164 comments on Drumbeat: April 9, 2009
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164 comments on Drumbeat: April 9, 2009
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Gail wrote an article arguing her thesis that the recent run up in FF prices impacted consumer spending and made it impossible for many to service their monthly mtge payments, leading to mtge defaults, bank failures, and international credit crisis.
The truth of the matter is that many folks were put into loans they could not afford regardless of the current price of FF.
In addition to Liar Loans there were various schemes such as "no cash down," immediate second mortgages to cover the closing costs on the property, mortgages in which no interest costs were paid in the first two years and this accrued interest was added into the principal so that the loan became more expensive, and adjustable mortgages which offered interest of 2% for the first few years followed by a reset to above market interest rates to compensate for the initial below market rates.
The "FF costs resulted in the financial meltdown" thesis is a big red herring and is extremely misleading as it suppresses awareness of the institutionalized criminal activity that gave rise to the financial crisis, leaves the public confused over the issues, and more importantly the corrective action required. Key to this is the fact that the folks who performed "regulation" of the corrupt market are still performing that regulatory role together with the fact that the public is getting ripped off twice: 1) the value of their assets have been eroded by the actions of the banksters; 2) Public funds are being used to make the banksters whole, pay their bonus money and retain their places of employment.
American socialism is worse than any Russian communism.
I would argue that until gas prices spiked last summer a lot of these folks could still pretend that they could afford their lifestyle.
Debt overload at all levels was obviously the cause of the meltdown but the oil price spike was the pin that popped the bubble, IMHO.
I am not in the US so my figures may not be comprable. My gas purchases went from $30 a fill to $44 at peak. A friend who drives a van went from a $50 fill to just under $100 at peak. How do those figures compare with a mortgage reset that bumps the monthly payment up from $1,200 to $2,400?
If the Gail thesis were correct then why do we have continued financial instability? Why are house prices forecast to drop another 20 to 30%? Oil is one third of the price at peak. If oil prices were the cause of the fiscal problems then why did these problems not correct when oil prices dropped?
Think of it as a domino effect. At three fills per month, expenses balloon by $150/month, putting you behind on car and/or house payments, pre-reset.
Even if you don't face an option ARM reset and car payment, a $150/month bite to discretionary income is tough on the economy. Some of that is reversing now, but the asset loss takes longer to overcome.
What person in his right mind would extend a loan of several hundred thousand dollars to an individual who will be unable to service the loan when the general price level rises by $150?
What you are describing is a situation in which a homeowner gets a parking ticket and has to default on his mortgage because he cannot afford to pay both. If this homeowner has a child then they will have to default. If this homeowner faces unexpected car repairs then they will have to default. If this homeowner has to make a hospital visit then they will have to default.
If this is the true nature of American enterprise then the whole world is laughing at you. And you want to be responsible for the world reserve currency, direct the IMF and World Bank, and dictate to Afghani yak herders how they should live?
Unfortunately, your middle paragraph sums up the situation that a great many Americans find themselves in. I wouldn't go so far as to say most, but certainly a very large minority live nearly exactly like this.
Regarding your lead question:
Somebody who isn't taking the risk of default on themselves.
It is and was obviously and criminally insane, yet somehow nobody is being called to task for it.
Exactly.
Mortgages were no longer held to maturity by the originating institution. They were sold to investment banks who packaged them as MBS and sold them on to investors. Everyone involved in this "value chain" collected a fee and so everyone had an economic incentive to look the other way, collect the fee, rinse and repeat.
One of the key people responsible is Larry Summers. Each morning he calls his blue phone from his red phone and gives himself heck for being a duffus and almost singlehandedly destroying countless American lives.
I understand Al Capone did an equally bad job investigating organized crime in Chicago. C'est la vie.
But even under this system, the buck has to stop somewhere. It should have stopped with those holding the mortgage backed securities. But unfortunately, the buck is stopping with the American tax payer.
