Everybody Thought They Were Rich In California
The Bay Area Newsgroup reports from California. “Over the year that ended in July, the decline in home prices in the East Bay was about five times worse than what happened nationwide. The East Bay is losing jobs at a much faster pace than the rest of the state or the country. The problems seem particularly pronounced in the East Bay, San Joaquin County and Solano County. ‘It’s a lot worse in the East Bay, which is the weakest part of the Bay Area economy,’ said Scott Anderson, a senior economist with San Francisco-based Wells Fargo Bank.”
“The fall of a once high-flying housing market in the East Bay and nearby regions unleashed many of the problems. ‘I’m trying to hang on here, but I’m afraid I’m going to lose my house,’ said Louis Tornillo, a Richmond resident and retired teacher who faces foreclosure.”
“His monthly mortgage payment went from $1,400 to $3,200. His home, once valued at $600,000, might now be worth less than its $400,000 mortgage.”
“‘In my part of Richmond, a lot of homes have had a devastating loss in value,’ Tornillo said. He hopes to find a rental in the Albany or El Cerrito area before the bank seizes his house.”
“Zillow reports that of the houses sold in 2005, 2006 and 2007, negative equity afflicts 59 percent of the homes in Alameda County, 76 percent in Contra Costa County, 85 percent in Solano County, and 93 percent in San Joaquin County. Nationwide, 52 percent of the homes sold during those three years suffer from negative equity.”
“Livermore resident Russell LaClair and his wife have watched their home values sag. The erosion weighs on their minds. ‘The problems with home prices diminishes our sense of wealth,’ said Russell LaClair.”
The Mercury News. “‘This is a storm the likes of which almost none of us have ever lived through before,’ said James A. Wilcox, professor of banking and finance at the Haas School of Business at University of California-Berkeley. ‘It is clearly the worst since the 1930s.’”
“Financial institutions are already tightening up on terms, conditions, rates and amounts of credit to businesses large and small, as well as to consumers. ‘Any number of us have gotten letters from our banks lately that have said the line of credit we thought we had for $20,000 has been reduced to $10,000,’ Wilcox said.”
“Now the wealth effect is running in reverse. ‘The headline I have been saying to people is that today we learned we are a lot less wealthy as a country than we thought we were,’ said Stephen Levy of the Center for Continuing Study of the California Economy.”
The Marin Independent Journal. “Bill Osher, chief economist with Tamalpais Bancorp, parent of Tamalpais Wealth Management in San Rafael, said Bank of America’s acquisition of Merrill Lynch & Co. and the bankruptcy filing of Lehman Bros. are part of a huge leverage bubble burst that followed the burst of a housing bubble caused by lenders making loans to unqualified buyers and selling the mortgages in the secondary market.”
“‘In the economy, the creation of money helps us grow,’ Osher said. ‘Money is created through leverage. If it creates a lot of growth, everybody is happy - the downside is we went too far.’”
The Sacramento Bee. “Wall Street’s meltdown is fast becoming Sacramento’s problem, too. It’s not just a psychological problem. The housing market crash has erased billions of dollars in wealth throughout Sacramento and the state. ‘A couple of years ago everybody thought they were rich,’ said Chris Thornberg, head of Beacon Economics consulting firm in Los Angeles.”
“Michael McGee, president of Winchester McGee Real Estate & Loans in Rancho Cordova, and others said they could feel credit markets tighten as underwriters become increasingly stingy. ‘It’s getting harder and harder by the day to qualify (for a loan),’ McGee said.”
“Victoria Benbow, an agent with Coldwell Banker in Sacramento, said one of her clients has a healthy credit score and employment history but is getting bombarded with requests for documentation from a nervous lender.”
“‘If there’s anything so slightly off-kilter, it requires at least one and two supervisors approving it,’ she said. ‘You can get approval and think you’re approved, and then you have to wait 10 days to get approval up the line.’”
From News 10. “San Joaquin County may be at the center of the nation’s foreclosure crisis, but that hasn’t stopped builders from putting up new homes. The Meritage Company continues to build in Lathrop, in a neighborhood called Riverstone.”
“It’s surprising to University of the Pacific Prof. Dr. John Knight who teaches finance and real estate. ‘It’s hard to understand, how the new homes can compete on a price basis, with the existing homes that are empty. It’s very hard to understand,’ said Knight.”
“‘Builders tend to want to build. When there’s inactivity, they get impatient to start building again. If they hit the market just right, they can get good profits,’ said Knight.”
The Recordnet. “A six-month-long streak of increasing existing-home sales in San Joaquin County ended last month - but not by much. Foreclosure homes continue to dominate a hot market, and closed sales slipped from 1,083 in July to 1,037 last month, according to figures from the latest Grupe Real Estate-TrendGraphix monthly sales report.”
“Foreclosures accounted for four out of 10 of the 4,419 single-family homes on the market last month and made up eight out of 10 of the closed home sales, the report said.”
“The median selling price last month of $205,000 slid by $10,000 from July. The monthly median hasn’t been that low since January 2002, when it stood at $200,000 countywide.”
“Ben Balsbaugh, residential sales manager for PMZ Real Estate in Stockton, said banks are looking to clear their stock of foreclosure properties, so they price them below market at times ‘to get them off their books.’”
“With most of the sales being foreclosures, ‘traditional sellers’ homes are just sitting there with no buyers, because they cannot compete with the bank-owned homes on price - so they have to lower their price,’ he said.”
“The number of foreclosures in the area is still on the rise; nearly 1,500 houses were foreclosed in San Joaquin County last month, according to the county Recorder’s Office.”
The Fresno Bee. “Sales of new houses continued to tumble in July as homebuilders struggled to compete with the popularity and low prices of foreclosures and a tightening credit crunch, experts said Monday.”
“In Fresno County, 158 new houses were sold, a 46.3% decline from July 2007 and 17.3% down from June. The median price fell 8.1% to $265,990 over the 12-month period, but was up 7.5% from June.”
