2013-01-11T04:41:47.897-05:00By George Friedman (Founder and Chief Executive Officer, Stratfor)Last week I wrote about the crisis of unemployment in Europe. I received a great deal of feedback, with Europeans agreeing that this is the core problem and Americans arguing that the United States has the same problem, asserting that U.S. unemployment is twice as high as the government's official unemployment rate. My counterargument is that unemployment in the United States is not a problem in the same sense that it is in Europe because it does not pose a geopolitical threat. The United States does not face political disintegration from unemployment, whatever the number is. Europe might. At the same time, I would agree that the United States faces a potentially significant but longer-term geopolitical problem deriving from economic trends. The threat to the United States is the persistent decline in the middle class' standard of living, a problem that is reshaping the social order that has been in place since World War II and that, if it continues, poses a threat to American power.The Crisis of the American Middle ClassThe median household income of Americans in 2011 was $49,103. Adjusted for inflation, the median income is just below what it was in 1989 and is $4,000 less than it was in 2000. Take-home income is a bit less than $40,000 when Social Security and state and federal taxes are included. That means a monthly income, per household, of about $3,300. It is urgent to bear in mind that half of all American households earn less than this. It is also vital to consider not the difference between 1990 and 2011, but the difference between the 1950s and 1960s and the 21st century. This is where the difference in the meaning of middle class becomes most apparent.In the 1950s and 1960s, the median income allowed you to live with a single earner -- normally the husband, with the wife typically working as homemaker -- and roughly three children. It permitted the purchase of modest tract housing, one late model car and an older one. It allowed a driving vacation somewhere and, with care, some savings as well. I know this because my family was lower-middle class, and this is how we lived, and I know many others in my generation who had the same background. It was not an easy life and many luxuries were denied us, but it wasn't a bad life at all.Someone earning the median income today might just pull this off, but it wouldn't be easy. Assuming that he did not have college loans to pay off but did have two car loans to pay totaling $700 a month, and that he could buy food, clothing and cover his utilities for $1,200 a month, he would have $1,400 a month for mortgage, real estate taxes and insurance, plus some funds for fixing the air conditioner and dishwasher. At a 5 percent mortgage rate, that would allow him to buy a house in the $200,000 range. He would get a refund back on his taxes from deductions but that would go to pay credit card bills he had from Christmas presents and emergencies. It could be done, but not easily and with great difficulty in major metropolitan areas. And if his employer didn't cover health insurance, that $4,000-5,000 for three or four people would severely limit his expenses. And of course, he would have to have $20,000-40,000 for a down payment and closing costs on his home. There would be little else left over for a week at the seashore with the kids.And this is for the median. Those below him -- half of all households -- would be shut out of what is considered middle-class life, with the house, the car and the other associated amenities. Those amenities shift upward on the scale for people with at least $70,000 in income. The basics might be available at the median level, given favorable individual circumstance, but below that life becomes surprisingly meager, even in the range of the middle class and certainly what used to be called the lower-middle class.The Expectation of Upward MobilityI should pause and mention that this was one of the fundamental causes of the 2007-2008 subprime lending crisis. People below the median took[...]
2011-01-01T05:55:22.654-05:00Writing in Business Insider, Gary Shilling of A. Gary Shilling Co., lays out the basis of his opinion that house prices have another 20% to fall. Referring to what he sees as the contrast between 'Great Expectations' and 'Reality', Shilling notes how in the spring of 2010 the belief became widespread that not only was the housing crisis at an end but that solid rebound was underway. In this period many investors were rushing into foreclosure sales and bidding up prices in CA. This was encouraged by the tax credit of up to $8,000 for new home-buyers that egged buyers on and many thought that housing activity nationwide was being kick-started. The Home Affordable Modification Program intended to help 3 million to 4 million homeowners with underwater mortgages contributed to the rosy outlook being claimed by paying lenders to reduce monthly payments to manageable size and then paying homeowners to continue to make those payments.Professionals will want to study all 27 of the charts in Gary Shilling's article. To illustrate some of what he is saying I have included a couple here.Chart 4 shows very starkly the false dawn of earlier this year when sales of existing homes skyrocketed under the influence of the factors mentioned above. It also shows how this development collapsed as dramatically as it rose. The upshot was that existing home sales fell to a new low. All the measures to support a revival of the market had only“borrowed” sales from the future.This is taking place against an employment picture that resists all attempts at revival as Chart 7 shows.This also means NAR’s Housing Affordability Index, reliable for the earlier post-World War II period, is no longer relevant today, especially with its additional threats of layoffs, wage and benefit cuts and the proliferation of part-time jobs. Homeownership hardly makes sense to someone who doesn’t know the size of his next paycheck assuming there is one? The situation is made even worse by the almost a quarter of all homeowners with under-water mortgages. With the principal owed exceeding the value of their houses, many can’t sell their existing homes, obviously essential for an active resale market, even if they wanted to.It is difficult to see how the situation overall is going change for the better anytime soon and those charged with the job of improvement are not to be envied.Related articlesThe Fallacy of a Pain-Free Path to a Healthy Housing Market (dallasfed.org)Bad news on foreclosure, housing price front demands action from administration (dailykos.com)Really? Few upbeat outlooks for '11 housing (lansner.ocregister.com)Gary Shilling: Don't Expect an End to Housing Woes (bloggingstocks.com) [...]
