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Real estate insanity in Canada and India, too
Tuesday, November 10th, 2009 | Economics | Permalink | No Comments |
America Canada - Deflation or Inflation. What’s in the Cards for Canada?:
Canada’s home prices have skyrocketed in this recession. When the dollar was at 97 cents US a couple weeks ago, average Canadian home prices hit roughly $320,000 US – an all-time high. Residential mortgage debt has over doubled since 2002. We will surpass the US in per capita residential debt within the next year. In 2009 alone, we will add 100 billion in fresh residential mortgage credit (equivalent of about 1 trillion in the US on a per capita basis).
The average price of a detached Toronto home has approached $600,000. I have attached a home listed at $559,000. The home is about a 15 minute drive from downtown in an average location. It is clearly overvalued. Yet it’s more than likely that the property will receive 20-30 bids and finally sell at over $600,000.
iTulip - Houses in Canada 2 to 3 times as expensive as U.S.:
I hope readers took note of that 1500 square foot old shack on the 30 front-foot lot in Vancouver: $989,000.
From some people with experience in Canada:
Based on my weekly research, in the GTA (accessible to the subway via a 10min. bus ride) a semidetached (3bdr/1.5bath) goes for around $450K, while a detached starts at around $600K/$650K. That is for a 1960/1970 built house in average area, with average repair to be done.
Another story:
I was in Vancouver visiting family in September and was *shocked* at the price of housing up there. As the article points out, prices are sky high and incomes are not nearly high enough to cover debt service. My cousins live in Burnaby, just 15 minutes east of downtown Vancouver. In addition to my cousin, his wife and two daughters, they have 4 other roommates to cover rent. I would guess the house is valued at close to $1,000,000 CAD although they are renters and do not own the home. I’m not sure if the roommate situation is the norm, but that seems about the only way to afford housing if you are a normal person. In any case, I definitely came away with the impression that there is a massive real estate bubble in greater Vancouver.
And in India:
Housing in India serves as a vehicle for the class that doesn’t pay tax (”Black Money”) to hoard its wealth. Ergo, due to massive income inequalities and rampant corruption/tax evasion, housing in India will always be much more expensive relative to income than in the West.
Bombay (Mumbai) is a good example of that. Prices there have been out of the reach of the vast majority of people for generations. And yet, despite massive corrections at various times, they continue to be at levels that even middle class people cannot afford (let alone the poor).
When I wanted to buy land in India, I was told that some 85 percent of the price had to be paid in hard cash (Black Money). This sum would not show up on any property deed and would not be the amount at which the transaction would be registered with the land registry for stamp duty purposes. I refused to do it. I managed to find a seller who agreed to accept the entire amount by bank draft. However, that was a rare exception.
Bush administration, Federal Reserve lied about banks’ health in 2008
Monday, October 5th, 2009 | Economics | Permalink | No Comments |
ABC News - Government Watchdog Says Treasury and Fed Knew Bailed-Out Banks Were Not Healthy:
The Treasury Department and the Federal Reserve lied to the American public last fall when they said that the first nine banks to receive government bailout funds were healthy, a government watchdog states in a new report released today.
The bailouts and the stress tests were a joke. Most banks are insolvent and are being propped up by government money, government backstops, and government regulators looking the other way.
“Some days I really wish I could go back to being completely clueless about the economy”
Wednesday, September 30th, 2009 | Economics | Permalink | 3 Comments |
From a financial board I read. “Some days I really wish I could go back to being completely clueless about the economy. Now I know enough to be scared but not enough to actually know what to do.”
I know the feeling.
In speaking to some local bloggers this past year a couple of people said things like, “I can barely read your site anymore. The economic stuff you talk about is too depressing.”
It is depressing. Worse, I’ve been holding back on how bad I think some parts of the economy are going to get.
For instance, I basically think the U.S. banking system is gone. Insolvent. Bankrupt. As in their liabilities greatly exceed their assets if their assets were fairly priced. It only takes a small writedown in assets to destroy a highly-leveraged bank in a fractional reserve system. Even by conservative estimates most banks are wiped out.
In the last few decades the banks made mountains of loans that will never, ever be paid back in full. Every foreclosed property you see is a loan gone bad. As Karl Denninger says, for decades credit expanded much faster than GDP. Do that long enough and you’ll never have any hope of paying back all the money.
The only reason the banking system hasn’t shut off the lights is that the government bailed it out. After they bailed it out they changed the rules so that the banks could mark their assets to fantasy and not be shut down.