“The monthly gain in price was likely temporary, said Jonathan Dienhart, director of published research at Costa Mesa-based real estate research firm Hanley Wood Market Intelligence, which released the report with the California Building Industry Association.”
“New-home sales in Tulare County fell 70.1% year-over-year and 26.5% for the month. Prices fell 22.1% to a median of $218,999 from a year earlier. Statewide, housing production is the lowest since World War II.”
“Robert Rivinius, California Building Industry Association president, said policymakers need to make it easier for home buyers to get loans.’
“‘Those who have good credit and verifiable income should be encouraged and able to buy a home,’ he said.”
The Tribune. “The residential real estate downturn has slowed bold development plans for areas on the edges of San Luis Obispo that were added to the city both this summer and in recent years. ‘We have just got it on hold right now until the economic climate gets better,’ said Richard DeBlauw of Deblauw Construction.”
“While some planning issues still appear on agendas for the residential projects, officials report the hurry-up-and-build momentum of just a few years ago has dissipated as other developers around the county are seeing homes go unsold.”
“‘That’s the big difference now as opposed to three years ago - the residential market has cooled off so there’s not absolute purchasers out there like there was then,’ said Tim Bochum, the city’s deputy director of public works.”
The Press Enterprise. “The Fed started lowering its federal funds rate about a year ago and had dropped it from 5.25 percent to 2 percent in an attempt to stimulate an economy battered by bad housing loans. Its meeting today has some economists suggesting that the bankruptcy of venerable investment broker Lehman Brothers Holdings and Bank of America’s buyout of Merrill Lynch might put another rate cut on the table.”
“Southern California economists and other financial experts, however, say it would not only be unlikely but probably not helpful to Inland Southern California or any of the other regions that are staggering under a huge number of foreclosures. There are doubts a lower interest rate would make it easier to refinance out of difficult loans.”
“‘My guess is they won’t’ drop the rate any lower, said Andy Montgomery, CEO of Palm Desert-based El Paseo Bank. ‘We’re already at 2 percent, and the rates being too high are not the issue. There’s just no one extending credit.’”
“The Inland area saw more than 21,000 foreclosure-related filings last month, according to RealtyTrac.”
“Redlands-based economist John Husing said there have been enough bad decisions to go around. But Husing agreed the Fed will not try to fix anything by changing the interest rates, nor does he think the Fed should make a move.”
“‘There’s a need to let the markets do what they’re going to do,’ Husing said. ‘Between (Fed Chairman) Ben Bernanke and (Treasury Secretary) Henry Paulson, there’s been a lot done to shore this up. But at some point they have to step up and say the federal government can’t take over the economy.”
“It will be harder for businesses to borrow, said Chapman University economist Esmael Adibi, but he doesn’t think an interest rate below 2 percent would help. ‘If you take it below 2 percent the Fed starts to run out of ammunition,’ Adibi said. ‘How much lower can it go?’”
“‘There’s no one lending anyway, so why change the rate?’ said Rancho Santa Fe-based Pacific Western Bank President William Powers, whose office is in Indian Wells.”
“‘There’s no one lending anyway, so why change the rate?’ said Rancho Santa Fe-based Pacific Western Bank President William Powers, whose office is in Indian Wells.”
Checkmate, pawn takes king.
“‘If there’s anything so slightly off-kilter, it requires at least one and two supervisors approving it,’ she said. ‘You can get approval and think you’re approved, and then you have to wait 10 days to get approval up the line.’”
Where were the underwriters the past 4 years? Isn’t that why they get paid? I thought they wanted to protect themselves on the downside.That is where this whole cdo thing seems like a scam.If it’s not your money I guess underwriting becomes a 10 minute observation,
This thread is laced with comments on perceived wealth…
The erosion weighs on their minds. ‘The problems with home prices diminishes our sense of wealth,’ said Russell LaClair.”
The headline I have been saying to people is that today we learned we are a lot less wealthy as a country than “we thought we were”,’ said Stephen Levy of the Center for Continuing Study.
‘A couple of years ago everybody thought they were rich,’ said Chris Thornberg, head of Beacon Economics consulting firm in Los Angeles.”
How quickly people forget…
Prior to say 2002, no one was discussing much about how your house could be your retirement savings. After all, at ~$115K for the average house, that money would not last long.
Even at $300K, it would be a drop in the bucket for your needs.
Ditto for $500K.
You need a LOT more than that to retire just comfortably. Even with current pricing.
SMF,
Very true. In fact in ‘01 and ‘02 most of us were simply talking about “getting our 401k’s ‘back’ to where they used to be”. But boy it sure caught on -fast- didn’t it?
By ‘03 just having a job ( or.. not? ) meant access to cheap credit
‘04, screw the stock market, have seen how much my house has gone up!
‘05, You… ‘don’t’ have a place on the coast?
‘06 ( oh and this one really got me ) You know I ( he/she/they ) have been looking to do something different in life… ( pats self on back for having been such a shrewd investor )
Ok, that scares me. I don’t know that I will ever make that much money or be able to save up that much money by retirement age, or beyond.
“Even at $300K, it would be a drop in the bucket for your needs.”
But that $300K was growing at the rate of 20% a year, which means one could have HELOCed $60,000 the first year alone! Why, a man’s house made more money than the man did working at a job! And there were great tax advantages to boot!
Financial magic was in the air everywhere.
People who could got out years ago.
I sold my overpriced San Jose house (a mere 1040 square foot stucco box) in May 2006 for $670K. Since it was paid off and I had about a half million in savings, I move out to Boise and retired. Since the cost of living is so cheap here having that much money means a frugal (but not extravagent) retirement.
My old San Jose home has been foreclosed upon. Zillow says it’s up for $540K, which by a coincidence is 80% of the FB’s purchase price (102% financing too). This smells of 80/20 financing where the second mortgage holder gets shut out completely.
The real kick was SJ homes were going for some 100/sq ft.. so it was worth far less back in 1997..I seen many triple in 6-7 years.
