# Our collective economic ass is about to get kicked, hard and rude. **URL:** \ **Category:** Lounge\ **Created:** [March 11, 2007, 9:45pm UTC](https://pheromonetalk.com/t/our-collective-economic-ass-is-about-to-get-kicked-hard-and-rude/2464 "2007-03-11T21:45:32Z")\ **Posts on this page:** 20\ **Page:** 3
**Author:** ![PheroQuirk](https://avatars.discourse-cdn.com/v4/letter/p/9e8a1a/32.png) [@PheroQuirk](https://pheromonetalk.com/u/PheroQuirk)\ **Post date:** [March 19, 2007, 2:50am UTC](https://pheromonetalk.com/t/our-collective-economic-ass-is-about-to-get-kicked-hard-and-rude/2464/41 "2007-03-19T02:50:32Z")
> [@MarkL](#): > > The supply of money is a key dynamic driver of the US economy. If the supply of money expands too rapidly, we get significant inflation, and all of the things that go with it. So, if you owe money, say US$300,000. If you get paid $50 per hour (after tax, etc.), then you have to work 6,000 hours to pay the bill. IF, however, the US dollar is inflating 25% per year, then in about four years, you’ll be earning twice as much – and a loaf of bread will cost twice as much, too. > > But notice: since you now earn $100 per hour, you will only have to work 3,000 hours to pay off the debt. Yes… but money (really these days, credit) doesn’t enter the economy evenly and because of that a rate of expansion in the planned supply of credit above the planned demand for it will have real effects. Speculators in real estate and financial instruments get the money first - they benefit at the expense of people on administered incomes and the entire structure of prices and incomes across the economy is distorted for as long as the credit expansion continues. Hence the $500 pizza now available in Manhattan accompanying stagnant income growth for many people not living on either coast. > [@](#): > > The Federal Reserve Bank is independent of the US government – the President appoints the Chair of the Fed, and can ask the Fed Chair to pursue certain policies, but the Fed can “just say ‘No’.” In theory the Fed can say no… but the chairman does need to be concerned about reappointment and more generally does not operate in a political vacuum. It’s remarkable the difference between the Fed’s public statements and the discussions going on internally as revealed in the minutes. Also compare Greenspan’s statements since leaving to those whilst he held office. I think he learnt his lesson after the v negative political reaction to his irrational exuberance comments in 96. > [@](#): > > When the Fed prints more money, or burns old money, or buys or sells the stocks it owns, it influences the amount of money in the economy and the flows of money into and out of the economy. (If you save money by stuffing it in your mattress, it’s out of the economy.) For years now there has been a very tenuous relationship between the broad supply of credit and the amount of cash the banks need to hold. Banks can meet reserve requirements using the vault cash they need to keep anyway for ATMs etc so reserve requirements are not binding (+ lots of credit creation is off balance sheet these days). So the Fed sets interest rates and credit creation does what it will… what will the Fed do I wonder should it turn out that it cuts rates to 1% again and nobody wants to borrow…? > [@](#): > > Because in the aftermath of the S&L scandal, the **Comptroller of the Currency** (a government employee in the Treasury Dept.) looked at the S&Love Scent, and said “No way this going to happen in commercial banks! Not on my watch!” So the Comptroller tightened credit requirements and also slowed the economy by changing the **reserve ratio** that commercial banks had to obey – and the reserve ratio turns out to be a very powerful factor in expanding or contracting the effective money supply. > > And almost singlehandedly created a recession/depression/economic collapse. * * * > [@](#): > > Given all that background, I ask whether it is the case that the “crunch” in home loans would have to be mishandled by both the Federal Reserve and the Treasury department to have the dire consequences that are being described. The thing is if mortgage equity withdrawal was about 7% of disposable incomes at a time when the savings rate was basically zero, it’s hard to revert back to that situation once prices stop rising even if you can avert a more serious collapse in housing (which I think is debatable). As Lawrence Lindsay says, this is the first time the textbook recipe to averting deflation post bubble (tech bubble) has been tried. The problem is nobody knows what happens next. I agree that once we see serious weakness in financial asset prices + signs of pain in coincident indicators of economic activity then the Fed will have to ease aggressively. But as we saw post tech wreck there can be quite a lead between easing and a recovery in asset prices + growth. Also, we’re starting from a much worse position and housing bubbles usually have much nastier hangovers than equity bubbles. In the end, I agree that you will be right - in USD terms housing will do much less badly than measured against some constant value numeraire like CHF, SGD or Gold. But how we get there matters as much as the end state. Not all inflations feel all that much fun… > [@tacitus](#): > > We’ll have to see how this one plays out. It may not, and probably won’t be one of those sudden crash things the equities markets are bracing for. I agree. > [@](#): > > so didn’t this whole mortgage voodoo environment start up because people were confident that FannieMae and FreddiMac would pick up the pieces? it really seemed to gather pace after they stopped expanding their portfolios 3-4 yrs ago. it will be interesting to see who actually ends up stuck with all that credit risk… ---
