Posted on 10/20/2008 1:58:37 AM PDT by TigerLikesRooster
This toxic crisis needs more than one shot
By Wolfgang Münchau
Published: October 19 2008 18:34 | Last updated: October 19 2008 18:34
What makes this credit crisis so toxic is that it involves numerous feedback loops with the real economy. This is why simple one-shot solutions such as last week’s rescue plans are not going to be as effective as many people think. Let us look at the present dynamic of this crisis in some detail.
First, the housing market. US house prices have fallen by about 20 per cent. To get back to the long-term real price trend, the market would have to fall by another 10 per cent to 15 per cent. This would also bring price-to-rent and price-to-income ratios closer to a long-term equilibrium. But there is no reason to assume that prices will stay on trend – not if there is a credit crunch, a dysfunctional money market and a deep recession with rising unemployment. The property market is more likely to overshoot, which is what it normally does even without those exceptionally bad circumstances. I do not want to produce a numeric estimate, but without a plan to stabilise house prices – which is not all that easy – we should expect substantial overshooting to take place. The same applies to the UK, Spain and Ireland, where prices have also fallen.
Second, credit cards. In a credit crunch, they are often the last source of freely available credit for many households. The last few weeks have seen large increases in credit default swap spreads for cards and car loans. The securitised market for credit cards is about as large as that for subprime mortgages. As the recession bites, credit card defaults will be rising and securitised credit card products will take a big hit.
(Excerpt) Read more at ft.com ...
Ping!
We’re doomed.
Despite the movie reference, I’m not being dramatic.
It’s probably time for Jubilee Year.
http://www.blueletterbible.org/Search/Dictionary/viewTopic.cfm?type=getTopic&topic=Jubilee+Year&entry.x=17&entry.y=12
That is debt, not the form of it, is the problem. The bailout is a farce. We now get to pay everyone's bills, after actually paying our own.
Live in debt up to your eyes balls, and you get a bailout. Live responsibly and you get screwed.
Marxism makes this simpler, since it packages this as if it was those who were without debt who are at fault, because they did not buy the car they could not afford or the TV, Computer, _______, _______, etc. & etc. ....
Bookkeeping is basic 5th grade math. I realize this does not matter, sorry, but one gets weary of subsidizing stupidity while trying to make ends meet, responsibly.
translation: we need to pass this financial burdern onto our children adn grandchildren by government borrowing. isn’t it far better to have our kids pay our debts than to have them impact our 401k’s?
At first, after creating the Fed, the amount of additional money created, based on debt, was sufficiently little that we could still maintain the illusion of a genuinely gold backed currency.
But with the massive increase of debt in the Roaring Twenties, this illusion began to crack, resulting in deflation following the crash of 1929. We had built up more debt (individual plus corporate plus government) than our gold could support, so FDR had to take us off the gold standard, except for international clearing, in order to open the door to more debt. His many social welfare programs needed much more debt, as did our participation in World War II.
Then with the further increases in the size of the economy and our debt in the 1950's and 1960's, Nixon had to take us off the gold standard even for international clearing, so as to keep the French from draining the last of the gold from Fort Knox.
Then following the dot-com boom of the 1990's, we had to go off the standard of credit-worthy debt, and start expanding our debt (our monetary base) with mortgages to No Income, No Jobs, No Assets (NINJA) borrowers, and to obfuscate the blatant low quality of those loans with a corrupt combination of discredited credit rating agencies, quasi-Government Sponsored Entities repackaging the loans and incomprehensible debt derivatives that spread (and hid) the increasing risk from being on any single lender, to being on the entire financial system of this planet. The quantity of responsibly managed debt, lent to responsible borrowers, was simply insufficient for our exponentially expanding need for more money, hence for more debt.
You see, banks can create more money out of thin air, in proportion to how much they have loaned out. Your mortgage, sitting in the banks vault, is part of the capital assets on which they generate more loans.
Our money, the dollar, the worlds reserve currency, is based on monetized future income streams paying off the interest and principal on such debt. Problem is, basing money on the monetized income stream from someone with no income is a bad idea.
