy theorists out of hand. And there are many things occurring of which I am not able to make financial sense .
Maybe this’ll help you figure some things out.
http://news.goldseek.com/LemetropoleCafe/1157900640.php
You are right, it is highly illegal. Every time I have a bank tell me “Well, we couldn’t do that with your money, it’s illegal”, I remind them that killing is also illegal, but it goes on nearly every minute of the day somewhere in the country.
So before you tell me that it’s illegal, tell me how honorable you are. What if Duke Cunningham was the guy responsible for determining when to tap the Strategic Reserves? Or maybe the other gentleman recently in the hot seat with cash in his freezer? Do you think they might be willing to release reserves under the table for a chance to get re-elected due to cheap oil? Yeah, I didn’t think so either.
Don’t know if this applies in your area, but WaMu just started up an 5% interest-bearing savings account. No minimum balance. That’s close to a CD rate and completely liquid.
I checked into these last week at other places near me. Most require that you open a checking account in order to get the best interest. With checking, CDs are 5.5% here in Florida and I was told by a friend in Georgia that a bank there was offering 6% on 6-month CDs last week.
why does this make me uneasy?
Because it implies that for whatever reason some banks are demonstrating a need for cash NOW?
Not as many people will walk as people think. A bankruptcy on a credit report can cause someone to lose their present job or not get a potential job. I think we may see more people stay in their homes and rent out part of it to help make payments. This is already being done in California by immigrants, but it may spread mainstream.
McDorms!
Funny.
My wife and I live full time in our 5th wheel RV. We travel the country and follow the sun, spending winters in warmer areas like Arizona. We don’t drive every day, In fact, we drive much less than the folks that commute to work. We utilize less water, less electricity (we are self contained) and we are mobile (can escape hurricanes, disasters, etc.) We have sattelite internet and TV and use a cell phone. We have our mail forwarded to us and pay most of our bills online. I encourage more folks to consider this lifestyle. There are many fine web pages dedicated to this lifestyle. There are “work campers”, home schoolers, and all sorts of great people doing this (over one million in the USA alone). It is also a growing lifestyle in Europe. So, life does not have to be lived in a stick house - think outside the box - the housing box - and look at the alternatives. Living the dream. Jim
Thanks Jim. I once knew a couple who had sold their house, bought an RV and drove around the west taking photos. They had these made into postcards and arranged for a number of retail outlets to carry them. Eventually, they drove from business to business, replacing the sold cards and taking more pictures along the way. I believe their annual gross was above $50k, and they were able to deduct most of their travel costs.
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Jim - What kind of RV do you have? Link?
I think i’d need the John Madden bus to be truly comfortable.
My brother in law’s retired parents who live in Florida take their RV on the road twice a year. They arrange for jobs in National Parks and then load up and head out. They sort of do the tourist thing for a week or so on the way up to their destination and then for a week or so on the way back. In between they work for three months or so at the Park. They meet a lot of people, keep busy, and see the US. Its kind of joke around the house but they love it.
I know of (haven’t met in person) contractor engineers who live that type of lifestyle. One (or both the married couple) gets a 6 month contract for engineering in the north in the summer and a 6 month contract in the south in the winter. It makes sense. These people have been doing that for years and saved quite a bit of dollars. Some contract engineers saved so much that they work only 9 months of the year and spend the other 3 months in their version of paradise. In general, in the coming bad years, it will be a bad thing to be a slave to the same roof over your head. In fact, it would be more lucrative to have fewer material things and be able to move across the country within a week for better opportunities. I lived that lifestyle the last 6 years and my income is much higher than when I was a salaried employee with benefits at a Fortune 500 company. I say that a lot of people are going to “walk.” That is certainly the most sensible thing to do and very immoral. They need to be quick on their feet to get some income because unemployment rates will be double digit such as it is now in Socialist Europe (I mean all over Europe).
