A Victim Of Fragile Confidence In The Era Of Excess
Some housing bubble news from Wall Street and beyond. Forbes, “The moment that the British banking sector has been dreading came on Friday. Northern Rock, the country’s fifth-largest mortgage lender, confirmed late on Thursday that it had requested and received a line of emergency funding from the Bank of England.”
“‘It has now become clear that the global credit and liquidity markets have not recovered in the early part of September, and that there continues to be a severe liquidity squeeze,’ said the bank on Friday.”
The Financial Times. “Early on Friday, anxious Northern Rock customers reported they were unable to access their online accounts following news reports of the Bank of England rescue. It appeared the volume of traffic from depositors and mortgage holders had caused the website to freeze.”
“Northern Rock had concentrated almost exclusively on mortgages. To finance this growth it imported innovative financing techniques from the United States, such as issuing securities backed by mortgages, which were eventually copied by other large banks. Northern Rock was showered with praise by the investment banks that helped arrange this financing, and its executives could often be seen picking up awards at industry events.”
“But just as Northern Rock benefited from the markets, so it has fallen victim to their fragile confidence.”
From Thompson Financial News. “Customers of Northern Rock were rushing to withdraw their savings today despite reassurances from the group that their cash is safe.”
“At Moorgate, the line of worried customers included retiree Arthur Smith of Islington, north London. ‘I’m closing my accounts and my ISAs. It’s my life savings, about 60,000 pounds. I hope the Bank of England will help them out,’ he told Thomson Financial News.”
“Another retired man, who declined to be named, said: ‘The Bank of England won’t back them indefinitely. This brings back memories of Equitable Life. It’s quite likely the Bank of England will say it’s the end of the road at some stage.’”
The Guardian. “The Bank of England has talked a lot about the ‘moral hazard’ of bailing out institutions that have made poor business decisions as they chase after profits.”
“But now the crisis has moved away from the City and on to the high street it is likely to take a very different line. It has opened a line of credit to Northern Rock, which means the bank will be able to meet any and all of its liabilities. That said, it was also unthinkable that Equitable Life would go under.”
“Northern Rock will no longer be in the business of offering cheap remortgages and may be forced to raise its standard variable rate.”
“Of course, borrowers can always remortgage to an alternative lender, but expect to see lending criteria tighten sharply across the board. If you were a borrower who took a 125% Together loan at Northern Rock, there won’t be many other lenders willing to take you on.”
“The only silver lining is for savers. Mortgage rates may be on the way up, but so are savings rates.”
From MarketWatch. “‘Northern Rock is a definite takeover target,’ said David Buik, a strategist at Cantor Index in London. Although the bank has far too much exposure to the U.S. mortgage market because of its twin role as a lender and as a trader of collateralized-debt obligations, it still has a ‘decent mortgage book’ and some nice assets, Buik said.”
“Christopher Kummer, president of the Zurich-based Institute of Mergers, Acquisitions and Alliances, stressed a possible scarcity of bidders. ‘In such a situation, the list of possible acquirers will be quite short unless the risks are transparent and limited and the price would be extremely low,’ he said.”
“‘I doubt that given the current market situation any responsibly behaving company board would approve the possible acquisition of Northern Rock,’ he added.”
The BBC. “Shares in UK buy-to-let mortgage lender Paragon Group slumped, as fears deepened over the ability of banks to finance their loans.”
“Paragon Group is solely a mortgage lender with no deposit facilities, which means it is reliant on issuing debt supported by the interest income from its mortgages and credit deals with major investment banks for cash flow.”
“‘It is able to pass higher funding costs onto borrowers, but there will be a timing lag,’ said Joanna Parsons, an analyst at ABN Amro, of Paragon’s position. ‘Plus, higher mortgages will reduce the attraction for landlords to buy, unless higher mortgage charges can be passed onto tenants.’”
From Bloomberg. “London house prices fell the most since 2004 this month after five interest rate increases in a year and turmoil in financial markets sapped buyers’ confidence, according to a Rightmove Plc report.”
“Growth in London property values is faltering after the collapse of the U.S. subprime mortgage market triggered losses in securities linked to the loans and spurred banks to raise lending rates.”
“‘We’ve reached the peak of the current boom,’ Miles Shipside, commercial director of Rightmove, said in an interview. ‘Affordability is stretched, and people are concerned about global financial markets and their ability to take on greater commitments.’”
From CNN World Weekly. “In the last 15 years countries such as the U.S., UK, Australia and Canada have enjoyed an economic golden age. But a flip side is emerging from this era of excess, with potent signs in the last week that the party is coming to a close.”
“Rising U.S. home foreclosures and a persistent housing slump have triggered a U.S. credit crunch which has unsettled global markets and raised concerns about a possible economic slowdown.”
“Economist Andrew Charlton from the London School of Economics believes the U.S. housing slump and high levels of personal debt are part of the same problem: People on low incomes getting in over their heads with either housing stock or personal debt they cannot afford.”
“Philip Hodson sees a few factors responsible for our credit binge: ‘We’ve developed retail therapy — it’s a drug — but it’s a very fragile plant and to build an economy based on it is ridiculous.’”
“He also says the government has encouraged a people to be reckless with money through their own bad example: ‘The government must take much of the blame for encouraging a debt culture.’”
“Economist Charlton believes our reliance on credit is symptomatic of prosperity: ‘It’s the by-product of the boom. In for example, Australia almost 30 percent of the population have never lived through a recession — young people believe you can always take on debt because it’s always easy to pay off.’”
“Merrill Lynch & Co., the biggest underwriter of collateralized debt obligations, signaled that third-quarter profit may be hurt by the subprime-mortgage crisis and said making money in credit markets remains tough.”
“The New York-based firm said in a regulatory filing today that it made ‘requisite fair value adjustments’ for potential losses to date on holdings and financing commitments. Merrill is at risk because it participates as an investor, lender, counterparty and guarantor in markets tied to subprime mortgages.”
The Orange County Register. “Long Beach Mortgage Co., one of Orange County’s first big subprime lenders, is facing its final days amid ongoing downturns in the mortgage and housing markets.”
“Parent company Washington Mutual, the largest U.S. savings and loan, said it’s shuttering Long Beach’s Anaheim headquarters and letting all 155 workers go in about 60 days.”
“Wall Street investors are shunning all but the safest home loans amid higher loan delinquencies and foreclosures. In Orange County, for example, banks foreclosed on 469 homes in August, the highest since October 1997, reports DataQuick.”
“Hovnanian Enterprises Inc. CEO Ara Hovnanian said the U.S. housing market is near the bottom and won’t recover until 2009. ‘The bottom is very near but I think its going to stay along the bottom for a while before a recovery,’ Hovnanian said today.”
“Hovnanian, whose family has been building homes since 1959, said a three-day sale starting today may help boost revenue in the company’s slowest markets, including California and Florida.”
“The company’s sale will be held in 18 states including California, New Jersey, New York, Arizona, Ohio and Illinois. Hovnanian is offering discounts of up to almost $150,000 on homes.”
“Buyers will ‘realize unprecedented savings’ with incentives of up to $100,000 in some California developments and more elsewhere, the company said in statements issued this week.”
“Asked whether the sales event was an act of desperation, Ara Hovnanian said it was a ‘logical thing to do’ in the current market.”
The Associated Press. “A Friedman Billings Ramsey analyst said Friday any benefit stocks of mortgage lenders will enjoy if the Federal Reserve cuts its interests rates this month will be temporary. Analyst Paul J. Miller Jr. said cutting rates will strengthen lenders’ profit margins, but will not fix the fundamental problem that led to the drainage of cash in the first place: sinking home values.”
“No matter what it does with interest rates, Miller said the Fed cannot rescue slipping home prices. As long as investors have no faith in housing, they will not finance mortgages, he said.”
“Former Federal Reserve Chairman Alan Greenspan acknowledges he failed to see early on that an explosion of mortgages to people with questionable credit histories could pose a danger to the economy.”