2010-12-29T05:22:29.646-05:00This article is aimed at those whose situation is such that they are eligible for those programs that are available. Obviously if we consider all those with mortgages they can be divided into those who have no problems with meeting their obligations right now, those who are in difficulty and can use any available help, and those whose circumstances are unfortunately beyond the help of the programs. (Even in the last category it is still a good idea to check with the resources given here).
2010-12-22T03:09:17.595-05:00Media preoccupation with other matters, either the WikiLeaks drama or the Holiday Season, has meant that the bankruptcy of AMBAC, the second largest bond insurer before it suffered huge losses on risky mortgages, has gone relatively unnoticed.
2008-01-02T04:28:18.499-05:00GEAB No. 20 is now issued. This is one of the few publications that has achieved a remarkable predictive record on the subprime crisis and the global credit crisis. Although it is a subscription item (I have no financial connection or other connection) there is an informative abstract provided on the site. The following is excerpted from this abstract:"The rapid aggravation of the global systemic crisis as its phase of impact unfolds (1) has brought our researchers to estimate that the contemporary global financial system will reach a breaking phase in the course of 2008.Crisis follow-up indicators now show that we should no longer only fear the failure of some large financial institution (and of many small ones) in the US first and the in the rest of the world (cf. GEAB N°19), but that the global financial system itself is structurally hit.The network of global central banks' repeated incapacity to control the « credit crunch » when the two historical pillars of the contemporary global financial system (a US economy in recession and a US dollar in decay), reflects the growing surge of centrifugal forces within this very system.Indeed it is no more a matter of competence or of magnitude of the corrective actions implemented by central bankers. These times are over since summer 2007 and, according to LEAP/E2020, we are now witnessing an increasing divergence ineconomic interests among the different components of the global financialsystem.The expected failure of the Fed's most recent attempt to coordinate a joint action of the main central banks in order to feed the banks in US dollars (2), is particularly revealing. This action meant to restore confidence in the financial system by two means:- reinstating the now moribund inter-banking market, by proving the existence of a « joint force de frappe (strike force) » of global central banks.- enabling large financial institutions in distress to anonymously restock in US dollars, in exchange of their assets being accepted as discount window collateral (i.e.worth their value some months ago, when they were still worth something)(3).Of course the first goal is predominant, as reinstating of interbanking market is the only means to bailout banks in distress in a sustainable manner. However, it is already clear that the target has failed to be reached (4). The LIBOR (London Interbank Offered Rate), a key indicator of the health of the interbank market, has not moved an inch from its highest levels ever reached (5). “Psychologically” speaking, the global stocks decline recorded after the action of the central banks was announced, proves this if any message went through, it is that the situation for large US banks is even worse than announced in the past months (6).According to LEAP/E2020 research team, it is already a fact that after it lost control over interest rates (cf. GEAB N°16), the US Federal Reserve has now lost two more of the attributes that characterized the post-1945 global financial system: its credibility as a proactive player capable of influencing heavy market trends(8), and its capacity to organize and drive global central banks altogether along its own rhythm and goals. In doing so, it has just lost the ability to steer by itself the entire global financial system, an ability it has gained after 1945.Even though today, financial markets are mostly receptive to the loss of the first attribute (9), our researchers estimate that it is the loss of the second attribute (and the impact on the system's leadership) which will result in the global financial system's break sometime in the course of next year, probably by summer, when the effects of the ongoing US recession will start being fully felt and when Asians and Europeans will decisively be compelled to impose their own priorities to the “Fed-pilot”.In this 20th issue of the GlobalEurope Anticipation Bulletin (December 2007 issue), our team describes in detail the characteristics of the growi[...]