Hey Jim,
Right On for you folks! I lived for 5 years (1992-1995) on a sailboat in Dana Point, CA… beautiful place. Paid $285.00 per month for the slip…was bringing home $650.00 net a week in a Quality Assurance position, rode my beach cruiser 3 miles to the Metrolink commuter train to get to work…sweet, sweet memories. Never was able to impress my friends or family with a formal entry way or two lion statutes on the walkway…but most of them had alot of fun when I took them out to see the migrating grey whales. I would look up at the 2+million $$$ homes on the cliffs overlooking the harbor and ponder what great neighbors they made. A brief period on my life where I was at peace with things all about me and not having a house payment and all the other $$$ stuff related to it seemed like a great burden was lifted off my being. I think alot of folks in the good ol’ USA have been sold down the financial river of delusion and destruction. Hope you folks have many, many SAFE miles on down the road!
Timothy
I heard a quote the other day: “You must be at peace with yourself in order to be content with what you have.” And I think that’s the main problem - most people aren’t at peace with themselves, and try to answer that emptiness by buying stuff. Sadly, that doesn’t work, so they buy more and more and more and their consumption is what defines them as a person, and us as a society.
A couple of former neighbors are living in their RV and traveling around the USA. They sold their house at the top of the market last year, BTW.
I don’t see 8.5 trillion dollars of debt as a problem for the US. That represents less than our annual GDP. I do think there is too much mortgage debt out there, which to a large extend is unproductive capital. This will way down certain sectors of the economy.
I for one would like to see no more regulation. Let people walk, let investors and banks pay the price. The market must find the correct pricing for the risk being taken.
I think the government should make it clear that they have no responsibility for Fannie Mae or other “quasi” governmental institutions. Make this clear now. You buy their debt, you own their stock, you are on your own.
In many ways Fannie Mae represents everything the government can do right and wrong at the same time. The idea of creating fixed rate mortgages was a terrific concept, and one the financial markets could not support at the time. This is the good government can achieve. The bad side is the government has remained in the game once it became clear that markets can provide this service.
So my solution is not to worry (Herbert Hoover style). Let investors get whacked, allow banks to fail as necessary, wash our hands of Fannie and friends, and let the market right itself.
This will probably cause deflation as the velocity of money slows. I have argued before that deflation is not necessarily evil, despite the fear it strikes in politicians. The problem is the times we have seen deflation have been when the financial system was trying to correct for horrible imbalances in the first place.
I argue that normal natural deflation is good for the environment (as people consume less) and good for wage growth, as more capital becomes available to invest per worker. It straight jackets government spending by making debt much more expensive. It protects investors from capital gain taxes, and it will probably help to contain bubbles.
It would also have the advantage of allowing me to tell my grandkids (if I have any) back when I was your age, a $1 did not buy very much ….
Oliver
Oliver, The Govt. has alreaqdy shown what their intentions are. FNM was late ,what 3 years? on reporting an accurate filing for the SEC. Anyone else would have been delisted..Obvious to any moron the system was corrupt yet there still isn’t a charge against them..Biz as usual.
—
Re; Defaltion, ..Housing dropping 50%, Banks ,hedges crashing..truly a halt to retail,and discretinary spending..prices of all kinds dropping. Houses,Cars, Boats etc..Then we will see as W.Buffet said ” when the tide goes out we will see who was swimming naked “..Think every pension fund ,and private equities that didn’t know the extent of the cancer that was bubble RE…Anyway..”the great unwinding ” to deflation, then only way out is full tilt printing to mitigate the blood flow…inflation (hyper?)
great, let people (the FB’s) walk and the banks fold …
Do you think any of the high level banksters gets harmed when their bank folds? Most of them have already made enough to retire, no problem for them; their private capital is safe. If the FB’s can walk away unharmed the result will be to wipe out the savers (with the leverage in the housing market, it is easy to have all money in savings accounts magically disappear overnight, Argentina-style but a little worse). In fact I think the FB’s can probably keep their homes but instead of pay the mortgage they will pay the rent- somebody has to live there anyway.