The next step was to effectively replace the banks’ lending function. The U.S. government is now the de facto banker in the United States. The banks are just the places with the brick buildings, free toasters, and lollipops for the kids. Any money they lend ultimately comes from the Federal Reserve’s purchase of Treasury notes, Fannie Mae and Freddie Mac debt, and mortgage-backed securities.
If that sounds like paranoid rambling, see yesterday’s post, Federal Reserve has bought 100%+ of 2009 mortgage market. I’d love to be convinced I’m wrong, but I don’t think I am.
Fed’s quixotic plan to raise interest rates to the moon once inflation starts
Tuesday, September 29th, 2009 | Economics | Permalink | 2 Comments |
AP - Officials: Fed will need to boost rates quickly:
To prevent inflation from taking off, the Federal Reserve will need to start boosting interest rates quickly and aggressively once the economy is back on firmer footing, Fed officials warned Tuesday.
“I expect that when it comes time to tighten monetary policy, my colleagues and I will move with an alacrity that, if needed, will be equal in speed and intensity” to when the Fed was slashing rates to battle the recession and the financial crisis, said Richard Fisher, president of the Federal Reserve Bank of Dallas.
Color me skeptical. What they’re saying is that once the economy begins turning around and inflation begins they’re going to be willing and able to drastically raise interest rates. Consider what that means:
- Businesses that depend on revolving credit lines or short-term financing may be unable to borrow the money they need, forcing them into bankruptcy.
- Homeowners with adjustable rate mortgages will see their rates shoot to the moon, forcing millions of homeowners into foreclosure.
- Students will see their student loan rates skyrocket, keeping many out of college.
- Consumers struggling with credit card debt will see their interest rates rise.
Hiking interest rates is incredibly painful. It takes tremendous political will to do it. It also takes certainty that raising rates won’t kill a nascent recovery.
Too, all of this assumes that inflation can only happen after a recovery starts. That isn’t true at all. We could have stagflation - a stagnant economy combined with high inflation.
Federal Reserve has bought 100%+ of 2009 mortgage market
Monday, September 28th, 2009 | Economics | Permalink | No Comments |
Chris Martenson - Federal Reserve Buys More Than 100% of Mortgages Issued in 2009:
In other words, the Federal Reserve alone bought $722 billion of mortgages and agency debt when only $686 billion in new mortgages were issued. So, through August, the Fed bought more than 100% of the entire supply of mortgages in 2009.
That’s not a free housing market; that’s a market bought, owned, and sustained by the Federal Reserve’s willingness to print up three quarters of a trillion dollars out of thin air.
While the individual mortgages issued in 2009 may or may not be the exact same ones purchased by the Federal Reserve, that’s immaterial. All the mortgage issuers care about is that when they issue a mortgage, a purchaser with money exists somewhere down the line. The chain needs a terminal buyer, and that buyer has become the Federal Reserve.
The impact of these purchases by the Federal Reserve is to both provide liquidity and to drive down the rate of interest for new mortgages. By lowering both the long end of the Treasury curve (which the Fed does by actively buying Treasuries) and providing more than sufficient demand for MBS and agency paper, long-term interest rates come down.
Without the Fed’s activities, it is a rock-solid certainty that mortgage interest rates would be higher than they are, and possibly a LOT higher.
What happens if the Fed can no longer finance the mortgage market? Or America’s government, for that matter, which it is effectively financing by purchasing Treasuries. This is another of the risk factors for a sudden stop, in which the debt-addicted economy or debt-addicted government come crashing to a halt because no one will loan us any more money.
I started worrying about a sudden stop when my wife’s company went out of business in January. It was a 65 year old company with over 400 employees. When the banks wouldn’t renew their revolving loan they went out of business overnight. That’s the sudden stop scenario.
Previously - 80% of mortgages backed by FHA, which is low on funds
Kansas Supremes ruling could invalidate foreclosures on 60 million mortgages
Tuesday, September 22nd, 2009 | Economics | Permalink | 3 Comments |
Global Research - Landmark Decision: Massive Relief for Homeowners and Trouble for the Banks:
A landmark ruling in a recent Kansas Supreme Court case may have given millions of distressed homeowners the legal wedge they need to avoid foreclosure. In Landmark National Bank v. Kesler, 2009 Kan. LEXIS 834, the Kansas Supreme Court held that a nominee company called MERS has no right or standing to bring an action for foreclosure. MERS is an acronym for Mortgage Electronic Registration Systems, a private company that registers mortgages electronically and tracks changes in ownership. The significance of the holding is that if MERS has no standing to foreclose, then nobody has standing to foreclose – on 60 million mortgages. That is the number of American mortgages currently reported to be held by MERS. Over half of all new U.S. residential mortgage loans are registered with MERS and recorded in its name. Holdings of the Kansas Supreme Court are not binding on the rest of the country, but they are dicta of which other courts take note; and the reasoning behind the decision is sound.