GEAB N°19 - ContentsObviously there are plenty of signs of activity at the Fed and in Big-Corporate America to stave off this possibility and to minimize it. Thus the protracted series of adjustments to the books of various players and the paced revelations of write-downs stemming from SIV and conduit activities. The question that remains is whether the interventions available to governments are robust enough to succeed in a system that appears to have become a mystery to its designers like a modern Frankenstein. The international financial engineers are saying in effect that the way in which the new global reality is structured provides a field of buffers to dissipate the effects of any particular shock. However, it's as well to remember that this is what was claimed for large-scale hedging an eye-wink ago. Place your bets.
( Published on November 16,
International banks get dragged into financial crisis’ 'black
hole': Four triggering factors of a major financial bankruptcy
LEAP/E2020 now estimates that at least one large US financial
institution (bank, insurance, investment fund) will file for bankruptcy before
February 2008, sparking off bankruptcies among a series of other financial
institutions and banks in Europe (in the UK especially), in Asia and in various
emerging countries... (page 2)
Factor No.1 - Drastic drop in revenues
for banks operating in the US
The CDOs altogether are now dragged into a
general confidence crisis, and they represent a large part of bank assets since,
in the past few years, large banks from lenders became investors and
speculators, like hedge funds… (page 4)
Factor No.2 - Slumping value of
assets owned by these banks resulting from new US banking regulation (FASB
On November 15, 2007, a regulatory factor, the FASB 157
standard (designed to enhance transparency of financial statements of financial
institutions operating in the US) speeds up the pace of financial organisations'
collapses (American and others)… (page 7)
Factor No.3 – Increasing
weakness of bond insurers
Bond insurers are financial markets' «
supports ». Completely unknown to the public today, their names could soon
become as common as the word 'subprime' has… (page 9)
Factor No.4 –
Economic recession in the US
As a complement to our anticipations of the
impact of the US economic recession for banks operating in the US, we find it
useful to analyse here how much US official statistics have become totally
surrealistic… (page 12)
"But now plans to sell the bank are running into a wall of opposition from politicians who are outraged that a sale could involve an open-ended commitment to provide government support to a buyer. 'Why should taxpayers' money be used to help Richard Branson, or whoever eventually acquires Northern Rock?' asked Vince Cable, shadow chancellor for the Liberal Democrats [a UK political Party]."
2007-09-28T23:12:28.213-05:00"Defaulting middle-class U.S. homeowners are blamed, but they are merely a pawn in the game. Those loans were invented so that hedge funds would have high-yield debt to buy." Satyajit Das in an interview with Jon D. Markman, The Credit Crisis Could Be Just BeginningIn what follows I revisit the theme I touched on recently, namely the way in which all the focus of the current credit crisis is being laid at the door of the subprime bubble and by implication on those Americans who entered into one or other of the less than prime mortgages. Let's not forget the hoopla around the spread of home ownership in recent years and the signal it gave that anyone who struggled to get a foot on the home ownership ladder was being a model American. Now there is a definite atmosphere being created that those unfortunate enough to have been on the lowest rung of the ladder are the ones whose 'irresponsibility' has been the cause of tipping the ladder. Let there be no doubt about it that this is a smokescreen, and one made all the easier by the shroud of hocus pocus that has been built around the technical aspects of the finance world.Everyday life has a pretty good idea of how cause works and despite all the verbal alchemy things are no different in the case of the credit crisis. If anyone approached an auto collision by focusing on how the innocent party had invited the offending vehicle to bring it on we would rightly consider it silly. Similarly, the growth of the subprime mortgage market wasn't a result of some smart idea dreamed up by the homebuying public. It resulted from a premeditated strategy to extend the market for mortgage credit. It wasn't the ordinary homebuyer who invented this mind boggling range of products. On the contrary the various players in the market vied to outdo each other in the next esoteric product they could come up with. All of this went on with the blessings, some would say encouragement, of the FED. Listen for example to Alan Greenspan speaking at the Community Affairs Research Conference in April 2005: “Innovation has brought about a multitude of new products, such as subprime loans and niche credit programs for immigrants. Such developments are representative of the market responses that have driven the financial services industry throughout the history of our country. With these advance in technology, lenders have taken advantage of credit-scoring models and other techniques for efficiently extending credit to a broader spectrum of consumers.” The question then arises of the driver for these marketing innovations. We hear lots about the world having been swimming in liquidity. Note however that not many speak of this as being awash in cash. The truth is that the creation of 'liquidity' stemmed from the development of a range of financial products by the investment community, products massively built on leverage and the off-loading of risk through instruments that to all intents are one or another variety of insurance policy. The problem is that whereas insurers have a long experience of the statistical possibility of the risks they cover actually occurring and know full well that 'runaway' risks are absolutely rare - even mass auto pile-ups or 'out of control' forest fires have a limit as to how far they will go - no such predictability comes with the markets. No one ever heard of 'unwinding' in the case of the ordinary business carried by insurers.Everyone in the financial markets however had better have heard of the great crashes that have been a recurrent feature in the history of that world. If not they have no business being in business. In practice of course what happens is that every generation cooks up one or another 'theory' that they've got things under control and it won't happen again, "the business cycle has been mastered" and so on, only to be proven wrong each time. Th[...]