I think making the FB’s pay is the first requirement to make sure this does not happen again. In my country I have seen many examples of FB’s (usually young people in their first job, with no money for a serious downpayment) who have taken huge leverage and have become millionaires in a few years thanks to the housing bubble. They know that the downside risk is very small compared to upside opportunity; in the worst case they will file for bankruptcy and have to live for three years on social security - so everyone signs for the biggest bet they can get. After that they can try again; all the risk is for society. We have to root out this evil for good and teach people some responsibility. I agree that the banks/lenders are part of the problem too, but it’s difficult to have THEM pay and not their customers (or the general taxpayer) who have no responsibility for the crazy lending.
We can’t have debtor’s prison, but I wouldn’t be against mild public humiliation. Perhaps they should be required to buy an ad in their local newspaper, with a photo and written underneath: “Attention creditors: I, Joe Blow, am a deadbeat.”
Lou — good idea, but you may be optimistic. It seems harder and harder to shame anybody about anything. Glad I’m not raising kids today.
really, I think the some newspapers still might post local arrests….
Maybe they need to do the same with foreclosures and bankruptcies - in 14+ pt font
How is GDP calculated? It is done based on questionable productivity calculations, and then questionable inflation numbers are used to get the final tally. So if you’ve erred to the friendlier side of productivity, and then erred to the friendlier side of inflation, can you see how the whole GDP can be swayed somewhat substantially?
http://www.financialsense.com/stormwatch/2005/0624.html
That was Andrew Mellon’s advice to Hoover in 1929: Allow the bad investments to be liquidated. Take the short-term hit, clear away the deadwood, and avoid a decade-long depression.
Hoover didn’t listen. In trying to manage his way out of the 1929 recession, he (and his successor) only made it longer.
Although some will try to douse the flames of this Real Estate inferno; in the end, Adam Smith’s invisible hand will prevail and the Sheeple will burn.
I love leg of lamb…
If we look at Asset Bubbles in any arena the adjustments have been some what erratic depending on the size and nature of bubble in relation to the size of the economy. Take gold in the 1980’s. As high as gold got on a world basis at $850 per OZ. there were not that many players in the world that got upside down on their investments to where it made an impact on the economies of the world. If you take Oil by it self it had a greater impact because we all paid higher prices for everything we purchased in our economies of the world. If we look at Real Estate today the amount of debt incurred, is huge in terms of dollars and that is why it will play a major impact on all economies of the world. Especially in the U.S.
This debt that has been incurred was created out of nothing by speculators driving up the prices of Land and Homes with out creating any unit of production except the material value of the new construction it self,plus some labor. This was totally inflationary and eroded the value of the dollar. We have yet to feel the impact of all of this funny financing and depending how the Federal Reserve decides to fix this problem we all are going to feel some pain in this unwinding.
It is my opinion that the individuals,including the financial instutions that made this possible should bear the full responsibility of the unwinding of this mess even if it means bankrupt systems in the future. These people should have known the potential outcome. If they did not, they should not have been rewarded with big salaries and bonuses as they are the incompetent ,inept,SOB’s that are going to hurt a lot of innocent citizens.
I don’t think it really is the RE speculators driving up the prices of land and homes. The problem is the central banks with their unlimited credit creation; all this money has to end up somewhere and the biggest asset class they could think of (after the stock market) is apparently real estate. I can assure you that most of the financial wizards who are responsible for this mess will be hugely rewarded instead of punished; it worked like that in previous manias and this time will probably not be any different. The general public will get stiffed with the bill.
Agree with you Dennis . There are alot of innocent people that will feel the pain of the unwinding .I would like to see the gamblers get their due with it effecting the innocent the least .
joe should pays his tab or work on a chain gang
So should Ken Lay. Oops, he can’t.
C’mon you don’t beieve Lay is dead do you?
I saw Ken Lay flipping burgers with Elvis in Dubuque, Idaho last week.
Don’t make me send the black helicopters after you, Tinfoil Hat Boy.