MERS as straw man lacks standing to foreclose, but so does original lender, although it was a signatory to the deal. The lender lacks standing because title had to pass to the secured parties for the arrangement to legally qualify as a “security.” The lender has been paid in full and has no further legal interest in the claim. Only the securities holders have skin in the game; but they have no standing to foreclose, because they were not signatories to the original agreement. They cannot satisfy the basic requirement of contract law that a plaintiff suing on a written contract must produce a signed contract proving he is entitled to relief.
Freaky. Not being a law-talkin’ guy I’m not sure if the ruling is good law or how likely this is to stand on appeal. Paging Ace of Spades, Instapundit, Countertop, and XRLQ!
P.S. I do know that a number of lawyers have challenged their clients foreclosures by demanding to see the original mortgage paperwork. In many cases the mortgage has changed hands so many times - and the mortgage originators were so sloppy - that the mortgage paperwork couldn’t be found and so foreclosure was stopped or delayed. (And some people are doing the same thing with credit card debt that’s been sold off to collection agencies.)
That’s a separate issue from this, legally, but it points to the many problems caused by having one entity originating loans and another entity ultimately holding the note expecting repayment. Mortgage-backed securities (MBS) were a large part of last year’s financial collapse and we haven’t heard the last of them. With foreclosures set to rise, option ARMs preparing to reset, and the Federal Reserve increasing its backing of these rotten securities it’s guaranteed that we haven’t heard the last bad news about mortgage-backed securities.
80% of mortgages backed by FHA, which is low on funds
Tuesday, September 22nd, 2009 | Economics | Permalink | No Comments |
The Money Times - Rising foreclosures to drop FHA’s reserves below mandated level:
Battered by the slump in the housing market, Federal Housing Administration (FHA) said Friday that its reserves will fall below the congressionally mandated level for the first time in its 75-year-old history. Battered by the slump in the housing market, Federal Housing Administration (FHA) said Friday that its reserves will fall below the congressionally mandated level for the first time in its 75-year-old history. Despite falling reserves, FHA Commissioner David Stevens said that the agency will not ask Congress for support to rebuild the reserves
And here’s why it matters. iTulip - Mission Accomplished – Part I: Wrecking of the world’s greatest economy:
If we told readers in 2005 when we warned about the housing bubble that GSEs Fannie Mae and Freddie Mac were to be nationalized within three years, we’d have been called alarmist. But the Wall Street Journal reported on Tuesday that this year 80% of all mortgages were purchased in the secondary market by the FHA, versus 20% in 2006. What the chart above says to me is that some day down the road we may find a large segment of our banking industry has been nationalized much as we have for all intents and purposes nationalized the mortgage banking industry.
Think about what the virtual nationalization of mortgage debt means. It means that 80% of home sales that are occurring today would not occur except for the government’s guarantee of mortgage credit. We have for all intents and purposes a nationalized housing market here in the U.S. And who is backing the mortgage debt? Not investors in mortgage-backed securities in Europe and Asia. In fact, the Treasury is busy buying back Agency debt from them, the bonds issued by the GSEs, with Treasury bonds. You can see the net decline in purchases in agency debt and the corresponding rise in net purchases of Treasury bonds in the data.
NY Times article on option ARM loans
Monday, August 31st, 2009 | Economics | Permalink | 2 Comments |
New York Times - Loans That Looked Easy Pose Threats to Recovery:
On his annual salary of $100,000 as a television camera operator, he could afford the $2,200 initial mortgage payments. And he planned to sell the home before the mortgage reset.
Now Mr. Clavon is part of what many economists say is a looming threat to a housing recovery: more than a half-million option ARMs scheduled to reset in the next four years, at rates many homeowners cannot afford. His mortgage payments have risen to $2,700 a month because of a clause he did not notice on his contract, and are scheduled to rise above $4,000 in two years.
Because Mr. Clavon made only minimum payments on his mortgage, his balance has risen to $680,000 from $618,000, on a house worth closer to $400,000.