It just seems like a fairly good principle that there should be consequences for one's actions. In this case, however, the big banks do not have to suffer the consequences. And what will be the lesson here? And why wouldn't this whole episode or something like it be repeated again? This is so wrong on so many levels that I feel this black mark will cancel out whatever good Obama may accomplish in other areas.
Scenario: US banks default on debt, CDS bond-insurers go t*ts-up.
US Govt says 'gee too bad' to all holders of worthless US paper.
China (for example) sells it's 1 trillion US dollars of treasury notes, dollar totally collapses, china buys most all oil futures and expects delivery by tanker, siezes taiwan and the spratlys, fails to prevent Kim Jong Il believing that he should shell Seoul or use Japan for target practice.
Buck stopped. Easy when you know how ;)
.. and while they're at it, knock out a few US important satellites, sink a few carriers - in short: laudable restraint.
and thereby kill their export based economy?
I don't think so.
No person in his right mind would do so. Working in foreclosure defense, I have seen loans from 2005 or so where banks refinanced 100% loan to value for borrowers in their 70's. It's beyond insane.
Go ahead and laugh. We deserve it--and besides, this is an accurate description. In my county, a prominent billboard on all the public transit buses says something to the effect: You shouldn't have to choose between paying your phone bill and taking your sick child to the doctor.
It's reality. Americans bought up (still?) everything in sight and spent every last dime because they thought the party would never stop. One slight change--and bang, the troubles begin. There is no plan B, not even a Plan A. No thought for tomorrow. Instant gratification.
Real estate already peaked by 2006/2007. Once that happened, people couldn't sell or refinance their homes to avoid the payment resets. It takes a few months after that to get behind on payments, go into foreclosure, etc. High gas prices didn't help the long distance commuters with McMansions 50 miles from work. It might even be enough to push a fixed-rate borrower over the edge, but nobody with a big payment reset was going to make those payments.
And those payment resets and the sudden transition to a housing market surplus drove down prices and destroyed any equity held by those who had paid 20% down. This same price drop also undermined the value of all MBS. These were deemed to be extremely safe investments and were widely held. They were deemed "safe" as house prices generally increase or hold steady. Banks which held MBS were now under capitalized and those who had invested in derivatives were technically insolvent. And so the house of cards began to collapse.
This collapse would have occurred even if the price of oil had remained steady. I believe the rise in the price of oil was likely a result of the housing bubble (and not the cause of the bubble's collapse as the Gail thesis argues).
Think of it. Thousands of people suddenly had access to credit they had previously been denied. Housing became increasingly "affordable." The result of freely available credit was a rise in the price of houses as buyer A can now easily outbid buyer B. The house price rise sparks a boom as it provides false confirmation of housing as a "fail safe" investment, and this growing bubble draws more builders, more lenders, and more buyers.
An identical boom and collapse took place in Holland circa 1650. This one concerned tulips rather than houses but the mechanism was much the same.
http://en.wikipedia.org/wiki/Tulip_bubble
It's all a matter of timing.
Without the oil price increase due to the production plateau things might have run smoothly for another year or three.
This probably would have made things even worse, though my imagination balks at the concept.
BOP,
Don't you know that when oil goes up everything gets more expensive, not in the last place food ?
When oil prices drop the problems are not over, because for the current type of mass economy to stay healthy it needs to grow and therefore will consume increasing amounts of oil. To avoid major problems with dwindling amounts of oil the only possibility is decreasing globalisation and less FF dependent cars.
Whats your missing and what Gail should probably emphasize with the oil/housing bubble connection is new home buyers. Remember its a ponzi scheme you have to keep sucking in fresh blood. Continued home buying in the US using 3% down mortgages for 400k homes still way beyond reasonable prices indicates they did not run out of suckers however rising oil prices reduced the amount these suckers could pay for a new house.
So the bottom level ponzi entrants could not put as much down. 100 dollars a month finances about 15K so if your overall expenses go up 200 a month then you can finance 30k less a month.
Also of course interest rates where also increasing and this is something else thats being ignored.