The best outcome is an immediate return to affordable prices, accompained by mortgage writeoffs. The former gets the market moving again; the latter restores sustainable lending practices via market discipline.
Muddling through and pushing off costs to future generations, however, is the more likely outcome. The generation now in charge is consistently anti-posterity.
As an economist who lives abroad, but travels frequently in the US and has many friends and relatives there, a couple comments. First there is an overwhelming consensus among economists and historians that a bad recession evolved into The Great Depression ONLY because of ignorance/bad management by the FED; this WILL NOT happen again. Central bankers know how to destroy an economy: too much monetary expansion(inflation) or excessive monetary contraction(severe recession); they can avoid both. Getting the temperature just right in between is their problem. Second, very significant(?) reductions in RE values will occur in many markets–how much and how fast has been discussed on here. Ironically, some markets such as NC may/and are to benefit from so many people trying to find alternatives to Florida. Third, other major forces drive the economy as well. Americans sometimes forget, and foreigners who increasingly have no love for America seem always to forget, the US economy is an amazingly successful economic machine (ignoring distributional issues) compared to other OECD countries–4.7% unemployment, continued impressive growth, ability to absorb 10+ m illegal workers, a national debt that is still small as a % of GDP compared to most countries, among the lowest taxes (%GDP) in the world– NYC and Mass aside. In general, focusing strictly on Economic Fudamentals, the US economy can absorb this RE adjustment with little more than a light recession–particularly with energy prices continuing to soften intermediate term. Yes unemployment might rise to 5.5-6%–but remember most countries aspire to such levels–your neighbor Canada is at 6.4. A lot of flipper and SUV/McMansion–in your face–AH–people will go down; arguably, deservedly. My grandfathers where Scots and Germans who probably never borrowed for anything and never spent a dime foolishly–except for fine Scotch and German beer–I probably inherited too many of their genes along with a lot of their unspent dimes–one of Warren Buffet’s winners in the DNA lotto. But there are an awful lot of people who knew nothing about economics or finance and had little education who modestly and ecstatically thought they were about to join the lower middle class and were beginning to realize the American dream, which included home ownership. Many of them are going to be hurt badly and will not recover. It may be mildly reminescent of the collapse of the Freedmens’ Bureau banks in the Panic of 1873 and the virtual destruction of the savings and “freedmen grants” of most of the newly freed slaves–a real tragedy with, arguably, an impact for generations. I am a free market guy, but I must admit that if I could find a practical way to limit the availability of some of these new lending instruments, I could be tempted.
I think the best way to limit riskly loans is to make all new loans for SFH non-recourse. If the lender knows the max they can get is the house they will think twice before giving people loans they know can’t be repaid.
I agree with most of your post. But …
- the US economy can absorb this RE adjustment with little more than a light recession–particularly with energy prices continuing to soften intermediate term.
This statement makes me a little uncomfortable.
1 - Fuel prices have pulled back TEMPORAIRLY. This will lull everyone to sleep … you can be assured that another middle east crisis will explode within the next 12 months.
2 - Savings rates seem to be much higher in other countries. Our society hopes to win the lottery or get an inheritance.
“First there is an overwhelming consensus among economists and historians that a bad recession evolved into The Great Depression ONLY because of ignorance/bad management by the FED; this WILL NOT happen again.”
Not so sure about this. For one, many of the Roosevelt (Keynes) era programs designed to insure that a bad depression would never happen again had the unintended consequence of encouraging a buildup in systemic risk — e.g., the combination of Social Security, a historically paternalistic pension system, and booming stock and housing markets conspiring to drive us to a profligate lifestyle funded by a negative savings rate.
Second, as Robert Shiller has pointed out, the current housing price blowout is unprecedented in US history, even larger than the fundamentally-driven boom after WWII, which was the second-largest; since it really is different this time in terms of the record imbalances between the housing sector and the rest of the economy, it is also impossible to foresee how it will be resolved.