Never mind the option ARM problem. The real problem is that a guy with a $100,000 income got a $618,000 mortgage. That’s a 6 to 1 ratio. The safe ratio is 3 to 1.
On the one hand, the guy made a bad decision. He bought more house than he could afford using a financial instrument he didn’t understand. He deserves some of the blame.
However, I reserve most of the blame for the company that made the loan. They failed their fiduciary responsibility - they should have been more responsible in underwriting the mortgage to assure that it could be repaid. Now there are consequences for their owners, for the Clavons, and probably for the taxpayers, who are covering many of these loans directly or indirectly.
The credit bubble and housing bubble got completely out of control. Housing prices got so high that many people simply could not qualify under the traditional lending rules. In order to keep lending the banks had to throw out the rules. Mortgages based on 3 to 1 loan ratios and 20% downpayments disappeared, to be replaced by 6 to 1 ratios, nothing down, no doc loans, and option ARMs that were interest-only for the first few years.
If the banks and agencies like Fannie Mae and Freddie Mac had followed long-standing loan guidelines the housing bubble would never have reached its dizzying heights.
Foreclosure filed against Northshore Town Center
Thursday, August 13th, 2009 | East Tennessee, Economics | Permalink | No Comments |
Josh Flory’s got the story* and a followup here.
I pass Northshore Town Center on the way home every night. (For locals, it’s at the corner of Knoxville and Pellissippi.) It was a New Urbanist project with walkable retail and a little playground and pond. Parking was on the street with alleyways in back for garages and garbage service.
The idea was interesting, but the timing was bad. They began building as the housing bubble came down. The three story retail center is empty. Only 10-20% of the lots were built out.
On the way home last night I drove through the project and picked up a few flyers. One advertised a 2700 sq. ft. with no yard and no porch for $399,000. It’s a nice home inside and brick on the outside, but that’s outrageous in 2009 for Knoxville. It’s worse considering the house is in an unfinished subdivision that’s mostly empty lots. If the appeal was to be close to neighbors and walking to distance to retail then the absence of neighbors and retail is a drag on the price.
* Pssstt … Josh, feel free to use that.
Homes in foreclosure: Phoenix 1 in 22, San Diego 1 in 37, Tampa 1 in 39
Monday, August 3rd, 2009 | Economics | Permalink | No Comments |
Holy cow. Foreclosures: How bad is your city?
Too Much of Everything: Condominiums
Sunday, August 2nd, 2009 | Economics | Permalink | 2 Comments |
1 is very lonely number for New Jersey family that is the sole tenant of Florida highrise:
FORT MYERS, Fla. (AP) — The Vangelakos’ southwest Florida condominium has marble floors, a large pool overlooking a river and modern furnishings that speak of affluence and luxury. What they don’t have in the 32-story building is a single neighbor.
The New Jersey family of five purchased their unit four years ago, when Fort Myers was in the midst of a housing boom and any hints of an impending financial crisis were buried in lofty dreams of expansion and development. They made a $10,000 down payment and eagerly watched as builders transformed an empty lot into an opulent high rise, one that now symbolizes the foreclosure crisis.
“The future was going to be southwest Florida,” said Victor Vangelakos, 45, a fire captain who planned to eventually retire and live permanently in the condo.
Most of the other tenants in the 200-unit condo didn’t close on their contracts, and the few that did have transferred to an adjacent building owned by the same company because more people live there.
If you’re thinking “Woo hoo! They’ve got the whole place to themselves,” think again. As sole owners they would also be responsible for all maintenance costs and taxes for a 32 story building. That’s one of the counterparty risks of condominium ownership. Maintenance fees and taxes are divided by the number of owners. If there’s a falloff in ownership everyone’s fees increase.
Previously - Too much of everything
Why don’t banks work with more people facing foreclosure?
Wednesday, July 29th, 2009 | Economics | Permalink | No Comments |
Since foreclosure is expensive for the bank, why don’t they work with the homeowners to forgive part of the loan and/or make the payments more affordable? Answer here. Short version:
- 30% of people facing foreclosure pull out of it on their own, which means 30% of loan modifications would be wasted.
- Of the people whose loans are modified to make them more affordable 30-45% default anyway, so loan modifications just postpone the inevitable.
- If a bank lets it be known that they’ll forgive part of the loan if people are in foreclosure more people will stop payments and enter foreclosure in order to get the free money.
