Nobody Thought It Would Ever End
Some housing bubble news from Wall Street and Washington. Associated Press, “Shares of American International Group Inc. hit a new 52-week low Monday after the insurer said in a regulatory filing that auditors have found material weakness in how it reports the value of certain credit default swaps. In a filing with the Securities and Exchange Commission on Monday, AIG said it would need to alter the way it values credit default swaps involving collateralized debt obligations.”
“CDOs are funds that contain slices of bonds, some of which are backed by mortgages. Back in August, AIG called exposure to subprime debt ‘minimal.’ In November, it maintained that despite some losses due to mortgage-backed bonds, its exposure to the debt remains ‘high quality,’ with ’substantial protection.’”
From Bloomberg. “AIG, the world’s largest insurer by assets, said auditors found a ‘material weakness’ in how the company values its credit- default swap portfolio. The stock fell the most in 20 years.”
“The contracts declined by about $4.88 billion in October and November, according to data in a regulatory filing today. The drop was confirmed by company spokesman Chris Winans. AIG had said in December that the value of the ’super senior credit derivatives’ fell by about $1.1 billion in those two months.”
From MarketWatch. “Shares of IKB Deutsche Industriebank tumbled more than 20% Monday, retreating after weekend reports that the struggling German bank needs a further 2 billion euros ($2.9 billion) in capital to cover its subprime-mortgage risks.”
“But German newspaper Frankfurter Allgemeine Sonntagszeitung reported Sunday that KfW, which holds some 40% of IKB, cannot afford to provide any further capital and that the other banks that participated in the rescue have so far refused to increase credit lines.”
“The newspaper said the additional capital is needed in light of IKB increasing its view of the risk from assets on its balance sheet, to 3.3 billion euros from 1.35 billion euros.”
“The bank also has about 8.1 billion euros of exposure through its off-balance-sheet Rhineland Funding. The investment vehicle borrowed money by issuing short-term commercial paper and invested in longer-term debt, including subprime mortgages.”
From Reuters. “CNA Financial Corp, a commercial insurer whose majority owner is Loews Corp, said on Monday fourth-quarter profit fell 50 percent, hurt by losses related to subprime fixed-income investments.”
“Net realized investment losses totaled $61 million, reflecting what CNA called a ‘decline in credit market conditions including credit spread widening and exposures to sub-prime collateral in our fixed-income securities.’”
“Banks are driving the cost of protecting corporate bonds from default to the highest on record as they seek to hedge against losses on collateralized debt obligations, according to traders of credit-default swaps.”
“‘Banks have taken losses, spreads are going wider and they are just cutting positions,’ said Andrea Cicione, a senior credit strategist at BNP Paribas in London. ‘Lenders are probably reducing risk positions in a deteriorating credit environment by unwinding CDOs.’”
“Contracts on the benchmark Markit iTraxx Crossover Index soared 17 basis points to 547 at 12:50 p.m. in London, according to JPMorgan Chase & Co. The Markit iTraxx Asia Ex-Japan Series 8 Index soared the most in one day, rising 15 basis points to an all-time high of 144.5, according to BNP Paribas SA.”
“The Group of Seven estimates banks worldwide will suffer writedowns of $400 billion on home loans, German Finance Minister Peer Steinbrueck said at a weekend meeting of officials and central bankers in Tokyo.”
From Realty Check. “You just can’t make this stuff up. Apparently even a big builder’s daughter can’t seem to keep faith in the Florida housing market.”
“According to an SEC filing, Wendy Topkis, daughter of Toll Brothers co-founder and Vice-Chairman Bruce Toll, is walking away from a Florida condo, just like everyone else. A Toll Bros. condo!! The Palm Beach Post says it best: Et Tu Wendy?”
“Daddy is quoted as saying she just changed her mind because she had another child and the place would be too small, but I’m guessing the 13 percent drop in Florida prices was screaming at her a little louder than the baby. So Wendy just adds to the company’s 61 percent cancellation rate in the Sunshine State.”
“The daughter of Bruce Toll informed the company last month that she and her husband ‘did not intend to make settlement’ on a $2.47 million home they had previously agreed to purchase, the company said in a regulatory filing.”
“Toll Brothers went on to say that it intends to pursue its rights under the agreement of sale with Toll’s daughter, Wendy Topkis.”
The Chicago Tribune. “But when I called TCW Group Chief Investment Officer Jeffrey Gundlach this week…he was fixated, and agitated, about information anyone could interpret. ‘Listen to this,’ he said as he read a headline from a CNNMoney.com article: ‘Homeowners: Can’t pay? Just walk away.’”
“‘People have decided that it’s acceptable to default on mortgages,’ said Gundlach, a top bond fund manager who was singled out by Morningstar Inc. as a ‘Manager of the Year’ in 2006 and predicted the current housing mess early in 2007.”
“‘It’s acceptable to default!’ Gundlach emphasized, his voice a mixture of dread and disgust. ‘They even have a new term for it: ‘Jingle mail.’ ‘We are in a growing culture of default,’ Gundlach said.”
“The way Gundlach sees it, this is one of the biggest threats to the economy. He sees the potential of a dangerous spiral of nervous lenders and a housing glut. And the risk in this spiral is clear: Fewer people will qualify to get loans, so more houses will sit on the market and prices will slump more.”
“Lehman Brothers economist Michelle Meyer noted that Toll Brothers, a luxury home builder, reported this week a 37 percent year-over-year decline in signed contracts in the fourth quarter. And the average price per home dropped from $730,000 during the first quarter last year to $634,000.”
“Builder D.R. Horton recently reported a 52 percent drop in sales, and 44 percent of the sales that were arranged ended up being canceled.”
The Washington Post. “For a time, the snow-dusted forests ringing this picturesque mill town might as well have been made of gold.”
“Eager U.S. construction companies scooped up Canadian lumber in record volume during the great American housing boom of the middle of the decade. As prices spiked, sawmills cashed in, spending millions to increase production.”
“They upgraded factories and enticed laborers with salaries upward of $80,000 a year, adding third shifts to pump out wood for McMansions in Miami and instant subdivisions in Phoenix, 24 hours a day.”
“The lumber bubble brought to this sleepy town of 4,500 people about 600 miles north of Vancouver a rush of wealth, still easily visible in the freshly minted Ski-Doo snowmobiles and $60,000 pickup trucks, now idle in driveways.”