2007-08-25T02:36:52.956-05:00Anyone get the impression as I do that the scene is being set for placing the blame for the economic crisis on those hapless people who were so inconsiderate as to put everyone at risk by actually taking advantage of what they saw as the opportunity to get their piece of the pie? Yes folks, the reason the wheels of high finance are now gumming up is you or your neighbours utter selfishness in wanting a decent roof over the heads of your families. How thoughtless and unpatriotic of you to throw caution to the wind.Max Wolff notes the mindlessness that has become a feature of commentary on the financial crisis where mouthing "subprime" a sufficient number of times seems to absolve anyone from actual analysis. The following from Credit Backwash August 21, 2007 "Every day we watch people blame sub-prime. Sub-prime is neither contained nor, is it the essence of present trouble. Discussing sub-prime as the cause of asset re-pricing has become ubiquitous. I would liken this line of explanation to the way that American urban violence is often discussed as "gang related" or "drug related". In short, it is a lazy catch all employed to avoid scratching below the surface. ..."The truth is it seems that it's not only in the housing mortgage sector that 'liar loans' have been the fashion."A huge credit bubble exists and extends far beyond sub prime mortgage distress. The global bubble is enormous and has many sub-component bubblettes. The internationalization, integration and expansion of finance extended and distributed the effects of overly cheap and easy credit. Innovation of new products, thin opaque markets in credit vehicles and voracious appetite for leveraged yield have transformed balance sheets and portfolios. This mountain of gas soaked rags was ignited by the credit concerns in sub prime. Now the credit bubble is burning. Years of euphoria, easy money and asset inflations built to dizzying heights. Massive, cheap and easy debt was taken on to buy houses, currencies, bonds, equities, mortgages, leveraged loans, credit default swaps, real goods and services. Credit burdens were taken lightly, rolled over, bundled and sold. As long as lenders, buyers, ratings agencies and faith held, bubbles formed and swelled. The size, volatility and interconnectedness of international asset inflation was unprecedented. The downturn has been similarly correlated. Sub-prime credits and the collateralized mortgage obligations comprised of them deflated- the match was struck. The fire is never really caused simply or exclusively by the match that lights it. All these innovative new mortgages were written because there was great money to be made in bundling them into mortgage backed securities (MBS) and collateralized mortgage obligations (CMO). Lenders cashed in on a "originated to distribute" bonanza. All types of finance companies wrote mortgages- and many other types of credit contracts - only to sell them off. A popular final destination was in collateralized obligations. This industry swelled as trillions of dollars in mortgages were written over the past few years. Every obstacle to further lending was innovated around to allow profits to continue to flow. The risks of all this lending were less pressing as mortgages loans were made to be sold- not held. All the available credit bid up house prices and led to the false conclusion that houses were always safe, appreciating assets. Questionable loans and sub-prime mortgages were sold and reconfigured into AAA rated product. Risk vanished from consideration and discussion. Transformed mortgages became credit vehicles and were sold all over the world. Part of the mad dash now involves finding these hidden gems hiding on books and ascertaining their real value."Meanwhile over at the Pundit's Blog Brent Budowsky tells it to America straight: Gilded Age[...]