A couple years ago, I knew that I was a lot richer than most other people around here, and I knew I couldn’t afford to buy a house. So how the hell did all those other rich people ever make the mistake of thinking they could have something that I couldn’t?
ditto V
WTF is going on with au…financial armageddon is upon us and it’s falling in value? If you had told me all of these bank failures and rate cuts and bailouts were going to happen a year ago, I would have predicted no less than $1,200/oz. This market is so freaking hard to navigate, even SKF doesn’t seem to be doing what it’s supposed to.
This is the problem with gold. It often doesn’t react the way it should if all its virtues were true. On Black Monday, it fell $10. We saw a lot of money creation in the 90’s, but it didn’t move as much as it should have. I posted a bunch on this on my metals blog. Even if it had just kept up with govt. stated inflation, it should be over $3,000. So something doesn’t add up and it hasn’t for a long time. My best guess is there is a deflationary undercurrent that is sucking central bank $ creation out of the system. Global overcapacity would be an example of this.
Also, if people are trying to raise cash, they will sell whatever they have to– including gold.
la girl,
Gold is and never has been an investment. If you remember that axiom, then it’s *erratic* behavior essentially is a non-sequitor. The t’wains don’t meet.
Gold is a hedge. And that’s all it is.
Despite the insanity of today’s credit markets and the huge increase in the tightening of credit, there’s still massive piles of cash out there. When cash finally does finds where it should be invested (1-5 years from now - who knows?), you’ll be surprised how much still remains out there.
I bet lots of people on this board are sitting on piles of cash right now. We’re not alone.
Its a deflationary market so the dollar is going up in value.
Deflation is one weird animal.
Deflation is kind of a destruction of money, specifically credit, so gold would relatively be worth less.
lol
Don’t make the mistake of flight to perceived safety with deflation.
The dollar is down big time against the Yen. The Yen is the safest currency in the world.
At this time, margin calls in stocks and bonds forced liquidation of commodities. Nothing special it is just that Gold and many other commodities are 100% fungible.
hoz –
Any idea of the *average* margin call figures in the commodities market? Does the commodities market offer the opportunity for 50%+ margins like equities have since 1995? To what extent have gamblers (I don’t refer to those playing the high margins markets as investors) taken over the commodities world? (Likely a high number, since it is commodities after all).
Do you know of any realistic, reliable source that tracks something that esoteric and seemingly impossible to track?
Yeah, I know I’m likely asking the impossible/futile. I’m just trying to wrap my brain around all this unsiftable shit.
Thanks in advance for any input or thoughts.
If, as many firms did, you bought gold at 570 per ounce and rode it up, buying stocks along the way with profit; when the stock market collapsed and your models say ‘own XYZ stock’, you sell your commodities.
The dollar was 100 yen just a short time ago. Then it was 110 yen. Now it’s about 106/dollar. The euro and the pound have also fallen in the last 90 days. M2 and M3 are still exploding. The Fed is inflating my savings away. With what we learned from the HBB we should all have been buying puts and selling calls on the banks and home builders. Lehman was $64 just 7 months ago. Opportunity is where you find it. Or - - - buy 40 houses in Reno with 40% down. hehehehehehehe
Since none of my posts are showing up, I doubt this one will either.
Deflation is so 1930s, the key is to keep inflation from going out of control.
“…The TIC for July paints a very clear picture: Treasuries were the only US asset foreign investors were willing to buy. Foreigners bought $34.3b of long-term Treasuries, while selling $57.7b of Agencies, $4.2b of corporate bonds and $5.2b of equities. On net, foreigners sold about $25b of long-term US assets.*
That would normally make it hard to sustain a large current account deficit. The US still needs roughly $60b a month in net inflows to cover its external deficit. Net sales of foreign assets of $32b provided some financing — but not nearly enough to cover the outflow of short-term funds. $75b in net outflows isn’t exactly a good sign, even if the dollar’s rebound suggest more flows (perhaps from large US sales of foreign assets) in August. …”
Mr. Brad Setser
If you don’t follow the bond markets, you don’t have an idea of how F’ked the US currently is.
We need moneys to operate, the US will print up as much as is needed. Foreigners are only willing to buy assets.
This won’t show up anyhow.
hoz, can you recommend a good primer on bonds, either on the Internet or in an old-fashioned book? Thanks to the folks on this blog, I’ve done plenty of studying on the basics of the stock market, but would like to keep going in that area.
BTW, watching CNBC yesterday, a couple of the commentators said they knew the market was going to tank due to credit spreads in the early afternoon, and that proved, I think, what you are alluding to above.
Thanks in advance.
Huge disconnect in the gold market right now… Paper vs physical. And today, the miners went up while the metal went down a bit. Opposite of yesterday.
BTW, a big money market fund just broke the buck and froze withdrawals. Turns out they had a pile of Lehman debt. The flight to safety in Treasuries is very crowded as well.
So it’s a choice between safety and liquidity - expect more fireworks tomorrow.
BTW, a big money market fund just broke the buck and froze withdrawals.
Uh..who?
I won’t post a link because my post won’t show up. But take alook at the front page of marketwatch dot com
It’s called Primary Fund symbol RFIXX
Like Ben said yesterday, he is getting lots of SPAM and if our posts get lost amongst all the crapola, I think he said ’sorry, he is trying to locate them amongst the pony poop’. I am paraphrasing. hehehe
Compared to the white metals, Gold is doing just fine…
My friend with perhaps the largest inventory of bullion in L.A., told me he was besieged with buyers in panic mode yesterday.
This financial meltdown is just getting started, and there really isn’t a lot of inventory out there.
Supply vs. Demand will tell the real story of Gold’s value, but not until you can’t buy anymore.
That day isn’t far away~
Anyone care to offer some insight on when we should go long real estate…At this point, I’d rather have a depreciating, now-only-slightly overvalued house or apartment building with positive cash flow than a frozen money market account!
You do not want to go long RE until the credit crisis is over - and there is no end in sight at this point - too many black pools to unwind.
Give it a couple more years and look for some safe banks. Wells Fargo is allegedly doing OK.
If you have cash, I think the really good buys will be in 2010-2011 on the West side for good cash flow rentals that hold value.