Third, our economy has had a major depression since the beginning about every sixty-or-so years since the beginning of our country; Ravi Batra predicted one in 1990 which never materialized, but is that because it is different now, or just that Greenspan managed to forestall it over his 19 years at the Fed by building up a much larger imbalance through repeatedly goosing asset prices to the upside (the Greenspan put).
All told, I don’t think you have much justification to back up your opinion, other than a rehash of the standard, conceptually vacuous position of the mainstream of the economics profession.
First there is an overwhelming consensus among economists and historians that a bad recession evolved into The Great Depression ONLY because of ignorance/bad management by the FED; this WILL NOT happen again.
First read all the statements from great economists and politicians prior to the Great Depression (or other depressions …) and you know that the sentence above virtually assures we will get an even bigger mess this time. Just reading how Ben Bernanke has figured out how he can save the finance economy with his black helicopters makes me sick; the arrogance and stupidity (in a historic sense) of current economists and politicians is just as bad as in 1929.
Stop with the gov’t interference. No feeling of “safety” through FDIC, and people would think twice about what foolish bank they are giving their money. No money to lend, no money being lent to people making 30K to buy 500k houses. You can still have the capital available to invest, but less of a chance it will be misallocated through FREE markets. These markets we’re experiencing are “FREE”, but being manipulated by numerous forces…some with great intentions but terrible results. Same story repeating itself.
…this WILL NOT happen again.
…they can avoid both.
…the US economy can absorb this RE adjustment with little more than a light recession.
I admire you for sticking your neck out like this in print on an internationally recognized forum, because these words will haunt you for the rest of your life.
I just opened an account on the San Diego Creative Investor’s forum. I will be polite. But I think my icon might bug some people. At least I hope so.
Gee, here’s a thought…quit buying so many imports. Especially automobiles. High paying manufacturing jobs stay in the U.S. People can actually afford to pay their bills due to decent wages. Since tax collections are higher due to higher wages the budget deficit drops. Trade defecit drops like a stone. Dollar firms up in international trade. Interest rates can drop without creating bubbles and borrowers can pay less interest on loans.
In other words quit nibbling around the margins and look at the elephant in the room.
All other things being equal I’d prefer to buy American cars; I was looking hard at a Nissan but I saw the new Saturn Aura this week & rather liked it. We’ll see what I end up with. I’m not ready to buy for about 6 more months.
Agreed. I’d buy an American car, except for the pesky fact that no American car gets the same horsepower, liter for liter, as a Japanese counterpart. The Saturn Aura is probably the closest — I think it gets 255 hp out of a 3.6L engine, not much lower than the Toyota Camry’s 268 out of 3.5.
And I have a soft spot for Saturn — I’m still driving my college-vintage 1999 SL2, “Trigger,”* which has never given me any mechanical problems that weren’t self-inflicted. (Note: Do not spill a root beer float on the center console. It shorts out the main solenoid and the key won’t turn.)
Of course, the old SL’s were built at the non-union Spring Hill factory, and my understanding is the Aura is built in a union factory in Michigan, so we’ll see how quality control stands up. But I’m seriously considering the Aura for Trigger’s replacement.
*Named after Roy Rogers’ Palomino horse because of its similar gold color.
Nope. I won’t quit buying imports. I don’t want my car built by union members. I owned American vehicles before. Only one of them, my Chevy Truck, was good. Everyone else was a POS. Union-built. I don’t believe in buying substandard, and that is not a litmus test for patriotism. I am very patriotic and I know that buying my good quality Toyota is a patriotic action. How? By forcing competition to Ford and GM. 1000 raspberries to to the Unions.
In may even be the case that your “foreign car” had more American worker content than a comparable “American car” as many “American car” components are imported and many foreign cars (Toyota, Nissan, Honda, BMW) are actually made in the USA!
Bought a new 1977 Ford Pinto just out of college. Arguably the biggest POS produced by US automakers. Car died at 60k miles. Only Hondas since.
Okay, so…buy a Nissan, not a Ford. Right?