“‘Everybody went out and bought new toys,’ said Mackenzie’s no-nonsense mayor, Stephanie Killam. ‘Nobody thought it would ever end. They were wrong.’”
“As the ripple effect of the U.S. subprime-mortgage collapse spreads around the world, the boom times for Mackenzie and dozens of other towns built on the legacy of the Canadian lumberjack have come crashing down as fast as you can say ‘timber.’”
“With wood demand and prices plummeting along with U.S. housing starts, three of Mackenzie’s five sawmills have shut down indefinitely and others have cut shifts — propelling the town’s unemployment rate from single digits to more than 70 percent since August.”
“Similar events are playing out across the Canadian hinterlands, where at least 139 sawmills, many of which depend on the U.S. market for most of their sales, have been forced to close indefinitely or reduce shifts over the past 18 months, according to Canadian government statistics.”
“Thousands of forestry workers are jobless, creating what analysts are calling the industry’s worse shakeout in modern history.”
“‘They were selling $250,000 houses [in the United States] to guys who worked at McDonald’s, and guess what, they couldn’t afford them,’ said Gerald Girard, a laid-off Mackenzie lumber worker. ‘So now, who’s paying the price for it? It’s not just them, aye. I’ll tell you who. It’s us.’”
The New York Times. “For more than half a century, Americans have proved staggeringly resourceful at finding new ways to spend money. By the 1980s, millions of Americans were entrusting their savings to the booming stock market, using the winnings to spend in excess of their income. In recent years, millions more exuberantly borrowed against the value of their homes.”
“But now the freewheeling days of credit and risk may have run their course, at least for a while and perhaps much longer, as a period of involuntary thrift unfolds in many households. With jobs shrinking, housing prices plummeting and debt levels swelling, the same nation that pioneered the no-money-down mortgage suddenly confronts an unfamiliar imperative - more Americans must live within their means.”
“‘We don’t use our credit cards anymore,’ said Lisa Merhaut, who lives in Leesburg, Va., and whose family last year ran up credit card debt they could not handle. Today, Merhaut manages her money how her father did. Despite a household income reaching six figures, she uses cash for every purchase. ‘What we have is what we have. We have to rely on the money that we’re bringing in.’”
“The shift under way feels to some analysts like a cultural inflection point, one with huge implications for an economy driven overwhelmingly by consumer spending.”
“The unraveling of the real estate market appears to have left millions of families with little choice, yanking fresh credit from their grasp.”
“‘The long collapse in the United States savings rate is over,’ said Ethan Harris, chief U.S. economist for Lehman Brothers. ‘People are going to start saving the old-fashioned way, rather than letting the stock market and rising homes values do it for them.’”
“For the 34 million households who took money out of their homes over the past four years by refinancing or borrowing against their equity, roughly one-third of the nation, the savings rate was running at a negative 13 percent in the middle of 2006, meaning they were borrowing heavily against their assets to finance their day-to-day lives, according to Moody’s Economy.com.”
“By late last year, the savings rate for this group had improved, but just to negative 7 percent and mostly because tightened standards made loans harder to get.”
“‘For them, that game is over,’ said Mark Zandi, chief economist at Economy.com. ‘They have been spending well beyond their incomes, and now they are seeing the limits of credit.’”
“Not long ago, Elena Gamble would have looked at the Cadillac parked across the street from her modest home in Elk City, Okla., and felt a twinge of jealousy.”
“‘We live in a small town, and everybody looks at your clothes and what you drive and where you have your hair done,’ said Gamble, who earns about $2,600 a month as a grievance counselor at a local prison. ‘Everybody wants to be rich.’”
“Now, she and her husband - a prison guard who brings home $2,000 a month - are grappling with $10,000 worth of high-interest debt. They no longer go to the movies or out to eat, except for the occasional visit to McDonald’s. They dropped their Internet service. Last May, their car was repossessed.”
“‘What we say now is, ‘If we can’t afford it, we can’t buy it,’ Gamble said. ‘It stays on the shelf.’”
The Marin Independent Journal. “As our economy falters because of the housing bubble and the erosion of the dollar’s value, there is less faith in this country’s economic soundness by our creditor nations.”
“A clear lesson is that we have for too long been living far beyond our means as a people and as a nation. We can no longer consume so much more in value than we produce.”
“Many in Marin are lamenting that real estate prices are skidding. We are ‘losing money.’ If we’re honest, we know that much of the equity in our overvalued real estate is ‘funny money’ based not on real values but on the speculative furor of the past decade.”
“Losing some of our shaky home equity is not the medicine we want. But perhaps it’s needed. It’s as true as ever that it’s better to live within our means and not go too much in debt - especially if it’s for all the wrong reasons.”
The days of the media reporting on what was going on at Fannie Mae may have ended, but I haven’t forgotten. AIG was rumored to have been involved in some of the off-shore ’special purpose entities’ Fannie set up. I even read that there were more than 1,000 of them. Years later, still no financials, no audit, no idea what’s going on. They just lifted the lid and closed it again. For shame congress!
“They just lifted the lid and closed it again.”
I guess they did not like what they saw lurking beneath the lid of Pandora’s box?
Or it was as if they lifted the lid on the septic tank…
Let’s try another word association exercise:
“shame” and “Congress” goes together like…?
Oil and water.
Nice catch.
Saw my picture in the paper
Read the news around my face
And now some people
Don’t want to treat me the same
When the walls
Come tumblin’ down
When the walls
Come crumblin’, crumblin’
When the walls
Come tumblin’, tumblin’
Down
Yeah, yeah, yeah, yeah, yeah
Yeah, yeah, yeah
Glad to hear that the Greenbergs are sweating. They’ve been putting the shaft to folks in disaster areas for years!
I was listening to a financial show this morning. There was mention that the fallout from the subprime mess might actually be 3 and 4 times as bad as previously believed. If that be the case, then say bye-bye to bonds and the banks that insured them. The thought of that scale is simply mind altering.
3-4 times? This time last year we were hearing $20 billion. By summer it was $60-$80 billion. Now the G7 is talking $400 billion.
By the time all is said and done it will be more than $2 trillion.
Like the article said, “.. a cultural inflection point..”
