Journal tomhudson's Journal: Welcome to a US version of Japans' lost decade. 24
People still want to believe that the only reason Japan "lost a decade" is that the government waited too long to lower interest rates.
Lower interest rates won't justify bubble-era prices.
"When the asset-inflated bubble burst, over-generous Japanese lenders were left with masses of bad loans."
[X] Same with the US and GB.
"From its 1989 peak of 38,916, the Nikkei stock average fell 63% during the 1990s; land prices slumped -- a far cry from the days when the grounds of the imperial palace in Tokyo were rumoured to be worth more than all the real estate in California."
[X] Housing prices are in free-fall. $30 Million condo site sold at auction for $100.00. Housing prices in Nevada, California, and Florida have cratered.
"Consumers lost faith in the economy and during the deflationary decade, held on to their savings."
[X] We've got the loss of faith in the economy, we've got deflation,
"Tokyo's bail-out package came at a price. Free to lend again, banks simply used funds to keep countless "zombie" companies afloat, so great was the desire to avoid bankruptcy and mass unemployment."
[X] GM, Chrysler, AIG, etc., etc., etc
"The government recouped much of its outlay by reselling collateral, most of it real estate, but the process took more than 10 years, and full recovery, some point out, remains elusive. The Nikkei stock index is still 70% off its 1989 peak, and property prices are at about 40% of their 1990 values. "
[X] This is what the current TARP plan is supposed to do.
"TARP does not allow banks to recoup losses already incurred on troubled assets, but officials hope that once trading of these assets resumes, their prices will stabilize and ultimately increase in value, resulting in gains to both participating banks and the Treasury itself. The concept of future gains from troubled assets comes from opinion in the financial industry that these assets are oversold, as only a small percentage of all mortgages are in default, while the relative fall in prices represents losses from a much higher default rate."
These "opinions in the financial industry" are from the same people who said that there was no bubble, that housing values wouldn't go down, that we were in the "new new economy". These "opinions" turned out to be just wishful thinking or whistling while walking past the graveyard. This plan simply cannot work when more than a "small percentage of all mortgages are in default."
Most of the mortgages that are finding their way into TARP will default. Estimates are 80% or higher, just like current estimates are that almost 100% of sub-prime will default, and 1 in 5 prime mortgages that were made in the last 4 years. Already, we're seeing people whose mortgages were re-worked defaulting a second time.
The only fix for an asset bubble is to pop the bubble. You either do it painfully but quickly and move on, or painfully and slowly. Trying to artificially prop up housing prices isn't going to work. Injecting a trillion or two of extra "liquidity" into the markets isn't going to work when banks can't lend it because they, you know, want to be fairly sure they'll get repaid, since it's going to be a lot harder to sell off the loans and say "It's not my problem if the loan defaults."
If you weren't in the market for a car, then buying one, even with 0% interest, is a sign of "irrational exuberance". Who would do such a thing? The same market demographic that is already drowning in debt because "36 easy payments" let them buy something they didn't really need, or realistically couldn't afford. The same people who bought houses with no money down, Option ARMs, and Pay Option mortages. People who are already drowning in debt. Lots of luck with that business plan, Skippy
Ditto for business loans. A business drowning in debt won't be profitable by taking on more debt, unless that debt is spent on lowering costs. Even then, if there's a likelihood of default, low interest rates won't change that, because the loan won't get done. Now that it's harder to "sell on" the loans to suckers^investors, loan performance matters.
Sometimes a recession is unavoidable. After a bubble pops is "one of those times." Prices for stuff that's over-valued - particularly real estate - needs to drop to where they were before the bubble started. Is this deflationary? Yes, in the same way that the asset bubble was inflationary. Inflation was a lot higher over the last decade than the "official figures", because food, fuel, and housing were removed from the index. Under the same rationale, fuel and housing price decreases shouldn't be figured into any "deflation index" - so either the books were cooked all along (which we now know to be the case), or this sectors' deflation is just an adjustment to reality.
When Henry Ford was selling his Model T, he managed, over the course of the vehicle's production lifetime, to shave 3/4 from the price, continually making improvements in the production process. People could buy a Model T for 10 weeks' wages of the average worker.
What sort of car can you buy today for 10 week's wages for the average worker? From Social Security Online:
The national average wage index for 2007 is 40,405.48
10 weeks' wages is $9,324.34. That'll get you a base Hyundai (taxes extra). A rebadged Saturn (aka Chevy Malibu) is 2 to 3 times the price. Guess which one is more affordable during a crunch? The one that's priced in line with historic wage-to-price models.