**Author:** ![Nunya](https://avatars.discourse-cdn.com/v4/letter/n/ac8455/32.png) [@Nunya](https://pheromonetalk.com/u/Nunya)\ **Post date:** [March 26, 2007, 6:45pm UTC](https://pheromonetalk.com/t/our-collective-economic-ass-is-about-to-get-kicked-hard-and-rude/2464/42 "2007-03-26T18:45:43Z")
[Subprime bust forces families from homes - Yahoo! News](http://news.yahoo.com/s/ap/20070325/ap_on_bi_ge/house_of_cards_6) just saw this and thought of y’all. now it’s making mainstream headlines. ---
**Author:** ![sigma](https://avatars.discourse-cdn.com/v4/letter/s/dec6dc/32.png) [@sigma](https://pheromonetalk.com/u/sigma)\ **Post date:** [March 26, 2007, 7:23pm UTC](https://pheromonetalk.com/t/our-collective-economic-ass-is-about-to-get-kicked-hard-and-rude/2464/43 "2007-03-26T19:23:21Z")
> [@Nunya](#): > > [Subprime bust forces families from homes - Yahoo! News](http://news.yahoo.com/s/ap/20070325/ap_on_bi_ge/house_of_cards_6) > > just saw this and thought of y’all. > > now it’s making mainstream headlines. Yep, the market took a plunge this morning when housing market sales falling short of forecasts hit the media. Its been in the media for a couple of weeks. Seems like the market is finally starting to take it seriously. ---
**Author:** ![Nunya](https://avatars.discourse-cdn.com/v4/letter/n/ac8455/32.png) [@Nunya](https://pheromonetalk.com/u/Nunya)\ **Post date:** [March 26, 2007, 7:25pm UTC](https://pheromonetalk.com/t/our-collective-economic-ass-is-about-to-get-kicked-hard-and-rude/2464/44 "2007-03-26T19:25:09Z")
thanks for the heads up. I haven’t been able to keep track day to day from here at work for some time now. ---
**Author:** ![tacitus](https://avatars.discourse-cdn.com/v4/letter/t/6a8cbe/32.png) [@tacitus](https://pheromonetalk.com/u/tacitus)\ **Post date:** [March 28, 2007, 8:03pm UTC](https://pheromonetalk.com/t/our-collective-economic-ass-is-about-to-get-kicked-hard-and-rude/2464/45 "2007-03-28T20:03:34Z")
for grins, I accessed the google blogsearch function and entered the word **forclosure** … the results were: Results **1** - **10** of about **336,596** for **foreclosure** **That’s a whole lotta blogging aroung the concept of forclosure !** ---
**Author:** ![Nunya](https://avatars.discourse-cdn.com/v4/letter/n/ac8455/32.png) [@Nunya](https://pheromonetalk.com/u/Nunya)\ **Post date:** [March 28, 2007, 8:10pm UTC](https://pheromonetalk.com/t/our-collective-economic-ass-is-about-to-get-kicked-hard-and-rude/2464/46 "2007-03-28T20:10:41Z")
on of my former coworkers messaged me today, after we parted ways on a previous job - he moved on to work for this booming mortgage company. Anyways today he let me know that they just laid off 100 people. His company dealt with subprime, but apparently that’s only a small chunk of their business. He sounded a little worried. ---
**Author:** ![tacitus](https://avatars.discourse-cdn.com/v4/letter/t/6a8cbe/32.png) [@tacitus](https://pheromonetalk.com/u/tacitus)\ **Post date:** [March 28, 2007, 9:17pm UTC](https://pheromonetalk.com/t/our-collective-economic-ass-is-about-to-get-kicked-hard-and-rude/2464/47 "2007-03-28T21:17:48Z")
100 employees is a good sized business in itself, not major, but a decent shop… Interesting how Citicorp recently decided to lay off about 10,000… timing coincidence or ? blog hits: **152,329** for **subprime , 137,881** for **meltdown, 626,097** for **paris hilton,** aaaaand… the real question looming on the finance scene, **7,966** for **Alt A mortgages…** Ben “Xanax” Bernanke’s comment’s today aside, one blog offers: _“In my nearly 25 years in the real estate business I have never seen such fear in the mortgage industry. Everyone is sweating, even those that have nothing to do with subprime loans.”_ and further thoughts on the subject: At issue are mortgages made to people who fall in the gray area between “prime” (borrowers considered the best credit risks) and “subprime” (borrowers considered the greatest credit risks). **A record $400 billion of these midlevel loans - which are known in the industry as “Alt-A” mortgages - were originated last year, up from $85 billion in 2003,** according to Inside Mortgage Finance, a trade publication. Alt-A loans accounted for roughly 16 percent of mortgage originations last year and subprime loans ([http://dailypundit.com/?p=24613](http://dailypundit.com/?p=24613)) an additional 24 percent. Hey Ben – STFU!Data from UBS AG show that the default rate for Alt-A mortgages has doubled in the past 14 months. **“The credit deterioration has been almost parallel to what’s been happening in the subprime market,” says UBS mortgage analyst David Liu.