Roidy
Trading in CDOs slows to a trickle
By Paul J Davies in London
Published: February 10 2008 22:05 | Last updated: February 10 2008 22:05
The market for complex debt securities has seen its worst start to the year in more than 10 years with issuance of collateralised debt obligations grinding to a near halt worldwide.
Just three CDOs worth a total of $1.3bn were sold in January – one in the US and two in Asia – compared with 37 deals worth $22bn in January 2007, according to analysts at Morgan Stanley.
http://www.ft.com/cms/s/39f3e128-d808-11dc-98f7-0000779fd2ac,Authorised=false.html?_i_location=http%3A%2F%2Fwww.ft.com%2Fcms%2Fs%2F0%2F39f3e128-d808-11dc-98f7-0000779fd2ac.html&_i_referer=http%3A%2F%2Fwww.ft.com%2Fhome%2Fus
I guess Banks think their CDO’s are worth more than their neighbors. They are holding on to those 2005 prices
After all, they’re not going to give them away!
lol az slim
if they do not sell they have not lost the money
like holding a stock that has taken a major nosedive
I know next to nothing about the banking system, but from what I’ve gathered here on this blog, the banks are holding onto their REO’s with a small paper loss rather than realize an actual loss for the time being, even though the market is falling. If I understand correctly, this is going to catch up to them as the non-liquid, non-performing assets pile up and move them toward insolvency. Could some of you bank wizards comment on this, and how soon they are apt to start addressing market realities? At least here in San Diego, it seems the REO’s are by and large priced higher than FB’s under duress.
cayo-ron, I am a true ignoramus, but it looks like since banks can’t unload the properties without big losses and the secondary market for loans is dried up, they are in mucho trouble. This screams credit crunch even with all the bailouts. My guess is banks are in a wait-and-see mode. There is so much to lose that they are hoping for anything that will reinflate the market. When that doesn’t happen, they are going to have to start unloading just to stay in business. I don’t see that happening until the next election. There is too much at stake for politicians.
Who didn’t see that coming?
I’m surprised at that number. How in the world did even 3 CDOs sell? I expected the number to be $0.
“Toll Brothers went on to say that it intends to pursue its rights under the agreement of sale with Toll’s daughter, Wendy Topkis.”
What a bizarre story. Certainly either daddy or Uncle Bob can spare a few mill to help out the next generation?
Oh this is a publicity stunt. You know they aren’t really going after the daughter… Even if they do, I am sure daddy will give her the money and just file an expense report to get reimbursed.
Just like everyone here has been saying: It’s just a smart business decision to walk - no point putting money towards a depreciating asset. Why should it be any different for her?
“Certainly either daddy or Uncle Bob can spare a few mill to help out the next generation? ”
She should be forced to live with her parents until age 40, and then only get a house if she spends 50% of her income.
Ya just can’t make this stuff up!
Har,
Leigh
Toll’s daughter walks — sweet!!!
Not that it matters. Daddy will make her whole with his cashed-out moolah.
On an unrelated note, Toll condos? Wow, things are even crazier than I thought.
Someone is killing Toll’s shorts today…
http://www.marketwatch.com/tools/quotes/intchart.asp?symb=TOL&sid=4922&dist=TQP_Nav_chart
$22/share = Goldilocks price for Toll stock shares (not too hot, not too cold, just right…)
Stimulus package… the illusion that raisng the conforming loan limit will stall the crash. The delusion that there are enough people that have the income to qualify, that are willing to buy the overpriced crud.
Was listening to “Marketplace” on NPR this morn. Sloan (of “Sloan Report” fame) wasn’t too impressed with the stimulus package.
“…Gundlach, a top bond fund manager who was singled out by Morningstar Inc. as a ‘Manager of the Year’ in 2006 and predicted the current housing mess early in 2007.”
The bar is set pretty low over at Morningstar, huh? Note his astonishment over the concept of jingle mail too.
The bar was always set pretty low at Morningstar.
What exactly do they do? Maintain ratings? For whom? The average sheeple?
Morningstar was a classic dot.com style business. Eyeballs, etc. They were just smart enough to go IPO during the next IPO boom not at the tail end of the dot-coms.
I’ve never paid attention to a “Moringstar” rating. I just look at what the fund owns.
“predicted the current housing mess early in 2007.”
A regular Nostradamus. Only about 3-4 years behind HBB and Patrick.net.
RE: Note his astonishment over the concept of jingle mail too.
As has been noted here before-the ivory-tower intellects and the Sky-Box money crowd continually just don’t get it.
I agree the bar must be set really low at Morningstar. I bought my first house in the spring of 1999. We had to move further out to get the price we wanted because every house we made an offer ended up in a bidding war; people were waiving inspections and paying top dollar for starter homes. I consider myself fairly economically naive, but I do know that the value of things is totally arbitrary, and mass market goods must have price ranges that are sustainable. Two years ago the local steal estate agent came by while I was washing my car and asked me if I was interested in selling my house. She said I could get about 350,000 for it (I only paid 172,000). I told her that I didn’t want to take on more debt and that my house payment was fixed and I could not even rent an apartment for what my mortgage payment is. I also said that I didn’t believe the housing prices are sustainable, how can people afford these prices I said. She literally looked at me in disgust and said goodbye….
“‘They were selling $250,000 houses [in the United States] to guys who worked at McDonald’s, and guess what, they couldn’t afford them,’ said Gerald Girard, a laid-off Mackenzie lumber worker. ‘So now, who’s paying the price for it? It’s not just them, aye. I’ll tell you who. It’s us.’”
Meanwhile, house prices are up 45% yoy in Saskatoon, Saskatchewan.
http://www.reportonbusiness.com/servlet/story/RTGAM.20080211.whousing0211/BNStory/robNews/home
You can thank mining for that.
For those that don’t know, Saskatoon is surrounded by 300 miles of flat, open land in every direction. Anyone wanna bet house prices crash there ?
This is why it is so important to prevent bubbles in the first place. A few people benefit during the bubble, but when it bursts, everyone suffers.
For the past 10 years “bubblenomics” has been our official policy, and it simply isn’t sustainable.
Truthfully if these people would have pocketed the extra money from the boom times, they would have made out well too. But we all know that seldom happens. People are either dumb or overly optimistic…or maybe a combination of the two.