The combination of rising interest rates and rising oil prices and general feeling of being squeezed and actually paying attention to your finances probably adds up to a 30-100k pull back in what you feel like you can finance. Also of course Americans where deferring the expenses via credit cards but you get the bill every month with the rising balance.
Its a confidence scheme and rising oil prices played a significant part in popping the scheme especially at the marginal end. Understand near the end they where selling 500k homes to dishwashers and strawberry pickers these people are impacted by this sort of increase.
I take the approach that money and oil are so intertwined that trying to determine the chicken and egg is fruitless. The truth is that our monetary system evolved in a period of cheap abundant energy and in general excess resources as this became increasingly false from both population increases and real constraints the overall system hit its breaking point. There or so many intertwined feedback loops many running over decades that you can't split it out.
I dont think oil prices were "the" cause of this mess but they were sure a contributing factor, and as the economy does recover rising oil prices will put the brakes on all sectors of the economy.
I think that is a key insight. China is already working on the creation of a SE Asia free trade area and is engaging in currency swaps with regional central banks. The likely outcome is that the yuan will become a "regional" reserve currency and be used as the primary trade currency in SE Asia area. Since SE Asia remains a relatively dynamic economy I suspect it will lead the way out of the global slump.
If this is correct then the Chinese and other Asian nations will be able to bid a higher price for oil ( to put this another way: the cost per bbl relative to growth in Chinese GDP will be lower than the same ratio in the US or Euro region). As US/EUR seek to climb out of recession they will be hit with higher fuel costs and have less ability to cover those costs. This will slow the pace of US/EUR recovery.
What makes a currency a reserve currency? Simple answer - it's usefulness for trade and / or finance. Now, ask yourself, how much does SE Asia export to China? Import from China? How much does SE Asia export to the U.S.? Import from the U.S.?
Now ask the same questions about Financial flows.
Still think the Yuan will become the regional reserve currency?
This is the thing that all hand-wringing about China doesn't get. Even with all its growth over the last twenty years, the U.S. (and Japan, for that matter) are more important to the economy of east asia then China (despite what Hugo says).
Bankers had no idea they would get into trouble by issuing Liars' Loans. They figured that even if the borrower did default on his mortgage, the property would still be worth more than he paid for it because real estate prices were going up so fast. Se even if the borrower defaulted, they could just resell the property and make even more profit. But when the real estate market collapsed the property became worth a lot less than the amount of the mortgage.
But I disagree with your last sentence. This is not American Socialism, it is unregulated capitalism. A little socialism would have helped because it would likely have meant tighter regulation. The extreme right insisted that we drop all regulation. Laissez-faire literally means; "Leave us alone." And the government did exactly that, no regulation whatsoever. That is a far cry from socialism.
Ron P.
Maybe your shock should help you understand that there is a lot happening that you are unaware of.
Bryan, why are your comments always so mean and snarkey? Was that comment really necessary?
I have always understood that there is a lot happening that I am unaware of. I, like almost everyone else in the nation, was totally unaware that liars' loans were being conducted. Or that they were later packaged and sold with a triple A rating.
Ron P.
It is just that this story has been posted and discussed numerous times already-other posters and sites have been all over this thing for a very long time and now you are shocked along with "everybody else". Often you attack posters who attempt to relay useful info by calling them "conspiracy nuts". I have no idea how it took you until April 9/09 to understand that this garbage was sold with a triple A rating. I agree that both of these comments are unnecessary.
Still, you did not answer my question, which was:
There is a kind way and a mean and nasty of saying anything. Some people always choose the latter.
Ron P.
American Socialism starts not when the banks failed but when the government gave money to those banks.
We sure have unregulated capitalism which led to the collapse but what we did afterward is pretty much socialism in reverse -- taking the money from the poor and the weak to give to the rich and powerful.
Yeah -- the right is the worst of the bunch. Not only they want this "stolen" money but they also want a tax break on top of that. I am speechless -- to be fair, the democrats are just barely a bit better.
Absolutely correct. It's not socialism--it's crime.
After that long list of flaws with american capitalism, how do you then make the completely illogical leap to american socialism?