Heh. My current car is a Ford, designed by Volvo. I won’t even speculate as to its manufacture. (And I love it, but I think it’s that five-star safety rating— designed by Volvo, remember— that really does it. Getting rear-ended by a heavy truck and suffering not so much as a bruise makes me happy.)
Oh yeah— has anyone bothered to tell certain companies (Chevy) that their design is crap? I mean, ergonomically their cars are not only counter-intuitive but ugly suckers, with usability issues all over the place.
Car rental agencies have given us Chevrolets many a time, and there has not been one which was not a pain to deal with.
This is what the U.S. Treasury Secretary Henry Paulson is telling the world:
Paulson Tells G-7 Not to Fret Over U.S. Housing Slump
http://www.bloomberg.com/apps/news?pid=20601103&sid=aFAF6uJlVXhQ&refer=news
I read it that Paulson is saying only that the housing crash will be offset by enough offsetting good news that the world economy will not suffer much. But I think housing is going to be sacrificed both because it deserves what it is about to get and because the salability of our bonds is of overriding importance.
Paulson’s also used the speech as another chance to use the rate of Yuan appreciation against the US dollar as an excuse for the size of the US Current Account Deficit. Hmmmm, the 2006Q2 CAD number is due out Monday, I wonder if it’s really bad?
I think his real anger is that Wall Street can’t make the profits they think they could if the Yuan was floating completely freely.
(Note that there’s a respectable body of opinion that thinks that the Yuan would FALL against the US dollar if the Chinese removed all controls. They anticipate a tsunami of Chinese businessmen/politicians/crooks looking to get their money out of Yuan into hard currency before the Chinese banking system implodes.)
Sorry rjsasko, but you couldn’t pay me enough to drive a US car
I’m all for buying ‘local’ but some things are beyond the pale…
When I read “best way to resolve the housing bubble” I immediately began to think of macro solutions. Some of the contributors have suggested, however, that the bubble could be “resolved” by FB’s walking away from the homes. I just want to point out that walking away from a home which has negative equity does nothing to resolve the problem. Sure, it will get foreclosed at some point, and yes, some states are non-recourse, so while you might not get sued for the deficiency in some places, every lender will send the 1099 so that they can write off the bad debt on their taxes. Then the FB gets a lovely letter from the IRS and the problem continues. Additionally, if every FB did that simultaneously, banks would collapse from temporary cash and liquidity crises. They would lose their income streams, take back properties which aren’t worth what was paid for them, and be unable to liquidate a large number of those properties. The properties themselves would remain vacant, encouraging drug use, vandalism and crime. Not a good outcome.
No, the question as I understand it is whether this ticking bomb can be defused short of a collapse. Is there a silver bullet for the wolf scratching at the door?
The only one I see is the anti-Malthus: technology. For those who aren’t familiar, Malthus predicted since population expands geometrically and agricultural production increases in a linear fashion, mankind was destined to starve. There are obvious problems with his rationale. For example, won’t a geometrically expanding population have the option of expanding agriculture geometrically by sheer numbers of hands to go to the fields? Some say no, but that’s a question for a different thread.
The commonly accepted reason why Malthus’ theory has not become reality is the advance of technology. Modern farms, dairies, and stockyards can produce far more using modern tech than their historical counterparts. More people are fed, fewer people starve. The advance of technology is also one of the primary reasons why America has stood at the forefront of the world economy. It is American tech which created the information age and ushered in an new era of efficiency. American tech created the mouse, the PC, the internet. These have sustained and supported our economy for two decades now.
What we need are technological breakthroughs. The greying of America indicates that substantial advances would be welcomed in the fields of longevity, geriatrics and similiar fields. There is huge potential in biotech, nanotech, and medical tech. Breakthroughs in any of these fields might create another “golden age” for the US.
Absent this type of phenomenon, however, the tab is coming due, and must be paid.
Excellent post Kia .I agree the tab is due and it means a life style change for alot of folks . People in general ,as many posters have mentioned ,could also get into the fine art of energy saving and not living above ones means .