Similarly, the "safe loan amount" for a mortgage is 2.5 to 3x income. What sort of house can you get for $101k to $121k? This is what the "average house" should be selling for. Sure, higher prices where local incomes are higher, and lower prices where local incomes are lower, but until the credit bubble, 2.5 to 3x income was the norm, so we still have LOTS of scope for houses to fall lower in price.
Keeping those prices artificially inflated, either by loan modifications that don't do anything about the underlying principle, or by bail-outs, isn't going to work. All it does is further distort the market, and divert resources (in this case, up to 3 trillion) away from productive investments.
The political will isn't there to stop bail-outs and hold people responsible for what was, in many cases, a combination of fraud, wishful thinking, and willful ignorance. So, instead of a harsh but short recession, the US is now facing 2 decades of economic anemia.
THAT is the real price of the bail-outs. Sayonara.
Economics FTL! (Score:1)
Inflation was a lot higher over the last decade than the "official figures", because food, fuel, and housing were removed from the index. Under the same rationale, fuel and housing price decreases shouldn't be figured into any "deflation index" - so either the books were cooked all along (which we now know to be the case), or this sectors' deflation is just an adjustment to reality.
My economics teacher in college pointed this same thing out 4 years ago. He already viewed the Federal Reserve system with a
The Condo (Score:2)
The auction price was payed by the lender - which means they are the ones who loaned Meruelo the 30 million he bought the place with. And they had publicly stated they would pay up to that 30 million, so it makes sense that nobody tried to beat them on it. So - it's probably not worth 30 million, it is certainly worth quite a bit more than 100 - and I am sure will eventually sell for more than that. But what the lender really payed for it is the original loan - whatever was payed + 100.
In my neig
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The lender was prepared to pay up to $30 million because, as the creditor for whose benefit the auction was being held (for their $30 million lien), they could have effectively bid $30 million without putting a penny down.
Of course, if anyone else had bid even a penny over $30 million, they would have let them have it, because they would have gotten their money back from the soured loan.
In other words, this is how they got back the property that they loaned money on. The fact that NOBODY ELSE even bothe
I don't think so (Score:2)
citation needed ... and I'd put a significant amount of money on a bet that 1 in 5 prime mortages from the last 4 years aren't going "default" (assuming that means actually default on the loan, and not default on a single payment).
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I happen to agree we're seeing a revert to the mean.
This means the average residential property is going to drop to 2.5x to 3x average yearly income (plus down payment). Sure there'll be some market variation but most places that have seen prices go up faster than inflation in the past 15 years or so will likely see them fall before this is all over.
Even more fun than all of the real-estate deflation is going to be unwinding all of the "tulip bulbs" in the form of exotic financial derivatives. Don't worry,
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The derivatives are all messed up - to the point where one of the players should just step ut to the plate and say "Look, it was all gambling, and since gambling is illegal, we're not honouring any of it." then again, the same could be said for the stock market. That's why it's referred to as "playing the stock market."
Throwing money out there didn't "stabilize" the stock market - all it does is get people to try to time their buys and sells with the helicopter dumps.
If they really wanted to stabiliz
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Already, 1 in 10 mortgages are either a month or more behind in their payments or in foreclosure nationwide. Watch what happens as job losses mount, and more people get "under water." Just do a search for "1 in 10 mortgages" and click any link on the first page of results.
By the way, half of all people who got loan modifications are already in default or foreclosure again. It's not working.
Earlier estimates [projo.com] put the total number of mortgages that will be under water by next june at 1 out of every 4, (12
That makes sense. (Score:2)
http://mises.org/story/1623 [mises.org]
http://newsroom.ucla.edu/portal/ucla/FDR-s-Policies-Prolonged-Depression-5409.aspx [ucla.edu]
http://online.wsj.com/article/SB122455099434052597.html [wsj.com]
Throws some light on the issue. Were I conspiracy minded I would look at these:
http://en.wikipedia.org/wiki/Cloward-Piven_Strategy [wikipedia.org]
http://www.discoverthenetworks.org/groupProfile.asp?grpid=6967 [discoverthenetworks.org]
But that just seems too far fetched to be real.
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Debasing the currency can't end a recession, but it *can* destroy confidence.
Bailing out corporations with taxpayers' funds while those same taxpayers are losing their jobs causes people to lose confidence in their system of government just as surely as allowing rioting and looting in the streets to go unchecked.
Subsidizing dishonest, willfully ignorant, and greedy homeowners with tax dollars collected from renters and people who were more prudent in their financial dealings destroys the moral sense of
You're not looking at the root (Score:2)
The root problem is not the lack of credit availability, sub-prime mortgages, or auto makers making crap cars. The bubble wasn't the .com boom, or the real estate boom, or the sub-prime boom.