Lots of time though.
Price to income is still way out of whack. You get around 4.3x income and you are in the right area. Expect the dip to be much lower.
The P-group metals are dropping due to fear of reduced auto production - they are used mostly in catalytic converters.
I have no clue what’s happening with silver.
Best to have a diversified portfolio. I hear an awful lot of people panicking and buying metals these days. That isn’t to say that buying some metals is a decent idea. But even with the market as bad as it is, you will more than likely still do just as well, and likely better investing in the overall stock market.
Say it isn’t true, but My parents, My Wife’s parents, and my Aunt and Uncle have nothing but old-fashioned mutual funds, 401k’s, large cap, small cap, and international funds. They are now worth millions. These are not upper class people either. All strictly middle class. They simply put money in and let the market do its thing.
The key is to buy, hold, and look at it from a long-term perspective. Even with all the calamity in the market, my accounts are worth only about 3-6% less than last year.
Lastly- as said countless times, A house is not an investment. Its a liability and a place to store your crap. That’s it. Oh- and you might get more for it so when your family puts you in a home, it might give them enough to pay the home to keep you.
Hi Jetson Boy:
Not to be a boor, but our parents were the beneficiaries of the most fruitful time in US history. It is not at all clear that such conditions will ever exist again on Earth.
All indications are that the stock market is still highly overvalued, and I kind of doubt that it will bounce back up to it’s double-bouble highs of yesteryear. I’m not going to get back in until the S&P is at most 1100. Just like housing, I’m in “wait and see” mode. I feel lucky that I got out in June of last year. That just helps make up for the fact that I sold out of all my short positions like way too early. With all the government intervention, I felt like I couldn’t predict anything. The only thing I could really be sure of was that gravity would eventually happen. I think it will continue.
As someone pointed out, a lot of good assets are getting tossed out with the bad, which includes metals.
I have wondered this myself a lot, what’s up with Au (&Ag). I have a simple view at this point. Every tangible asset imaginable has been bid up to the moon on credit. The credit expansion is over. People owe currency. Every tangible now is as good an investment as a house. When the credit contraction stops, then the tangible you want should be priced “right” for a time. May you have the currency to aquire it, and the timing to dispose of your currency efficiently. Might be a small window. Gold is not a god, it’s a play. There are more people in debt selling it than there are people with currency buying it (or promising to buy it), for today.
10% Au, 10% Ag, 2% foodstuffs, 25% Franklins, balance in Treasuries and Agencies in a 401K trap.
!00% in a fishing pole and a .270 and a passionate redhead. Life is good, and the show is interesting.
Is gold higher than last year at this time?
Yes
Is crude oil higher than last year at this time?
Yes
Is SandP higher than last year at this time?
No.
I’m going with gold and silver and crude oil, because they are still in bull markets and are real, tangible things that cannot be created out of nothing.
For all you people in cash, what happens if 5% of you decide to visit the bank on the same day and pull your money out at once?
Answer: You will realize something amazing: the money simply isn’t there. Anyone care to argue the point and convince me that the money is there, waiting for you to come pick it up?
Deflation. Falling asset and commodity prices as the credit bubble unwinds.
Bernanke didn’t cut rates. Halleluah.
LOL! The East Bay stuff cracks me up. People in the Bay Area are so in love with their houses. I’ve met dozens of them who basically have no retirement, have spent decades just trying to save up for a down payment on a crappy little starter home, and then when they move in, the home becomes their main retirement tool. I’ve told countless people what a totally stupid idea that is. Yet the allure is simple too much for these people.The East Bay has only one economy: buying and selling houses.
The Bay Area is a total and complete joke. I’ll be glad when we get the hell out of here.
jetson_boy,
Carol Lloyd of the Chron. ran a great column on a friend of the family in the BA that could trace the family’s entire ‘fortune’ to one rinky dinky unremarkable house! The dad was a prof. and it put him through school, paid to put his kids thru school and was now ready to provide for he and his wife’s retirement!
Totally insane. Who would thought 1,100 s/f out of the entire planet’s surface could do all that?
( I hear ya’ )
My parents bought a 1,300 square foot starter home in Palo Alto back after the war. IIRC $10,500 in 1948. GI bill so I’m sure it was no down, 3%.
That house sold a few years ago for $1.1 MILLION.
My parents sold up and sidways a few times. The last house in Sili Valley was a condo in Los Gatos which they purchased in 1974 for $55K. They sold in 1979 for $185K and retired to Auburn.
Planning on retiring from the proceeds of a Bay Ayran house once made sense.
So did you really decide to leave then, JB? If you stick it out, then you know you can get something good. Personally, I think there are better places than BA, but I’m just sayin’.
I never see anything about Yolo County - Fremont. Are they immuned?
Also, tried to ask in bits but it never showed up: seller financed DPA is still going away, isn’t it? Or are they going to monkey with that too?
Or are they going to monkey with that too? Why of course they are. Bill H.R. 6694
http://tinyurl.com/59gt3j
Yolo County is inland - the upper central valley - next to Sacramento County. Fremont is lower East Bay.
There was massive over building all over the east bay extending all the way into Yolo County, as well as Stockton and Tracy, so all will suffer.
OK, I knew I’d screw that up. I get Yolo, Inyo, all those names mixed up. Wondering about Fremont specifically..
Fremont is in Alameda County. As goes the rest of the East Bay, so shall it go. It’s not that big a city, so it probably won’t make headlines in and of itself.
I live near Fremont. It’s yucky here.
The east bay sucks. The peninsula is the place to live.
East bay = Raider fans
Peninsula = 49er fans
A generalization but not that far off.
Ever watch a Raider game. It’s like Mad Max beyond Thunderdome in the stands.
Mike
Yolo contains Davis, a university enclave that remains very overpriced. They also seem to have one RE broker that dominates the landscape, keeping prices high.
The rest of Yolo is overbuilt towns like Woodland and West Sacramento, which have fallen hard.
