Posted on 12/27/2008 4:50:54 AM PST by TigerLikesRooster
Ping!
in other words, it's just that the recession is the reality of inverted demographics striking? Bush's cryptic remark upon the failure of immigration reform that "now you're going to pay," certainly explains his point of view, knowing as he did that the last gasps of credit-driven prosperity were built on illegals building houses for illegals. What a mess.
“Unrecognizable?”
Not to those who have studied the history of the 1933 to 1940 and 1873 to 1879 depressions it isn’t.
This is a classic debt deflation, per Irving Fisher’s description of same in 1935.
The only people who might not recognize this for what it is are people who are still gulping down the either the Kool-Aid of idiots like the National Ass’n of Realtors (for whom there is NEVER a bad time to buy a house), or their used bong water. These people are, sadly, everywhere, but saddest of all, they’ve been most especially abundant in the “George Bush’s economy is A-OK!” and “Dude, where’s my recession?!” camps of erstwhile conservatives, who should know better.
The patterns of what are happening are unfolding in the order as laid out by Fisher in his paper, in the same order he describes. Once I read Hyman Minsky’s paper on debt collapses and Fisher’s paper on debt-deflation, it became pretty clear to me that history repeats itself.
The only ‘unrecognizable’ component of this time ‘round is that we now are beholden to foreign investors, sovereign wealth funds and foreign central banks, praying that they continue to buy our US-backed paper even as we’re issuing yet more debt as fast as we can. At some point, our creditors will cease believing that they will get paid whole, and they’ll quit buying.
After the hyperinflation that collapsed the Weimar Republic, in Germany, the nation of Germany then turned to its real estate as a reservoir of value to back their currency, as their national treasury has been sacked by the French and British as “war reparations”, and the country was penniless. These new “Reichmarks” were backed by something called the “Rent”, the collection of a property tax that was laid on every piece of real estate in the country. Using this newfound prosperity, the Germans began to build their “Wehrmacht” military, first in secret, as a sort of national guard, then openly, after they occupied the Rhineland, contrary to terms of the treaties ending the original World War. When no effective response to this action on the part of Germany was made, Hitler was encouraged to proceed, secure in the belief that Great Britain and France would simply roll over and accept the situation.
We all know where this scheme ended up. What the heck, there were people pulling for Hitler to WIN.
And what if he HAD won?
Yeah, subprime banzai crowd.
If this crisis is not handled right, we may end up going back further than 1873. To 1860.
This is what makes the whole current situation so bizarre.
If what you've posted here were really the case, then interest rates would be rising -- and fast. For some reason these foreign investors, sovereign wealth funds and foreign central banks continue (at least for now) to buy U.S. Treasury debt even as interest rates are at historic LOWS.
for later
It’s a good time to be poor. The masters of the universe are agonizing over how to keep up payments on their Maseratis, given that they’ve never actually worked for a living.
Anybody who says that an upturn is just around the corner has got some worthless assets he needs to unload and is looking for some patsy to take them off his hands.
This means lots of debt was rung up to create these bubbles that are now deflating. Plus it was misallocated borrowing such as in housing. Enough money was borrowed to build 30 years worth of new houses in only 3 years. This was objectively unnecessary but could not be stopped, too many people were making money off this mania
Care to make a guess how long deflation will be with us?
“Unrecognizable” is the perfect term. Based on the sentiment by most of my friends and co-workers, I’ll go out on a limb and say that most people think this is just a normal downturn and normal economic cycle. People do feel it will be worse than the last few recessions, but they are mainly clueless about the scale and scope of the coming contraction or its underlying cause.
So, how would you describe the coming scale and scope?
In a normal situation, you’re right - that’s what would happen.
However, we now have the Fed acting with absolutely no restraints, and they’re buying both US Treasuries and agency paper to reduce interest rates.
So: let’s review. We have a Fed that has reduced interest rates to zero percent, who is paying interest on bank reserves (which induces banks to keep their money in piles, because they’re getting a risk-free return from the Fed), who is now buying up US treasury, agency, commercial, student, unsecured consumer debt with wild abandon.
Interest rates won’t act normally - now.
At some point, the piper will have to be paid. When that happens.... I can not predict. But at some point, someone might finally say “Heeyyyyy.... we figure out... you no gonna pay us baaaack...” (insert South Park City Wok accent here) and the jig might we up with a speed and fury that makes the speed of the events of the last three months look positively leisurely.
I just don’t know any more. The Fed is acting in ways that defy comprehension to me, and they’re in a position to change the timeline on deflation.