They see something happen for a few years, and that is the new way of the world. It is only up from here. Get all the toys, trucks and houses you want, because it only gets better from here on out. This attitude tends to cross a lot of industries and income levels.
I can always tell how the economy in Western PA is doing by the number of toys at the end of driveways for sale. Things took a turn for the worse this fall, and aren’t getting any better.
I keep trying to find a reason to try to be optimistic, but I think there is just too much excess debt, excess retail capacity and excess global labor to allow the US economy to go right back to consumers consuming non-stop without ever really paying for any of the consumption.
I think there will be a lot of people being forced into Bankruptcy repayment plans, and that will be the only way their consumption will be curtailed. And that folks isn’t good for an economy that is built upon the credit ratings of the American Consumer and Consumerette.
Everyone cannot profit from the boom. It was a massive Ponzi scheme with each layer taking its cut.
The only way to win is to not play, or play early and get out.
“‘They were selling $250,000 houses [in the United States] to guys who worked at McDonald’s, and guess what, they couldn’t afford them,’ said Gerald Girard, a laid-off Mackenzie lumber worker. ‘So now, who’s paying the price for it? It’s not just them, aye. I’ll tell you who. It’s us.’”
These are the same guys that splurged on toys and are now in trouble too. Their income went up and they went out and blew it on toys. Great.
Glad its all contained. Glad our sense of entitlement isn’t going to our heads.
Hear, hear. This is why I believe Alan Greed-scam should be publicly flogged and then sentenced to life imprisonment at hard labor. The Fed and Wall Street have really screwed the pooch this time and the fall out will be horrific.
“This is why it is so important to prevent bubbles in the first place. A few people benefit during the bubble, but when it bursts, everyone suffers.”
OT,
What is the past perfect of “have screwed the pooch”? Possibly “had screwn the pooch”?
Roidy
I believe the good folk of Mass have already solved this: screw, scrod, had scrod, will screw, will have scrod.
so “had scrod” is your answer.
isn’t scrod a fish?
Exactly. And there’s plenty of it in Boston. Sorry, Bahstan.
“Scrod” is the past pluperfect subjunctive of “to screw.”
True, why else do you think he started talking more and released his book? He’s guilty, that’s why.
He’s the financial world’s equivalent of OJ’s “If I did It.”
Greedscam should be sentenced to working at McDonald`s.
well you don’t see people investing in tulips anymore so maybe peole learn…….if you don’t bail them out of their tulip gardens.
It was more like selling McMansions to sanitary engineers in the states, eh?
You Deserve A Loan, Today.
Sorry.
You Deserved a Loan, Yesterday.
Today the Payback Bee-yatch is in Town, and she’s one Mean Mother…
http://www.youtube.com/watch?v=unjiS_Cow20
Oh Wimpy, your FICO score alone won’t let me do that!
(NSFW BTW)
Speaking in the same vein, I’ve been eyeing Nashville for a few years now. One thing that I find disturbing is that their median is actually UP, and by what is in my mind almost in bubble percentages. 7% last quarter.It seems nonsensical to me even though it is cheaper there.
Just as a feeler, is anyone from the area who has some actual insite? Is it mostly the upper end of the market raising the median? There’s still TONS of houses well below the 150k mark, but there’s also a lot of ridiculously overpriced, 450-500k Mcmasnsions too.
I know the raw land market around Nashville. It too is still going up. On the low end land is going for about 1500 to 2000 per acre. This is up from 800 to 1300 a year ago.
Well, I just re-did my research. Turns out homes sales are off almost 20% and appreciation is just about flat. Up around 1%. So in other words, it looks like Nashville is about 6 months behind the Bay Area. The report I read from DQ was from the 3rd quarter of 2007.
Wait, aren’t they running out of land around Saskatoon?
Hmmm, why did my post show up here instead above?
Tundra Lawns for evereyone.
From Realty Check. “You just can’t make this stuff up. Apparently even a big builder’s daughter can’t seem to keep faith in the Florida housing market.”
“According to an SEC filing, Wendy Topkis, daughter of Toll Brothers co-founder and Vice-Chairman Bruce Toll, is walking away from a Florida condo, just like everyone else. A Toll Bros. condo!! The Palm Beach Post says it best: Et Tu Wendy?”
Wow, just… wow. So much for the “sanctity of contracts” argument. The Walk-Away’ers are just modeling the rational, self-insterested, ethics-free business behavior of the people at the top of the food chain. Nothing to fret about –it’s “just a business decision”, right?
Contracts embed a walk-away option.
Sometimes it will even be spelt out explicitly in the contract. Just ask any contract attorney.
Think she’ll sue to get her deposit back?
Too bad her name’s not Renee.
Bill, I was doing really good today forgetting that stupid song…LOL
Walk away Wendy.
How many people who graduated from top schools failed to take ethics in business classes?
Are these the ones playing with leverage on Hell St?
This practice has served corporate America well for years, all the while selling the “morality” of paying your debts. Sucks for them that the word is out..it’s just a contract and nothing else and Yes, just a business decision. That knife cuts both ways..don’t feel so good does it?
RIF: That knife cuts both ways..don’t feel so good does it?
Actually, it only cuts one way. When borrowers don’t pay back their mortgages, “corporate America” doesn’t lose any money. Some of its minions might have to find new jobs. But that’s the extent of it. It’s shareholders and debtholders who lose money. If you own a bond or stock mutual fund, you are paying for the people who welsh on their debts. If you own the stock or the debt directly, you have lost a big chunk of your life savings, so that these borrowers could go on spending sprees. Without the Feds spending a dime on a bailout, savers, not “corporate America”, are paying the price of borrowers’ irresponsibility.
Make no mistake - anyone financing a home purchase in the future will also pay a price - in the form of a higher rate, a higher downpayment and other onerous terms - in order to make financial institutions solvent again. It’s no different from tolerating violent crime without punishment - both crime insurance rates and violent crime go up.
The only people who get off scot-free are the people who don’t pay their debts - their only punishment is that they can’t borrow again for a while. That’s like punishing a petty thief by telling him he can’t steal again for a while.
test post
And you get an A-plus!
Let’s just waterboard him/her on general principle.
Yeah, Faster. After all, you can’t be too careful.