** The UBS report contrasts with testimony Federal Reserve Board Chairman Ben Bernanke gave to Congress Wednesday. “Our assessment is that there’s not much indication that subprime issues have spread into the broader mortgage market,” Bernanke said. meanwhile: BusinessWeek is reporting a [slowdown at FedEx](http://biz.yahoo.com/bizwk/070322/mar2007pi20070321894125.html?.v=1). Package delivery company FedEx said Mar. 21 that it’s been struggling to grow profits during recent months. Fuel costs cut into profits, while snowstorms made it tougher for trucks to deliver packages. And as the U.S. economy slowed, customers who might have insisted on shipping everything overnight express during easier years downgraded to less expensive services. Buffeted by such factors, the Memphis (Tenn.) company’s net income during the third quarter ended Feb. 28 fell 2% from a year ago to $420 million. “The U.S. economy grew at a lower rate than we expected in the third quarter, and we saw continued adjustments in the automotive and housing markets,” said CEO Frederick W. Smith in a press release March 21. Still, FedEx’s Smith promised better times ahead. He called the U.S. economy’s recent performance “a healthy transition” as it "phases into a more sustainable growth rate." **FedEx Summary** - Shipping volume down - Customers seeking cheaper alternatives (cutting back on overnight) - Economy slowing and FedEx did not see it - Denial about the future **CFC Begging for more Subprime Pain** Reuters is reporting [Countrywide 2006 failed subprime loans could be new worst](http://biz.yahoo.com/rb/070322/usa_subprime_lenders_countrywide.html?.v=1).Countrywide’s subprime mortgage defaults for 2006 loans may exceed the company’s highest on record, a company executive told a government panel examining mortgage lending.Countrywide’s “worst single origination year was 2000, for which the cumulative foreclosure rate was 9.89 percent,” Sandor Samuels, the company’s executive managing director, said in prepared remarks.“We believe that declining home prices and other factors … may produce foreclosures numbers on 2006 originations approaching or exceeding those on loans originated in 2000,” Samuels said in remarks.The company believes that there was overcapacity in the mortgage market in 2004, the company said, and does not agree with federal regulators that borrowers should be approved at the “fully indexed rate” that considers the long-term costs of the loan.Countrywide is not close to the reality phase yet. I base that statement on the comment CFC “_does not agree with federal regulators that borrowers should be approved at the ‘fully indexed rate’ that considers the long-term costs of the loan._” Not looking at borrowers’ ability to repay loans is just what got CFC and every other subprime lender into hot water in the first place. That they see no need to take fully indexed rates into consideration says that they are begging for more pain down the road. **Kiss No Down Payments Goodbye** Bloomberg is reporting [Subprime Meltdown Snares Borrowers With Better Credit](http://www.bloomberg.com/apps/news?pid=20601103&sid=a8ilcv.eOxMc&refer=news).The subprime credit crunch is beginning to ensnare even borrowers with better credit. Lenders are increasingly refusing to lend to homebuyers who can’t make a down payment of more than 5 percent, especially if they won’t document their income. “It’s going to be very difficult, if not impossible, to do a no-money-down loan at any credit score,” said Alex Gemici, president of Parsippany, New Jersey-based mortgage bank Montgomery Mortgage Capital Corp. Companies that buy the loans “are all saying if they haven’t eliminated them yet, they’ll eliminate them shortly.” Bear Stearns Cos., General Electric Co.'s WMC Mortgage, Countrywide Financial Corp., IndyMac Bancorp Inc., Goldman Sachs Group Inc., Lehman Brothers Holdings Inc. and Credit Suisse have all said in the last two weeks they’re pulling back from buying Alt A mortgages sold with no down payment or in a refinancing of the house’s entire value.So another chunk of marginal buyers just went out the window. **Who was it that said this mess would be contained?** ---
**Author:** ![Nunya](https://avatars.discourse-cdn.com/v4/letter/n/ac8455/32.png) [@Nunya](https://pheromonetalk.com/u/Nunya)\ **Post date:** [March 28, 2007, 9:31pm UTC](https://pheromonetalk.com/t/our-collective-economic-ass-is-about-to-get-kicked-hard-and-rude/2464/48 "2007-03-28T21:31:19Z")
hmm…interesting stuff. and now i’m wondering how this is all going to affect all these 300k+ shoebox condos they have built all over my city. if anything i hope this flood of defaults, and the general chaos in this sector, will at least force a correction in real estate prices. I wonder if they’ll let those condos go empty, or convert them into apartments? In which case i also wonder what’s going to happen to rental pricing. I could see it skyrocketing, because it’s tougher to go buy that new mcmansion, but at least in my area, the unsold shoebox condos offer a glut that can be used for rentals as well. ---