{edit: sorry, didn't see Darwinian's posting of same message before mine. Still worth a double entry.}
If there are any profits then those profits belong to the banker and hedge fund operators. Any and all losses belong to the people.
We, the people, have undertaken to compensate and keep whole the bankers and hedge fund operators. And this to the tune of several trillion dollars. You provide social safety nets for your wealthy elites and little or nothing for ordinary people. You permit your elites to prey on their fellow citizens and then when it all goes wrong you support them so they can make their payments on their mortgages. But you can go live in your car.
http://www.merriam-webster.com/dictionary/socialism
The American System is not Socialism. Check your dictionary for the use of the term "Facism" sp?
Looks a lot like serfdom to me unless we get off our rears and take our country back.
I'd have to agree with Penury here.
If you read that definition of socialism and compare it to what is happening in the united states now is definitely not socialism:
I'm not sure what to call what's happening in the US, but definitely not socialism!
Re: I'm not sure what to call what's happening in the US, but definitely not socialism!
Members of congress would disagree with you.
Gotta remember socialists are sneaky. They disguise themselves as your neighbours and then give trillions to the poor on Wall St.
That "hidden" socialism is the entire democratic party
Please lets not get into a paranoid mind set
Is the leap entirely illogical? Politics make strange bedfellows.
In the real world, where politicians get ahead by looting Peter to purchase the votes of Paul and Mary, what is socialism about other than looting producers to purchase the votes of freeloaders? And plenty of strange freeloading bedfellows sure enjoyed the ride, romping through their very "own" borrowed palaces while returning nothing of value in trade.
It helped immensely that the free rides, first made available by foolish regulation, could be widely expanded by foolish deregulation. Once that penny dropped, the politics became wildly popular, pervasively bipartisan, and totally unstoppable.
I'm not so sure that it isn't this "institutionalized criminal activity," which is built into the structure of capitalism that is the red herring. This has always been a part of our economic system, so unless you can demonstrate some special and unique spike in this activity in the last few years, there is no explanatory power in it.
I would like to stay out of a "Darwin" debate as there is a substantial difference between the early and late Marx but Das Kapital is not entirely lacking in explanatory power apropos the current crises. Marx argues for declining returns to capital and the need to squeeze harder and harder to make a profit, this to be followed by popular recognition of the cultural contradictions inherent in capitalism, followed in turn by a legitimization crisis, followed by some new form of social structure. This theme was more fully explored in a subsequent movie Duck Soup.
Lenin, Trotsky et al operationalized Marx's theory so I suspect you may be aware there is much opportunity for confusion in this topic.
After a perfectly lucid comment on the situation, you resort to crude name-calling at the end. Why? Does it make you feel better to use the latest bogeyman term to characterize the criminality of the system? And is this even correct: corporate socialism is fascism, not socialism.
Fair comment.
I agree with various posters on the difference between socialism and fascism. I find it curious that various posters react very strongly to the US being referred to as a socialist state but appear to have no problems accepting the US as a fascist state.
As for socialism as a bogeyman, I live in a socialist state. I don't see that as a problem. I think it has many benefits. Many of the European states are socialist states with strong social safety nets and significant government intervention in the economy.
America provides safety nets for the rich and for the investors in large enterprise. I concur that this is more typical of fascism. I just didn't want to use that name as I didn't wish to be exposed to the charge of "crude name calling." While America is flirting with fascism I don't think it is there yet. Wolin describes a condition of "managed democracy and inverted totalitarianism" which I suspect is a good fit with reality. See the outline of his thesis here:
http://www.amazon.com/Democracy-Incorporated-Managed-Inverted-Totalitari...
With regards to the last comment I was thinking of Dimitri Orlov's description of Russian collapse vis a vis an American collapse. He posited that the US is much less well prepared for such a collapse then the USSR as USSR had features which better enabled it to manage the crash. That was the intended meaning of the last phrase. Could not make it more lucid as I was called away on other tasks and had to hit SAVE in a hurry.