One never knows if someone is posing one of dem dar turrrrrrists.
Tase him, bro!
“But now the freewheeling days of credit and risk may have run their course, at least for a while and perhaps much longer, as a period of involuntary thrift unfolds in many households. With jobs shrinking, housing prices plummeting and debt levels swelling, the same nation that pioneered the no-money-down mortgage suddenly confronts an unfamiliar imperative - more Americans must live within their means.”
Sounds like it is high time for the Fed to mount a troop surge in the War on Savers.
“For the 34 million households who took money out of their homes over the past four years by refinancing or borrowing against their equity, roughly one-third of the nation, the savings rate was running at a negative 13 percent in the middle of 2006, meaning they were borrowing heavily against their assets to finance their day-to-day lives, according to Moody’s Economy.com.”
“By late last year, the savings rate for this group had improved, but just to negative 7 percent and mostly because tightened standards made loans harder to get.”
O — M — G!!!
“The savings rate has only been negative for a full year twice before, in 1932 and 1933, when Americans were struggling with huge job layoffs during the Great Depression.”
Story from a year ago:
http://tinyurl.com/32fqr7
Does this mean we’ve now done in 2006/07 what had previously only happened before in 1932/33?
except this time the neg savings rate preceded the layoffs, as opposed to being the effect. Uh-oh.
Only in America, could it still be called a “savings rate” even though it’s still negative. Vat a country!
You just need to know how to spin these things–the negative savings rate becomes a “positive spending rate”, then the sheeple & the CNBC talkmeisters are happy
“an unfamiliar imperative”
Also known to microeconomists as the household budget constraint.
Makes me want to go right out and spend my tax rebate!
“There’s a special down at the Tacomat; hundred tacos for hundred dollars.”
- Bart Simpson
The Bart Simpson line was one of the funniest things I`ve ever heard !!
I already spent mine. Used my card to borrow it from, and put that down on a wide screen, 0% interest, no payments till 2010.
Just kidding.
Budget restraint?
Oh constraint.
Both words grate.
It appears they’ll only stop borrowing and spending when they have to, so consumer confidence is irrelevant. Lender confidence is all that matters. How is that these days?
And for our government?
“Sounds like it is high time for the Fed to mount a troop surge in the War on Savers.” They already did that with the rate cuts, my interest income will be half this year, not even keeping up with inflation. But I’ll be damned if I’ll spend any of it to goose the economy.
Mo Money.
Ditto here.
Actually, I just have to save yet more to make up for the loss of interest. I have to admit, my spending is really getting down there.
“CNNMoney.com article: ‘Homeowners: Can’t pay? Just walk away.’”
——————————
Movie sequel idea:
Debt Man Walking
lol .. with the Bob Seger tune Ramblin gamblin man
“They upgraded factories and enticed laborers with salaries upward of $80,000 a year, adding third shifts to pump out wood for McMansions in Miami and instant subdivisions in Phoenix, 24 hours a day.”
Funny how businesses can find labor if they are willing to pay a decent wage. I wonder why they didn’t just bring in LatinAm immigrants to do the work for $10/hr or less. You just know that had those saw mills been in the US that is what would have happened.
Reminds me of the sociopathic pandering of agri-business and those who pander for them when they “threatened” to let tomatos rot on the vine in California I think. IIRC, it was a debate about illegals. Go right the frig ahead… starve your revenue stream and let them rot or pay a living wage. My bet is they’ll pay a living wage before letting it rot.
I wonder why they didn’t just bring in LatinAm immigrants to do the work for $10/hr or less.
I have just one word for you: unions. They don’t come any stronger than in the BC forest industry.
Also the Canadian government actually discourages illegal immigration instead of winking at it, one big reason being that Canada has a very large population of legal immigrants who don’t want illegals competing with them for jobs.
Recall (from American history) that Cesar Chavez was quite opposed to illegal immigration. Reason: Illegal immigrants could be hired for lower wages than the members of his United Farm Workers Union.
But, but, but our captains of industry INSIST that cheap labor is required for an economy to hum!
Sad isn’t it Colorado?
Sorry if this is a repost.
“Who will pay the mortgage when the homeowner walks? You!”
‘Bank of America CEO Kenneth Lewis said, “There’s been a change in social attitudes toward default … I’m astonished that people would walk away from their homes.”
http://tinyurl.com/33bs9l
Is he also astonished his bank made loans that could never be paid back ?
“‘It’s acceptable to default!’ Gundlach emphasized, his voice a mixture of dread and disgust.”
Yeah, baby. Just like the big Boyz, the peasants are using your playbook now. Payback’s a bitch, huh?
Testify, brothah spike. As I said in another post, it almost makes me wish I had been an FB.
defaulting is OK for LLC’s but now allowed for the masses….Yea right.
Shouldn’t this also be a wake-up call to retailers who sell stuff like furniture and big-screens, etc. with “no-down, no interest, no payments” until some time in the future? Chances are that those who walked from their mortgages will find no problem walking from any other type of contractual obligation… It’s the new paradigm!
As for me, I prefer the ultimate easy payment plan: 100% down, no additional payments.
I would like the same, with an indefinitely-frozen teaser rate on the side…
Boy, I’d have the fear of god about having any skin in the game in other than the best (stability-wise) areas and neighborhoods. I remember several of us here brought that up some while ago.
“With wood demand and prices plummeting…”
To finish the thought:
Wood prices plummeting, land prices falling, a lot of available labor….
New construction doesn’t sound so crazy.
“New construction doesn’t sound so crazy.”
Wish I could convince my wife of that.
“Now, she and her husband **** are grappling with $10,000 worth of high-interest debt. *** Last May, their car was repossessed.
‘What we say now is, ‘If we can’t afford it, we can’t buy it,’ Gamble said. ‘It stays on the shelf.’”
How sad that even in such a modest area of the country as Elk City, OK, people modify their spending habits on the basis of how they think others will judge them. And how such a basic premise as “if you can’t afford it, don’t buy it,” has to be forced upon them by the inability to pay their debts.
‘What we say now is, ‘If we can’t afford it, we can’t buy it,’ Gamble said. ‘It stays on the shelf.’
What the hell were they saying before??
CHARGE IT!