2008-12-11T17:12:39.717-05:00Since Secretary Paulson's remarks on the housing bubble in the Newshour segment for Thursday May 17, Treasury Secretary Discusses Wolfowitz, Chinese Economy , may have been drowned out by more salacious developments in the world of high level banking I give them here:JIM LEHRER: One final question, and a third subject. How worried are you about the slump, so-called slump in the housing market in the United States right now? And what kind of damage, if any, is it doing to the economy?HENRY PAULSON: Well, let me say this. As you've pointed out, we've had a major housing correction in the U.S. The U.S. economy had been growing at a rate that was unsustainable and, in housing, it had clearly been growing at a rate for a number of years.That correction was inevitable; that correction has now been significant. We think it is near the bottom. It will take a while to work its way through the system. Fortunately for us, we have a very diverse, healthy economy. There are other things that are positive that are offsetting that. We've had business investments start to pick up. They've got a very strong labor market, unemployment at quite a low level. We have good growth outside of the country. We've been talking about exports to China, but exports everywhere are picking up. The consumer remains healthy.So my very strong view is that we are near the bottom and that this will be contained as -- the housing will be contained, and we're fortunate that we have a diverse, healthy economy. The correction to which Sec. Paulson is referring is that beginning in 2006 when homebuyers courting default suddenly found themselves with no additional home equity to see them through. They also faced the additional obstacle to selling presented by a glut of inventory on the market. Refinancing options quickly evaporated as borrowers were unable to get appraisals matching the original purchase price of the home. But where is the evidence that would lead him to conclude that this is the extent of the correction that in his own words "was inevitable?"The language Sec. Paulson uses is in itself instructive. All in the same breath he is able to say "we've had a major housing correction", "We think it is near the bottom. It will take a while to work its way through the system." and "we are near the bottom." The mixture of past present and future tenses doesn't exactly inspire confidence.Another opinion can be found in the Credit Suisse Mar 12 2007 Mortgage and Housing Report which points out that "escalated delinquency rates on 2006 vintage loans are not being driven by the payment shock issue which is at the forefront of legislative and regulator debate, as rate reset has not yet occurred on these loans. As shown in Exhibit 42, [below but for a clearer image see the report] roughly $300 billion of securitized subprime mortgages (36% of outstanding subprime MBS) are set to reset in 2007 alone, with even more occurring in the non-securitized space. This, in our opinion, is the next shoe to fall and will likely contribute to additional delinquencies, foreclosures, inventory and additional pricing pressure." Perhaps this explains the hesitancy implicit in the Secretary's language.As for the factors that are claimed to be "positive" and "offsetting," i.e., the "diverse, healthy economy", with "business investments start[ing] to pick up", "a very strong labor market", "unemployment at quite a low level", "good growth outside of the country", "exports everywhere are picking up", and the "consumer remain[ing] healthy", each in turn is in strongly disputed territory. At least with regard to the China trade Sec. Paulson admits that the administration have only "been talking about exports." So much less than a positive is this factor that talk of a developing trade war is more on the lips of commen[...]
2007-05-15T01:00:24.962-05:00Who hasn't heard stories of inveterate betting men fully alert to the essential truth that everything in life is a wager. It's chilling to think that the progress of the subprime bubble may well depend on the progress of two flies on a window pane, but let's not forget the idea attributed to chaos theory of the connection between the flapping of butterfly wings and the tornado that topples an economy. (A fascinating area in which to see the dissipation of risk based on essentially the same notion is the apparently mundane world of Insurance and Re-Insurance where the losses from disasters are spread in a worldwide market. Mundane until it's recalled that the men in the London coffee-houses were themselves no stiffs when it came to a bet).The wild frenzy of gambling that now grips the world is not only attested to by the 54 million casino visits made by Americans in 2004 to lose more than $78 billion on the turn of a card or the spinning the slots, in effect sophisticated mechanical flies. James Mackintosh in The unbearable obscurity of exotic hedge funds gives a truly hair-raising listing of the current trend in hedge fund products. These make the sorties into housing speculation of the American homeowner positively parochial. You start to get the flavor of the 'New Economy' on learning from Mackintosh, "As hedge funds move into the mainstream, managers are testing demand for ever-more exotic investments - and finding backers willing to stump up millions of dollars for funds putting cash into everything from football players, wine and art to aircraft leasing and carbon credits."A telling clue to the unease of large investors in the plain old vanilla securities market can be had from the tendency of big institutions to ensure that their fortunes "will not move in line with shares, bonds and other traditional investments." Following on this in the recent period money has flowed to a range of 'exotic' funds. These include football funds that buy the rights to talented young players in the hope of profiting from transfer fees should these achieve star status; instead of boring old charts investors must assess the risks of injury, drug abuse etc. (American Idol Fund anyone?). Others include fund specialising in sugar, film financing, art and wine. Ominously, given the level of consumer debt, there are also funds investing in defaulted credit card debts and partnering with collection agencies in recovering the debt. This in an era when some credit card debt carries interest approaching 30% and when the UK for example is beset with problems stemming from the practices of doorstep consumer loan companies. There was a time when this kind of debt was purely a 'family' affair. Perhaps these developments lend a new meaning to the expression 'gangster-capitalism.'Enter the multiplier, never far behind. Not to be outdone, Orthogonal Partners is launching a fund dedicated to - investing in exotic hedge funds. "There is a wall of money chasing every opportunity in the alternative scene so you really want to be targeting new niches where you still have a scarcity of capital and inefficiencies that can be exploited," says Dan Gore, Orthogonal's co-founder.A staid voice intrudes; 'Tracy Pearson, head of alternatives at London fund of hedge funds Forsyth Partners, says it is questionable how many of the exotic funds are really hedged. "If it is offshore and they can charge 2 [per cent a year] and 20 [per cent of profits] it is a hedge fund," she says. "We get all sorts of stuff, usually sent from a Yahoo e-mail account."'Any day now I expect offers from Nigeria to arrive in my inbox; they may even be packaged with the scams offering to make me an instant multi-millionaire in exchange for help with repatriating the fortunes of some hapless tyrant[...]