We can grow the debt base of the dollar (the worlds reserve currency) no more. The largest Ponzi scheme in human history, past or I suspect even future, is collapsing before our eyes. We see it as a termite sees the collapse of the building that it and its ancestors have been chewing on, for generations.
Just as the Roman Empire had to cheapen the coin of their realm, with more and more base metals mixed in with the gold basing their currency, so have we had to cheapen the coin of our realm, with more and more bad debt and obfuscated debt derivatives mixed in with the honest debt basing our currency.
I don't think we get to hide from this any longer.
We are all about to gain an enormous lesson in monetary theory and practice.
We have had an increasing monetary base to (more and more debt in) our economy since the Great Depression, through good times and bad. We have had the greatest economic bloom in history.
Now, for the first time in almost anyone's memory, our monetary base is shrinking, as of a month or two ago. The rapid increase in Federal debt is but a modest fraction of the shrinking of debt due to failed derivatives layered on top of failing mortgage backed securities leveraged on top of lower quality mortgages than what the fancy mathematical models were designed to accomodate.
As the best monetary theoreticians have been warning us all along, a debt based, fractional reserve monetary system is destined to blow up.
We are now witnessing this.
This week Tuesday I believe, they are supposed to clear out the Credit Default Swaps (CDS's) that triggered due to the collapse of Lehman Brothers. This will burden various counter-parties to those CDS's with a few hundred billion dollars more liabilities, payable immediately. It would not surprise me to see another big bank fail as a result, this week or next.
This financial distress has been playing out for about a year now, and is spilling over into the main economy. The problems on Wall St. are becoming the problems on Main St.
Each original dollar of U.S.Treasury debt provides, through this fractional reserve system, the basis for another four or five dollars of additional private, corporate and local government debt.
Ain’t gonna work.
The problem is not liquidity. It’s debt saturation. The Fed is now planning on practically giving money to the banks on the condition that they loan it out.
To whom?
My bet is that a large percentage of folks who wanted to upgrade real-estate wise did so during the boom.
And I would also wager that many people who are prone to use credit card type instruments are pretty close to being maxxed out there.
With uncertainty in the energy markets, why take a risk on a large outlay like a new vehicle? A decent used rig can be had almost anywhere in America for a song.
So who they gonna lend it to? For what?
Has somebody discovered a new type of flower somewhere?
Yes, I know - the "MSM" would lie and cover it up for them, trotting out all kinds of "facts" and "statistics" to point out why it was and always will be the Republicans' fault.
>The Fed is now planning on practically giving money to the banks on the condition that they loan it out.<
I have never been one who would borrow a single dime if I wasn’t positive that it was within my abilities to pay it and the interest back within the terms of the contract.
With the national economy in such desperate condition I wouldn’t borrow a dime because I wouldn’t feel secure in my employment. (I am retired now.) Seeing major stores closing across the nation, businesses collapsing left and right isn’t what I would consider as stable times.
I guess it has a lot to do with having a bankruptcy isn’t something I would want in my biography. I would feel ashamed of myself if I did.
For reference use.
The Working Group on Financial Markets (also, President’s Working Group on Financial Markets, the Working Group, and colloquially the Plunge Protection Team) was created by Executive Order 12631,[1] signed on March 18, 1988 by United States President Ronald Reagan.
The Group was established explicitly in response to events in the financial markets surrounding October 19, 1987 (”Black Monday”) to give recommendations for legislative and private sector solutions for “enhancing the integrity, efficiency, orderliness, and competitiveness of [United States] financial markets and maintaining investor confidence”.[1]
Some people are saying a few hundred banks will fail before this is over. Will short term treasuries be the only safe place?
Short term treasuries and GNMA's are safe enough.
If and when interest rates start climbing again and inflation becomes more serious, then while treasuries and GNMA's and bank deposits will still be safe, they will begin to lose value to inflation. At that time, if one wants to avoid that loss over time of value, one will have to switch to some other asset class -- perhaps real estate or commodities or gold -- I don't know yet.
So how much will it take?
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