Like, “don’t buy stuff you cannot afford?”
http://video.google.com/videoplay?docid=-726450075131909113
I showed that video to my mother a couple of months ago. We shared quite a belly laugh over it.
My dad as a retirement job works as a counselor in a private prison really close to there. I bet it’s the same one. I suspect he knows that lady.
Sounds like they got the book..
http://optempo.com/2007/12/31/dont-buy-stuff-you-cannot-afford/
What do you mean end? Many people haven’t come terms with the down turn that is why it continues to be a major problem, they are in disbelief they they can’t flip or sell for outlandish prices.
They really believe the calvary is coming to bail them out, when the marshall or sheriff shows up and tells them the party is over time to pay up or get thrown out they are not mentality prepaired ,they actually thought the whole thing was a game and all were suppose to be winners no losers?
“‘The long collapse in the United States savings rate is over,’ said Ethan Harris, chief U.S. economist for Lehman Brothers. ‘People are going to start saving the old-fashioned way, rather than letting the stock market and rising homes values do it for them.’”
Fat chance.
I can’t help but feel like these people will find yet a new and creative way to get themselves into even deeper into doo.
How?
I agree with you that they will try but this downturn baby - she got some good legs.
i am starting my own saving for dummies business
step 1
spend less than you make
step 2
see step 1
In this country, a “savings” book will make you go bankrupt faster than a strawberry picker with a $700K house!
Good idea, except for the fact that making more than it costs to pay for necessities is getting kind of tough. Wages have not gone up, but food, health care, gasoline, utilities and so forth have gone up tremendously. In the near future, when the average family is forced to try to live on what it actually earns, it will not be pretty.
“But German newspaper Frankfurter Allgemeine Sonntagszeitung reported Sunday that KfW, which holds some 40% of IKB, cannot afford to provide any further capital and that the other banks that participated in the rescue have so far refused to increase credit lines.”
Bailers beware!
“a period of involuntary thrift unfolds in many households.”
News flash: you don’t have to be a family to practice involuntary thrift.
You can be single too.
In my case my Scottish ancestors are beaming with delight.
I think you’re confusing “voluntary” with “involuntary”. Some of us are cheap by choice. Most people you’re reading about have no choice.
I am 1/2 Scottish too, and I think frugality is built in from the start. I know I have friends that make very good money, but are up to their eyeballs in debt.
They just can’t see how a little bit of restraint in their spending would make a world of improvement in their overall quality of life. To them it is just the opposite, being responsible is seen as diminishing their quality of life because that would mean saving for things instead of financing them and having them right now.
The slightest bump in the road and they are done. They have no savings, and have obligated themselves to several thousands of dollars in monthly debt obligations for many years to come.
Far too many people base their future projections on a rosy Best Case Scenario. The thought that they could actually make less money doesn’t cross their mind, because that would force them to admit that obligating themselves to BS monthly payments is not in their best interest.
And right now there are many millions of people that are making far less in this economy. A lot of the jobs that have been created are commission only type jobs, which are definately affected by a slowing economy. As are hourly jobs that are related to the construction and building supplies industries.
I can personally attest to the fact that having Scottish ancestors means that thrift is hardwired into the DNA.
“I can personally attest to the fact that having Scottish ancestors means that thrift is hardwired into the DNA.”
So where the heck can I find a Scottish girl? Usually when I try my “I will take you to McDonald’s for our date” line on girls they don’t work all that well.
Eh, that’s simply because the food sucks. Even my dog won’t eat it.
You could whip up a nice cheap goulash at home and serve with a decent red wine. Impress her with your thriftiness AND your cooking abilities.
Cougar - try a little more upscale, you’ll get a lot more bang for the buck. if she’s anything like me, she’ll insist on paying half the time anyway.
Scots-Irish here - the Scots side saves it, the Irish side drinks it up.
I’ll admit to having some Irish blood as well. I think that’s the side that has the taste for fine beer. Or perhaps it’s the German from my mother’s side of the house.
“With wood demand and prices plummeting along with U.S. housing starts, three of Mackenzie’s five sawmills have shut down indefinitely and others have cut shifts — propelling the town’s unemployment rate from single digits to more than 70 percent since August.”
(Me, a year or so ago, praying respectfully:)
“Oh, please, please, please, dear Sweet Baby Jeebus, please let there be one tree left when all this utterly insane crap is over. A wetland or two without a WalMart on top of it would be nice, also. You like trees, dear Baby Jeebus, don’t you? They’re so pretty and all, how about You exert Yourself to preserve a few..You probably better hurry up, though.”
(Me, today in 2008, praying respectfully:)
“WhoooHOOO! That’s what I’m talkin’ about, Sweet Baby Jeebus! AllllllRIGHT! Yeah! Thanks! Thank you, Jeebus! Save the trees! Frogs are great! Nothing else left to pray for!
Well..I suppose a pallet of gold ingots and 20 pairs of new shoes with rhinestones on them wouldn’t hurt, but don’t exert Yourself–keep focused on the trees and frogs. WhooHOOOO!”
I saw a nice tiara on Craig’s List yesterday. I thought of you.
Roidy
Thank you for that prayer, Olygal. Nobody up there ever listens to me.
“‘We are in a growing culture of default,’ Gundlach said.”
The walk away revolution is on. Free yourselves, serfs!
http://online.wsj.com/article/SB120243369715152501.html
Love the cartoon.
I agree walking away with the “herd” is the safest option. The hit to your credit will be less if so many people do it en masse.
I’m worried about someone borrowing on my credit. I’m about to file paperwork on a credit freeze with the three credit bureaus.
But with insurance rates on the rise, and people using credit scores for all kinds of things (job applications, insurance rates), might that come back to bite me?
You can always “temporarily” lift the credit for jobs, insurance, mortgages, whatever. You can even specify whom to lift it for.
Freeze the thing.
Paying $30 to lift it temporarily (your state may have a different price) is a miniscule amount of pain for shutting down their bullsh*t show forever!
After having my identity stolen last year, I got the Lifelock service. Basically all they do is put a fraud alert on your account with the big 3 credit reporting services, but they do it perpetually, rather than it expiring in several months. At $90 a year, it’s worth it for me to not have to deal with it myself, IMO.
RE: At $90 a year, it’s worth it for me to not have to deal with it myself, IMO.