"The two major players in the world
financial system at that time were the United States and Great Britain. The
United States was the emerging industrial power, whereas Great Britain was the
mature and stagnating industrial power. ...
Now fast forward to today, and what
you see is China as the emerging industrial power and the United States as the
mature and stagnating industrial power."
2007-05-08T03:28:58.935-05:00Having argued in a recent post that the position of homeowners faced with foreclosure on being unable to meet rising mortgage payments coupled with stagnation or housing price decline, ( see Speculation and The Housing Bubble - "The position is no different in essence to that of someone stricken with margin madness in a stock market bubble."), I was gratified to read this take presented in detail in a comment by jm on a thread at Economist's View . The whole comment is reproduced here:The real problem in the housing market isthat people are being allowed to speculate with nearly infinite leverage.In what other market are people asunsophisticated as the average home buyer allowed to make multi-hundred-thousandasset purchases with so little cash up front, and without being adjudged capableof understanding the implications of a margin call -- and more to the point, ofhaving the financial resources to withstand one?As interest rates fell through thelast decade, homes began trading like bonds, except that no one would ever letanyone, let alone the average home buyer, buy bonds with margin loans like themortgages being made today.For decades the home ownership ratein the US held within a very narrow band around 64%, but over the last ten yearshas risen to 69%. That's 0.5 percentage points a year against the number ofhouseholds, meaning that the pace of new home buying has been at least 400,000units a year above the rate of household formation, and that there are now 4million more home-owning households than we'd have at the historical averagelevel. Is anyone out there going to claim that this is because the economy isbooming for people in the economic situations of those households?I predict that, since wageshave risen very little since the late 90s, and home prices were already elevatedthen due to the rising ownereship rate, prices are going to fall back tolate-90s levels or below. A lot of people are going to get very cruel lessons onthe risks of highly leveraged speculation in illiquid assets.The awful evil of this is that itcould have been prevented just by enforcing in the mortgage lending markets thesame kind of standards that are applied to margin buying in the bond market. Itwouldn't have taken any explicit targeting of asset prices or judgments aboutwhat did or did not constitute a bubble.Posted at Economist's View by: jm Mar 31, 2006 8:24:05 PMI am left wondering what is the mystery behind the inaction in the face of what could have been prevented so easily. One answer put forward so far is that fueling the housing bubble was a sure fire way of maintaining momentum in the economy in the face of looming recession and in the aftermath of the Dot.com bubble. Another sees the Fed's cheap money policy as being more a result of being caught between a rock and a hard place than a policy of choice.Meanwhile we are confronted with what to some are mixed signals everywhere. Reports of the Housing Bubble being a global phenomenon multiply. Yet the securities market appears to roar on oblivious. The common wisdom on bubbles, which I share for now, is that things can't go on forever. Yet there does seem to be a certain resiliency in the Global Economy. Could it be that there is something different about the new conditions of globalization that we are not seeing? [...]
