Posted on 10/18/2008 1:45:18 PM PDT by vietvet67
I do, bought and paid for over about 30 yrs.
If the value of the real asset goes down the so does the value of the loan against it - I'm assuming you've heard of the concept of foreclosures and margin calls. Secondly, not all debts are securitized against real assets. Those debts are at best secured by the future earnings of the debtor. If the debtor has a sudden change in his earning potential the value of that debt for the creditor goes down since there's nothing he can claim against to recover his capital.
Who do you imagine owns every office building and shopping mall and small business you drive past every day, if not Americans?
Plenty of foreigners own assets and businesses in the United States. Secondly, most of those buildings and shopping malls are heavily leveraged, so I'd say the banking system owns most of them.
What can you possibly imagine debt is, that you could think any of it would be worth zero or less depending on how it is financed?
It can be worth zero if the value of the collateral goes to zero or the debt is unsecured to begin with.
“Will it prevent a real economy recession? No, that was baked in a year ago”
Jason - how severe do think the recession will be? How long do you think it will take us to get out of it?
And you foresee that the construction of new shopping malls and offices will continue to offset losses in property values in the current climate and maintain that figure of $21 trillion?
Now that the crap has really hit the fan and credit is frozen and house prices are caving substantially, I repeat my belief that the figure of $21 trillion for real estate values will decline.
If the debts are backed by assets and future income insufficient to repay them, the only way for the lenders not to lose money is for the money is supplied by, or taken from, someone else. Whatever damage would be done by forcing lenders to write down their debts is damage that is guaranteed to ultimately be observed , because in reality it has already happened. The only effect of pumping in money to pretend things are solvent is to encourage future investors/lenders to pay off the earlier ones, thus losing more themselves than the earlier lenders would have done.
If an implosion of the credit bubble would completely destroy the economy, then it's already dead and just doesn't know it. Trying to delay the implosion will simply make it bigger when it occurs.
Note that had F&F not opened the floodgates to wacky mortgages, the housing bubble would have deflated a couple years ago, exposing the fact that someone with a $15,000/year job cannot afford a $100,000 home. Had that been allowed to happen, nobody would have even thought of bailing them out. Rather than let that be revealed, F&F et al. opened the floodgates to all sorts of nonsense, thus allowing the problem to get so big that they could hold the government hostage.
BTW, one thing I wish bubble investors would realize: investing more money in an asset class than it can readily absorb will generate severe market friction. Investors need to realize that rising prices are a red flag which means stop investing. They should not be regarded as red flag to a bull: charge ahead.
Imagine that an investor or speculator decided that since Christmas decorations are cheaper in January than in Septmber, it would make sense to buy surplus decorations at the start of the year, warehouse them for eight or nine months, and resell them. Actually, if the right number of investors and speculators do that, it would help make the markets more efficient, and all the investors involved could profit.
Now imagine that lots and lots of investors/speculators see this Christmas decoration investment as a great idea, so they collectively invest $500B buying decorations. Such a demand would cause prices to skyrocket, and some companies would have to set up new production lines to meet the demand. Nonetheless, if investors really wanted to spend $500B buying Christmas decorations, they could do so.
Unfortunately, no amount of spending on decorations will change the fact that the demand for them is finite. Regardless of how much investors spend on decorations, people who would actually use them aren't going to spend that much. The rising prices as investors dumped money into the market was not a sign that the decorations were a good investment. They were a sign that they were a bad investment that was getting worse.
The amount of money lenders and investors dumped into the housing market exceeded the total demand for housing. How could the market not implode?
Our overall earning power isn't going down, it goes up 3% a year long term average and 6-7% per year nominal. Recessions are brief pauses in that, only. Every decade, the income and the assets of the American people grow by trillions, and their debts grow by less than half the addition to their assets.
Why are conservatives and capitalists so wedded to the idea that the richest nation in history is broke? Why commie koolaid have you idiots been drinking?
All of the above are going to add approximately 3.5% to GDP over the next several quarter. Unemployment remains low enough that personal income will be flat at worst. There will be a hit from a higher savings rate and a lower willingness to spend, due to wealth effects, but those may be no larger than the trade and energy price improvements above, over the next six months of so. It will take time for credit to flow again, but it will, as soon as people see some stability in asset values to lend against (notably, corporate bonds are bottoming at very attractive spreads).