Just like payin’ the Mob protection money…
Credit heisters outta do 10 years mandatory in a Texas chain gang.
It’s free now for many states so you don’t have to pay anything.
WT - I’ve been wondering the same thing, but am about to conclude that it’s worth the inconvenience. I believe there are ways to let those you select have a peek at your score.
This also applies to hedge fund and mutual fund managers.
If you are truly contrarian and try to be decorrelated (supposedly good), you can easily get fired when you have a down year/quarter and the crowd makes money.
But if you lose money at the same time as everybody else, then you’ll be OK, since they can’t fire everybody.
Bingo.
Doing the right thing only works for your own account.
“‘People have decided that it’s acceptable to default on mortgages,’ said Gundlach, a top bond fund manager who was singled out by Morningstar Inc. as a ‘Manager of the Year’ in 2006 and predicted the current housing mess early in 2007.”
“‘It’s acceptable to default!’ Gundlach emphasized, his voice a mixture of dread and disgust. ‘They even have a new term for it: ‘Jingle mail.’
First of all, check out the fact that Mr. Genius “predicted” the current housing mess in 2007, when it was well under way.
Secondly, note his “outrage”. ROTFLMAO! Amazing how financial elites get up on their hind legs when the masses emulate them, in their own small way. This guy almost makes me wish I was an FB.
Companies (and individuals) declare bankruptcy all the time. Why should it be any different for homeowners?
I don’t see Pets.com board members or United Airlines executives headed to debtor’s prison because their enterprises ended up defaulting on loan obligations.
This guy’s in the bond industry. Bonds are rated (and yield) according to risk factors surrounding repayment prospects. Are bond issuers personally liable for bond performance? Hell no.
Agree completely: this jerk is suprised that plain old folks — just like corporate executives and entities — will act in their own self interest if given the opportunity. Amazing - just amazing.
Yeah, it’s like we have a new trade union, of debtors. Corporate America will kick us to the curb if they can, but now they’re suddenly faced with a tsunami of debtors who’ve been drinking their Just Do It, Buy It Now, No Money Down, koolaid.
Ok, now let’s start seeing the interest rates reflect that reality!
Pricing for Risk in a Faith-Based Consumer Economy.
Wow Ben, this whole posting was quite upbeat! Damn, I think some phase of reality is starting to creep in. Great post after a great weekend in the Monterey Bay area.
Wow, A lot of pissed off people commenting on Suze Ormans “money matters” writeup.
http://finance.yahoo.com/expert/article/moneymatters/63481
Ha ha! When I clicked that link - on the right side of the page they have Yahoo!’s Top 5 questions. What were the first three?
1. What is a short sale?
2. Will a recession affect my 401k retirement plan?
3. How difficult is it to find a place to rent after you’ve just gone through a foreclosure?
When that kind of forum touches on these subjects you just know things are getting funky. No more asking: “what’s the best way to get rock hard abs?”, or “does eating tomatoes really help prevent cancer?”
Suze Orman came out with this today!
http://finance.yahoo.com/expert/article/moneymatters/63481
Here one responce!
The Mexican man up the block was so mad because the $400,000 house they sold him is going to be taken away. So he sold the refrig, wooded floors, cabinets, fixtures, garage door & openner, all the windows, sliding glass doors, sink & bathtub and he even sold the bricks that made up the front entrance. He took all the money, left the keys and went back to Mexico. He made $72,000.00 and he put nothing down on the house when he bought it. Tod
This killed me I cant believe this!!!!
Contrary to popular belief about War on $avers, etc. that $72K will go very far in Mexico especially if he is from a rural area. He will probably not need to work very hard for the rest of his life.
He won’t be able to “retire” but he won’t need to. A small piece of land growing his own vegetables, etc. and a regular job will carry him through life.
I think Americans are clueless how cheap it is to live in the rest of the world on a PPP (purchasing power parity) basis.
This was the biggest free-option ever. Like duh! he took it.
“I think Americans are clueless how cheap it is to live in the rest of the world on a PPP (purchasing power parity) basis.”
True. But at the same time, I think Americans are clueless how *expensive* it is to live in much of the world. I’m always amazed that Americans still carry these out-of-date notions about cities like Moscow or Shanghai — when they can’t come close to affording them.
Try buying (or renting) an apartment in supposed “developing world” cities like Kiev, or Ho Chi Minh City or Split. (I’ve lived in them all for months/years here and there). Those places are *easily* US prices now (and often higher).
Then try doing the same in Hong Kong, Moscow, Dubai, Tokyo or (shudder) London. London is off the charts, but that’s almost to be expected. I was in Dubai for 3 days, and my credit card *still* hurts - Jebus! Moscow is fully ridiculous now: I used to rent an apartment in Chistye Prudy when I worked there for a bit (its a nice, but not too nice neighborhood). Now the area blows away Manhattan prices and the apartments are microscopic.
The reality is that the dollar has tanked and is still falling fast. Many of those “cheap” places to live are now beyond the means of most Americans.
Mexico, in the big scheme of things, is a pretty great deal (if you can keep your wallet).
This is the type of “victim” Hitlery has in mind, when she says she WILL raise YOUR taxes so “we can take care of these poor people”.
Of course, left-wingers from Berkeley to Harvard overwhelmingly approve and applaud.
Wrong blog.
give me a break. i’m a radical left winger with conservative leanings and more mainstream sympathies and a tad bit of anarchism thrown in deploring fascism of any stripe from Berkeley and don’t believe in taking care of these PB’s. I’d like to rip a new you know what to the military and pharmaceutical corporations but please don’t generalize when you try to demonize! after all we’re just plain folks.
Yeah, I’m fed up with the Dittohead drivel. And Bush has raised our taxes in more ways than you can imagine, he just uses smoke and mirrors to make GOPs think they’re getting a free lunch.
“‘It’s acceptable to default!’ Gundlach emphasized, his voice a mixture of dread and disgust. ‘They even have a new term for it: ‘Jingle mail.’ ‘We are in a growing culture of default,’ Gundlach said.”
Mr. Gundlach, I’m sure you are also aware of the term coined for people who pay off their credit card monthly : ‘deadbeat’; but I’m sure that term doesn’t bother you at all. I must say that Mr. Gundlach’s quotes made my day!!!
I thought the term for people who paid off their credit card debt every month was “freeloader”, and those who do not are “revolvers”.