“In an upcoming interview, Greenspan said he was aware of ’subprime’ lending practices where homebuyers got very low initial rates only to see them later jacked up, causing severe payment shock. But he said he didn’t initially realize the harm they could do.”
“‘While I was aware a lot of these practices were going on, I had no notion of how significant they had become until very late,’ he said in a CBS ‘60 Minutes’ interview to be broadcast Sunday. ‘I really didn’t get it until very late in 2005 and 2006,’ Greenspan said.”
“Critics say the Fed kept rates too low for too long, encouraging a Wild West mentality in housing.”
“After the 2001 recession, the Fed cut its benchmark rate to a four-decade low of 1 percent. That move, along with Greenspan’s hands-off approach to regulation, have brought him under fire as this year’s bursting of the housing bubble and the subprime mortgage crisis again threaten to sink the broader economy.”
When I was on Open Source radio in the summer of 2005, the host asked me what I thought was the source of the housing bubble (in the US, we never got to the global bubble). I told him I believed it was a confluence of factors, but the primary cause was Greenspans Fed. He almost reacted like I was a fringe character for saying something about the Federal Reserve, until I pointed out that editorials in the New York Times and the Wall Street Journal had said about the same thing. IMO, it is positive development to see the issue get the attention level of 60 Minutes.
Yes, I will be interested to see the entire interview.
However, the bubble could never have happened without the mass agreement of individuals. Unfortunately, Greenspan baited the trap. This man will not leave behind a good legacy.
Is there a good nickname for Greenspan that reflects his unique combination of hubris combined with desperatation spin (to salvage his legacy in the face of mounting evidence that his allegedly superiour intellect maybe wasn’t so infallible)? I’ve heard Greedspan, but I don’t think that cuts it.
read: “unique combination of hubris and desperation spin ….” My intellect is clearly far from superior and infallible.
Still imbibing morning coffee.
Greedspin?
Or Grandspin.
Greedplan…had to know it was coming.
Greenspit
jack welch
Godsplat.
I don’t believe Greenspan did not know the mess he was creating. He knew perfectly well - he infact encouraged people to take ARMs and didnot act when he saw house prices exploding. He’s a cohort of wall street bankers who profited enormously from making people debt slaves and eventual transfer of wealth from taxpayers/savers to speculators. Even now Fed ignores all the energy / food and owners equivalent rent inflation. don’t hold dollars in bank thats all we can do - other than maybe some political activism to make Fed more accountable, open and prevent them from stealing money by destroying currency. Our lives being so dependent on Fed decisions is ridiculous in this age. Fed has too much power by controling the supply and hence value of money. They are affecting real people’s lives.
The very educated, and financially well off have a hard time understanding economic fundamentals when applied to the less educated and less financially well off.
On other words, an ARM exploding for a person who is using 5% of their income on their mortgage to start is much different than an ARM exploding for a person who is using 40% of their income for their mortgage.
From where Greenspan sat, it DID make sense to take out an ARM, as it did for many, many other people who were not highly leveraged, and rich. The problem is, if you believe that interest rates are largely unpredictable, then that it ALWAYS MAKES sense to use an ARM if you are really wealthy. You pay a premium to fix your rate.
That being the case, why wasn’t Greenspan touting the benefits of an ARM 15 years ago? Why only during this bubble?
For the rich, or very low levered, you should always go adjustable–over the long run, you’ll pay less interest. For the poor, middle class, and more highly levered, you should ALWAYS fix your rate for a significant timeframe–they simply cannot absorb the payment shocks. You pay more interest, but you pay for stability, since at a more highly levered position, you NEED stability in payments.
Until this logic finds its way back to the market, I’m on the sidelines.
excellent points
Mr. Magoo or Ken Lay — take your choice. He was either a bumbling fool or a calculating criminal.
Egomaniac, John Law II, Sir Printsalot, Greenspam, Greenscum, Sir Bubbleblower,
Wayback machine: remember how the reporters used to act like addled schoolgirls around Donald “Cakewalk” Rumsfeld when his star was ascending. Same for Al “Bull Market Genius” Greenspan.
Now that the party’s over and God’s flashlight is shining in their bloodshot eyes . . . what? Just post-party debris and us poor SOBs left to clean up the mess.
Greenspan, Rumsfeld et al say “See ya! Wouldn’t wanna be ya!” as they ride off to greener pastures and retired comfort. [History will probably give `em a pass, too.]
‘the mass agreement of individuals.’
It played out over years, and IMO, that’s why the Fed was complacent. Doesn’t excuse it though.
No, it doesn’t, but I cannot have an effect on Greenspan or Bernanke from where I sit. I can, however, have an effect on my neighbors and friends and people I talk to in the course of everyday affairs in the community. And that’s where I fall down, because like many of the posters on this blog, I don’t like to get into it with those who are in denial or make enemies or make people feel bad about their decisions. Having the courage to speak out means being able to do it with friends and fellow members of the community in which one lives. And if it is so hard for me as an individual, I can imagine how difficult it must be for people in high positions. That’s why I admire Ron Paul, with the courage of his convictions. The man is my hero.
I totally agree with you on this. It’s a lot easier now, though. I’m amazed at some of the obnoxiousness from all of the housing boosters that I read about here. I guess because both my wife and I come from (relatively ) fiscally conservative families, we were spared much of this. My dad is the ‘big achiever/big spender’ in his family, and even he is a massive pennypincher by the standards of all of the “HELOC Hummer & plasma” folks out there. I’m continually amazed at the various ways that my dad managed to store up money all over the place. And my mother-in-law bootstrapped herself up from nothing, so you can imagine how reluctant she is to go up to her eyeballs in debt.
My hero is Barbie. Go figure.
I had Shiller’s chart on my office door for a couple of years and warned everyone who would even pretend to listen that we were in a monster bubble that would eventually have to burst.
In Bozeman, MT that went over like a lead balloon, and I sincerely doubt that I changed a single person’s mind. “Oh, but everyone wants to live here. It’s the mountain tax. Real estate will never go down in Bozeman.” It wasn’t until 2005 that my own wife started to believe me.
Groundhogday,
No one ever wants to realize what actually goes into wealth creation – they just want the wealth. I think the article txchick posted a few articles back that showed that mean average of net worth in this country is about 17k says it all. Who wants that to be their reality? We’ve got a substantial reserve – it took *GENERATIONS* of people not being stupid, not having umpteen children (we love the ones we have, thank you – but who in their right minds thinks they have the resources to provide for a family of 6 or more in today’s economies? We aren’t family farmers in need of cheap labor anymore – the traditional reason for having lots of offspring – and we don’t have 30+% infant mortality either, the other reason…).
No one could understand why we hadn’t tapped the house and remolded. Well, we know we couldn’t pay a 500+k mortgage on what we actually make, and we ain’t ever touching the assets that are already paid for! As I told a couple friends “um, if you want granite counter tops, great – buy the house from us at market value and have at it…”. Generally shut ‘em up – but not in the sense that they ever thought the bubble in our neighborhood would pop, they just decided we were “tight wads”.
Yes we are, thank you!
The fact is that this “mass agreement” by individuals did what was (perceived anyway) in their best interest. It is very annoying that an attitude persists that regular people should shoulder some blame for this bubble. Nonsense! Of course, there are speculators who helped drive up prices. But the vast majority of individuals buying a home at bubble prices took a cue from the market signal. That was the market price. Cheap credit made it easy to buy and distorted the market. This is the Fed’s fault, period. This caused individuals to misallocate capital.
I know several people in their late 20s who just bought their first home. Their mortgage balance is outrageous. These folks will be underwater for ten plus years. They are nice people who made a mistake based on a government entity that screwed them. They now will should a real burden that would not have happened without the Fed and a banking system built on theft.
Not buying it. If I could see the yawning trap, and I’m not all that bright when it comes to financial stuff, then other regular people should be able to see it, too, like many of the posters on this blog. Anyone should be able to know how much house they can afford and that an adjustable rate is exactly that, adjustable.