2007-05-02T01:45:08.103-05:00If the unfolding contagion of the subprime crisis really has the potential to precipitate, (in the awkward translation of the Global European Anticipation Bulletin' No.14 report - see below.) 'America's Very Great Depression', then sooner or later the question of a "New 'New Deal'" must enter the discussion. And in the belief of many it is not only America's fate that is in the balance. If as many claim the money financing this housing bubble comes from global sources, the end of the US housing bubble could have disastrous consequences globally. If indeed 50% of “securitized” mortgage debt is held by overseas investors, the subprime meltdown could shake the entire global financial system.While it is true that assessments of the extent to which the New Deal rescued America from the ravages of the Great Depression vary widely, in any case, on this occasion perhaps we can for once commit ourselves to learning something from history. And this at a time when there is an unmistakable undercurrent of hopelessness abroad in the land. It is salutary to recall that the most pessimistic reflections on the New Deal conclude that it was all for nothing and that the real 'saviour' lay in the dreadful carnage of the World War.A few areas therefore that strike me as candidates for deliberation. The first question that comes to mind is whether America today is in a position to undertake a new New Deal. Much has been written about America's changed position in the world economy. Whether this change is reflected in international wealth production rankings, the structure of international trade, or national and international debt liabilities, the picture is very different from that faced by FDR. Among European economists some hold the view that Europe could 'de-couple' from the impact of a New American Great Depression. Such opinions would have been unheard of in earlier periods.A second question concerns the power of the nation state to intervene in an era of privatization and the global free market. It is said that 'the market' is the best mechanism for the solution of all economic problems and that matters should be allowed to run their course. However, whatever merit there is in this idea must surely meet its limit if the consequences are large scale social disruption and the attendant disorders that threaten the very social order that such a market mechanism is claimed to uphold.There are signs that the implications of an economic disaster are being taken seriously in the centers of power. Witness Senator Charles Schumer's recent remark that, “The subprime mortgage meltdown has economic consequences that will ripple through our communities unless we act.” Federal regulators have called on lenders to work with those borrowers unable to meet their high-risk mortgage payments to help them keep their homes.And those who perhaps have the most at stake in the spectacle of millions of homeowners defaulting on their loans are showing signs of action. Several major lenders have already unveiled plans for a housing market rescue. Citigroup and Bank of America have together created the Neighborhood Assistance Corporation of America. This will provide $1 billion in subprime loans assistance to allow homeowners to refinance their mortgages and avoid foreclosure. The 30 year loans envisaged will carry a fixed interest rate one point below prime with no fees and with the banks paying closing costs. Washington Mutual has announced a $2 billion program to forestall the worst of the foreclosures impact and Freddie Mac has committed $20 billion with the same goal in mind, adding that the term would be extended to a maximum of 40 years from the existing 30 year limit.Perha[...]
2007-04-23T04:19:45.822-05:00It is remarkable how quickly the euphoria hitherto evident in the UK housing market is showing signs of a definite mood swing. On Apr 9th, Larry Elliott, economics editor at The Guardian was reassuring readers whilst hedging his bets under the banner Britain is not the US, so don't panic - yet, by Apr 21 the 'pink un', the UK's venerable Financial Times, an organ not known for frivolity, finally announced in the measured tones we have come to expect of it, Subprime market in UK 'has parallels with US.' Before the bombshell of revised UK inflation expectations and the consequent fall in the dollar against the pound, Elliot was assuring his anxious readers with the Halifax, Britain's biggest lender, announcement that house price inflation had broken through the double-digit barrier for the first time in a year in March, (rising to above 11%) and that the Bank of England decided that a raise in interest rates from their current level of 5.25% was not in the cards; "get on the ladder now before that dream home becomes even less affordable," he urged.Turns out though that the Brits have been having their own subprime party, just that true to form they haven't called it by name, ever wary of the Yankee's tendency to embarrass with straight talk. But whadda ya know; turns out that UK lenders have attracted first-time buyers with low introductory offers, there has been an increase in 'self-certification' (read liar-loans) for those with 'irregular income' (read $100,000 pa 'lawn care specialists'), and in return for a higher interest rate the usual checks aren't done on the borrower's ability to pay. Also lenders mortgages can be had at five times income and the ratio of house prices to income is higher there than in the US. Sound familiar?I was particularly amused by Elliot's invocation of US "unscrupulous lending practices," not to be found of course among the saintly denizens of Threadneedle Street. Then there's the hoary old myth of land availability in which the US has limitless open space coupled with lax planning laws so when prices increase supply can easily be adjusted, while the UK is a small island where land availability is additionally limited by usage regulations. All this together with a favourable property tax system leads to an inefficient housing market where high demand leads to inflation rather than an increase in supply. The conclusion Elliot draws: UK house prices have an in-built tendency to rise and low quality UK loans are less likely to lead to negative equity than they would in the US. Amazingly, his argument for the strength of the UK economy appeals to the health of consumer spending, financed through, you guessed it, mortgage equity withdrawal! And so it goes.Enter Jane Croft at the Financial Times less than (an eventful) two weeks later; ""Banks may be "taking on substantial risks" by ramping up mortgage lending to customers with patchy credit histories, the City regulator warned yesterday." It seems arrears in the UK subprime sector are 20 times those on primes. And shockingly enough, rising house prices are leading some high-debt borrowers to take on additional debt by borrowing against the resulting increase in 'equity.' Clive Briault of the UK regulatory Financial Services Authority: "For example, lenders are in some cases taking on substantial risks through a combination of high loan-to- value ratios and high income ratios, in part because borrowers are using additional borrowing against property as a means not only of debt consolidation but also of increasing their debt at regular intervals by taking as much advantage as possible of ri[...]