Study: refinancing, not buying at top, caused most SoCal defaults
Wednesday, July 29th, 2009 | Economics | Permalink | No Comments |
Via Calculated Risk:
Michael LaCour-Little, a finance professor at California State University at Fullerton, looked at 4,000 foreclosures in Southern California from 2006-08. He found that, at least in Southern California, borrowers who defaulted on their mortgages didn’t purchase their homes at the top of the market. Instead, the average acquisition was made in 2002 and many homes lost to foreclosure were bought in the 1990s. More than half of all borrowers who lost their homes had already refinanced at least once, and four out of five had a second mortgage.
Right after I bought my house I visited my Uncle John in Georgia. When he found out I had a house he said, simply, “Good. Now don’t ever get a second mortgage.”
Fire sale on local lakefront property - up to 97% discount at auction
Thursday, July 23rd, 2009 | Economics | Permalink | No Comments |
Properties below are near Knoxville. From Josh Flory’s Property Scope:
One striking example was at Rarity Bay, in Vonore, where Lot 1305 was sold for $11,000. In 2006, that lot had been sold for more than $200,000 to a buyer who was later hit with a foreclosure.
One of the biggest discounts may have come at Rarity Mountain, in Jellico. According to an official with the Campbell County Register of Deeds, Lot 40 was sold for $5,500. The register’s office said that lot had been sold in 2006 for $445,000.
Rarity lots aren’t the only ones that are suffering. An official with the Campbell County Register’s office said three lots in the Villages at Norris Lake were sold for $5,500 apiece. Prior to being foreclosed on, those lots had sold for prices ranging from $45,000 to $199,000, according to the register’s office.
Some property owners took a big hit and so did First Tennessee Bank. Now the homeowners who are still in those developments are wondering how much their property is really worth.
Three scary economic charts
Thursday, July 23rd, 2009 | Economics | Permalink | 5 Comments |
1. Plunging Tax Revenue
The government wants to bail out the economy. Who’s going to bail out the government? Their revenues are plunging, debts are soaring, and the cost of borrowing money is rising as bond buyers question long-term U.S. financial stability.
We’ve seen a number of economic indicators that are getting worse, but at a slower rate. However, the falloff in federal tax receipts is accelerating. From Matt Trivisonno: Federal withholding taxes fell off of a cliff last quarter, continuing a trend from the three previous quarters:
2. Debt Defaults
We’re in a severe debt deflation. There’s bad debt everywhere - mortgages, commercial real estate, credit cards, you name it. As more and more defaults occur it’s going to get harder and harder for the private sector to finance economic activity. With too many defaults the financial sector will simply collapse under all of the bad debt.
We are approaching losses of approximately $6 trillion — based on a market basket of household debt equal to 100% of Gross Domestic Product (GDP) of $14 trillion (40% of $14 trillion = $5.6 trillion = Round to $6 trillion).
To put that number in perspective, I estimate the total equity held by the financial sector at the onset of the crisis equaled about $1.5 trillion ($15 trillion of assets * 10% = $1.5 trillion of equity). If $6 trillion disappeared in the financial sector, and granting my assumption of $1.5 trillion of initial equity, then the financial sector will go completely broke FOUR times. You only have to go bankrupt once to go bankrupt.
3. An Insanely Overpriced Stock Market
The traditional tool for evaluating a stock’s price relative to its performance is the Price/Earnings ratio. A high P/E ratio means that stocks are very expensive relative to the earnings of the companies. The historical average ratio for the S&P 500 is about 15 to 1. Right now the stock market is priced at P/E ratios so high they make the dotcom bubble of the 90s look sober and cautious by comparison. We’re headed for a big correction in the stock market.
At the end of last month the P/E ratio for the S&P 500 was 134! That is not cheap by any stretch of the imagination. When you put this on a chart it literally flies off the paper:
I don’t see any way we can avoid another leg down in the economy. We have deep structural problems to fix and it will take years to get all of that bad debt out of the system. The one thing you can do now if you haven’t already is to get your money out of the stock market while you can. The current levels are completely unsustainable.
Court docs: Countrywide put minority borrowers into subprime loans
Wednesday, June 10th, 2009 | Economics | Permalink | 1 Comment |
Consumerist - Affidavits On How Wells Fargo Gave “Ghetto Loans” To “Mud People”:
Here’s the official court filing (PDF) so you can get the full details on how Wells Fargo pushed or even fraudulently placed black borrowers into sub-prime loans, even when those borrowers could afford prime loans, along with an office environment where employees threw around racist slurs, calling black borrowers “mud people” and their mortgages “ghetto loans.” The official statements referenced in the NYT article are in this document in full. The affidavits begin on page 48.