**Author:** ![ash](https://avatars.discourse-cdn.com/v4/letter/a/f19dbf/32.png) [@ash](https://pheromonetalk.com/u/ash)\ **Post date:** [March 29, 2007, 1:21pm UTC](https://pheromonetalk.com/t/our-collective-economic-ass-is-about-to-get-kicked-hard-and-rude/2464/49 "2007-03-29T13:21:41Z")
Not to be obtuse, but wouldn’t a surge in condo to apartment conversions cause a decrease in apartment rental prices as they compete with one another for those who need somewhere? Or would the large number of people dislocated from their homes be enough to overcome that causing prices to go up? I think rental prices are already too high since mortgage prices for comparable homes are significantly less than renting (in this area at least). Not that this helps me any since I’m stuck in an apartment because of not intending to remain in this area long term. ---
**Author:** ![PheroQuirk](https://avatars.discourse-cdn.com/v4/letter/p/9e8a1a/32.png) [@PheroQuirk](https://pheromonetalk.com/u/PheroQuirk)\ **Post date:** [March 29, 2007, 3:02pm UTC](https://pheromonetalk.com/t/our-collective-economic-ass-is-about-to-get-kicked-hard-and-rude/2464/50 "2007-03-29T15:02:51Z")
> [@Nunya](#): > > hmm…interesting stuff. and now i’m wondering how this is all going to affect all these 300k+ shoebox condos they have built all over my city. > > if anything i hope this flood of defaults, and the general chaos in this sector, will at least force a correction in real estate prices. I wonder if they’ll let those condos go empty, or convert them into apartments? In which case i also wonder what’s going to happen to rental pricing. I could see it skyrocketing, because it’s tougher to go buy that new mcmansion, but at least in my area, the unsold shoebox condos offer a glut that can be used for rentals as well. i guess the scary question is what happens to the broader economy once the boost to consumer spending from mortgage equity withdrawal fades. it will likely take some months to play out. ---
**Author:** ![Nunya](https://avatars.discourse-cdn.com/v4/letter/n/ac8455/32.png) [@Nunya](https://pheromonetalk.com/u/Nunya)\ **Post date:** [March 29, 2007, 3:39pm UTC](https://pheromonetalk.com/t/our-collective-economic-ass-is-about-to-get-kicked-hard-and-rude/2464/51 "2007-03-29T15:39:27Z")
> [@ash](#): > > Not to be obtuse, but wouldn’t a surge in condo to apartment conversions cause a decrease in apartment rental prices as they compete with one another for those who need somewhere? Or would the large number of people dislocated from their homes be enough to overcome that causing prices to go up? I think rental prices are already too high since mortgage prices for comparable homes are significantly less than renting (in this area at least). Not that this helps me any since I’m stuck in an apartment because of not intending to remain in this area long term. well that’s what i’m getting at - if the condos convert to rentals, there certainly would be plenty to choose from, hopefully bringing down rental prices. i’ve chosent ot rent as well, simply because real estate here is overvalued and has been for a good while. I know when i do buy i’ll wind up paying higher interest. But on a lower amount, hopefully. > [@PheroQuirk](#): > > i guess the scary question is what happens to the broader economy once the boost to consumer spending from mortgage equity withdrawal fades. it will likely take some months to play out. this is a good scary question. i guess we won’t know until the fullness of time allows. what’s going on with refi market at the moment, do ya know? ---
**Author:** ![tacitus](https://avatars.discourse-cdn.com/v4/letter/t/6a8cbe/32.png) [@tacitus](https://pheromonetalk.com/u/tacitus)\ **Post date:** [March 29, 2007, 10:22pm UTC](https://pheromonetalk.com/t/our-collective-economic-ass-is-about-to-get-kicked-hard-and-rude/2464/52 "2007-03-29T22:22:58Z")
So much of the animal spirits in the economy were sprung from **expectations** … Clauswitz, of military fame, said that man acts from inklings and suspicions… We’re exiting a phase where expectations of price growth were met or exceeded (and for an extended time, until this seemed like a state of nature). We don’t properly know the full impact of **expectation** on the way people have behaved with their money… So the economists and punditry only have quant methods to fall back on to try and speak about elasticity and inelasticty… when economics doesn’t do well is transitions from elasticity to inelasticity… for example, if home prices fall in excess of say, 10%… do sellers feel insulted and remove their properties from the market ? Does the tightening of one lending environment (mortgages) lead to the tighteneng in another (credit cards) ? So far, nobody is freaking out… things appear faily stable, rumble here, rumble there… that’s about it… but changes could creep up on us too, sometimes great changes move like powerful glaciers… ---
