which carries with it a serious risk load… buying off deflation for the moment and shifting into the future… which ultimately may actually accelerate the process of deflation… because why borrow now when you beleive you can borrow next quarter for less, especially if you feel that the Fed is haviing the screws put to it…
of course, this might all be so much paranoid bone rattling and all my be a smooth as cream… I’ve never liked the idea of a prediciton being taken up as an inevitability…
yes. once you get started down that road it seems near impossible to get off. continue to keep rates too low and you continue to pile up debt and imbalances in the US and Asian real economy (as well as benefiting the speculator class at the expense of the masses). hike rates to levels that are long-run sustainable and you have your 100-year flood of debt deflation.
http://news.goldseek.com/LewRockwell/1149703993.php
let us hope we are wrong…
I really don’t find this info all that surprising. America’s economy has been heading for a huge downslope for years.
Whether it be the real-estate market today, the tech market of yesterday, or the lack of structured industrial growth tomorrow- there is going to be a financial crisis in the not too distant future. All you can really hope for is that DC steps back from arguing about Brokeback Mountain and Non-binding Resolutions and gets something done.
But a great depression act two? I really highly doubt it. There’s financial analysts that will say anything to get attention. Last year it was the fact that America is going to go flat broke when we pay back China and Japan in 2030. Before that it was the Enron/Worldcom fiasco, blah blah blah.
As long as you don’t keep all your eggs in one basket then you will be fine, most financial/market news is so overhyped - it’s either “You’re going to be a millionaire tomorrow” or “Your kids aren’t going to college and you’re moving back in with your mom.”
My two cents at least.
There’s not necessarily much that can be done, only choices between unpleasant alternatives. It’s true that we avoided that post tech wreck scenario many warned about, but I fear that was at the cost of storing up worse trouble in the future.
Real estate and consumer debt bubbles don’t usually have pretty endings - which is not to say that the 29-39 script exactly applies to the outlook today.
You know, I have a large stack of books here dating back as far as 1960’s or so warning about the coming crash, currency collapse, Howard Ruff, Harry Brown, buy silver now!, etc…
Didn’t happen. Didn’t happen. Came close maybe. Didn’t happen. etc.
Okay to take reasonable precautions against unexpected swings, but the extremes never seem to happen…
There’s quite a distance between the Aunt Sally of the extreme, stuck-clock doom-and-gloom crowd and prevailing perhaps overly complacent expectations about the outlook for asset markets and the economy… 68-82 was not a pleasant time for stock market investors. 1972-4 house prices fell 50% in real terms in London. 6 s.d. moves happen all the time and making sure one is somewhat prepared is a useful antidote to the human tendency to extrapolate from the recent past.
The Next Meltdown – Page 1 – TIME
The Next Meltdown
Friday, Jan. 05, 2007 By [NIALL FERGUSON](javascript:void(0))
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In the world of finance, that was one happy Old Year. Whether they were buying Indian real estate or Brazilian commodities, traders and investors made serious money. Profits at Goldman Sachs exceeded the gross domestic product of Bolivia.
The best explanation for the good times is liquidity. Thanks to global integration and financial innovation, higher short-term interest rates have not translated into monetary tightening. On the contrary, the world economy has been swimming in credit of every conceivable kind. Money-supply figures for the U.S. understate the phenomenon because billions of dollars flow abroad every month to finance the American trade deficit. The world’s central banks control about $5 trillion of reserves. This in turn has raised monetary growth rates. The total value of commercial-bank assets worldwide is close to $56 trillion, and bank loans are only one of the many forms credit now takes.
The key question is whether something could happen in 2007 to drain away this liquidity. For most investors and policymakers, the nightmare scenario remains that of the post-1929 Depression, when a stock-market crash was followed by a spectacular wave of bank failures and a massive monetary meltdown. However, by blaming the Hungry Thirties on blunders by the Federal Reserve, we reassure ourselves that history couldn’t repeat itself. Today’s central bankers are smarter. But history provides an example of another liquidity crisis that went far beyond what central banks could cope with. Until the last week of July, 1914 looked as if it would be another good financial year. The stock-market crash of seven years before had almost faded from memory. Inflation was under control, and interest rates had stabilized. Emerging markets were booming. On the back of sustained global growth, commodity prices were up. Best of all, volatility was as low as most investors could remember. Sound familiar?