Do yourself a favor; read the full article.
2007-11-11T03:14:19.035-05:00The (free) abstract of GEAB 14 is now available online. This issue claims that the "2007 Very Great Depression has indeed begun."Two aspects are identified:1. A historical reversal of global financial balances:The report chronicles the decreasing role of the US in the field of international trade and wealth production signalling an end to a century-long tendency which began during WW1. This is supported by statistics showing the current dominant place of the EU in the external trade of oil-producing countries. In addition China has now surpassed the US as premier source of EU imports. It also notes that in March 2007, the value of European financial markets surpassed those of the US. This represents "a 'seismic tremor' for the global financial markets as it shows a displacement in the centre of gravity of the global financial sphere out of the US and towards the Old Continent."The following US trends are identified:relentless and durable decline of the US currencydecreasing share of the US in international trade and the production of global wealthgeographic remoteness of the US compared to the 'Old Continent's' Eurasian economic centresimpoverishment of the US consumercollapsing competitiveness related to collapsing quality of education 2. An implosion of the US society:US income disparity is now comparable to what it was on the eve of the Great Depression. The ratio of incomes between the richest 0.01% and the poorest 90% hovered in the 170-180 range throughout the period 1950 to 1980. It soared to 880 in 2005, this being about the same level (891) as in 1928. It is thought that this disparity will produce severe social and political tensions, a hint of which are already present in the number of foreclosure evictions. The report maintains that the economic recession will grow deeper and that US society is being split into two groups, one poor and the other very rich, with the middle class in increasing danger of falling into the poor group.Unlike the situation during the Great Depression when the US was in the ascent as an economic power, the current depression will take place in a period when US economic power is eroding. It is claimed that in April 2007, the tipping point of the global systemic crisis is already occuring and that trends will speed up and their impact intensify and become obvious to everyone.The full report (subscription) describes four other trends that will dominate the coming quarter:The continuing contagion of other types of home loans and other sectors of the economy by the subprime crisis. The return of stagflation with US growth falling below 1% by this summer. A further sharp increase in the US deficit by mid-2007. An intensification of the geopolitical oil crisis in May 2007 with Iran and Venezuela on the frontline and Oil on the rise (USD$100) and the US Dollar suffering a further dramatic fall by summer 2007. [...]
2007-04-14T00:53:53.955-05:00Bloomberg reports an interview with Kenneth Heebner, co-founder of Capital Growth Management, the top-performing real-estate fund. Commenting on the potential effects of the subprime crisis Heebner inferred that U.S. home prices could fall as much as 20% due to rising defaults on high-risk financing. "It will be the biggest housing-price decline since the Great Depression," he is quoted as saying. Nor will hedge funds be immune from the effects of subprime-loan defaults. Although to a lesser extent, the same goes for mutual funds that invested in Collateralized Debt Obligations (CDOs) and other instruments secured by this type of loan. However investment banks and the brokers who are in the business of packaging and marketing these products will avoid being hurt, having passed on the bulk of the risk to investors. "They know the product is toxic; they're not going to get caught," Heebner said. These comments by someone who has a consistently successful track record in calling the market should give pause for thought. A 20% drop in prices would undoubtedly affect many more people than the lower rungs of the subprime borrowers. Those with half-million dollar homes who have over-reached in equity backed borrowing could well find themselves walking away from homes with $100,000 of debt following them. I have witnessed just such situations in the Ontario market in the 80's. This is before the knock-on effects in the rest of the economy are even considered. Many people have been paying attention to the market and conversations about selling are growing in frequency. This is a difficult matter to decide. Those who leave such a decision to the end in the hope of a recovery can end up being disastrously disappointed. On the other hand, at least one commentator not known for optimism has offered the opinion that a slump in prices that he sees as inevitable in mid-year could be followed by an upsurge in the fall when buyers from Asia will be attracted by the property bargains to be had in the US. But the same writer has been issuing a 'sell now' message for at least a year. No help will come on this question from anyone who has a vested interest in shoring up the market. This includes politicians and mainstream financial 'gurus'. And it is well to bear in mind that your Financial Planning Associate at the local bank is more often than not speaking on the basis of the minimal requirements for offering such advice that holds in most jurisdictions. [...]
2007-04-10T02:01:15.485-05:00I've added a Feedblitz subscription service so you can now get posts and comments without visiting the page. This can be handy when accessing email 'on the go' or just when you aren't in the mood for clicking links. When I figure out how I will make it possible to leave comments through this method, assuming it's not already a feature!