**Author:** ![tacitus](https://avatars.discourse-cdn.com/v4/letter/t/6a8cbe/32.png) [@tacitus](https://pheromonetalk.com/u/tacitus)\ **Post date:** [March 29, 2007, 10:37pm UTC](https://pheromonetalk.com/t/our-collective-economic-ass-is-about-to-get-kicked-hard-and-rude/2464/53 "2007-03-29T22:37:03Z")
BTW… this morsel from no less than: BCA Research… _**Collateralized Debt Obligations (CDOs) based on low quality home equity loans are still warning of difficulties in the sub-prime debt market.**_ Despite the bounce in the underlying assets, ABX Tranche Index (TABX) prices have dropped steadily since the indexes were created in mid-February. As discussed in the _ **U.S. Bond Strategy** _ Bulletin this week, **the loss in value has not been limited to the lowest (equity) tranche, but seems to infect the entire structure up to and including the most senior class** (solid line in the bottom panel). Admittedly, the TABX is constructed using the relatively weak 2006-2 and 2007-1 vintage securities and therefore are not representative of the broader CDO market. Nevertheless, the downtrend in prices could reflect more difficulty ahead for sub-prime, given that the most senior class of a CDO is meant to be a low risk investment, unaffected except in the most dire circumstances. ---
**Author:** ![tacitus](https://avatars.discourse-cdn.com/v4/letter/t/6a8cbe/32.png) [@tacitus](https://pheromonetalk.com/u/tacitus)\ **Post date:** [March 30, 2007, 5:34pm UTC](https://pheromonetalk.com/t/our-collective-economic-ass-is-about-to-get-kicked-hard-and-rude/2464/54 "2007-03-30T17:34:04Z")
hmmmmm… yessss. those of us watching the ISM numbers weren’t surprised… funny how few DO closely scrutinize the vital stats: " [http://bcaresearch.com/public/data/PRE-20070329.GIF](http://bcaresearch.com/public/data/PRE-20070329.GIF) _ **U.S. core capital goods orders failed to rebound in February, after weaker-than-expected readings in recent months.** _ U.S. capital goods orders have weakened by much more than we envisioned, underscoring that the main economic risk is that companies retrench in the face of slowing consumption. The backdrop for investment has been favorable: the return on capital has improved dramatically in recent years and remains well above the cost of capital, and our investment Model is still upbeat. Corporate balance sheets and profitability are solid, implying that sizable cuts in payrolls and capital spending plans should be averted. However, the cautious nature of the business sector after the profit implosion early this decade, means that corporate executives could delay investment given the high level of uncertainty about demand, thereby triggering a larger economic slowdown than we (and the Fed) have been anticipating. Stay tuned. " ---
**Author:** ![PheroQuirk](https://avatars.discourse-cdn.com/v4/letter/p/9e8a1a/32.png) [@PheroQuirk](https://pheromonetalk.com/u/PheroQuirk)\ **Post date:** [March 30, 2007, 7:49pm UTC](https://pheromonetalk.com/t/our-collective-economic-ass-is-about-to-get-kicked-hard-and-rude/2464/55 "2007-03-30T19:49:49Z")
> [@tacitus](#): > > So much of the animal spirits in the economy were sprung from **expectations** … Clauswitz, of military fame, said that man acts from inklings and suspicions… > > We’re exiting a phase where expectations of price growth were met or exceeded (and for an extended time, until this seemed like a state of nature). > > We don’t properly know the full impact of **expectation** on the way people have behaved with their money… > > So the economists and punditry only have quant methods to fall back on to try and speak about elasticity and inelasticty… when economics doesn’t do well is transitions from elasticity to inelasticity… for example, if home prices fall in excess of say, 10%… do sellers feel insulted and remove their properties from the market ? Does the tightening of one lending environment (mortgages) lead to the tighteneng in another (credit cards) ? > > So far, nobody is freaking out… things appear faily stable, rumble here, rumble there… that’s about it… but changes could creep up on us too, sometimes great changes move like powerful glaciers… Yep… it seems like we just have no idea of the consequences of a shock outside peoples’ normal expectations. Though Minsky warns us that we should expect that an extended period of stability might breed instability later on. [Ponzi nation February 2007 Low volatility and easy credit are boosting asset prices. But according to the late theorist Hyman Minsky, today’s stability may be sowing the seeds of its own demise. 07/02/2007 00:00:00](http://www.iimagazine.com/Article.aspx?ArticleID=1234217&PositionID=16672) ---