“Financial institutions are already tightening up on terms, conditions, rates and amounts of credit”
And yet we still have the lowest interest rates in history ? If I was these clowns I’d be jacking the rates up to mitigate losses, not lowering them. Maybe it would be worth saving again if the damn banks were paying a rate higher than inflation rather than the measly rates we get now.
The problem is people can’t qualify because they still don’t have stable income and good credit scores. It is NOT hard to get a loan IF you’re well qualified, regardless of how many whiny stories you hear in the news about how it’s too hard to get qualified, nobody can get a loan, etc.
The problem is simply that most people aren’t well qualified.
Ben just when I was in a state of complacency you had to post a couple of articles to tic me off.
‘Any number of us have gotten letters from our banks lately that have said the line of credit we thought we had for $20,000 has been reduced to $10,000,’ Wilcox said.”
Gee, you know I have a $20K line of credit in the bank and because I own it, it hasn’t been reduced and I don’t have to pay it back. Mr. Wilcox, please join the land of the living!
Along the same lines of people whining because they can’t get a home loan (because they’re not well qualified), there have been a lot of stories about people whining that the lines of credit have been decreased or cut off. Never in the same story will you see the question raised why it is that a person is dependant on a line of credit to survive?
Here’s a tip for the whiners - if you don’t use and don’t need credit, then it won’t matter when it’s taken away.
That’s what I told my cat when we fixed him.
Every time the Fed starts to ease or is considering easing, the rocket scientists say the same thing. “It won’t help.” “Nobody’s lending anyway.” “They’re pushing on a string” etc.
This is patently wrong and has been proven wrong every time. These are the same people who blame Alan Greenspan for lowering Fed Funds to 1% and keeping them there too long.
If lowering rates doesn’t work, then why did it matter if he lowered rates and kept them there? After all, nobody was lending money any way, right? At the margin, every decline in interest rates helps somebody.
“every decline in interest rates helps somebody.”
And hurts somebody else. Low rates for too long just took out most of the investment banking industry yesterday, and a big insurance company just about went down today. Not to mention the money market fund that just broke the buck and froze up this afternoon. And the dollar has lost something like 40% of its value since 2000.
Negative real rates eventually cause economic distortions with disastrous side-effects.
At this point, the Fed is trying to stimulate the economy. The argument isn’t, “have rates been too low for too long?’ The question is, what does the Fed do to stimulate the economy?
I submit that lowering rates at this point would be economically stimulative. The writers in the post argue otherwise. I contend that they are wrong.
The argument isn’t, “have rates been too low for too long?’ The question is, what does the Fed do to stimulate the economy?
The question should be “have rates been too low for too long?” The problem is you have idiots (the media) asking the questions on behalf of the American public.
At this point, the Fed is just trying to keep the major financial institutions from blowing up. Stimulating the economy will have to wait until this crisis is over. Negative real interest rates are like trying to cure a heroin addict by hooking the patient on crack.
Lowering interest rates is not going to help for more than a week or two, and risks a severe inflation problem - that is - worse than what we have seen since the 1970s.
Got gas lines?
After all, nobody was lending money any way, right? Wrong there. Manybodies were lending like it was going out of style. And now it’s gone out of style. The current situation is much different.
RE: “Economic stimulation” is needed by promoting more leveraged borrowing from banks.
I’m sorry, but I guess I’m just a confused rocket scientist…are you saying that this economic crisis was provoked by banks not lending money cheaply enough, and by giving the public a socially engineered incentive to put more money into the stock market rather than savings by undercutting market interest rates?
Most investment banks failing now were leveraged 30:1. I thought this was a solvency issue, not a liquidity issue!
Help me out here…you’re not making any sense at all.
Alan created the credit bubble with too-low interest rates. He wasn’t pushing on a string at the time because there wasn’t already a credit bubble. Rather, there was a stock bubble that had only half-way popped. Investors were more than happy to shift their money from the stock market (bad place) to the RE market (happy place, low interest rate). Bernanke can’t do the same thing now because there’s already a credit bubble. Investors are not not not eager to shift their money into RE. Even if they did want to go into RE, they can’t. Now that the whole house of cards (an economy based on borrowing) is falling apart, they are losing money on all of their assets, so they don’t have money to lend. All of the assets were inflated due to all that lending. Now everything is going down.
It’s worse than a stock bubble — It’s a credit bubble.
“Wall Street’s meltdown is fast becoming Sacramento’s problem, too. It’s not just a psychological problem. The housing market crash has erased billions of dollars in wealth throughout Sacramento and the state. ‘A couple of years ago everybody thought they were rich,’ said Chris Thornberg, head of Beacon Economics consulting firm in Los Angeles.”
How can you erase what never was? Anybody who thought they were rich before they cashed in their hand was breathing some form of rarified air. The herd instinct was alive and well and Sacramento’s problem was that they were a part of the herd and failed to have any free thinking leaders on the payroll. No leadership, just highly paid managerial staff.
salinasron,
One of the aspects that seems to lend credibility to that theory is that WS’s implosions have been very high profile with well recognized names.
Unless you’re a fan of Mortgage Implode ( or worked at one of those schlock shops ) who would know that Joe Bob’s Mortgage Guys went belly up? So hundreds and hundreds of wholesale lenders, brokers and realty shops get boarded up, who cares?
That imaginary money has been counted as actual real money on every index, in every account, in every government statistic, and most importantly in almost everyone’s minds.
Everyone’s been making their plans counting it as real money in the bank. Look at all the state and local governments that built all sorts of fancy government buildings assuming property taxes would continue to stay high with house values. I’m sure most of those buildings were built with borrowed funds, either via public bonds or direct loans to the municipalities, in anticipation of the continued bonanza of tax money inflows.
Since it’s now being show to actually be imaginary money, things are falling apart. The perception of wealth does make a big difference in how people plan for the future, both individually and collectively.
This is going to turn into a very rude shock for the majority of the US population.
Good point - California’s massive budget shortfall is a good example of how they were banking on income that would inevitably dry up.
Very good point indeed! Unlike most posters here that secretly hope for the best but prepare for the worst, it’s almost as if most are waiting for a sign, ANY sign the good times are rollin’ again.