It was an act of terrorism on June 28 that began the crisis. At first it seemed like just another assassination in just another Muslim country (Bosnia-Herzegovina, occupied by Austria-Hungary only a few years before). And although the terrorists scored a big hit (Archduke Franz Ferdinand, heir to the Austrian throne), the financial markets took it in their stride. Stocks barely moved.
It was not until the Austrian ultimatum to Serbia on the evening of July 23 that investors began to feel nervous. Its terms were truly formidable, particularly the demand that Austrian officials be allowed into the country to investigate alleged Serbian sponsorship of the terrorists. The government in Belgrade immediately dismissed the ultimatum as “impossible.” Germany took the Austrian side; the Russians lined up with the Serbs. By Aug. 4, a little Balkan difficulty had become a full-scale European war.
The financial crisis happened even faster. Within days of the Austrian ultimatum, the delicate web of international credit was torn to shreds. German trading companies ceased to remit the money they owed to brokers in London. European investors rushed to withdraw their money from New York. As nervous banks called in loans, panic selling swept the world’s financial markets. But the further asset prices fell, the worse the crisis became. Securities that had been the collateral for immense pyramids of debt were suddenly unsellable. The central banks had to admit they lacked the means to stem the outflow. The only way to avoid a complete financial implosion was literally to close the world’s stock exchanges. London’s exchange remained shut down until January 1915.
Could such a “great drain” happen again, sucking liquidity out of the international financial system? Many experts would dismiss the idea as mere doom mongering. A full-scale war, they say, is one of those “10-sigma” (10 standard deviation) events that are so rare they lie outside the domain of risk management. Like an asteroid hitting the earth or a global influenza pandemic, a really big war belongs in the realm of uncertainty. You just can’t price it in.
But try rereading the events of 1914 with the place names changed. Imagine the assassination of the U.S. Vice President in Baghdad this coming June. The U.S. suspects Iranian involvement and sends an ultimatum to Tehran. Israel takes the American side; Russia lines up with the Iranians … It’s not a wholly implausible sequence. And some central bankers admit privately that they would have to struggle to counter the liquidity crunch that such a geopolitical shock would trigger. A stock-market shutdown in 2007? History warns us not to rule it out.
so far the corporate sector is in good shape, no sign of impending anything, wage growth and employment numbers are nice, and confidence is high… so the crash and burn model probably isn’t realistic…
however… we are running on a similar track of guns and butter, a la Lyndon Johnson in the Vietnam war era… and if memory serves, as I was present for the events, right before the emergence of OPEC (an “unthinkable” event) we had the Nifty Fifty stocks that everyone had to own, the economy was deliciously liquid thanks to gobs of defense spending, gas was dirt cheap, and nobody though in ters of conservation…
Nobody knows, an it is doubtful they know how to model a 10% contraction in the R.E. market, how the future will play out…
Most reasonable predicitions are for a sizable hiccup at worst, a classic “growth recession”…
And that well may be it, for now…
However… we ARE seeing elements of overcapacity globally, and some markets, especially technology do appear to have deflationary characteristics… and we have other warning signs, a general complacency, furious chases after yield, based on the assumption that “we have it figured right this time”…
A defensive rationalist might counter and say, what if we don’t, how much capacity for serious error IS lurking in the structure of our economies ?
Deflation, Hyperinflation, and Stagflation. History has proved that in every government that switched to fiat currencies. My personal favorite pastime is researching economic history, (most recently read about the causes of hyperinflation in France in the 1800’s)
Anyway, if you want some bitter humor as the sink drains, look up and read Richard Daughty’s column (the Mogambo Guru) It’s the only thing I can count on to make me laugh these days.
Cheers !?!
Quicksilver
(My name takes on new meaning now, doesn’t it?)