We did used to have guidelines that everyone buying knew. 28% of gross income for piti and 36% for all debt plus piti. However, now there are no guidelines. Younger people just venturing into the adult world really don’t know what percentage is reasonable for expenses. My kids do, because I taught them, but many don’t have anyone giving them any guidelines.
Younger people just venturing into the adult world really don’t know what percentage is reasonable for expenses.
Of the two knife-catchers in my acquaintance, one is the female half of a twenty-something couple. They just couldn’t wait to buy a house because they were…”tired of throwing money away on rent”. I asked her mom what the big hurry was, but mom seemed to think that her kid was missing the boat if she didn’t buy a house this year.
So now the daughter and BF are locked into a debt obligation that will soon be joined by children expenses, etc. if they get married. And if they don’t get married, who is going to buy who out, and at what price?
People get so crazy with House Lust, they just stop thinking.
This was the buyers fault, period. I mean, didn’t these people do any research before buying? If not, too bad, they should have. If they did do the research, they would have seen that the price increases were not justified by fundamentals- and, if they proceeded in view of that information- too bad.
“A government entity that screwed them?” Are you kidding me? How did it screw them, rates are still at historically low levels. Did The Fed put guns to their heads? I’m sorry, I do not feel bad for these people, they did not have to buy. Hell, I am a fairly well paid professional in my mid-thirties and I do not own, nor have I ever owned, a home.
“They took a cue from the market signal?” Yeah, I did too, it told me that prices were too high and at levels that were unsustainable.
“These folks will be underwater for ten plus years.” Yep, they should be, Boofu*kinghoo. But, I bet if they made 100-200K flipping it 2-3 years later, and leaving someone else holding the bag, the story would be different. And, if that was their intention, they really aren’t nice people.
I don’t blame the buyers, since most of them are pretty stupid. Look at it. The average human being’s IQ is 100 points; that’s barely enough for to flip a burger. Think about this. Half of the world’s population is under 100 IQ points. Come on. now if you see the problem this way, you’ll realize that the buyers, consumers, etc can not be blamed. The government must do thing to stop these stupid people from hurting themselves; that goes for housing bubble, global warming, voting for g bush etc. no way you can blame the buyers.
Well, regular people are supposed to excersise caution in their own financial affairs. These couples had the same information available to them that we had available to us. While the Federal Reserve obviously shoulders an awful lot of responsibillity, so do the lenders, mortgage brokers, RE agents, and, yes BUYERS.
I guess what I’m trying to drive home here is that we should all be doing our due diligence.
Some posters here tend to lump all buyers together in the corrupt greedy speculator bunch. Yes, many here were able to spot something wrong all on their own. But stop to think a minute, would you have been so smart if you hadn’t already had at least one homebuying experience under your belt? That’s how you find out what your monthly costs realy are. The last few years indoctrinated kids have been lied to and sold a fake bill of goods that they couldn’t spot themselves because public schools strive to eliminate critical thought.
So the broker tells you you can afford the house of your dreams. And the lazy kids don’t run any numbers themselves and instead give misplaced trust to a disguised shark who is looking out for only his/her own interest.
I’m not saying there isn’t TONS of fraud and illegal activity in this mess. There is. And I’m also not saying that these stupid kids don’t share the blame for their predicament. I’m just saying that there, for the grace of God (and a caring mother who yanked me out of public school after 5th grade) go I.
…Their mortgage balance is outrageous.
What is truly a head-scratcher is that ridiculous monthly payments don’t seem to scare off the knife-catchers. There is a realtor sign on the lawn of a TH nearby. Here’s the text:
FOR ONLY $750 DOWN AND $1975 A MONTH…THIS HOUSE CAN BE YOURS!
Who in their right mind would shell out $2k a month for
this?
I was renting an apartment for $600 a month. Similar complex across the street went condo for “starting at $130K”. PITI, condo fee, and maintenance you’d be paying > $1200 a month.
Same thing happened in houses. House that could be rented for $1300 a month would cost $2200+ a month to buy!
Sorry, but ANYONE buying at those crazy inflated prices deserves a HUGE chunk of the blame!
Dear Devildog:
I do not have any home-buying experiences under my belt. I came of age during a bubble. Hence the delay in my first purchase.
This country is based on the idea that people can and should take care of themselves. Government is there to organize the group, not to control it.
I blame the buyers, too. Maybe not the ones in 2000-2002… things were getting pricey, but not ridiculously so. When my wife and I moved after I finished grad school, we rented for a few months to get our jobs nailed down, then went out looking. I was outraged at prices. Even with my wife, the realtor, and her parents saying buying would be ‘good’, I couldn’t make myself believe that 750k was a good price to pay for an average house in a so-so Sunnyvale hood, where the median HOUSEHOLD income is 80k. I remember saying “Who is BUYING these things? You need to be making almost 250k a year to BUY this thing!”
The realtor tried to convince me that everybody buying now must be making that much.
This was in February. My wife finally relented because of how unhappy I was, and how many fights over it we were having, and agreed to rent for another year, while saving money for a downpayment.
Needless to say, she’s quite pleased with my stubborn headedness.
Consequently, I have exactly zero symapthy for any buyer, helocer, refier, realtor, mortgage broker, CFC employee, or government budgetman.
I could see it. You all could have, too, if you’d done a bit of due dilligence. So shove your heads where the sun don’t shine, and enjoy your baths.
Big V you are wrong. Government exists to protect our rights from infringement by ANYONE, individuals or groups. Your freedom to do what you want is suppose to end when it infringes on my rights and vice versa (but of course because our government no longer functions constitutionally this is not the case).
Yes people must take responsibility for their own actions. What I object to is the government indoctrinating and dumbing down people so that they are no longer able to effectively act in their own best interest, and then preying on them. And there has also been a historic and long perceived idea that the lender acts in their own interest to protect themselves by only lending what the borrower could actually repay. So it was pretty easy for simple gullible people to get in over their heads - I know a few of them. Just because I spotted this Ponzi scheme in early 2004 doesn’t mean I think everyone is evil who bought a home in the last few years and is now in deep trouble.
I am in the blame the buyer camp. Have two highly educated coworkers (one with a PhD) and both are living paycheck to paycheck because they bought into the housing mania. One bought an investment condo during the peak and one bought an overpriced house that he stretches to the limit to buy. They are two examples but there are several others I know like them. I was arguing with my sis-in-law blue in the face two years ago why the housing price is way out of line and not a good time to buy. Thank goodness they didn’t have enough money then to “invest” in the housing gamble or they’ll be in trouble today.
Hi Devildog, it’s me again:
I agree that the government should step in in cases where the law was broken. Fraud should never be tolerated, but I don’t think the government can be blamed if some people are dumb or gullible (i.e., they trusted a salesperson to make decisions for them).
As long as these people were not directly defrauded (not just persuaded), then they have no one but themselves to blame for taking too much risk with too much money.
Amy repo girl:
MORE than half of the worlds IQ is under 100. If you are talking about the White world, or the Chinese/Japanese world, you would be closer to correct. If you are talking about the WHOLE world, you’ll need to come down a bit.
The average IQ of Papua New Guinea is 57, and in most of Africa it hovers around 70.
The book for you is IQ and the Wealth of Nations.
Hey, I went to public schools, and critical thinking was part of the curriculum! Of course, it was suburban Boston…
I have to say, some otherwise smart people got fooled because of the way RE in Boston got so expensive and kept rising every year, at a time when rents were not only “recovering” but zooming through the roof. Many people fled to the “safety” of homeownership in the late 1990’s because rent was going out of reach.
Of course, things really got ridiculous after 2000, but there was lots of slobber in the paper about how Boston and SF prices had reached a permanently high plateau. Crime rates–the perceived culprit for the very low prices we all remembered in the inner city in the late 1980’s–pitched towards an all-time low. Salaries were rising. In other words, the picture did not look ridiculous.