Kia, I don’t see this as a crisis of survivability,but a crises of Economic stability,and standard of living.We as Americans are very resourceful,but the situation at hand is potential catastrophe. Time will tell..maybe the powersthatbe can engineer a soft unwinding. I hope so….but nature points out the folly of men. Truly a potential house of cards…Cascading cross defaults. We came relatively close that time..that was a footnote compared to this..
http://216.239.51.104/search?q=cache:_oU-wMwhyQkJ:www.federalreserve.gov/BOARDDOCS/Testimony/1998/19981001.htm+cascading+cross+defaults&hl=en&gl=us&ct=clnk&cd=1
“[Banks] would lose their income streams, take back properties which aren’t worth what was paid for them, and be unable to liquidate a large number of those properties.”
Not so sure about “unable.” More like “unwilling.” The right price will clear the market in a relative instant.
You nailed it, KIA.
I’ve stated before that a sudden burst of fiscal responsibility by every entity — public & private — and every individual would immediately throw this country (if not the world) into a depression. The current economic models are entirely unsustainable, and there’s just no easy way out.
Suggestions for slowing or halting the geometric expansion of population? Does China have it right? Should technology allow us to live far beyond any expectation of personal productivity?
“2. Fuel prices go up, think the airlines are going to be hit big time, days of going from CA to east coast for some weekend bingo party for $300 will be gone. I think in 20 years train travel will get bigger. Best cost per ton per mile there is.”
Great for freight, but if our train system cannot be relied upon for on-time, reliable, wide-ranging, fast travel, travel will simply reduce.
More than likely, telecommuting and other technological means will replace much of the air travel, not trains.
Actually, the train can be rather pleasant. As for the timeliness, the major issue appears to be overscheduling and the apparently bogus presumption that freight takes precedence. Amtrak recently sued Union Pacific over that— it seems that passenger trains are supposed to take precedence, and UP has been ignoring that, generating holds that cause cascading delays for the passenger trains.
If passenger trains get priority as they are supposed to (according to this lawsuit), I can see their timeliness ratings climb. When I went from Sacramento to Denver via train, we were actually early— the benefit of being on a line that is primarily scenic and not a major freight corridor.
Trains are great. What we need is coast to coast bullet trains with stops in major cities. Forget the Mars trip, spend the billions on transportation. I’d much rather take a train than a plane, much much more comfort possible.
trains CAN be great, but travel the NE corridor and you will see that there are no easy solutions. Maybe more tracks? Dedicated bullet tracks? Electromagnetic tracks (ones where they do not touch)? Maybe faster trains and more routes. I don’t have the answer, but I am sad that trains are not more in the forefront
I don’t think the issue is technology. The Netherlands (and many other EU countries) had an excellent trains system when I was young. But over the last 25 years or so, politicians have done everything they can to promote private cars and to limit funds for public transport. If you do this long enough public transport gets really bad (like unreliable service, longer travel times, many train stations and bus lines closed, economically uncompetitive etc.) and more and more people switch to using a car. This leads to a downward spiral.
After many years of delay we will get a high speed train next year (from Amsterdam to Paris); it’s a disaster, aimed mostly at EU politicians and other government workers traveling to Brussels but too expensive for the average public. With the funds that were used for this totally useless highspeed train system, they could also have made a tremendous improvement to the general public transport system in the Netherlands. But of course, that is not what politicians do. They have already started talking about an electromagnetic passenger train in the north of the country that will be a financial disaster just like this highspeed train to Paris.
Make charitable contributions a credit instead of a deduction for homes.
Allow donations of homes similar to cars where the person donating sets the value of the donation.
Habitat for humanity or Goodwill then gets to give the homes to needy families that can afford the property.
I appreciate the concern which is been rose. The things need to be sorted out because it’s not about the individual but it can be with everyone.
Somewhere it happens that we need to be alert towards our citizen rights
so that we are not exploited!!
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philip