Ah, like Goldman Sachs issuing a buy on gold only after accumulating a massive short position. So they were setting up precious metals investors to buy in, then they were going to yank the carpet out from under them.
Eventually though, public awareness will yank the rug out from under Goldman Sachs.
Commodities people… buy physical and hold … buy physical and hold long term. The correction (within 5 years) will not have a warning.
Do your due diligence,
Quicksilver
so what happened yesterday?
hedge-fund trigger?
From the Non Linear Dynamics Desk…
financial makets are chaotic, in the mathematical sense of chaos, which is another way of saying that they can rspond in wildly different ways to slight changes in initial conditions…
Over the years many a speculator, not to mention entire classes of speculators, have been shellaced because they believed that:
something HAD to happen
something COULDN’T happen
More often than the average voter would like to admit, the things that HAVE to happen don’t, and the things that CAN’T happen, do.
There is a minor industry of scanners who look for early warning signs or tells of impending change. Chaos theory suggest that the most large scale macro events may begin unwinding with the subtlest of changes, and those who know how to interpret those changes are the ones who reap great fortunes, while those who hold the bag are the class of perpetual losers…
One such tell to my mind was the ratfest on YouTube where a KFC Taco Bell outlet on 6th avenue was shown on television overrun with vermin. Literally crawling with the buggers. Big fat happy new York rats… yum!
The standout point was the response… the city’s health department, apparantly on advice from above, went rather overzealous and started closing restaurants right and left… odd and unsettling to walk by a popular spot and see the now familiar yellow health deparment posting on the windows… the reaction caught my attention… what was with the near-hysterical need to assure the public that all was well and the authorities were in control ? It seemed that there was an implicit fear that IF the public got a case of the nerves, it could spread to other things, and there HAD to be a show of force to stabilize the situation…
Interesting, to say the least…
However, well fed rats do not a real estate correction make. They DO suggest an almost paranoid oversensitivity to public perceptions.. the metaphor of the rats leaving the sinking ship and all that literary stuff…
So, the whole damn thing might amount to nothing, or it might be the precursor to a real something… or not…
Here’s a worthy closing thought from Robert Samualson:
" It is commonly said that another depression will never occur. This is probably true, as long as “another depression” means a crude repetition of the thirties. However, crises can come in unfamiliar forms. The basic lesson from the Great Depression is that governments cannot permit massive collapses of banks or spending. The deeper lesson is that there are times when the world changes so much and events move so rapidly that even the well-informed do not know how to respond. This is the story of the depression. Now it seems preventable. Then, it was baffling. World War I made restoration of the prewar economic system difficult, maybe impossible. But that is what world leaders attempted because it was all they knew and it had worked. Only its collapse convinced them to try something different. Old ideas were overtaken and overwhelmed. It has happened before—and could again. "
my next comment has nothing to do with Econ - but your interpretation of the taco bell thing exactly mirrors what’s going on at my job at the moment. I’m not in food service, but everything else is pretty much my current experience.
thanks for showing me the parallel.
You mean that there is a general concern that all the surfaces are polished and everyone toes the party line ?
mmm..a little more than that. My department is being analyzed by “efficiency experts” of a sort. They did a big agency-wise survey and got feedback on all the different ways we suck. Many of which I will happily admit to, because they are true of my department as a whole, and I have the same complaints of some of my cohorts. (think of that survey as the rat video)
So since then my direct supervisor and manager have been overly micro-managerial and try to be Johnny-on-the-spot with every little thing (like the health department). Which is both a pain in the ass, and hilarious to me, because my “customers” and I have long-standing support relationships and we find it funny that these people feel they need to insert themselves in our interactions, no matter how small, to give the perception that they are all over it. It’s a matter of too little too late, and the overcompensation is so apparent.
actually - it’s prolly more like too much too late. Either way, it gives me the impression that neither of these folks really have a grasp on what true customer service is, based on their behavior at the moment.
Ever looked at the stuff produced by Williams Inference center? seemed intriguing but pricey…
From Barrons. Hatzius knows his stuff.