Of course, “everyone” knew that Las Vegas was a bubble. In fact, there was lots of talk of buying into the bubble with the plan of selling before it burst.
I was taught to be frugal and not to spend more than 28% of income on housing (and no more than 10% on transportation) by my parents. (Certainly wasn’t in school … we learned zip about finance, which was a real mistake. This includes college. Most northeast intellectuals are very, very ignorant about finance even though they think they’re informed because they read columns by economists.) As a result, I rented rooms because that’s what I could afford.
When I came to Gainesville I looked into buying a house. I figured I might be here for a while and I knew young people who’d bought houses in rural VA and in AZ (before the boom). I ran some numbers in a mortgage calculator and found out that renting was cheaper than owning in Gainesville. Other bus drivers had bought houses years ago or lamented the fact that they couldn’t afford a house, so I didn’t feel left out at work. One driver had bought a house from the bank a few years back … 3/2 for $60K in a nice NW neighbhorhood. That house would have a wishing price of $320K now. LOL.
I found out about the bubble from iTulip … I went back there for entertainment, actually looking for old info on the DotBomb (I totally called that … good grief, it just slayed me that anyone went for it, but then again I was working in computers and saw the scam first-hand). However, even without iTulip I had already come up with a price I wanted to pay for a house with the means that I had, and the only houses for sale at my price were early 20th century shacks in a sketchy ‘hood, less than 1000sqft, originally heated by stove, no A/C, and not even built with a plumb line, bathroom not original but tacked on the back during the mid or late 20th century.
Well, I can rent something nicer than that!
Damn, it feels good to be a cheapskate.
I want to call out the Fed because even though People Are Sheep, plenty of honest, sober people with common sense are now bearing the brunt of counterparty risk. Yes, screwed by the bubble even though they didn’t participate. I’m not one of them (although the uptick in crime does not fill me with happy happy joy joy), but we’ve already had stories in HBB about the couples with paid off homes or mortgages they could afford, and the houses around them are empty or multifamily rentals.
The hurtin’ doesn’t always hit those who deserve it the most … the Fed violated its purpose by allowing, even having a hand in creating, this bubble.
Headline coming soon to a paper near you:
Greenspan: I really didn’t get it
Greenspan: I really didn’t get it
One of the most damaging things Greenspan did was that speech suggesting that people take on ARMs, stating that they could save a lot of money by doing so.
With fixed rate mortgages at their lowest levels in decades, he actively encouraged people to take ARMs. There was no “he didn’t get it”…he got folks to keep buying overpriced housing, and using teaser rates and exotic lending to shoehorn themselves into places they couldn’t afford. He actively kept this mania going. When the head of the Fed starts giving this kind of advice, you can bet a lot of people listened and believed him.
Greenspan’s Call to ARMS:
http://www.usatoday.com/money/economy/fed/2004-02-23-greenspan-debt_x.htm
From your link:
“Mark Zandi of Economy.com says that although Greenspan is technically correct, for some borrowers, including those with high debt, fixed-rate mortgages may be a better bet.”
Zandi is at Moody, which rated the subprime loans AAA.
I vividly remember his speech. And the only rationale I could come up with was that Greenshit believed interest rates would remain low for an extended period. ARM’s would make perfect sense in that situation.
I am CFO of a small independent bank, and I must make interest rate projections for budgeting and asset/liability forecasting. At the time, I felt that we were headed for a recession, mainly due to globalization and our bent-over middle class. And I commented to our Board that his speech reinforced my belief that interest rates would stay low.
But then we went and built about 50 million houses, created 3 million temporary jobs, the economy soared, and the fed funds rate was raised from a too-low level to, IMO, a higher-than-necessary level. So, now, the impending recession we should have had 3 or 4 years ago will be even worse than it would have been, and the fed funds rate will begin dropping once again.
I find it hard to believe that a FFR of 5.25% is “higher than necessary.” Inflation pressures are clearly visible…look at energy and food prices. High FFR also encourage saving, something which is highly deficient in this country. The problem is that this country is so addicted to debt, almost like a heroine addict seeking his fix and developing tolerance, that it takes almost non-existent interest to keep the debt monster consumer alive.
The purging has begun. Even if the FED lowers to 1%, the housing market is history. The biggest asset bubble in the history of the world.
Well, the bond market is a better indicator of the state of the economy than some artificial rate set by a few ivory-towered economists. The current 10-year Treasury note yield of 4.46% indicates that the fed funds rate should be under 4.00% right now. And the only inflation we have now is in the cost of surviving. With wages stagnating or falling, the prices of toys and other non-essential shit will be dropping like Joe Frazier from a George Foreman uppercut.
I do agree, though, that a lower fed funds rate will not prevent the impending implosion. All it will do is decrease the borrowing costs of our too-big-to-fail banks. But that won’t put a dent in the billions that are fixin’ to be charged off.
It will be like peeing on a forest fire.
I always wondered if Greenspan suggested ARMs because he didn’t want banks to get stuck with tons of 30yr fixed loans @ 5.0% on their books. That would’ve really killed their ability to lend when interest rates jump.
That is what Greebritches was supposedly paid for….His ability to lead not steal from the poor and uneducated.
What a mess!!!! He new exactly what he was creating. No Excuses!!!!
OT, but I learned yesterday that Jason Alexander’s (he played George Costanza on “Seinfeld”) real last name is Greenspan. I wonder if they’re related?
Wonder if Conan O’Brien ever did one of his “If They Mated” portraits of Greenspan and Andrea Mitchell.
That one’s easy, Palmetto. It would look like this.
http://tinyurl.com/22jjaa
You know, it’s hard not to laugh out loud at you guys when my boss is only about 10 feet away max (and no partition).
Oh, man, NYCityBoy, you owe me a new laptop, big time. I nearly killed myself laughing.
did the fed run REAL rates this low, this long, during the depression ?
“After the 2001 recession, the Fed cut its benchmark rate to a four-decade low of 1 percent. That move, along with Greenspan’s hands-off approach to regulation, have brought him under fire as this year’s bursting of the housing bubble and the subprime mortgage crisis again threaten to sink the broader economy.”
********
Why does everyone ignore the fact that the FFR was pushed down to 1%, it’s lowest point, nearly two years after 9/11? (which was an even longer period of time after the 2001 recession)
He pushed the FFR to further prime the punchbowl from midyear 2003 to June 2004. He wasn’t worried about deflation at that point.
What was he doing really, since the FFR’s effects on economic activity (borrowing and such) is not felt for many months afteward?
He was probably more worried about his legacy and other factors, such as who would win the White House.
Greedscam?
I might be one of the few people that think that the fraud in lending was also a major cause of the upswing in prices along, with Greenspan holding the interest rates to low for to long .
When you got 40% speculation/flipping buying accounting for the demand, along with unqualified buyers being able to submit liar loans ,this is what drove the market up beyond reason .
Based on Greenspans low interest ,the affordability would of reached a cap in 2001 or 2002 in most areas .The builders over building was a greed ,easy underwriting ,sell to speculators type of event, as was the investment scheme of buy now and flip or refinance tomorrow on low down liar loans . So many of the foreclosures are this ponzi scheme sort of leverage purchase financed by low down liar loans .These loan packages were made to look like the borrower qualified . How can Wall Street justify rating those high risk loans at low risk ? What about the fact that Congress refused to listen to the appraisers that tried to alert them to the corruption sometime in 2004 ?
I really don’t think that Greenspan knew how much fraud was taking place . Fraud in lending/appraisals to me was the main cause of at least the last three years of the boom prices.
We should all be grateful that “privatizing” social security failed. Can you imagine adding that disaster, based on how well average folks manage their financial affairs, added to the housing/lending crash? Doesn’t bear thinking about.
Yes, “privatizing” is bad.
Oh, since food is really, really, important shouldn’t the government provide it?
The government does supply it… through massive crop subsidies and controlled markets for major staple items, corn, wheat, dairy products etc - you think there is a free market in food… guess again!