**Author:** ![Nunya](https://avatars.discourse-cdn.com/v4/letter/n/ac8455/32.png) [@Nunya](https://pheromonetalk.com/u/Nunya)\ **Post date:** [April 2, 2007, 4:43pm UTC](https://pheromonetalk.com/t/our-collective-economic-ass-is-about-to-get-kicked-hard-and-rude/2464/56 "2007-04-02T16:43:21Z")
so my freind’s company closed their doors today. ouch. that came fast and hard. maybe they had more of a subprime share then they let on. ---
**Author:** ![tacitus](https://avatars.discourse-cdn.com/v4/letter/t/6a8cbe/32.png) [@tacitus](https://pheromonetalk.com/u/tacitus)\ **Post date:** [April 2, 2007, 5:07pm UTC](https://pheromonetalk.com/t/our-collective-economic-ass-is-about-to-get-kicked-hard-and-rude/2464/57 "2007-04-02T17:07:54Z")
Ummmmm… although this may seem like a piece of policy trivia… the Fed has “discontinued” a critical monetary measure, as well it has “discontinued” the data that could be used to estimate this measure… and any moron knows the real reason behind this (disingenuous public blatherings aside)… that being by cloaking M3, or large base money supply, the Fed can hide what’s really going on… no M3, no fingerprints you could say… however: " With the recent passing of Milton Friedman, it is indeed fortuitous that Barry Rithotlz over at the [Big Picture Blog](http://bigpicture.typepad.com/) has found a new source for M3. And folks, the picture ain’t pretty: [http://i17.photobucket.com/albums/b84/bonddad/M3.png](http://photobucket.com/) ---
**Author:** ![tacitus](https://avatars.discourse-cdn.com/v4/letter/t/6a8cbe/32.png) [@tacitus](https://pheromonetalk.com/u/tacitus)\ **Post date:** [April 2, 2007, 5:11pm UTC](https://pheromonetalk.com/t/our-collective-economic-ass-is-about-to-get-kicked-hard-and-rude/2464/58 "2007-04-02T17:11:58Z")
that chart and commentary are available from: [Bernanke Opens the Floodgates of Money | The Agonist](http://agonist.org/bernanke_opens_the_floodgates_of_money) so, inquiring minds want to know, why ? Why the necessity of hiding Fed operations by eliminating and old and venerable data stream ? And secondly, why, when M3 is exploding, such perceived problems, or the other way around, ARE the problems possibly deep enough that the Fed feels that it has to resort to extreme liquification (as it did after 9/11) to prevent a serious “event” , a “real estate katrina” ?.. and third, will it work ? ---
**Author:** ![tacitus](https://avatars.discourse-cdn.com/v4/letter/t/6a8cbe/32.png) [@tacitus](https://pheromonetalk.com/u/tacitus)\ **Post date:** [April 2, 2007, 8:02pm UTC](https://pheromonetalk.com/t/our-collective-economic-ass-is-about-to-get-kicked-hard-and-rude/2464/59 "2007-04-02T20:02:50Z")
Now this merits some close attention… as Japan has already had one nasty brush with defaltion that scared the living daylights out of the US fed… from out friends at BCA research, with an ominous tone to it… "14:00:00, April 02, 2007 [http://bcaresearch.com/images/spacer.GIF](http://bcaresearch.com/images/spacer.GIF) [http://bcaresearch.com/data/PRE-20070402.GIF](http://bcaresearch.com/data/PRE-20070402.GIF) _ **Japanese CPI measures show that the economy is slipping further into deflation, providing no support for further tightening.** _ Friday’s releases show that National headline CPI inflation fell below expectations and back into negative territory (at -0.2% YoY) for February. The core measure, excluding food and energy, fell to an annual rate of -0.3%, matching Tokyo core CPI for March. Recent price trends have done little to build market confidence in the BoJ, which hiked last month largely to prove its independence after succumbing to political pressure in January. However, Monday’s release of the February MPC Minutes reflected regret from some board members and we suspect that the central bank will now stay on the sidelines at least until conditions show some signs of improvement. In this respect, it is unlikely that Japanese price trends will rebound in any meaningful way over the next few months as global growth downshifts, given that the economy is heavily reliant on external demand. ---
**Author:** ![PheroQuirk](https://avatars.discourse-cdn.com/v4/letter/p/9e8a1a/32.png) [@PheroQuirk](https://pheromonetalk.com/u/PheroQuirk)\ **Post date:** [April 3, 2007, 4:28am UTC](https://pheromonetalk.com/t/our-collective-economic-ass-is-about-to-get-kicked-hard-and-rude/2464/60 "2007-04-03T04:28:15Z")
credit bubble? it’s not just a US thing **[eXile - Moscow-based Alternative Newspaper - Issue #259](http://www.exile.ru)** **Credit Nation On The Brink? Blowing credit bubbles in Russia’s financial sector** By Yasha Levine ( //’ + email + ‘’); //]]\> [yasha@exile.ru](mailto:yasha@exile.ru) yasha at exile ru ) [Browse Author (32)](http://www.exile.ru/archive/by_author/yasha_levine.html) **«** Previous (30) ([http://www.exile.ru/2007-March-06/feature\_story.html](http://www.exile.ru/2007-March-06/feature_story.html)) The greatest threat to the Putin regime isn’t what’s grabbing all the headlines - opposition marches, NATO encirclement, separatism in the Caucuses, the ever-crumbling infrastructure. No, the most likely threat to stability comes