If we want to talk specifically about housing price deflation, well that is easier to predict in terms of housing inventory and median pricing than in terms of time. The long-term trendline of housing prices in the US is that housing median prices are 2.6 to 3.0 times median household income. Right now, the national median is something like 3.4 times median national income, so we’re still high. In some areas of the country (eg, CA) we’re still higher than that.
Given that median household income is taking a hit as unemployment goes up, housing prices are now having to chase a moving target on the downhill run... which means that they’ll likely over-correct on the downside.
I’d say that in any market in the US, when the housing inventory gets back down to only four to six months of supply (seasonally adjusted), you’re likely back in an area where the deflation will slow down or stop.
But national, economy-wide deflation? When does that stop?
Heh. No clue. The Fed is doing things so fast, so erratically, with seemingly no coherent meta-strategy, that I just don’t know any more. Every day the market is open, I wake up and say in a happy tone to my wife: “Let see what lunatic stuff that crack-smoking PhD Bernanke has announced today!” It isn’t profitable, but it is entertaining.
I’ll give one example of an unintended consequence with ominous implications: one of the problems that extended the Great Depression was that when the economy juuuuust started getting out of the open grave in 1935, the Fed says “Hey, all you banks.... we’re increasing your reserve requirements.”
This has the same effect as suddenly and dramatically raising interest rates - bank lending power in a fractional reserve system like ours is dramatically reduced when you (eg) take reserve requirements from 8% to 12%. That’s like pulling 33% of the available credit out of the banking system with a snap of your fingers. Interest rates are unchanged - banks simply don’t have money to lend. They’re having to keep more money sitting around, doing nothing.
BTW — the Fed could have done EXACTLY this in order to stop the housing bubble. They could have simply raised reserve requirements and that would have been a tool they could use to both improve the strength of the banks to weather bad loans they’d already written, as well as keep them from writing so much new paper. If the Fed had both increased lending standards and raised reserve requirements, the problem could have been largely solved - and the Congress/Freddie/Fannie would have been able to do nothing about it.
Back to 1935/36: This led to a withdrawal of credit just as the economy was getting going, and this, coupled with unions getting most everything they wanted from FDR after his re-election in ‘37, meant we went right back down into a depression in ‘37 and ‘38.
OK, so why do I bring up all this history of bank reserve requirements and the Fed?
Well, the Fed is paying interest on the reserves banks are required (by the Fed) to keep on hand. This amounts to a risk-free return. So banks are piling up reserves and asking the Fed “pay me on my reserves” - in net effect, pulling credit out of the US banking system. The Fed can lower lending target rates on the one hand, but there’s still unquantifiable risk in lending right now. Piling up cash and getting paid by the Fed (albeit a lower interest rate than they would if they lent the money out to a borrower) is the easy, risk-free play for a banker.
So Bernanke, this genius historian of the Great Depression, is starting to re-create some of the mistakes of the Great Depression Fed, only with different mechanisms.
As a result, all prognostication is for naught.
Like it or not, this economy is in the hands of some yahoos who think they’re “the best and brightest.”
Sigh.
Duh — brain fart. I meant to say “raising reserve requirements by 8 to 12% removes a big chunk of credit from the lending system with a snap of the fingers.”
I was thinking of another example and just slapped in the numbers without changing the rest of the example.
A good example of the opposite, where the excess liquidity came from is in the increased leverage allowed to the i-banks, by allowing them to go from leverage of 12 or 15:1 to 40:1 — there’s a huge increase in the amount of money seeking a borrower as a result. Same sort of idea, only in reverse. Think of reserve requirements as the inverse of leverage.
Well, even going back to the level of the 1930’s concerns me. You’re right — with enough Harvard MBA’s and Ivy League PhD’s — any amount of damage is completely within the realm of unintended consequences.
I fear that the country would effectively partition in two - the self-sufficient, un-leveraged people who know how to manage money and those who become completely dependent upon the “next bailout” - because they have no skills, no motivation, no worth ethic, an over-developed sense of entitlement and self-esteem that they’re in the right.
It is the formula for some really bitter, scorched-earth policy battles.
I believe that we will see this happen first when some states (CA and NY in particular) approach the Congress for a bailout.
As I understand the official definition, we're still not IN a recession. A recession is two quarters of negative growth in a row.
Since we officially had 2% growth in the third quarter, we can't really enter a recession till April of 2009.
This may, of course, say more about the inadequacy of the definition of recession than its reality.
There will be no ‘split’ if you think
‘red’ states will be immune from this depression/recession, think again. We are all in this together. I don’t care how frugal you are if you lose your job and can’t get another, you are toast. Especially when desperate states will raise taxes to get money...even if you own your home outright, you won’t be able to pay the taxes.
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.