I couldn’t agree more, HW, and it is still going on today. I paid a tech visit to a broker’s office two weeks ago to assist them with software/hardware issues. One of the brokers was on the phone with his borrower and discussing ways to ‘pressure the appraiser’ to bring back the ‘appropriate value’ on his home for a refi. It was disgusting, but is the norm in the business. If appraiser ‘A’ won’t toe the line, appraiser ‘B’ will and get the job.
At another office visit one of the brokers pumped $9,000 into a borrower’s so-called savings accounts on the loan application. She then winked at me and said, ‘You aren’t an auditor, are you?’ Again, this is commonplace as I see it every fargin’ day.
You’d think brokers/appraisers/borrowers would have learned, but most are now so desperate to keep the gravy train rolling they are willingly engaging in fraud.
And no, Amy Repo Girl, it is NOT the government’s job to protect people from themselves. Government’s job description does not include ‘nanny’.
Greenspan has been wrong so many times. Back in the early 90’s he did the exact opposite with rapid rate hikes that squeezed out legitamate buyers with down payments and good credit. Thats when all these alternative loans started popping up. Just like most things they start out well meaning and get totally out of control. I dont think it took a genius or great insight to this housing bubble happening, I think it’s experience and knowing that simple math is the key to any mortgage. I read this blog everyday and there still seems some confusion on why prices went up and when will they go down. Pretty simple formula has always been three components. Income median 60,000, price of house, interest rate 8% because its about 15 year average. When no more than 40% of income can cover all your home expenses, that would be the time to buy. I think it will be at least three more years before the good deals start popping up. I live in Ventura Ca, and bought a little 3bd2bth condo for 85,00 8 years ago I sold it in 2004 for 235,000 and thought it couldn’t go higher. It was listed at one time for 355,000 only reason was easy money. Now that unit is bank owned and asking 235,000. I won’t even look at house’s till that condo gets back to about 130,000 and stays there for 2 years then it may be close to buying.
The Bank of England has been talking tough and saying it is not right to bail out folks and then like magic here comes a bailout days later. I wonder what is the point of pretending days before you are not going to bail institutions out and then immediately start doing it.
I don’t think that’s strictly the case. If you read the Guardian arrticle, they are a depository that is backed up sorta like with our FDIC. So it may be that is why they are given the line of credit. Notice the non-depository UK lender’s stock is dropping like a rock, and there is no bail-out there. Nor of Northrocks stockholders.
Excellent clarification Ben and thank you for explaining the situation.
Also keep in mind that the line of credit is being given at what is explicitly described as a penalty rate.
Good point seattle and I appreciate you and Ben giving feedback, I was beginning to wonder if the Bank of England was beginning to monetize debt the way the Fed has been doing for some time (think competive currency devaluation). This looks more orderly and appropriate after clarification.
and I thought no one was paying attention.
I can promise yu Yuan6P isnt paying attention, but the High Party Officials in the Peoples Republic are keenly aware of the situation.
notice the rate hike today on the Yuan…beating BB to the punchbowl.
Penalty rate or not, the bank is only solvant IF the MBS and CDO it holds could eventually be sold for enough, or they eventually collect their money back by people not defaulting in too great of numbers.
Before making this loan, the BoE checked the banks books and said, “yep, solvant. We’ll loan you money to keep going”. That assertion of solvancy had to make lots of assumptions about the bank’s holdings, assumptions that could prove incorrect, and quickly turn this “solvant” bank into an insolvant one, meaning these “penalty rate loans never get paid back and the money stays in the system = inflation.
Wow even the UK is getting pummeled. I think this global meltdown is just getting started….
Aeyra: all RE is local and it goes up forever and ever. Buy now or be priced out for forever
Repeat after me.
Yeh, and the percent of Brits owning property in FL is staggering. Wonder what that’s going to do for prices.
I think it will kill prices in UK enclaves like SW of Orlando, near Disney. “Last bloke out, shut the door.”
“I think it will kill prices in UK enclaves like SW of Orlando, near Disney. “Last bloke out, shut the door.”
Oh no! Don’t tell our friend Suhkram…he’s holding out for his price, one that’s competitive with RE in New York.
Poor Sukhram.
But even if the bank takes back his house, they can’t take away his beautiful signature (see his mortgage docs)… uh, not till he gets his fingers broken by the collections boys, that is.
Not to worry, he has years before his payment (not his balance, but his payment) adjusts upwards.
I sure hope the Netherlands is next; it’s about time after more than 15 years or RE bullmarket and price gains in the 600-1000% range. People (including politicians) here still believe that RE prices wil never go down.
BBC TV showed lines of people around the block waiting for the bank to
open to withdraw their money. Wow.
Noticed the homebuilders are up today on the large discount programs rolling out this weekend. Standard Pacific (SPF) is still stuck in the mud and I am beginning to wonder if they are going to go BK?
I was about to post that there is a 27% short position on SPF, but I went to check and it has risen to about 35% so it is really looking like Standard Pacific is and odds on favorite to BK at this point.
I wish there would be some way we could get real statistics on the outcome of the discount programs over the weekend. Should be interesting around here. But I just don’t think there’s anyone much in a position to buy. Maybe I’ll drop by one of these joints and see how they pitch me. Better hide my car, though. Heck, I’ll just show them my bankbook and see if any saliva drops.
Do have crack in your bank book?
ROTFLMAO!
I think you should go over the weekend palmetto, I would like to know what you observe if you decide to check out things. Traffic levels and the like
Hovnanian which is rallying today has a short position of around 50% so I would say they look like they are going to go BK. They are slashing prices to sell anything to raise cash at this point so they are clearly bleeding off whatever reserves they have left. Have not looked at their financials but they must be pretty bad to muster a 50% short position
“Hovnanian Enterprises Inc. CEO Ara Hovnanian said the U.S. housing market is near the bottom and won’t recover until 2009. ‘The bottom is very near but I think its going to stay along the bottom for a while before a recovery,’ Hovnanian said today.”
If they’ve been in business since 1959 they haven’t really learned a lot about previous housing slumps. This is no where near the bottom and this is going to be the mother of all housing slumps.
I’m still not sure that they are losing much at the prices they are selling new builds for, even with their “Sale of the Century”. Like I mentioned in an earlier topic a day ro two ago, seems they even jacked up prices on one development near here by $5k before offering the Sale of tjhe Century $15k discount! Their half off options is probably still enough to keep their people emoployed and not lose much (or any) on the deal. And the new prices work out to about $120/sqft which is not terribly cheap for far-flung suburbs like Hagerstown (ugh!).
Yeah, at the bottom, a while. Cement slippers will do that.
Ara was on CNBC’s fast money a few weeks ago and commented on Beazer, who was being pummeled.
He said somethin to the tune of “That won’t happen to us. Things will be tough but we are solid and we will position ourselves for when things turn around.”
Do you think they really are going BK?
65% short position so I would say yes.
To bad they didn’t spend some money on there website before doing this. It would be nice to be able to get some information, but the thing is stopped dead.
Uh-oh, looks like it’s time for Arizona Slim to saddle up and head out on another real estate bicycle ride. I need to check on that HUGE Standard Pacific at the River community on the north side of Tucson.
It’s near River Road and Stone Avenue, and it first caught my eye a year ago. What got my attention was the size of the development, the furious pace at which it was being built, and how few of the units appeared to be sold and occupied.
Fast-forward to this past Memorial Day weekend, when I biked out to a friend’s CD release party at Zona 78 (a good restaurant, BTW). Since it was late in the day, I didn’t see a lot of construction going on. But the community looked to be more empty than occupied.
Greenspan kills me. I have a minor in business and I saw it coming like a Mack truck. I expect government officials to be smarter than me.
“I expect government officials to be smarter than me.”