The root is in the existence and popularity of credit in all its various forms, including deficit spending on anything, all aggregated together, and of everyone taking advantage of it.
What's happened is that over the last 40+ years we've been spending more than we have on the promise of future payback. We locally
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Even John Brunner's "Stand on Zanzibar" is starting to look optimistic ...
However ... Many countries are below zero population growth. The most notorious exception right now is the US. Maybe THIS crisis will change that, as people realize that the money (which is just another way of representing other resources, such as labour, energy, time, or materials) just isn't available ...
Unfortunately, even with ZPG, the overall population will continue to climb, since people take a lifetime to die.
We may f
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We may find that cities over a certain size are counter-productive, wasting more resources than smaller cities. Certainly, the daily commute in some of the larger cities would make this argument. IBM showed that location *isn't* everything when they pulled out of New York in favour of lower-cost Armonk. "Location" certainly didn't help the failed Wall Street firms much, either.
Probably not. Though density rather than absolute size is more important to efficiency. The thing that makes that commute so horrid is the vast ring of suburbs most good size cities have around them.
Suburban settlement patterns suck resources like crazy.
As for the debt picture it is troubling but:
a) The unfunded obligations aren't a problem as long as the money is there to cover current payments. With most obligations you don't expect the entity owing them to be able to pay the full amount all at once.
b) Wh
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We already have a quick fix for the housing and credit crisis - massive foreclosure on bad mortgages.
For the entire decade, the housing market has been a Ponzi scheme. If you got sucked into it while others, who were more prudent, stayed on the sidelines, don't expect to get off scot-free, and more importantly, don't expect to be rewarded by being bailed out by the more prudent.
This would have several effects:
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Do NOT take on new non-essential debt.
Pay off existing debt as quickly as possible.
Cut the plastic. ALL of it.
There are some other ways of looking at this (at least from an individual perspective):
First case is if credit continues to tighten and looks to stay that way for a while who the heck cares if you trash your credit score? Might as well let the bank eat it if you can't keep up with the debt service.
Second thing is if you expect inflation due to the massive increase in the money supply, holding debt isn't necessarily a bad thing and might be smarter than holding savings.
In any case I wouldn't cancel your card
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This is what a lot of people who are under water on their mortgages are doing. They're not interested in adding the missed payments to their debt.
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There are more problems that I didn't mention above. One big one is the U.S. (and most of the West) has decided that we are somehow "above" manufacturing, that we should be offering services, or services to help sell services, or services to help sell services to service organizations, etc. We have sold much of our manufacturing overseas to factories where people are willing to perform actual labor, which is where actual value is produced.
That's the problem I have with not bailing out the auto makers.
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While I will agree everyone got drunk on a bubble of easy credit, and easy credit fueled many of the bubbles. Shutting down credit almost entirely is a bit of an overreaction and in the case of short-term credit drains the oil from the engine of the economy.
True, credit overdone can be a bad thing. However, used properly, there is nothing wrong with using long-term credit to finance capital spending for business and government nor using short-term credit to manage and smooth out cash flow.
As for resource ex
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Oops, sorry, I meant indium, not iridium. Indium is used in the manufacture of LCD displays, as it works well as a transparent conductor. And the one estimate I remember reading placed the world supply to be about 12 years remaining.
And now I just read the wiki on it and my fears are quelled, so thanks for the tip. It's supposedly three times as abundant as silver. I now assume the scaremongers with their gloomy predictions are similar to stock pump-n-dumpers, trying to inflate their stocks for a qui
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With indium the problem is it doesn't like to concentrate in nice ore veins. I think most of the current supply comes from reprocessing tailings from other mining (it has slightly higher concentrations than "normal" in certain ore bodies). That is undoubtedly where the "12 year supply" figure comes from.
At the extreme case most rare minerals can be extracted from seawater.
It isn't so much we are running out of sources for rare earth elements as we are running out of CHEAP sources.
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The problem was, long-term credit wasn't used to finance capital spending (houses are NOT capital spending - they aren't income-producing tools except for house flippers), but for consumption.
IF the mortgages had been properly priced (2.5 to 3x annual income, 25 years maximum), they would have made economic sense, and been a sound investment for everyone. They didn't, and any mortgage that doesn't conform to that standard is in jeopardy over the long term. The return to 3x income, 25 year term maximum,
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I was mostly looking at the business/government side of the equation above, though for individuals even credit worthy borrowers are having trouble getting loans at the moment.
In any case far more troubling is the inability of businesses small and large as well as state and local governments to finance long-term capital spending or to access short-term credit lines. Companies are having to shut down because banks are pulling routine letters of credit and indemnity bonds. Governments are having trouble sellin
TARP, an anagram for PRAT... (Score:2)