from a more obvious yet far less sexy source: e-z consumer credit. People working in Russia’s high-flying banking sector are going to publicly deny the possibility of another financial catastrophe of the 1998 variety, the crash that brought an end to Russia’s experiment with Western Liberalism. But privately many admit there are signs that another crisis might be looming. This time the trigger could be an avalanche of consumer debt defaults following the popping of a ballooning credit bubble. If the personal easy-credit pyramid crumbles, it could trigger a major correction in Russian asset prices, which have been rising consistently for eight straight years now. Just two years ago, consumer credit was still relatively new and rare in Russia. Sure, loans have been available for years, but until recently banks weren’t as eager to issue consumer credit as easily as they do now, and Russians weren’t lining up in droves to finance a rabidly consumerist lifestyle. But, oh, how that’s changed. In 2004, Russia’s total consumer loans amounted to about $20 billion. Two years later, that number quadrupled, or more. At the end of 2006, consumer debt hovered just below the $80 billion mark (about 8% of Russia’s GDP), according to Alfa Bank. If you listen to Russia’s Central Bank (CBR), the number was closer $100 billion. The 400% jump in Russia’s personal credit revolution was not the result of a decision by the CBR to stimulate the economy by lowering interest rates. In fact, in the two-year period, interloan interest rates (the rates at which banks loan money to each other) rose by a few percentage points. This bubble wasn’t caused by fiscal policy, but by speculation and greed. According to the Russian daily _Kommersant,_\*\* Russian debtors are defaulting on roughly 35% of outstanding loans.\*\* You read that right. Thirty-five percent. This figure should have the financial sector shitting in its Depends and transferring its money into bullion. In comparison, only 5% of all American mortgages were foreclosed in 2006. But the _Kommersant_ article, published on February 2, didn’t cause any waves. Home Bank, a small Russian subsidiary of a Czech bank called Home Credit and Finance Bank, is a shining example of the type of institution that’s bringing the consumer credit market to the brink. According to _PROFIL_ magazine, Home takes pride in the fact that the bank approves virtually anyone with a heartbeat. As a result, Home proudly posts a whopping 22% default rate on their loans. That’s right, nearly one out of every four people borrowing money from them couldn’t pay them back. But the bank isn’t worried. They sell their bad debt to collection agencies for pennies on the dollar and still make enough to turn a handsome profit. The trick to the whole industry lies in the exorbitant interest rates they charge those who don’t welch; the losses are more than covered by the people that manage to pay off their loans. The result is a classic pyramid scheme. The banking industry is loathe to admit this, but Home’s practices are the industry standard. To see if Russian banks are indeed as suicidal as they’re made out to be, the _eXile_ called Russia’s five largest banks to find out what it takes to get $10,000 in cash, no questions asked. Turns out, credit history is not even a factor in the decision-making process. In the 16 years of Russia’s market economy, no centralized credit bureau has been established. Banks compile their own credit ratings and you can get a huge credit rating databases pirated from large banks at any _rynok_ in Moscow, but banks have yet to begin sharing the information amongst themselves. Banks clearly aren’t motivated by their clients’ ability to pay off loans. Rather, they’re driven by the fear that the borrower will take his business elsewhere. With the competition in mind, each bank assured us that getting a loan would not be a problem, even when we hinted that our income isn’t always as regular as we’d like. All we needed, the banking reps assured us, was a valid passport, written proof of employment, and deposit slips showing income. They didn’t care much about our salary, just so long as some of it was legal. Of all the banks, Russkiy Standart was by far the most, er, generous. Russkiy Standart is Russia’s largest consumer lender. For awhile, the bank gave out loans like toasters. All they required was a passport, proof that the borrower has maintained a job for at least six months and a co-signer who also had a six-month employment history. That’s it. Provided that, you could walk out of a Russkiy Standart loan department with a fat stack of rubles equaling $10,000. It’s almost like free money. And it is, until you look at their jaw-smacking interest rates. How long can the banks keep it going? How many dirt-poor Russian debtors can they keep shoveling off to collector agencies before the entire Russian population has repo men stealing their cars and goons knocking down their doors and dragging out their brand new plasma TVs? If up to a third of