"According to Goldman’s Hatzius, ARMs that aren’t subprime are going down the tube even faster than riskier loans. Prime ARM delinquencies are above their worst levels of the 2001 recession, he points out. By contrast, Subprime fixed-rate delinquencies are well below their recession levels. "But here’s a key point: prime-quality and so-called alt-A mortgages (middling credits, lower than prime but better than sub-prime) have longer reset periods – two years or more – than subprime. That means we haven’t seen the full impact of the sharply borrowing higher costs on many ARMs yet.
"As teaser rates on ARMs get adjusted, Hatzius suggests the teaser-rate problem could turn out to be bigger than the subprime problem. Clearly, lenders didn’t take care whether their borrowers would be able to shoulder the higher costs once the teaser rates ended.
"Will the Fed ease soon enough and by enough to bail these borrowers out? If it does, it effectively bails out feckless speculators, just as it did after the tech debacle. If it doesn’t, the Fed risks a new downturn worse than that resulting from the Nasdaq collapse.
“Once again, debtors borrowed well, at the time, if not wisely. The consequences are becoming apparent.”
anyone still reading ?
'nother thought:
"Instead the most surprising thing about this housing bust and subprime meltdown is how the “credit” cycle started much earlier than the “real” cycle and much more rapidly than anyone would have ever suspected. Now in an economy with still high growth, still high job creation, still very low unemployment rate, still high income generation we are already observing massive increases in subprime defaults and foreclosures, 20 subprime lenders going out of business in two months, the ABX going into free fall and the cost of insuring against the BBB- tranche of the ABX index going to a spread relative to LIBOR of over 1000bps. So, if all this happening in what the consensus terms as a “Goldilocks economy” what would happen if the economy – as likely – will start to slow down more in 2007? How much more carnage can we expect in many sectors and markets when the economy is weaker than in recent months?
The fact that the downward “credit” cycle has emerged so fast and so sharply in a still “strong” economy is the most important signal that this sub-prime mess cannot be easily dismissed as a niche problem that will have no contagious effects on the rest of the economy and of financial markets."
RGE - Sub-Prime "Meltdownâ€, ABX “Carnage†and the Risk of a “Credit Crunchâ€
so didn’t this whole mortgage voodoo environment start up because people were confident that FannieMae and FreddiMac would pick up the pieces? (or am i making things up?)
Oh goodness, looks like I’ll be putting spare cash in IRAs.
Does anyone remember the savings and loan scandal / collapse? The Resolution Trust Corporation?
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.
(Fixed rate) Lenders hate inflation; borrowers love inflation.
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’.”
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.)
The volume of money also influences the velocity of money. When the velocity of money is high, then you need less money in total to support the economy. The “effective money supply” changes as velocity changes. So the job of the Fed takes some finesse. If the velocity of money increases rapidly (making the total needed amount of money lower) or if the Fed prints more money, or if people save more money, then banks have more money to lend. That drives interest rates down.
And that used to be the total picture of the economic theory of interest rates until the S&L scandal jumped off of the rumor columns and into the headlines.
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&Ls, 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.
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. At best it could be one unhealthy segment of the market self destructing and ultimately cleaning itself up. Or the great real estate engine that has been driving the US economy could slow down and absorb the excess inventory that has been created.. giving us a stagflation or something like that… it is hard to read about (literally) hundreds of thousands of households suddenly in default and not wonder about the consequences… what we have to consider is that the real estate market has a velocity as well… and every time a property flips, if the Liscio numbers are to be believed, there is about 1.3 x the value of that transaction appearing relatively soon as money supply… and M2 money supply has been expanding very nicely… so the question has to be, and this may not get a good answer for a while, if conditions are this good, as all the Fed numbers do suggest, how could this happen in such a recessionproof boom ? Perhaps bad industry practices, perhaps a symptom of larger problems. Inquiring minds want to know, how many pundits called the market top during the tech boom ? How many analysts and commentators maintained that the boom wasn’t over well after the top had crested ???