Just like the spoof in The Onion: America Needs New Bubble To Invest in!
And on top of that, they spent it on stupid stuff. They should have given it to schools. I am going to donate to the police this year, though.
So, anyone want to guess our nation’s *actual* economy has been for the last 7 years, if you subtract all the “money” the government counted in GDP and all other statistics, now that it’s been proven to have been imaginary (and perhaps even fraudulent)?
I think that will wind up being a rude shock, too.
“‘In the economy, the creation of money helps us grow,’ Osher said. ‘Money is created through leverage. If it creates a lot of growth, everybody is happy - the downside is we went too far.’”
The Marin Independent Journal. “Bill Osher, chief economist with Tamalpais Bancorp, parent of Tamalpais Wealth Management in San Rafael…”
Hey Bill, you sound just like my brother! (inMarin)…is everyone inMarin so…modest & understated?
I see, “they” just can’t imagine a world were someone is “unhappy”…Disney will never run out of true believer “associates” employee’s
Disney HR “associate”: “Oh, I see here that your parents live in Marin, CA…you a little young at age 6…but, you might make a great Musketeer…you’re hired!”
“It’s not just a psychological problem. The housing market crash has erased billions of dollars in wealth throughout Sacramento and the state. ‘A couple of years ago everybody thought they were rich,’ said Chris Thornberg, head of Beacon Economics consulting firm in Los Angeles.”
Hey Chris, you disappoint me…for a guy that relies on statistics…don’t you have a Wall Street Journal almanac at hand…there are more millionaires / billionaires than ever in the history of the world, facts is facts…but “thought that they were rich?” that’s a little “over the top”…even for Sexcrementol.
OT… AIG Drawing up BK papers…NEW YORK (Reuters) - American International Group Inc has hired law firm Weil Gotshal to draw up bankruptcy papers, the New York Times reported on Tuesday.
AIG could file for bankruptcy as soon as Wednesday if a financing solution is not reached, according to the Times, citing a person briefed on the matter.
http://www.reuters.com/article/newsOne/idUSLAU67097420080916
Sir Paulsen to the rescue, fair damsel!
What..me worry?
____________
Money market giant freezes redemptions (Marketwatch)
By Sam Mamudi
Last update: 5:19 p.m. EDT Sept. 16, 2008
NEW YORK (MarketWatch) — One of the first and largest money market funds has put a seven-day freeze on redemptions after the net asset value of its shares fell below $1. Primary Fund (RFIXX:), a $62 billion fund managed by money market fund inventor The Reserve, said Tuesday afternoon that its $785 million holding of Lehman Brothers Holdings debt has been valued at zero. As of 4 p.m., the value of the fund’s share is 97 cents. The Reserve said that redemption requests received before 3 p.m. Tuesday will be paid out at $1 a share.
Aw, c’mon..that’s nothin’…
I read about a hedge fund investor that forced a redemtion. Well, according to the fine print, the hedge fund could pay the redemption “in-kind”. So, they send him a stack of “paper”. This basically means that they sent him his pro-rata shares of what the hedge fund was invested in. The look on his face must have been priceless.
You really have to read the fine print in life.
“‘In the economy, the creation of money helps us grow,’ Osher said. ‘Money is created through leverage. If it creates a lot of growth, everybody is happy - the downside is we went too far.’”
Huh. I thought money was created through production, and that leverage only created debt.
“I thought money was created through production,…”
We are talking about the kind of money that grows on trees here, not the kind that represents the value of actual production.
Moneys vs money
Moneys = leverage
money = demand deposit
One is to play with, the other if to pay with.
“I thought money was created through production”
Is there any chance at all, that this market swoon and its ensuing issues will wake up the Sheople?
Is there any chance at all, that we as a nation, can change direction?
or..is it just too late for any of that?
I’m hoping that things stay bad long enough for people to demand real change, not the cheap political rhetoric kind of chance, but real change.
Any chance of this helping a viable third party get started?
No.
Stop boring us with intelligence and common sense and all those other less desirable attributes in an American.
No, third party candidates always run on such narrow platforms that most people won’t entrust them with a complicated position of power. Not to worry, the Democrats are a whole boat-load of different from the Republicans.
Big V, no they are not that different. It’s just the same damn nonsense. If people keep voting for the ‘lesser of two evils’ we are going nowhere. This is not change. Vote with your principles. I realize a 3rd party cannot win (this time.) But we need to get the percentages up to make a statement.
Big V,
I couldn’t disagree more.
I’ll be writing in Ron P.
I won’t play their game any more.
Mike
“‘My guess is they won’t’ drop the rate any lower, said Andy Montgomery, CEO of Palm Desert-based El Paseo Bank. ‘We’re already at 2 percent, and the rates being too high are not the issue. There’s just no one extending credit.’”
I’m extending credit..
I credit Greenspan and the rest of the Fed for this mess, along with the “Masters of the Universe” types that thought they had it all figured out.
‘Zandi of economy.com. agreed that it’s not 1929 all over again. “This will go down as being the worst financial shock since the financial crash of 1929,” he said, “but the economy will still experience one of the mildest recessions in the post-World War II period.”’
CLICK!
huh?
OK, I don’t really like my job. But, I’m busy. We still have customers. I’m still getting paid. My peers are all working. Even on Long Island, the financial market turmoil is not leading to apparent problems. And, I am dearly wishing for the day when one of my wife’s uppity peers has to admit her husband is looking for work and they can’t make house payments.
The real economy is not crashing … just the banking economy.
I don’t know about this week on Long Island. I’m in Brazil and the Real economy also did not erupt into revolution (although their stock market just dropped about 10 %).
These comments are very much like an echo of the headlines in 1929 as well “Stock Market Crashes; People say so What?”.
As the credit based price distortions get worked out, prices fall and wages fall even faster.
“Robert Rivinius, California Building Industry Association president, said policymakers need to make it easier for home buyers to get loans.’
“‘Those who have good credit and verifiable income should be encouraged and able to buy a home,’ he said.”
…….