Previously: Memos show Fannie & Freddie knew of risks to subprime borrowers
Real Estate Kerfuffle in Key West
Wednesday, June 3rd, 2009 | Economics | Permalink | No Comments |
(While I’m on this topic, I personally know three people in Key West who are or were basically “squatting” in their homes, not paying their mortgages. One of these guys, a bartender who was given $700,000 Option ARM from Washington Mutual via a local mortgage broker chop shop is living in a place which will now not even fetch $200,000. He hasn’t made a payment to Countrywide and its successor in over one year.
Another of the guys, a real sharp college graduate and manager of a local eatery, just finished his “squatting” in his former house. He told me his bank told him they would not negotiate a short sale unless he couldn’t afford to pay his mortgage any longer. So he quit paying his mortgage, and sure enough, three months after he did, the bank started negotiating a short sale.
The third “squatter” is a Realtor/Investor I know. He hasn’t made a payment in over a year on his mortgage. He’s got a real sharp Boca Raton lawyer who is fighting the bank which claims ownership to his mortgage and house. This new bank cannot produce the original paperwork on the loan he originally received from Countrywide. In essence, no one knows if this bank really owns the mortgage.)
That blogger’s story starts by explaining that for the second time in as many years the banks foreclosed on his Key West rental condo because the landlord had quit paying the mortgage. It’s crazy out there.
This must have been a tough story to write
Sunday, May 17th, 2009 | Economics | Permalink | 1 Comment |
A New York Times economics writer tells how he fell deep into mortgage hell as a result of a divorce, a go-go mortgage underwriting era, and - let’s be honest - his vacation from reality financed by mortgage insanity and fifty thousand dollars in credit cards.
Eric Janszen gives the economic gloom and doom, take it or leave it
Wednesday, April 8th, 2009 | Economics | Permalink | No Comments |
One of my financial gurus is Eric Janszen of itulip.com. As an introduction and an aid to understanding what’s in the interview below, FIRE is Janszen’s acronym for Finance, Insurance, and Real Estate. His contention is that over the past three decades the American industrial economy has transformed into a FIRE economy, not the “information” economy that most people have been talking about for the past dozen years.
Santa Fe Reporter - Economy on FIRE and in debt:
Can you put today’s economic situation in a historical perspective? Is there any parallel?
More than one-quarter of all homes have negative equity in the US. That’s a bad problem. But there’s a worse problem developing.
I refer to the American housing market as “the big slum.” A slum is where the market value has fallen below the replacement value. It doesn’t make sense to fix anything. You don’t fix it, you just let it go to hell. There’s no way to get your money back.
It’s not that popular to be negative when things appear to be going well. I get interviewed more by the European and Asian press than the US press. It’s part of the culture, that we don’t really like people who are skeptical, who ask questions like, “How can you grow an economy that requires $5 of debt growth to create $1 of GDP growth?”
Another thing you’ll see reported all the time is that this is the highest rise in new jobless claims since 1982. The implication is this is like the early 80s recession, except in some ways worse.What’s not reported is every recession was induced on purpose by the Fed, in order to cool down the economy. This recession was not created by the Fed. The implications of that are lost on a lot of people: They are absolutely not in control.
I get calls from members of Congress asking me what I think she should do. They don’t really want to hear the answer. I think the ultimate problem is having to write down trillions of dollars of bad debts for their campaign contributors. There’s hardly any other rational explanation.We lectured the Japanese not to do what we’re doing right now.
Japan started out where we were, in terms of public debt, back in 1992. They were at about 60 percent of gross debt to GDP. Now they’re at 159 percent—a notch above Zimbabwe, just below Jamaica. None of that spending improved their sustainability as an economy. All they did was move the debt from private to public accounts over 20 years through the stimulus programs.
This is what our rocket scientists are planning for us. There can’t be enough output to pay the principal and the interest on all this debt.
Analyst: Bank losses could reach Depression-level
Monday, April 6th, 2009 | Economics | Permalink | No Comments |
New York Times - Bank Analyst Sees Depression-Size Loan Losses:
Mr. Mayo, who recently left his job covering bank stocks for Deutsche Bank to join a unit of Calyon, initiated coverage of 11 large banks in the United States on Monday, and his first report at his new firm assigns all of them “underperform” or “sell” ratings.
