It Wasn't a Mortgage Recession After All: So Why Don't We Feel Better

AOL ^ | Feb 26th 2010 | Robert X Cringely

[woofie]

The Great Recession wasn't the result of subprime mortgage madness, according to a new report from the National Bureau of Economic Research. It was just a plain old bank panic. Yeah, but weren't bank panics supposed to be a thing of the past, thanks to the creation of the Federal Deposit Insurance Corporation in 1934?

That's the problem.

The report, by Yale economics professor Gary Gorton, says subprime mortgage securitization was a mess -- a house of cards probably doomed to fall -- but subprime by itself simply wasn't big enough to put the entire financial system at risk. That required a failure of the Renew Sale and Repurchase (REPO) market for collateralized securities that over the last 30 years had come to backstop global finance.

The problem here, of course is that hardly anyone has even heard of REPO, which manages to be an unregulated, uninsured $20 trillion business that is absolutely essential to keeping money flowing in the world. Subprime is only $1.2 trillion -- not big enough by itself to wag this dog.

According to Gorton, the entire basis of global banking changed in the 1980s, thanks to money market funds and junk bonds, which took all the profit out of being a traditional bank. So banks began securitizing loans to regain those lost profits.

The REPO market of interbank loans had always existed but it grew dramatically in the 1990s to support securitization. But since there was no deposit insurance for institutional loans measured in hundreds of millions of dollars, counterparties demanded collateral to back these overnight REPO loans that generally replaced demand deposits in the banking system.

While the subprime mortgage crisis began in January, 2007, the ensuing bank panic didn't happen until August of that year when lenders began making collateral calls .....

[Tarpon]

So why is the federal government buying all that sub-prime crayola? Trying to hide the Democrats famous CRA 1977 are we?

How many ways to lie, start with snow causes layoffs, everything else is easy.

[Republic]

Too many lies.

Wonder if folks here are seeing what we are in this household...lots of people out of sorts, down and a general feeling of depression. It sure seems that something is out of whack, for real.

[Jim Noble]

So Why Don't We Feel Better?

Because the money's no good, and in a year, everybody will know it.

[bigbob]

I think we already knew that it was the creation of “toxic paper” by turning a pile of mortgages (some of which were subprime and loans to people in Rio Linda who had no ability to pay back) into a security that was what finally pushed an unsustainable economic situation into a panic.

[Southack]

The mortgage collapse was a symptom, not a cause.

The *cause* was overproduction. Too many homes were built (19 million are vacant today), too many shopping malls were built (see: deadmalls.com), too many office towers were erected (Dubai!), commercial vacancy rates are already at 20%...unsustainable.

Over-production causes deflationary cycles, as does over-capacity. Factories are running at 40% of their capacity today; that means that they can *double* production overnight without hiring a single new employee.

But wait, there’s more!

Besides overproduction, we have a demographic crisis. 77 Million Baby Boomers began hitting retirement age starting in 2007 (and will continue to so do through 2025).

Retirees want out of their McMansions and into little retirement condos. Thus, like the Panic of 1893 with Victorian homes, we are once again witnessing people walking away from large homes.

Jingle Mail. House keys are being mailed back to lenders...which collapses mortgages (and the secondary market for such paper).

[Carley]

Perhaps Reid’s comments about Indy Mac and assorted other financial entities was what caused the run on the banks.

[woofie]

I am a baby boomer (1950)..I was warned that a meltdown in the stock market would hit when all Boomers tried to get of their holdings ...I did not think it would be here yet.(WRONG).. but maybe the boomer thing is affecting every damn market (housing etc) there is

[Painesright]

To see this crisis as a subprime crisis only is not to see the forest for the trees. But it’s been repeated so many times now (mostly by politicians who needed a scapegoat to point to in the beginning) that noone will ever be willing to call it anything else.

I have been saying for a long time that subprime was simply the first link to break in a horrendously over-stretched chain of ALL KINDS of debt... subprime, Alt-A, prime, mortgage, car, credit card, commercial buildings, corporate debt, municipal debt, federal debt and on and on. All of that debt was further magnfied over and over and over by credit default swaps and derivatives.

There were about 1 Trillion in Alt-A negative amortization mortgages done. It is estimated that 70% or more of those will default this year and next year. (search youtube for “The Mortgage Meltdown CBS”)

Will we then switch to calling this the “Alt-A” crisis?... what about all of the Interest Only loans that are going to default? Or the “prime” loans or the FHA loans or the VA loans that are going to default? How about when cities default on their municipal debts? Will we just keep renaming the crisis? We can keep it simple by calling it what it is in general... a DEBT crisis.

There was much too much debt of all types, which caused the biggest asset bubble in history... not just a bubble in houses... a bubble in everything... too many cars produced, too many people hired to produce the excess inventory (yes, a jobs bubble!), stock prices that were too high, 401K accounts that were bloated by overpriced stocks, etc, etc.

Debt, debt and more debt. That is what caused this crisis.

We didn’t “pay it forward” as the saying goes. We “charged it forward”... and now we have to pay it back.

[FrankR]

"(some of which were subprime and loans to people in Rio Linda who had no ability to pay back) "

It goes back to - dare I say it? - community organizers.

For years these organizers, aka "agitators" have been making their rounds and convincing their dimwitted crowds that "the man" has given them the short end of the stick, and they are due free housing, free salary, no taxes, and unbounded rights to do exactly as they please. All this based on a seemingly never-ending debt to events that affected their ancestors several generations ago.

These folks are obviously very easily led and influenced by carpetbagging individuals who's very existence is based on making a living by inciting people to demand something they are not owed.