Robert conveniently left out an important detail: those are his zero down customers.
Let there be skin! 20% down.
Hi all - I know there is a sometimes poster here from Pullman, WA. I’d like to contact you offlist to ask you about the local market. Contact me at patiasaramom at yahoo dot com. Thanks.
Federal Reserve to take an 80% stake in AIG. Just heard it on the local news.
The Federal Reserve will loan AIG 85 billion for the 80% stake in AIG.
Yah, I just read that. I don’t even know what to say anymore, at this point, I think the gov has reached the absolute limit of insanity. There’s nothing more you can say or do when the inmates are in charge of the asylum, Hank Paulson being one of the chief loonies. He even looks and sounds like a complete nutbar. Let him pull the $85billion out of his ass.
Oh, pardon me, I spoke too soon. It’s Federal Reserve taking on the AIG. LOL! That’s OK, then.
So, an agency of the US Gov’t (yeah, I know, it’s supposedly a private corporation or some such crap) is about to become an insurance company? Interesting.
Oh wait. Social Security. Hmmmmm… yeah. This will end well.
Hey, what’s this going to do to Treasuries, bonds, etc.?
So,a Talking Head on TV said the worth of AIG was 90 billion and the government just loaned them 85 billion ,but say AIG is worth a little more ,the government just lent that high of a % (80 %)of the Companies net worth .
First ,correct me if I’m wrong ,but isn’t this the same as buying the company name AIG? What interest rate did the Feds get for such a high loan to value bridge loan ?
On the Bear Stearns deal the gov. put in 50 billion or so didn’t it ?
With freddie and fannie ,its a blank check ,but 200 billion and still counting .
On the stimulus check it was around 150 billion ,if I remember correctly .
On the Housing Bill bailout it was 300 billion if I remember correctly .
Now I’m not even counting the outstanding short term loans the Feds have extended to Financial Firms in the last year at dirt cheap interest rates .
So ,it over a trillion already that the government has laid on the line already ,correct me if I’m wrong .
Is this sort of help from the Feds ,or risk of public funds , a little crazy or is it a little crazy ? Its seems to me whenever the pain starts with Wall Street ,they scream bloody murder and out comes the checks . The borrowers scream ,’I can’t pay my mortgage and out comes the government violins and promised relief .
Now mind you, I’m always hearing about this so -called risk if the government doesn’t step in ,but isn’t this so called risk the loss that is associated with a bad investment ? These cats at Wall Street are refusing to take their losses .
I almost barfed on the dentist when I found out.
AIG going under will be like a 8.8 earthquake, with aftershocks a’plenty…
And then next week another shoe will drop, and then the week after another one, and so on, and so on.
This slow moving train wreck containing 666 cars has lurched over the abyss, and the locomotive is dangling from the precipice~
I hope I’m not on that train, alad.
Reminds me of The Gambler.
Southern California house prices are still too high, people do not make enough money to buy a house in the state. Why do you think there’s now record-breaking foreclosures all over the state? People had no business buying half-million dollar houses with the incomes they were making. It was a crazy housing boom and now the bubble is here and they’re all dumping their homes. Anyone that has to sell their house, has to lower their asking price or the house will just still there until incomes go up and that could be a long long time. I have friends that have been trying to sell their houses but refuse to take a loss and lower their asking prices … thus their houses remain unsold and unlooked it and panic is setting in after a year on the market.
The number that’s most often quoted is 2,000,000 homes “at risk” for foreclosure.
I’ve also seen figures that as many as 70% of mortgage applications had some degree of fraud.
Let’s use round numbers and call it 50%.
That means that 1,000,000 people borrowed money they had no way of paying back to buy an overpriced house. Figure $100,000 of overpay per house and you’ve got 1 Trillion dollars.
This is *the* source of our problem! There’s a trillion dollars of worthless paper out there.
So here’s my solution.
1. Start a massive public works project, like the WPA in the 30s, to build 1,000,000 prison cells to hold these 1,000,000 people who committed mortgage fraud.
2. Put these 1,000,000 in jail and fine them each an amount equal to whatever they can raise by selling everything they have.
3. Immediately dissolve any and all “down payment assistance” or affordable housing programs. Do a complete investigation of all those involved in the scam called the “Nehimiah Program”. A lot of urban mega-churches were sponsors of this. (Google it!) Force them to dissolve and sell all their assets if there was any criminal wrongdoing.
4. Allow banks to use sensible lending criteria. Get rid of all those “redlining” laws that were the start for the demand for many of these wacky mortgages.
5. Immediately eliminate all taxes on dividends. Provide a stimulus package to people who have zero debt and have savings.
There! That will solve our problem, and we’d get to full employment while building all those prison cells.
And, no, I’m not joking.
Aw, heck, reuven, we don’t need to build prison cells. We just need to deport ‘em all to Mexico. That’s what I would do, if I were king. Let the border patrol use them as human shields while dumping them all on the opposite side of the border.
I mean, really, who didn’t feel a bit uplifted by yesterday’s “turmoil”. I was in a good mood all day, thinking FINALLY we’re gonna get some of these big swinging dicks out of our faces. But no, these turds just can’t let things alone, can they? Oh, and don’t think the “salvation” isn’t selected. Eenie, meenie, miney, mo. Check it out, Goldman Sachs, Paulson’s company, is profiting out of all of this.
I have been thinking lately about this pick and choose stuff on who gets the money and who doesn’t also palmetto . I guess any big company could have counter-party risks or investments related to leverage involving real estate . Look at GMAC and Ford ,they have a credit division and they make loans .
I mean didn’t the bail outs just start with the concept of just helping out the poor borrower who got in over their heads with toxic loans and now it’s turned into what we thought all along in being the biggest bail-out in history of the WALL STREET/Lenders leverage risks or gambling on credit ?
How do I give five stars to the last post? Would save Ca tax payers 15 billion dollars! Bingo, budget deficit solved!
For some reason, I don’t really worry about illegal immigrants. Many of them pay Social Security tax and will never collect. So I don’t know what sending people back to Mexico has to do with anything.