The report was full of gloomy predictions, not least of which was this one: Mr. Mayo projects that loan losses in the current financial crisis will eventually exceed the levels experienced during the Great Depression.
However, for a little perspective on how an analyst can change his mind, see About that Deutsche Bank analyst who priced GM at $0.
Hat tip to Josh Flory.
Senate bill would raise FDIC borrowing from $30B to $100B
Tuesday, March 31st, 2009 | Economics | Permalink | 3 Comments |
If you’re not mad about the FDIC’s shameful conduct in the banking meltdown it’s because you’re not paying attention. Mish has the latest:
In a galling move that has nothing to do with credit card reform at all, the Senate slipped in a provision to allow the “FDIC to borrow up to $100 billion from the U.S. Treasury, an increase from $30 billion now. The FDIC has said the additional borrowing authority may reduce a special one-time fee imposed on banks to replenish the deposit insurance program.”
And of course borrowing “from the U.S. Treasury” means borrowing from taxpayers. By getting the money from taxpayers they reduce the “special one-time free imposed on banks.” Translation: they’re putting the burden of bailing out failed banks on the taxpayer, rather than the banks. Recall that the FDIC collected almost no insurance fees from banks from 1996 to 2006.
Note that just six months ago the FDIC was publicly repudiating a Bloomberg News report that said the FDIC might need $150 billion in taxpayer money to cover deposits at failed banks. Back in the long ago innocent age of September, 2008 the FDIC stated in the strongest terms:
Let me be clear: The insurance fund is in a strong financial position to weather a significant upsurge in bank failures. The FDIC has all the tools and resources necessary to meet our commitment to insured depositors, which we view as sacred. I do not foresee – as Mr. Evans suggests – that taxpayers may have to foot the bill for a “bailout.”
Yet here we taxpayers are in the faraway future of March, 2009, being asked to foot the bill for a “bailout.” This bill calls for an increase on the FDIC’s borrowing limit against taxpayers to $100 billion, and a Congressman recently called for $500 billion for the FDIC “bailout.” As long as we’re putting bunny quotes around words, note that the FDIC is “borrowing” this money from the taxpayer. What do you suppose the odds are that we will get our money back?
In summary, the FDIC - the federal agency tasked with insuring against bank failures - failed to collect insurance premiums, failed to adequately account for banks’ risky lending, failed to foresee just six months ago what Bloomberg News saw as a looming disaster, and will now be taking tens or hundreds of billions in taxpayer money to bail out the failed banks they themselves were supposed to insure. If you’re not mad about the FDIC’s shameful conduct in the banking meltdown it’s because you’re not paying attention.
Note that this is a bill and is not yet law, but at this point this sort of taxpayer bailout of the FDIC is probably unavoidable. The least we should get out of this is reform of the FDIC. In particular, I want banks to pay insurance premiums year in and year out, just as I pay my home, auto, and life insurance premiums even in good years when my house didn’t burn down, my car didn’t get totaled, and I didn’t keel over and die. That’s how real insurance companies work and it’s how the Federal Deposit Insurance Corporation should work.
WSJ asks 6 economists: Did the Fed cause the housing bubble?
Monday, March 30th, 2009 | Misc | Permalink | 7 Comments |
Five of six answer in the affimative.
Via The Corner, which has a summary of answers if you don’t want to read the WSJ piece. One sample:
“The blame for the current crisis extends well beyond the Fed — to banks, regulators, bond raters, mortgage fraud, the Bush administration’s weak-dollar policy and Lehman bankruptcy decisions, and Congress’s reckless housing policies through Fannie Mae and Freddie Mac and the Community Reinvestment Act.
But the Fed provided the key fuel with its 1% interest rate choice in 2003 and 2004 and “measured” (meaning inadequate) rate hikes in 2004-2006. It ignored inflationary dollar weakness, higher interest rate choices abroad, the Taylor Rule, and the booming performance of the U.S. and global economies.”
Bernanke in 2005: no housing bubble to go bust
Monday, December 15th, 2008 | Economics | Permalink | No Comments |
Washington Post October 27, 2005 - Bernanke: There’s No Housing Bubble to Go Bust; Fed Nominee Has Said ‘Cooling’ Won’t Hurt:
Ben S. Bernanke does not think the national housing boom is a bubble that is about to burst, he indicated to Congress last week, just a few days before President Bush nominated him to become the next chairman of the Federal Reserve.