I expect us to have a modest recession and nothing like the great depression rerun the media is breathless rooting for. Obama might make it worse by raising taxes at the wrong time, that is a wildcard that could extend it to a year and drive it a percent or three of GDP deeper, overall. But none of it is anything we won't have grown right back out of in the course of the next presidential term, even if it is him. Asset values will reflect that, making much of the current quotational loss temporary.
The great depression is as likely to show up as the great pumpkin. All the extravagant doom mongering is a big lie, as big as the claim that we were losing in Iraq, and coming from the same people. Those peddling it do not believe in capitalism in the first place, and have been predicting its speedy demise religiously for 160 years, and counting. They are hopeless and hopelessly wrong.
Both of them? The average US wage per job is 2.5 to 3 times that figure, and most households have 2 earners (other than single people, with few to support).
thank you for the overview.
At first I was wrong about Iraq, but switched in late 2002. I didn't know much about capitalism until I read Ayn Rand about 22 years ago. I have never doubted it for a moment since. Perhaps I'm wrong about the credit bubble and it will just continue to increase 3 or 4 dollars or more per dollar of GDP all the way to infinity. I think we'll find out if that's true in the next few years.
Yeah, but I suspect a significant number of houses got sold to people with little real income. Why would anyone who has a real income want a NINJA loan? A loan which requires that borrowers have means to pay it back will almost certainly have a lower interest rate. Would NINJA loans have been offered if there wasn't a desperate desire to do something with houses and investment capital?
great post - thank you!
Somehow I'm doubtful on that. Unless you can show me that most households start off with more than 50% equity in their homes.
Why are conservatives and capitalists so wedded to the idea that the richest nation in history is broke? Why commie koolaid have you idiots been drinking?
Because we can read trend lines and there's a difference between being "broke" and being unable to service your debt which is becoming an increasing problem for government.
debt myths and historical reality
And the reason why leverage levels wind up about where they do is also no secret. People finance new house purchases, yes, but they also pay off their mortgages. At any given moment, some are recent purchasers, most are midstream on their payments, and same are older owners who have fully paid off their loans. Traders up tend to start with some equity from their previous house, used to fund downpayments on their next, often larger one (moving up as they age and accumulate capital).
That is why the relationship between mortgages outstanding and real estate assets tend to run about 50%. If can be lower than that when prices have recently fallen, and it tends to be higher than that if they recently rose quickly. But overall, for every recent buyer with little equity there is another who bought literally decades ago with tons of it, while most are somewhere in between.
Similarly the consumer credit line item is largely composed of auto loans and the like financing about half of the major consumer durables, plus a month or so of disposal income financed on credit cards. With some later in loan cycles paid off, balancing those who use more credit than is good for them, but that is the average. People who routinely misused credit soon do not have any.
Meanwhile, businesses used only low levels of leverage in the distant past, but extended to roughly 2:1 leverage since the inflationary 1970s, as a form of capital heavily favored by the combined tax code and ongoing inflation, even at moderate levels. Smaller businesses first got serious access to credit around the same time and now parallel larger corporations in credit use terms. They tend to use more bank loans or secured mortgages and less unsecured corporate paper or bond market funding, that is all.
Households may not feel as flush as the line items say, because one of the significant asset categories in pension funds, and another insurance funds, that are in their favor but people don't see until retirement. A lot of the privately owned mutual funds are in the same category, being stored in IRAs and 401ks and the like. But plenty of it isn't - it is just relatively concentrated as to holders. But it is there. All of the stocks are owned by one of these categories or another, of course.
Nor is the income supporting all of that any great mystery. The corporate sector earns well over $1 trillion a year net of taxes and interest payments, and that stream grows overall with the economy. Corporate profits aren't even the largest category of capital income, however. Rents are larger by a factor of 3 to 2. Much of it for commercial property, and earned indirectly by banks and their depositers, financing it with mortgages, and by pension funds, as well as private real estate owners.
Government receipts at all levels is running at a $4 trillion annual rate right now. That is 50% higher than a decade ago, even with a current downturn in receipts. US government debt service is $450 billion this year. I don't have an exact figure for muni interest paid, but the gross is on the order of $75 billion, certainly under $100 billion, and the net may be lower, $50 billion or so. (Because some state projects are "pre-refunded" by buying treasuries, states earn interest on their cash holdings, etc).
A total debt service of $525 billion comes to 3.67% of GDP. Receipts on average rise that much in about 4 years (they rise at a rate higher than that, but GDP is more than receipts). Saying we can't afford that level of debt service is like saying a family with a secure $100,000 income and regular raises every year cannot afford $300 a month.
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