Russians are defaulting during the peak of a huge economic boom, then what will happen if the economy takes a turn? What will happen if something like the recent China tremors or America’s growing debt problems cause investors to pull money out of Russia, or oil prices to fall? Investment banker Jim Rogers, who correctly predicted a bull market in commodities that began in 1999 and opened the massively successful Quantum Fund with George Soros, doesn’t need to be told what will happen. “I wouldn’t put a nickel of my own money in Russia, and I wouldn’t put a nickel of your money there either,” he recently announced. “Everything about Russia is one big bubble, and it’s going to pop. It’s going to happen sooner rather than later … When that happens, people will look around and say, how did that happen? That’s when we’ll find out about all the skeletons in the cupboard,” Rogers told Reuters in a ranting telephone interview last week. According to him, the slightest glitch in Russia’s economy and the whole thing could tumble like a house of cards. But not everyone agrees. Our source at Alpha Bank thinks it’s all hype. According to her, Russia’s credit and real estate markets aren’t as fluid as Western markets. Russia’s low consumer debt/GDP ratio (currently at 8%, as opposed to America’s 92%) is going to limit the fallout of any banking shocks, and shield the country’s real estate markets. But financial bubbles are part psychology, part economics and are tricky to predict. Besides, there are signs that the big boys know it’s coming. Some of Russia’s largest banks have already stopped issuing easy credit. The high profits are no longer justified by the increased risks built into Russia’s consumer credit. According to _PROFILE_ magazine, VTB 24 is leading the pack in killing off its high-risk checkout credit programs. VTB 24 is a subsidiary of VTB bank, which is half-owned by the Russian government and is Russia’s largest bank in terms of authorized capital. VTB has the biggest lending reserves, yet it is pulling out of the high-risk credit game. Rosbank and Alfa bank are following suit. The government and the CBR are finally stirring as well. Earlier this March, Gennady Onishchenko, head of Russia’s Trade and Sanitary Inspection Authority, promised to curb predatory lending by eliminating hidden service charges that banks hide in their loans. You know the Kremlin is getting involved if Onishchenko is setting up to the plate. He’s the guy that imposed an embargo on Moldavian wines and Georgian mineral water because of supposed “health concerns” which he discovered just at the time that Moldavia and Georgia started playing footsie with NATO. But is it too late to prevent the meltdown? The only thing that could help now would be for the federal government to start pumping money into the banking system so the banks can start lowering interest rates. It looks like this might be happening as well. The average interbank loan rate this year is already 2% lower than the average of the last quarter of 2006. If the credit economy were to crash, you might start to see a lot more people with the time and energy to protest. Because if there’s one thing that can crush the opposition more completely than censorship, jail time and OMON put together, it’s Russia’s new E-Z credit economy. If there’s one thing that can make living in an FSB-controlled state tolerable, it’s free money of the sort we’ve been seeing. The protest leaders don’t seem to grasp this. “When 85% of this country’s population isn’t seeing the benefits brought in by the flow of petrodollars, a new team must analyze this horrible social layering,” Gary Kasparov told Russian _Newsweek_ after the protest. But easy consumer credit is doing a pretty good job of temporarily masking this “horrible social layering.” Who needs a thriving and growing middle class when even Russia’s poorest village dwellers can go on the biggest shopping spree of their lives, paid for with someone else’s -a bank’s, that is credit? Why waste your day protesting in the streets and run the risk of getting billy-clubbed and thrown in jail, when you can go shopping for the newest 54-inch LCD TV with Dolby Digital surround sound and then spend the next 6 months bragging about it to your drinking buddies? One of the main reasons behind Putin’s popularity - as well as one of the reasons the opposition doesn’t have a chance is that millions of Russians, for the first time since 1991, can act like the professional consumers they’ve always dreamed of becoming. So what if they’re signing themselves up for debt serfdom? Americans do it. But if the credit shit hits the fan and liquidity suddenly dries up, it could be the end for Putin’s New Russia, and the start of something that none of us would even dare to guess [Previous page](https://pheromonetalk.com/t/our-collective-economic-ass-is-about-to-get-kicked-hard-and-rude/2464.md?page=2) [Next page](https://pheromonetalk.com/t/our-collective-economic-ass-is-about-to-get-kicked-hard-and-rude/2464.md?page=4)