The Oil Drum | DrumBeat: December 14, 2007

439 comments on DrumBeat: December 14, 2007

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Stoneleigh on December 14, 2007 - 10:00am

A new Finance Round-Up has been posted at TOD:Canada.

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westexas on December 14, 2007 - 10:10am

A Rational Financial Panic

http://www.nytimes.com/2007/12/14/opinion/14krugman.html?_r=1&hp&oref=sl...
After the Money’s Gone
By PAUL KRUGMAN
Published: December 14, 2007

The financial blog Calculated Risk, using data from First American CoreLogic, estimates that if home prices fall 20 percent there will be 13.7 million homeowners with negative equity. If prices fall 30 percent, that number would rise to more than 20 million.

That translates into a lot of losses, and explains why liquidity has dried up. What’s going on in the markets isn’t an irrational panic. It’s a wholly rational panic, because there’s a lot of bad debt out there, and you don’t know how much of that bad debt is held by the guy who wants to borrow your money.

How will it all end? Markets won’t start functioning normally until investors are reasonably sure that they know where the bodies — I mean, the bad debts — are buried. And that probably won’t happen until house prices have finished falling and financial institutions have come clean about all their losses. All of this will probably take years.

Meanwhile, anyone who expects the Fed or anyone else to come up with a plan that makes this financial crisis just go away will be sorely disappointed.

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DelusionaL on December 14, 2007 - 10:46am

hey Jeffery,
I assume you read "Mish" as well as CR. They are daily reads for me.
D

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westexas on December 14, 2007 - 2:24pm

It is uncanny how events continue to unfold as one would expect--basically following a script from "Peak Oil: The Movie."

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Dennis Brumm on December 14, 2007 - 7:47pm

I'm anxiously awaiting the musical version before I buy the DVD.

Can you sing and dance? :)

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mcgowanmc on December 14, 2007 - 10:55am

I just found out that the cliche "keeping up with the Jones"
was famous during the Roaring 20's.

And just where did Citi get $58 Billion to cover it's worthless SIV's?

http://www.peakoilblues.com/blog/?p=128

(3) Shopping habits will be hard to break and credit card debt will continue to mount. Many will be incredulous that their homes have not and will not increase in value in the upcoming year, so will continue to rack up consumer debt as if refinancing remains an option. They will believe other people’s houses go down in value, but not their own.

(4) Regardless of their current income, homeowners who begin to believe that their access to ATM home equity has actually stopped will suddenly notice how much more money they owe on their homes and feel dramatically poorer. It will be a shock to learn that even cutting away the “extravagant” spending will not bring their budgets into line. The distinction between “luxury” and “comfort” will be blurry and they will be shocked when forced to realize that “simple pleasures” like vacations or cell phones are “luxuries.” This sense will be pervasive and depressing to them. They will feel “out of it” in being unable to buy the latest “in thing.”

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River on December 14, 2007 - 10:59am

'An economic law of physics
By The Mogambo Guru'

http://www.atimes.com/atimes/Global_Economy/IL15Dj02.html

...snip...'So I am looking at this Big, Big Problem (BBP) and how it looks like the whole thing is going to degenerate into real work, when I was saved by a little-known law of physics: "If at any time you find yourself doing a transfinite amount of work, the answer can be obtained by inspection'...snip...

'And if you want more proof that people don't have any money, from online.wsj.com we get the headline, "Surge in Auto-Loan Delinquencies Is Latest Trouble for the Economy'

'An interesting bit of trivia is that "car delinquencies are closely linked to the health of the economy", because the "typical delinquent borrower" made a reasonable, good-faith estimate of the future economy, and buying the car "seemed like a manageable payment". It turns out the economy did NOT turn out as expected, and now the borrower can't make the payment. Bad, Bad News (BBN)'

'With a little history thrown in ("That is the biggest one-month jump in at least eight years"), I will take this interesting bit of automotive trivia to bring up the fact that if you have to choose between your house or your car, a car is more important than a house, as you can live in your car, but you cannot drive your house to someplace looking for a job, or to the street outside of your parents' house where you can park and look so miserable day after day that they finally get embarrassed and agree to let you into their house where you can gradually take over after stuffing them both in a nursing home against their will.

So you get another house to live in, and you still have a car to drive!' :)

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WNC Observer on December 14, 2007 - 11:35am

For myself, it is the other way around. I could walk to work, shopping, etc. But I must have the house.

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CrystalRadio on December 14, 2007 - 12:36pm

With such a globally interconnected sandcastle tower of debt on debt it shouldn't take much of a shock , possibly like Mrs Murtze not buying that Christmas salad shooter, for dearest cousin Mildred, to cause even the fine porcelain vases in China to tumble off their great wall.

As you might easily discern, and with good reason, I am not the CR that DelusionaL mentions on his recommended financial reading list:)

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Cid Yama on December 14, 2007 - 9:18pm

And the world dumping the USD won't help.