There’s your trouble, right there, LOL! Seriously, though, most people with half a brain avoid going into government and those that do, are eventually so worn down that I think they begin to develop a generalized contempt for their constituents. I read a very interesting article about Dick Cheney and how he morphed from a halfway decent guy who used to give even some eccentric bum constituent of his a patient listen when he was working in his district, to rabid control-freak paranoia. I am surprised that Ron Paul has remained so sane and focused over the years. For this, I have to admire the guy.
Yes but he was the MAESTRO ! People hung on every word and he was a demi-god by speaking in riddles. Reality being it is Hubris.
I would be poetic justice if his book gets released on same day of major market crash.
Let’s face it, Greenspan is no different from a crack dealer. Everybody got high on the cheap stuff and loved him for it at the time. His problem was that it all went into his head and he couldn’t bring himself to restrict the supply. IMHO that is the key lesson to be learnt from all forms of leadership: It is not a popularity contest.
Let’s all watch “Being There” this weekend!!
“I expect government officials to be smarter than me.”
Many are. The higher ups don’t listen to them, because their information does not match their paymasters political interests.
Let’s be honest.
Greenspan is not idiot, and he knew EXACTLY what was going on. He did nothing to stop it because he’s in bed with the Republican shills currently occupying our White House. He kept the game going for the sake of propping up a failed administration. Ostensibly, you could also say he kept it going because this country was supposed to shed the dead weight accumulated during the Internet Bubble, which he also presided over. America never really had a correction from the Internet Bubble, and like an obedient shill, Greenspan lowered rates to near zero, turned a blind-eye to regulation….then LIED about the real-estate bubble. Now he comes back, and lies again.
He should be pummelled.
I’m not going to defend Greenspan, but he also served under Clinton and helped engineer the tech boom (and bust) in the 90’s. He’s not wedded to any political party. He’s wedded to power, period.
It is important to remember that in J6P’s eyes - the latter 1990s (read: Clinton era) set the stage for what was to come in this RE bubble. The actions of the FED in that decade whetted a national appetite for easy money. The ensuing proliferation of all manner of gambling led to what we face now - when even home and hearth are nothing more than an unweildy and illiquid commodity.
J6P thinks nothing of the sort. His memory goes back 6 months to a year.
I disagree. Greenspan may have seemed apolitical during the Clinton ers, but he put that Red shirt on as soon as GW got into town.
The Internet fed the the Internet boom. Greenspan just sat there and raised rates (which was the right thing to do at the time).
With all due respect, nobody here is mentioning Potomac Fever, which can mean a lot of things, but when it comes to rigging the system to benefit the small coterie of wealthy insiders, means they literally obscure their own vision as to the outcome of their actions for the people in this democracy.
“…That said, it was also unthinkable that Equitable Life would go under.”
pssst…not unthinkable silly… it’s…”inconceivable”
You keep saying that word. I do not think it means what you think it means.
“pssst”?
Maybe they could get Wallace Shawn [Vizzini] to play Greenspan:
“Subprime crisis? Inconceivable! For I am clearly more intelligent than you, you silly typing chimp!”
For this meltdown, I keep coming back to this:
Vizzini: I’m WAITING!
Got popcorn?
Neil
Say, didn’t Vizzini also say something like…”never get involved in a land war in Asia”? It was in the scene where he’s dying.
It was one of the two great blunders…
To finance this growth it imported innovative financing techniques from the United States, such as issuing securities backed by mortgages, which were eventually copied by other large banks.
Funny how they “imported” these techniques from the USA. Sounds like a back handed way to blame us. So before they got all these clever ideas from us, they had no clue and did business the old fashioned way? Above board forthright with their main concern for the depositor…. Riiiiiight! Sorry guys greed knows no bounds, and crosses all oceans.
“Funny how they “imported” these techniques from the USA. Sounds like a back handed way to blame us”
Funny that most of the ARMS are tied to the LIBOR - London Interbank… so they are actually contributing to the crash in the US.
I think they’re still a little sore about 1776 too.
Well, you know how I feel about England. IMHO, they’ve never really let go of their colonies or their empire and merely went underground. London is the financial capital of the world. US makes a nice scapegoat with ample skirts to hide behind. I laugh like a hyena whenever some limey politico gets up on his hind legs and points a finger at the US. Back atchoo, pip-pip and all that rot. The only thing I like about England is the way the Parliament can give the Prime Minister and each other a good razzing when they get up to speak. Love to see that happen to shrub, but he’d probably start crying.
Amen to that. PM’s Questions is the most entertaining show on TV.
I remember an English friend of mine telling me, in the early 1980s, that virtually all mortgages were variable-rate. I remember thinking how awful that must be, because it was well before ARMs’ widespread popularity here. Perhaps he meant only London, because of the relatively high property costs.
Variable rate is BS, IMHO. Too unstable and too untrustworthy, it is only for those who have deep pockets.
I ahve an adjustable rate mortgage (I’m in Canada) - it is tied to the prime rate. I did extremely well with it during the first 5 year term as the interest rates were high at the start and decreased practically the whole term. In the current 5 year term I have had the opposite but since prime has not increased all that much I’m not worried - also I have done some paydowns of principal (no penalty up to 10% of balance. Since my remaining balance is only $ 27 K I’m not overly worried about where interest rates go.
I had an adjustable rate in 1995. I loved it - I never had any surprises, and it only went up twice, by $25 dollars!
They only work when real estate is pulling out a trough, not the other way around.
I got a fully-adjustable (prime+1) mortgage when I bought my house in 1982, and just watched the interest go down and down while I paid off more and more principal without penalty.
Paid it off years ago - don’t even want to think what a long-term mortgage would have cost me.
It is my understanding that England invented the variable/adjustable rate loan .
Back in the late 70’s early 80″s in America ,the secondary market didn’t want anything to do with fixed rate loans .
During this time period was when the adjustable started to become a mainstream item in America ,but the fixed rate was offered also . Back in those days (25 or more years ago ),the adjustable loans were better loans because they had lower spreads ,lower payment raise potentials ,and they were tied to a slower moving index, like the Cost of Funds Index. In fact I had a adjustable during that time span and it averaged far lower than the fixed rate for 20 years and I was only paying 2% over the cost of funds index. But still ,the secondary market in general doesn’t like fixed notes in spite of the fact that people turn the loan on average every 7 to 10 years ,(of course that changed in this recent boom cycle ).
The new age adjustable were just taken not because they were good loans but because they allow for low down ,low qualify ,and the borrowers took those loans with short term goals in mind .it was a how-much- a -month is the payment until I can sell or refinance to tap equity/appreciation .
Borrowers are not victims when they use loans for short term investment goals and than get caught being a bagholder .
Hope you weren’t waiting to buy gold when the price comes down:
Due to the increasing market value of gold, the American Eagle Gold Uncirculated Coins are temporarily unavailable while pricing for this option can be adjusted; therefore, no orders can be taken at this time. We expect products to be available with adjusted pricing on or after September 27, 2007.
http://tinyurl.com/27dgw2
P.S. Plenty of worthless paper script still available…
A prelude to (re)confiscation?
Have you tried Kitco or Blanchard?
Since the government’s fiscal year ends Sept 30, I’d deduce a high likelihood that this is because they are inventorying what they have on hand. That would be a lot harder to do accurately if the bars and coins were moving here and there.
In his earlier years, Greenspan was a big proponent of the gold standard. It raises the eyebrow as to whether things are going according to plan.
When the US mint stops selling gold, which they just did, the decision has been made not to let you abandon ship.
Sort of like communist countries who won’t let people leave.
Or, for that matter, Enron when they wouldn’t let employees get their money out of the retirement plans, or Countrywide, or the hedge funds that won’t do redemptions.
Wow, this is going to get even uglier than I thought.
Wow, if you extrapolate that out, the next step is banks shutting down to avoid runs.
Palmetto, I just spoke to a dealer. They will sell to me based on my relationship but they are not selling eagles to J6P unless the Mint opens up again.
watcher, I don’t know a whole lot about this stuff, but it seems to me that you’ve just posted a very important piece of information. Has this ever happened before?