Turning down a loan for a black person making $30k per year on a $500,000 home, is NOT racism...it's good business. They would also turn down a white person on the same circumstance. Except, the agitators have convinced people that the white guy who does live in a big house and can afford it, got some kind of special deal because he's white.

Meanwhile, every white person drawing breath right now know that all preferences are based on race, and all preferences for the past 30 years have been slanted towards minorities. There is no denying that fact.

The communists found quite a tool in the civil rights bill; their goal being social upheaval and taking down America, they found that preying on the past misfortunes and mistreatments of minorities was an method by which they could take us down, so long as they could keep the whites wallowing in race guilt. It was a form of extortion that continues until this very day.

The sermons were all based on "entitlement", albeit contrived and exagerated. Whites have to pay to avoid being labled a racist...which has been elevated to the worst possible thing a human being can be...unless you're black, then it's ok. Jesse Jackson said that "black people can't be racists".

So here we are, in a big mess, caused by parasites bleeding the host dry...and are now upset because it's dry. Greece is going through the same thing...entitlements, union perks, until all the money is gone, and now the spoiled brats who benefited from it all, are rioting BECAUSE the money is gone.

The entitlement wonks are insatiable, there will never be enough for them, no matter what you give, or what you promise...they want more. When they get everything the government gives them, they'll just start taking it away from you and I. Home invasions are already on the rise as our castles are being ATM's for gangsta freaks needing a "hit".

At some point, the big steel door will slam shut, with the word "NO" painted in 20 foot letters...then, the wars begin.

Are you ready? Well, these

[Freedom_Is_Not_Free]

Great post.

Yes, more and more debt was the cause. How is Obama fixing the depression? With ever soaring debt. Literally pouring gasoline on the fire. It is like dousing a fire with gasoline so there is no current fire, but now the carpet is soaked with gasoline. The next spark burns the house down.

[Freedom_Is_Not_Free]

We will never “pay it back”. We might default on our debt or more likely, we will inflate heavily out of them.

That is my take. I would appreciate your take on this.

[Painesright]

I don’t meant to sound like a simpleton and just say “it’s a mess! I have no idea how we are going to get out of it”, but honestly, that is almost what I’m tempted to say.

We hear a lot about how much the federal gov’t owes, but I don’t think we have come to grips yet with how much consumers owe and how bad the shortfall is going to be for states and cities due to tanking tax revenues and skyrocketing social service demands.

Americans now owe almost 14 TRILLION dollars in residential mortgage and other consumer related debt. That is up from about 3.4 Trillion in 1990. (Fun fact that I like to throw around... One trillion, ONE, is $1 per second for 32,000 years... and that’s without interest!)

Cities and states are flat broke. CA is Greece times 100. Even Texas is going to have a huge budget shortfall soon!

There are two big differences that I can see between consumer debt and the government’s debt. The gov’t can tax and inflate their way out, we cannot.

Consumers need every dollar possible to pay down their debt, replenish their savings and prepare for retirement. The government needs every consumer dollar possible (in taxes) and they need to inflate the dollar to pay down their debt.

The hard truth is that we have to get back to “real” work. Make stuff that the world wants to buy. Produce our own energy (oil, gas, coal, nuclear) But, we have killed our manufacturing base and millions of “service sector” jobs are never coming back because they were fueled with credit-on-steroids. We have one of the highest tax rates and complicated tax systems in the world. And we have an EPA-carbon-tax-regulation-lovin-business-hating president and congress.

We need to cut the tax rate in half, cut spending in half and cut regulations in half to be competitive again.

I just don’t see the politicians and special interests (on both sides) getting out of the way and letting that happen.

But like you said, we will likely never have a way of paying it all back anyway... the rest of the world does not have enough money to buy enough stuff from us to allow us to pay it all back.

Oh, and we haven’t even talked about unfunded entitlements SSI/Medicade/Medicare yet! Those numbers are inconceivable.

Maybe it’s as simple as “game over”.

Your thoughts?

[Freedom_Is_Not_Free]

I like the way you think and I think you are on the right track. The possibility that we are doomed and we “don’t get out” is not out of the question.

Of course this means one of two things. We default and reset the debt clocks to zero and all debtors lose. Unpallatable.

I think the powers that be are actively seeking option II, inflate hard. Double digit inflation for years.

You said that unlike the government, consumers can not inflate their debt away. But I am given to believe that the government CAN inflate away consumer debt. If they can devalue the currency without destroying it, and force double digit inflation, then over time, salaries will have to rise. If they can quadruple salaries over a decade or two, it effectively shrinks all debt to 25 cents on the dollar and that $14 trillion consumer debt now acks like only $3.5 trillion.

I have no financial/economic training or formal study, so I a may just have a hole in my head, but I think this is the Fed’s strategy and it plays into Obama’s massive spending. I think they are going to try to tank the US dollar without collapsing it and risking hyperinflation.

But they are arrogant and self-inflated and they have no clue how to do this without a strong possiblity that they WILL trigger hyperinflation.

So I think the strategy is to induce two decades of double-digit inflation while riding the fine line of trying to avoid outright currency collapse.

Thanks for your insight. I think you have a realistic handle on things.

[Painesright]

I like how you think too and I think we are both on the right track... I, like you, have no formal training, but sometimes the most simple answer is the best one.

Personally, I have no confidence whatsoever that the “powers that be” can pull off inflating their way out of this crisis without crashing the dollar. They caused this problem, why would we think they can fix it?

Many people like Peter Schiff, Marc Faber and Jim Rogers think they have already crashed the dollar but it will take a while for the death to become apparent... it won’t be obvious until they run out of ways to paper over the damage (pardon the pun) by printing money and continuing the charade for just a while longer...

Hope they are wrong, but I’m afraid they are right. I guess we’ll eventually find out.

Take care...