My point is nobody wants to hold the people who are most directly reponsible for this accountable! These are the people who borrowed money in bad faith.
What possible national interest is served by eliminating taxes on dividends??? It is fiat money that encourages speculation, overleveraging, and provides an inflationary tax on those who do not gamble in the stock markets but instead derive their income from actual wages and assets. This is just a surreptitious tax giveaway to the wealthy, presumably under the fallacious assumption that supply-side economic policies benefits everyone.
It does *nothing* to reduce the ‘worthless paper’ that you are referring to, and merely adds to it.
Also, your assumption about ‘redlining’ as the root of exotic mortgage products implies that this is mostly a subprime issue. If you had been paying attention, you’d realize that the alt-A/option ARM/HELOC backed securities (>$2.5 Trillion) are a MUCH bigger problem than subprime mortgages ($1T), as pointed out by the famous chart from Credit Suisse. These riskier loans were mostly made to speculators with high FICO scores and median incomes who were clearly the bulk of the toxic lending market, not beneficiaries of redlining laws.
What this country needs is personal savings; a reduction of taxes on dividends (and interest for that matter) would encourage savings. The savings will only come from the producers; the ‘moochers’ are not going to help us out of this mess.
I say we institute the new “reuven tax”. Raise taxes just for reuven.
Don’t give the CA State Legislature any ideas! Actually Rob “Meathead” Reiner had an initiative on the ballot a few years back to do just that! He wanted to raise CA state income taxes by a full point on the upper few % to fund “mental health projects”.
I was pleasantly stunned when it didn’t pass.
There’s something undemocratic about allowing people to vote for something that raises other people’s taxes. If it had raised EVERYONE’S taxes 1%, the whole concept of it wouldn’t have bothered me.
So AIG had a market cap value of around $5 Billion, but we the great unwashed public get to buy 80% of it for $85 Billion…
How much longer can this nonsense go on?
Sickening. I wish I could trade my toxic garbage for treasuries too.
So the market value of AIG’s outstanding shares are 5 billion and falling and the government is lending 85 billion .Maybe it will go up to 10 billion tomorrow and than it won’t seem as crazy .
Aladinsane …Wall Street won’t take one ounce of pain . Everybody is complaining about mark to market and the Talking Heads on the boob tube are saying that it’s unfair that Companies should be under this sort of accounting rule. Isn’t the real truth this Company can’t meet their obligations ,therefore a mark to market is required ?
Private
Forget dollar value of stock that is for plebians. The incalculable cost of failure is what we would have to live with.
So Hoz, what is the end game ? The government just writes off the loan or what .
Hope and Pray that the AIG (new) is able to make the payments of 13% to the Treasury on the borrowed funds. Hope and pray that somebody thinks AIGs assets are worth $85B and is willing to buy.
Split the company up and take the Airline leasing as an independent public company and keep 25%. Gets some real quick cash.
But basically Hope and Pray. (We are way past ‘wait and hope’)
I am wondering about the forclosure market. I have been looking to buy a home for my family and it seems like it is actually hard to buy a foreclosure here in So. Cal. Are agents or agent houses actually buying these up or tying them up only to sell them for more? And are they making it difficult for a buyer to buy if they don’t use the house as the buying agent as well? Also, they are stacking up the offers and creating a bidding war? I recently made a solid full price offer and I was knocked out of the game. It does not make sense. I have seen homes that were short selling for less than when they became foreclosures. Should I be waiting for all these people who are involved now to blow their wads now, so that I can buy later? I am a bit perplexed.
I noticed that too. There were a couple of houses we saw at Zip that we tried to make an offer on. But the selling agent always gets back to us telling us that someone else with higher offer got it or the like. Strange indeed.
a bit OT from the market issues of the last few days - probably popped up somewhere else before:
The free “homes and land” magazine that’s available all over town (Santa Clarita Valley, CA) which used to be a thick, thick magazine has been downsized to a few pages. I guess it’s pricy to advertise in it and the real turds don’t have as much spare change as they used to. Mrs. ValVerde and I are a bit sad - we’ve started to call that rag “the funnies”.
…and a big thank you to you all - we’re lurkers more than anything else but have stopped by every day since about 2005. You’ve kept us from making a really bad choice a few years ago and are providing insight and daily entertainment on top of that!
no public losses without public gains - it is that simple.
why not just bill these losses against future gains?
That’s effectively what they’re doing.
The fed gets 79.9% of the company in warrants–presumably they’ll unwind this eventually. They are also charging LIBOR + 8.5% on the loan if I recall right, which should put interest on the load at over 10%.
If AIG actually pulls through the fed could make a ton of money.
AIG is not going to pull through, and this is a conflict of interest. How can our government make decisions in the best interest of the people when it’s revenue is tied up in a handful of private companies? This is what they call an oligarchy.
I think it’s pretty obvious the fed will sell them as quickly as they can reasonably do so. And it’s likely they’ll lose money on the deal. The feds taking out warrants on 79.9% of the company is essentially them ensuring that the stock holders lose their equity while still providing a bridge loan.
I assume they picked 79.9% so that the private holders can still name one board member.
Will Buffett figure in here anywhere? BRKB is up!
By my calculation, 80% of AIG had a market value at today’s close of $8.5 billion, so the Fed overpaid by a factor of TEN. I don’t expect public gains any time soon.
I’m guessing WaMu is next; hopefully they’ll have the decency to wait until next week, because the never-ending stream of bailouts lately is more annoying than Sarah Palin.
when do wal-street traitors start jumping off The Bridge To Nowhere?
da bear
With respect to the AIG thread, they are a major competitor to my employer and now they have the backing of my government to compete against me. With the money the Fed’s will give them, they can lower prices and potentially wipe out my job.
With respect to the original article and the quote about how hard it was to get a loan approved, I received a letter from Chase yesterday saying that I was approved for a $411,000 housing loan and they would not apply any fees. I never asked for a loan so I am a bit surprised about the letter but I guess the point is that banks are being selective.
Is Fungible just a smarty-pants way of saying Liquid?