AFAIK the mint has never stopped selling gold since owning it was made legal again. The fact that say they it MAY be available after September seems to leave it open to not resume gold sales. IMO gold will now be hoarded. I know I will spend all my green paper before I spend any gold.
Relax….this happens every year at this time with the Mint.
No it doesn’t. This has happened before, but only when the price of gold or silver rapidly increases. The Mint will begin selling these again once they adjust the price upwards.
There’s always the Gold ETF — (GLD) and then there are the miners, from AngloGold and GoldCorp all the way to smaller plays like Minera Andes. All of them are going to go ballistic in the coming months.
The media does its best to portray gold investors like they’re “tinfoil hat” fanatics, in much the same way that they tried to portray us housing ‘bubbleheads’ as a bunch of loons.
The only thing that’s truly “insane” is thinking that these pieces of paper with green ink on them are valuable. And that the government won’t just print more of them when they need them.
The gold bull is starting to snort and pound the dirt… this is going to be interesting.
The running of the bull$ hit
I may be paranoid, but I’ve been quietly pulling cash out of my bank and stashing it at relatives’ houses and other safe places. Not huge amounts, but enough to survive on for a while - just in case. Thinking about buying gold but I think it may be in for a bit of a drop if holders start selling it in quantity to pay off obligations.
If this can happen in England, then it can happen here(again).
Besides, just like the guy in that movie that always wanted to lead a round of spontaneous applause, I think it would be cool to lead a run on a bank.
As long as I get my money first…..
/greedy
Better hurry if you want gold. The US mint just quit selling gold coins; see my link above.
Per my note above, I think it’s better than 50-50 that the hiatus in sales by the government is due to inventorying, for year-end financials.
Why would they not say that it was due to inventorying then? Why blame higher prices?
I’m not sure it’s mutually exclusive. With fluctuating prices, they can have a large swing in inventory and presumably a lot of metal would be in “limbo” - paid for but not yet delivered. At any rate, if you can still buy from the independents, I think there is no signal of crisis. Mind you, I like gold and use it for insurance. Would have bought twice as much if I could have withstood the harping at home.
There’s always silver. It’s more affordable and less overvalued anyway.
Silver is nearly an industrial metal, barely precious.
Silver is a better buy in relation to gold.
It has been a precious metal since antiquity.
Last time gold was $700+ in May 2006, silver was well over $15 (it is below $13 right now).
Much less aboveground stock than gold.
Is actually useful for something, unlike gold.
Is trading at about 1/4 its recent historic highs (gold is 7/8 the way there).
It won’t take a credit collapse to catapult silver, indeed, industrial demand will boost its price too.
Silver beats gold in every way except one: it isn’t nearly as portable.
Take out the Hunt Brothers bubble equation, and silver looks overpriced…
Now
Silver will soon be in short supply because its needed for computer and cell phone curcuit boards.
‘…We’ve developed retail therapy — it’s a drug”
FED & Central Bankers… let’s huddle together here gang…O.K., I see then we ALL agree…more liquidity “injections” should “stabilize” the “Sit-U-ation”, now Captain Benny Boy, about that last heading for the “Good-Ship-Lollipop”… what exactly was the “Heading” and was it based on “Dead Reckoning”…
“Merrill is at risk because it participates as an investor, lender, counterparty and guarantor in markets tied to subprime mortgages.”
Yeah, “They” were squeezing every ounce out of the suckers with every roll of the “loaded” dice…
As the song goes…
Money… get back
I’m alright Jack keep your hands off my stack!
“Economist Andrew Charlton from the London School of Economics believes the U.S. housing slump and high levels of personal debt are part of the same problem: People on low incomes getting in over their heads with either housing stock or personal debt they cannot afford.”
Thank you, Andy! Yes, hyper-consumption and the housing bubble are completely intertwined. It is ridiculous to think that even for a moment consumer spending, along with RE, is not in a really precarious position. Can an economy based so heavily on consumption weather the first real postwar economic crisis?
“OT, but I learned yesterday that Jason Alexander’s (he played George Costanza on “Seinfeld”) real last name is Greenspan. I wonder if they’re related?”
Remember the episode when Jerry needs to learn how to lie so he comes to the undisputed master, George Costanza, and begs him to reveal his secret. After much begging and pleading, George finally relents and, looking first left then right, whispers, “it’s not a lie if you believe it.”
I vote for Greenspin. It’s all about money and lies.
As to the “experts” who failed to see this coming:
If they are experts then they are liars.
If they are telling the truth, they are not experts.
“Northern Rock had concentrated almost exclusively on mortgages. To finance this growth it imported innovative financing techniques from the United States, such as issuing securities backed by mortgages, which were eventually copied by other large banks. Northern Rock was showered with praise by the investment banks that helped arrange this financing, and its executives could often be seen picking up awards at industry events.”
That import could be as toxic to the British banking sector as certain imported lead-painted toys are to America’s children.
I would love to shove those “awards” of their a$$!
“Christopher Kummer, president of the Zurich-based Institute of Mergers, Acquisitions and Alliances, stressed a possible scarcity of bidders. ‘In such a situation, the list of possible acquirers will be quite short unless the risks are transparent and limited and the price would be extremely low,’ he said.”
I suggest Blackstone, Citadel, Cerberus, or Fortress should snap them up at a fire sale price.
I know this will be a stand alone weekend topic, but I want to get on record now:
Rates will be cut by 25 bp to 5.00%. And the 10 year will soar to 7% on anticipation of strong inflation for the next few years.
Anyone else care to guess?
It is possible that the FED will gamble that a 24 basis point cut won’t tank the dollar and send mortgage rates (still low for those who conform) soaring. A 50 basis point cut and forget it.
This is a clear choice between two sets of interests. Keep rates high, and young future homebuyers who save are assured low fixed mortgage rates and falling prices. But FB’s with ARMS and those who lent to them are screwed.
Re-spike, and you might get falling home prices anyway, but long term rates will rise (screwing savers seeking new purchases with fixed loans) as short-term rates fall.
Im gonna go out on a limb here wearing a tin foil hat just in case.
FED comes out and Jawbones.
Statement goes something like, “We are closely monitoring the current credit conditions in the marketplace and stand ready to act if a situation arises that requires quick and decisive action.”
TRANSLATION:
WE aint gonna blink till everybody blinks together. Got that Japan, ECB, BoE…..nobody blink yet. Now, I must get back to my desk in order to get these overnight REPOS done and calculate how much liquidity is necessary tomorrow.
The continued flight to quality will keep the 10-year low in the near term. If a 25bp move is already priced into the markets, wouldn’t the higher 10-year rates already have manifested themselves?
My guess:
.25 cut in the FFR to 5.0% .25 cut in the discount rate to 5.5%… With statement that has a neutral bias and says if the drop ignights inflation they’ll return to tightening bias.
Sort of a “this is all you get, and you’ll like it” statement.
.50 is already considered likely, so saying it ain’t so will casue marekts to retest their August lows, will cause tresuries rates to jump .25-.50, dollar index will jump back above 80, and we’ll return to Carry Trade unwind.
If the unwind gets crazy, Fed will drop discount rate another .25 possibly on Friday, the quadrupal witching day just to kill the shorts again.
Over the next two years, I expect falling house prices and rising unemployment to counteract inflation in food, energy and exports.
For the last 2 decades, imports have fallen while things produced here got more and more expensive. I expect this to reverse as house prices fall, unemployment and recession hold wages down and import prices rise.
Expect some healthcare reform, tort reform, and other things to try to keep some prices falling to compensate for rising import costs.
Basically, we need to undo the last few years of high inflation in everything except imports.
Oh, now I get it, back to the old, here’s the rate cut my Wall Street cronies and jawbone inflation with, “stay in your room or I’ll get the belt out!”
Im outs this market anyway, too much “Queens Gambit” Fed move crap getting “priced in” on the coming quadruple witching Friday. What a bunch of Horse Sh*t
3 to 1, cut 25bps
there you have it folks.