Russia to dump waning dollar - The world exodus continues

Russian oil firm Rosneft will follow the lead of Gazprom and LUKOIL to sell crude in rubles amid the ongoing depreciation of the dollar.

"Selling for rubles is much more attractive," Deputy Chief Executive Officer Leonid Fedun said on December 12.

Iran, the world's fourth most prolific oil exporter, has already abandoned the dollar, Iran's Oil Minister Gholam-Hossein Nozari said on December 9, describing the currency as unreliable.

http://www.presstv.ir/detail.aspx?id=34978&sectionid=3510213

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theantidoomer on December 14, 2007 - 10:36pm

Meanwhile the US dollar soars on the news....me thinks that currency markets aren't as simple as you think.

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super390 on December 14, 2007 - 11:53pm

There's a point when there is a difference between being an optimist for mankind, and a shill for the authority of a particular empire that exploits optimism to steal, kill and pollute.

The United States dollar is the form of capitalist authority, and capitalists and their banks across the world are pulling out all ethical stops to preserve it, instead of investing all they have in the available world-saving technologies that you laud for 15 minutes until the next one comes along. Who does this state of affairs benefit?

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Cid Yama on December 15, 2007 - 2:22am

There's a point when there is a difference between being an optimist for mankind, and a shill for the authority of a particular empire that exploits optimism to steal, kill and pollute.

Bravo. Thanks for telling it like it is. Now if you could just take him out back and beat the daylights out of him.

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elwoodelmore on December 15, 2007 - 7:35am

right, an euro is only worth $1.44 with the "soaring" dollar

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eric blair on December 15, 2007 - 10:19am

Meanwhile the US dollar soars on the news

And you see this over the last 10 year graph trend?

me thinks that currency markets aren't as simple as you think.

You can thinks whatever you want about your own skills.

http://en.wikipedia.org/wiki/List_of_Ig_Nobel_Prize_winners
Psychology - Presented to David Dunning of Cornell University and Justin Kreuger of the University of Illinois, for their modest report, "Unskilled and Unaware of It: How Difficulties in Recognizing One's Own Incompetence Lead to Inflated Self-Assessments".

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ilargi on December 14, 2007 - 11:33am

It'll be a rocky rest of the year in money. So much to hide, so little time.

As I said yesterday, of course the new Fed plan won't work, it can't. And they know that very well. It just buys them time to throw more money at the banks. It's called wealth transfer. That TAF was already a strange attempt to make the discount window more attractive, and now they do one better: they buy paper at the value it had prior to September 2006. Will the Fed now buy people's upside down homes at that value too? Right!

Fed Knowingly Takes Suspect Collateral in TAF Program

It’s almost as if the Fed hadn’t been paying attention to the recent turmoil in credit markets. Don’t they know there is widespread skepticism about even triple A rated debt paper these days?

And, apparently, they haven’t been paying attention. The documentation the Fed has provided for collateral values became effective on September 22, 2006—over one year ago!

And Citigroup takes its SIVs on the balance sheet, after "pruning" them down from $83 billion to $49 billion. Wonder where the rest of that body lies buried. The move also effectively kills the SuperSIV that Paulson was concocting (and couldn't pull off). That frees up time for even more of these wealth transfer schemes. Someone will pay for all this. You are a prime candidate.

Citigroup Rescues SIVs With $58 Billion Debt Bailout

Citigroup Inc. will take over seven troubled investment funds and assume $58 billion of debt to avoid forced asset sales that would further erode confidence in capital markets. Moody's Investors Service lowered the bank's credit ratings.

The biggest U.S. bank by assets will rescue the so-called structured investment vehicles, or SIVs, taking responsibility for their $49 billion of assets, the New York-based company said in a statement late yesterday.

Citigroup follows HSBC Holdings Plc, Societe Generale SA and WestLB AG in bailing out SIVs to avert fire sales of assets. The funds, which sell short-term debt and invest the proceeds in higher-yielding securities, have cut their holdings by more than 25 percent since August to $298 billion, according to Moody's. [Ed: yes, SIVs are down $100 billion in 4 months]

For more on all this gracefulness, see the Finance Round Up.

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SacredCowTipper on December 14, 2007 - 12:08pm

Stoneleigh,

These roundups are a lot of work and I just wanted to say thank you. I'm having lunch with a friend who is not financially sophisticated and we're going to be reading the links in the most recent roundup. Another associate yesterday did some reading and he is looking into turning his 401k into precious metals. The world is headed for a real mess, but perhaps I get to cushion some people close to me thanks to your editing efforts.

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Stoneleigh on December 14, 2007 - 12:20pm

You're welcome, from both of us :)

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Ric Williams on December 14, 2007 - 5:51pm

Me too. The financial round-ups are the first thing I look for. I'm legal conservator for my elderly mother--and I use the round-ups to help educate attorneys and the court on appropriate financial management.

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