U.S. house prices have risen by nearly 25 percent over the past two years, noted Bernanke, currently chairman of the president’s Council of Economic Advisers, in testimony to Congress’s Joint Economic Committee. But these increases, he said, “largely reflect strong economic fundamentals,” such as strong growth in jobs, incomes and the number of new households.
Bernanke’s thinking on the housing market did not attract much attention before Bush tapped him for the Fed job Monday but will likely be among the key topics explored by members of the Senate Banking Committee during upcoming hearings on his nomination.
Many economists argue that house prices have risen too far too fast in many markets, forming a bubble that could rapidly collapse and trigger an economic downturn, as overinflated stock prices did at the turn of the century. Some analysts have warned that even a flattening of house prices might cause a slump — posing the first serious challenge to whoever succeeds Fed Chairman Alan Greenspan after he steps down Jan. 31. Bernanke’s testimony suggests that he does not share such concerns, and that he believes the economy could weather a housing slowdown.
We now know how that played out. Federal Reserve Chairman Bernanke didn’t see the mortgage meltdown coming, even though it was Fed policy that largely created it. Now he’s in charge of cleaning it up as best he can through new Fed policy. Do you trust his judgement to foresee the effects of those new policies? I don’t.
Greenspan in 2004: fears of speculative bubble in housing prices exaggerated
Monday, December 15th, 2008 | Economics | Permalink | 1 Comment |
New York Times October 20, 2004 - Mortgage Debt Not Big Burden, Greenspan Says:
Alan Greenspan on Tuesday defended one of the most tangible results of his tenure as chairman of the Federal Reserve Board: the big increase in homeowner debt.
In his most detailed discussion yet on the subject, Mr. Greenspan disputed analysts who worry that home buyers have become swept up in a speculative housing bubble that the Fed is partly responsible for creating. While he acknowledged that consumer debt has risen ”especially steeply” in the last five years, he said family finances were still in ”reasonably good shape.”
Mortgage debt and housing prices have both soared since 2001, in part because the Federal Reserve pushed borrowing costs to their lowest levels since the 1950’s. With interest rates now rising, a growing number of economists worry that many home buyers will face higher monthly debt payments in an economic environment that could cause house prices to fall.
In a speech here to a convention of community bankers, Mr. Greenspan said fears of a speculative bubble in housing prices were exaggerated, because people cannot buy and sell their own homes as easily as stock market speculators can buy and sell stock.
Funny thing is, Greenspan had a stellar reputation until this year. He isn’t looking so hot now that the consequences of those low Fed rates are becoming obvious.
Intelligent software didn’t avert the current financial crisis
Friday, November 7th, 2008 | Economics, Tech | Permalink | No Comments |
Business Week - What the Market Crash Taught Me About Tech:
For years I’ve listened to software companies tell us that, with technology, our decision-making will be made easier. And we’ll be making better decisions. We’ll have better facts. We’ll be able to do better analysis—in small businesses, large enterprises, and financial-services firms.
And yet, the markets still crashed despite all this cutting-edge magical stuff. Where were the alerts? The safeguards? Those special programs and whiz-bang tools that so many tech companies promised? It didn’t do much for Bear Stearns, Merrill Lynch, and AIG. Those guys had a lot of great and expensive technology, but they still tanked.
This financial crash has taught me that even the best technology doesn’t do a very good job predicting anything—or even helping business owners and managers make decisions. At best, technology can help us do something faster. But we are a long way off from artificial intelligence. So, the next time some software sales guy tries to tell me that his business application will do anything more than increase productivity, I’ll be hard-pressed to believe it.
If that strikes your interest, read Jaron Lanier’s year 2000 piece One Half of a Manifesto about the ongoing failure of artificial intelligence to live up to its claims:
An official Turing Test is held every year, and while the substantial cash prize has not been claimed by a program as yet, it will certainly be won sometime in the coming years. My view is that this event is distracting everyone from the real Turing Tests that are already being won. Real, though miniature, Turing Tests are happening all the time, every day, whenever a person puts up with stupid computer software.
For instance, in the United States, we organize our financial lives in order to look good to the pathetically simplistic computer programs that determine our credit ratings. We borrow money when we don’t need to, for example, to feed the type of data to the programs that we know they are programmed to respond to favorably.
In doing this, we make ourselves stupid in order to make the computer software seem smart. In fact we continue to trust the credit rating software even though there has been an epidemic of personal bankruptcies during a time of very low unemployment and great prosperity.
We have caused the Turing test to be passed. There is no epistemological difference between artificial intelligence and the acceptance of badly designed computer software.
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