On CNBC hovnovian just said that they’re cutting prices to below the conforming limit of $417K. You can bet that they’re going to get rid of all of the freebies that allowed them to keep prices high and use the freed up money to lower real prices.
This will of course completely destroy the median prices. In places where the median is around $500k you could see price drops of 15% overnight once the incentives fad finally flops.
Day-O
Limbo stick come and over $417k ain’t no fun
Day-0
A friend of mine sent me this observation, relative to so many ARMs being indexed to the Libor rather than the Fed Funds rate:
…that is extremely interesting. What it means is that the banks have seen this whole scenario coming all along, have planned for it, and who knows, may have deliberately contributed to causing it (although I don’t accuse them) … It means that they are absolutely confident in bailout, and also believe that European interest rates will outpace ours for a long time. That means that a) the Fed will cut, big time, and b) the dollar will tank.
As a corollary, I think the stock market will go up, because it will become as cheap as popcorn to overseas investors, once the dollar stabilizes at the new low (about 80 yen). Foreigners already holding our treasuries (the Chinese) will take a royal bath, but they won’t be able to unload, because if they do, they’ll sink the global economy overnight, and the lights will go out on civilization as we know it.
The whole problem is easily solved. The USG will offer subprime defaulters a free ride on Fannie Mae, refinancing them at fixed rates with a negative amortization and extended payback to reduce the monthly payments to what they were before. Then there should be no more whining by the borrowers. The politicians are circling the wagons to end the war, because they’ve milked it for all the billions the taxpayers can stand. Now they’ll let the Fed and Fannie milk the public with bailouts.
Will it come to THIS????
http://www.youtube.com/watch?v=_Er69b4HMl8
Ben, this is an amazing post. In the course of a year, we’ve gone from there is no housing bubble….soft landing….subprime is too small to cause any problems….subprime is contained….global credit crunch….there is spillover….chance of recession is 40%….run on banks….largest mortgage company in the U.S. having to get emergency funding to stay in business…..
Unbelievable. Bottom line, I still don’t think people get how bad this is going to be. At least with the dot.com stocks, you had to have the money to buy the stocks. The housing mess is largely based on leverage, so it’s worse on the way down.
Yet many of us foresaw this a few years ago. Absurd and frightening at the same time.
Common sense isn’t so common after all.
I foresaw a housing bubble that would end in the bust, and Americans being forced to live within their means. I did not foresee a global financial disaster. This is scary.
Is this truly a global financial disaster, or are the PTB and their media agents at CNBC, etc. just playing it up to be one so they get their way? I am not entirely convinced. However, if there is a fundamental change in how commerce is viewed due to a crisis, bring it one. If I have to live through GPII to hear the words “A long time ago, there were these things called Hedge Funds” and kids think along the lines of BoogieMan, I’m ok with it. Colateral damage is a byproduct of all societal change.
Good post! Can we get the same kinda leverage in stocks as we do in housing? Hmmm 0% down 100% financing. Can I get that in the stock market? Not a chance.
The thing is, they can repo the house. The thing with stocks is once they go to zero, you’re toast.
But that never happens LOL
“‘While I was aware a lot of these practices were going on, I had no notion of how significant they had become until very late,’
I have a theory about why he didn’t know - he’s some rich dude who doesn’t know how much most folks were stretching to be part of the dream. Out of touch and clueless. We borrowed through the “prosperity” of the early 2000s (no real wage inflation, no large job gains, but corporate profitability sailed). Made people feel rich and made them feel they deserved all the sh*t in the world but couldn’t really afford it.
This from the same guy who once used the dottering anecdote about households now having two or more cars as a sign of unilateral and unprecedented prosperity.
“While I was aware a lot of these practices were going on, I had no notion of how significant they had become until very late.”
Yeah right! What about the dot com bubble, Mr Greenspan? I bet you also had no idea about Wall Street hustlers promoting and recommending worthless and profitless internet companies. What really gets my goat about central bankers is that when markets are going up and red flags are raised about bubbles, they always say that their job has nothing to do with targeting asset prices. However as soon as markets crash they start scrambling around trying to prop up the same asset prices. These guys are nothing but bare faced liars without any shred of integrity or shame.
This was posted by Ernest yesterday, and I also put it in the Bits Bucket. It’s an article reporting that, of all the hedge funds that reported earnings yesterday, 74% of them reported losses. Hedge funds are not required to report earnings, and thousands of them chose not to.
http://www.reuters.com/article/fundsFundsNews/idUSN1339735420070913
Big V. And that is another reason why I can’t understand why the stock market is going up .Without full knowledge of what possible loss is in the cards ,including any companies that are invested in these mortgage backed hedge funds directly or indirectly ,it’s to much of a unknow factor .
Its not enough to say sub-prime is contained .The cheerleaders on the business news make me want to puke . The traders are assuming a bail-out and many interest rate cuts ,and it’s nothing more than a cover-up .
Look at the margin, people are buying stocks the same way as they did houses. When the big boys sell they little goys are going to get crushed 3xs there investment. Loose all there money and perhaps a little or a lot more. This is where it starts to get fun for the home team.
What are margin requirements these days??
Big V,
I want to clarify re: my post yesterday about my uncle in Thailand that I was NOT in any way endorsing what he does or how he lives. In fact, I STRONGLY disapprove of how he has chosen to live, but hey it’s his choice. I’m guilty of adding a couple facts to the story that maybe I didn’t need to, but that’s all. Not that it matters, but he actually got a girlfriend over there….I didn’t want to imply he was chasing 10 yr. olds.
Even with the girlfriend part I disapprove, but it’s none of my biz. I live much differently. Just wanted to clear that up.
Thank you, understood.
I racked my brains to figure out what this all meant a few days ago.
I had to go back a month then move forward to grasp just what the heck is going on. In a nutshell, under a SEC rule dating back to 1933, I believe, certain private companies can trade amoung themselves and without public or SEC scrutiny. Ya just can’t make this up. Read first link, then second.
Best,
Leigh
http://tinyurl.com/3dajho
http://tinyurl.com/2qg8gq
For the super weathy only! Aspirin.
Great.. and when their investments turn south, will they ask for a bailout?
Just one more way in which the super-elite run (or rig) the table for their own benefit.
Anybody hear this ad on the radio? Check out the website, they want us to believe it’s crashung due to such high demand for “the deal.”
http://khov.com/deal
Since I have an active RE license even though I haven’t used it for years I got this email from K. Hovnanian Homes. I have a license in OH, so apparently they are offering up to $20,000 off here. (Which shows how little OH housing appreciated compared to the rest of the country). I only copied part of it because there was a lot of flashing pictures and commission structures with bonuses and trips depending on the number on homes you sell. They listed a bunch of Ohio cities. The ad was pretty long. Here goes.
Get Your Buyers Ready!!!
The Deal of the Century is coming for the new home of your dreams.
If you have buyers that have been waiting for the right time to buy their dream home, get ready for a busy weekend! From September 14th to the 16th, your buyer can
Save $20,000.00
off the base price of our 10 best selling home designs with the Deal of the Century from K. Hovnanian Homes Built On Your Lot. Whether they are a first time homebuyer or looking to move up, we’ve got the perfect home for them. And for 72 hours only, there are even more reasons to buy K. Hovnanian Homes!
PLUS
K. Hovnanian Built On Your Lot continues to offer you extra incentives to bring your buyers to your closest New Home Gallery! Beginning from April of this year, through October 31, 2007, the more you sell, the more you get!
Oh yeh, they’re getting desperate.
Just another scam to create urgancy in buyers… Get them this weekend because after monday these deals will be gone.
Like auto dealers having a “this weekend only sale”…. Please! Like you’re not going to have the same prices with another name slapped on the sale, soon.
It won’t work.
I’m organizing a $10k bank run, for this coming Monday…
Fiscal fitness required, physical not so much
You start and LA renters got your back