I happily freeload. And, everytime I receive one of those credit card offers, I go through the contract terms, cirlce the items that are ridiculous, write obnoxious things like “Ooooo. 22%? That sounds like fun!”, or “Change the terms of the agreement at anytime? That’s bullsh*t.”
I then stuff the little prepaid envelope with the defaced terms and agreements leaflet and mail it back to the company. The beauty is, since its prepaid, they get to absorb the expense.
haha
funny i have got to try that
If you’re gonna mail it back and have them pay the postage, glue it to a brick first.
I already checked with my Post Office, they won’t accept a prepaid envelope glued to a brick.
You go, Grey! I just did the same thing with a mailing I got from Crap-ital One. It was so much fun to write such nasty things all over their fabulous offer, then mail it back on their nickel.
Whatever makes you feel good. I’m sure that if it even gets opened on the other end, the shlub doing so ain’t gonna be too affected.
Me, I just mail back their empty envelope. Ain’t got nuthin to say to them crooks.
So banks and other lenders are taking it in the a$$. My worry is that they’re going to be able to convince the govt. to resurrect Resolution Trust Corporation to buy all their crap with our money.
RTC took over the assets of S&Ls placed into receivership. I don’t think too many bankers want that.
already have =”forgiveness” is a loss to the treasury
“‘What we say now is, ‘If we can’t afford it, we can’t buy it,’ Gamble said. ‘It stays on the shelf.’”
What they say now is, if we can’t afford it, we still try to finance it but get turned down due to bad credit, so then we can’t buy it and it stays on the shelf.
‘It stays on the shelf.’
Retailer stocks are providing leadership again today. One last pump and dump with granny’s nest egg?
with all this free wheeling credit that the banks have been handing out in the last 10 years, i just realized that the identity theft crime wave was revolved around the credit game. does anyone think that since the credit is contracting ,that I.D. theft will not be as wide spread as it is now?
“‘What we say now is, ‘If we can’t afford it, we can’t buy it,’ Gamble said. ‘It stays on the shelf.’”
…and when it stays on the shelf, china gets less dollars.
…and when china gets less dollars, usa sells less treasuries.
…and when usa sells less treasuries, treasury yields go up.
….and when treasury yields go up, interest rates go up.
….and when interest rates go up, more things stay on the shelf.
…and on and on and on.
ahhh…sweeter than bee pollen on a summer wind.
“when treasury yields go up, interest rates go up”
Lets see how many $650,00 “homes” sell with 14% interest rates…and at what volumes and exactly to whom?
As they say in the South: “Well shut my mouth!”
And as they say out here in Utah, “Well, I’ll be go-to-heck!”
‘For them, that game is over,’ said Mark Zandi, chief economist at Economy.com.
GAME OVER - OUT OF ORDER - TILT - YOUR AVAILABLE CREDIT IS ZERO DOLLARS AND ZERO CENTS - CHECK RETURNED FOR INSUFFICIENT FUNDS - REQUEST DENIED - PLEASE CALL YOUR ACCOUNT REPRESENTATIVE IMMEDIATELY
Game over, man! Game over!
So, I’m having a discussion with people on another board. Bunch of supply-siders.
We’re starting with the fact that Reagan cut taxes and increased spending and we got a boom economy that increased tax receipts, just not enough to compensate for the increased spending.
Their position is that, yes, Reagan messed up when he increased spending and balooned the deficits. Had he cut taxes and not increased spending, then the tax receipt jump would have more than made up for the tax cut and resulted in smaller deficits.
It is my assertion that it is the deficit itself that stimulated the economy. Cut taxes, increase the deficit, increase teh money suppky, increase tax revenue…. BUT not to the point where it compensates for teh full cut.
Here is my argument. If the government did not run a deficit, then we would naturally find equilibrium. When the government has a deficit, it stimulates the economy, but the economy then settles at a new higher equilibrium. Remove the deficit and the economy drops to find a lower equilibrium.
So, let’s say the tax cut adds $100 billion to the deficit. Okay, economy booms, tax recipts go up, the deficit comes down, but is still larger than before, so continues to boom just not as strongly, so tax recipts increase but not as much as before, so the deficit gets a bit smaller….
Or, in numbrs. Cut taxes $100 billion. $100 billion flows into the economy, boom, increases revenues by $35 billion. $65 billion extra deficit means boom, increased tax revenue by $20 billion. $45 billion extra deficit means boom, increased revenue by $10 billion. $35 billion extra deficit means boom, $5 billion extra revnue. $30 billion extra revenue barely a boom means no extra tax revenue means $30 billion extra deficit than before the tax cut.
Or, what Reagan did… $100 billion tax cut and $200 billion spending = $300 extra in the system = $100 billion extra tax receipts. $200 billion extra spending = $50 billion extra tax receipts. $150 billion extra spending…. You reach equilibrium, but at a level with larger deficits than before the tax cuts and spending increases.
Anyway, my question. I know I’ve heard Ben Bernanke and a few other big time economists say that cutting taxes does not increase receipts, but does anyone have a good link that explains it better than my simplistic example of equalibrium at a higher level of econmic activity and larger deficits?
You’re probably on track - but in addition to the stimulus from the deficit spending, raising the minimum wage had a large positive effect on tax collection and also on shoring up Social security.
Another thing people forget is how high the interest rates were in the ’80’s in servicing that debt.
‘People are going to start saving the old-fashioned way, rather than letting the stock market and rising homes values do it for them.’
Unfortunately, that just leads to a loss of puchasing power as inflation eats away at the interest and the principle. Gotta love this rigged game.
I’ve been desperately trying to suss what’s coming. Save like mad? or take the savings and refi into a 30 year fixed rate loan? Deflation or Hyper-inflation? Gah! Makes such a difference and man, rates are low.
The way the economy looks right now, you’d think it’d just tear in two trying to decide which way to go.
I love the story about the couple in Elk City, OK who make $4600 a month and are up to their eyeballs in debt, had to cancel their ISP, had their car repossessed, etc.
I looked up Elk City on relocationessentials.com. This is a little town where the median house is worth $80K and the median household — not individual, household — earns $29K per year. They’re making $55K per year in this environment and got into such perilous financial waters? Whiskey Tango Foxtrot.