Published on Friday, September 28, 2007 by CommonDreams.org
by Mark Klempner, a historian, author and social commentator.
LINK
I consider the Internet to be one of the world's great wonders. And also America's last hope for a free press.
When I was growing up in the 1970s, there were many people with a lot of things to say, but they generally had no platform. That's why we needed figures like Bob Dylan to be “the voice of a generation.”
The present generation has YouTube, whose motto-irresistible to young people-is “Broadcast Yourself.” So now, for example, a pert 18-year-old known as “AngryLittleGirl” can challenge her peers regarding their lack of critical thinking, especially when it comes to religion, by uploading a video op-ed. As of this moment, her piece has been viewed by more than two million people.
YouTube is but one manifestation of a rapidly expanding “social media” that performs the vital function of promoting honest discussion and analysis at a time when spin, trivia, and advertising dominate the mass market profit-driven mainstream media –or MSM as it is often called on the net. Social media also encompasses web-based interactive communication tools such as blogs, message boards, forums, pod casts, online communities, and wikis.
I have seen bloggers expose mistakes and biases in the MSM within hours or even minutes of an article's release. For instance, when New York Times science writer William Broad ran a piece deflating Al Gore's claims about global warming, numerous bloggers pounced on it for being sloppy and skewed. Among them were Robert Dietz and Julie Millican at Media Matters, who documented how Broad had misrepresented the backgrounds of most of the supposedly “rank-and-file” experts quoted.
I don't know what possessed Broad to so bend his reporting that he would lose credibility across a wide swath of readers (something he has in common with journalist Judith Miller, with whom he co-authored a book), but I do know that the MSM has become consolidated to the point that just a few transnational conglomerates and capital management companies control network TV, commercial radio, and most of our newspapers.
As for the repercussions of this ominous development, John Carroll, former editor of the Los Angeles Times, states them quite clearly: “Gone is the notion that a newspaper should lead, that it has an obligation to the community, that it is beholden to the public.” The current owners, he explains, care only about money, and “are sometimes genuinely perplexed to find people in their midst who do not feel beholden, first and foremost, to the shareholder.”
Bloggers are in an entirely different position: They tend to be mavericks who work for free, and operate far from the sources of power. Feeling no need to ingratiate themselves with the movers and shakers of industry and government, they simply tell it like it is from where they sit as concerned, informed citizens with diverse areas of expertise. Though they don't often have professional training as journalists, many of them exceed professional journalistic standards, because they answer to their consciences alone rather than to corporate honchos and fund managers. We need to hear from such people, and the fact that there are more blogs out there worth reading than anyone has time to read is a hopeful sign.
Of course, the blogosphere is also filled with nonsense, and worse –as might be expected in any open space that lacks gatekeepers. The all-too-human reality of the web is that the majority of its traffic is directed to sex sites. What's more, hate groups of all kinds find it a perfect forum to purvey their sick ideas. Even the benign Wikipedia can be used to disseminate false information with an effortlessness that has earned it the gratitude of propagandists everywhere.
How remarkable, then, that out of the cyberslime the lotus of a truly free press has been able to grow. Citizens seeking to avail themselves of the valuable commentary to be found on the web, as well as the fact checking services of legions of bloggers, can learn to easily bypass the detritus and go directly to those sites that offer valuable content.
Where, though, does one turn for in-depth investigative reporting? Though projects such as The Real News Network are attempting to create an alternative, the MSM is still pretty much the only show in town. Bloggers are generally not trained or equipped to do such reporting, and anyway, it´s a full time job that usually requires travel and a support staff, as well as knowledge and contacts developed over many years.
Newspapers carry out at least 80% of primary reporting. And yet the newspapers have repeatedly failed us, sometimes with tragic consequences, such as during the buildup to war in Iraq. In his documentary Buying the War, Bill Moyers (an exception to the rule that there are no outstanding journalists working in television) exposes how reporters at newspapers such as the Washington Post consistently deferred to the wishes of the Bush administration or were tricked, pressured or seduced into doing so. And behind Bush are the huge corporations that helped to put him into power, including those that own the MSM. What's a citizen to do?
Again I say: go to the Internet. Though it's worthwhile to read the print publications that pursue quality reporting-and some of the smaller ones really need our support-subscribing is not essential: nearly all of the important articles from these publications may be found on the web, and bloggers often link to them. And besides, there is also some fine web-based reporting, such as (to pick an example that is apropos to this discussion) the Salon piece that dissected and disposed of the myth, perpetuated by the MSM in tandem with then press secretary Ari Fleischer, that the exiting Clinton staff had removed the W's from their keyboards, and in other ways vandalized government property.
As our titanic democracy is sinking and the band of trivia and denial plays on, each Internet connection can function as an intellectual life preserver. The net has also proved invaluable as a way for concerned citizens to offer support to each other, and to act together for political and social change.
From Salon in 1995, to Common Dreams in 1997, AlterNet in 1998, truthout in 2001, The Raw Story in 2004, and The Huffington Post in 2005, the news coverage on the Internet has matured to the point where we don't really need to deal directly with the MSM anymore. As my wife says, “No MSG in my takeout; no MSM in my living room.” One household at a time, we'll escape the grasp of the Rupert Murdochs of this world, at least when they meddle with our freedom of the press.
Mark Klempner is a historian and social commentator. His book The Heart Has Reasons: Holocaust Rescuers and Their Stories of Courage was published last year by the Pilgrim Press. He would like to thank Paul Glover and Richard Silverstein for commenting on an early version of this piece.
30 September 2007
Our Paradigm – History’s Greatest Credit Bubble -Tice
· Unconstrained Credit systems are inherently unstable.
· Markets are inherently susceptible to recurring bouts of instability and illiquidity.
· Wall Street financial innovation and expansion created what evolved into a precarious 20-year Credit cycle, replete with self-reinforcing liquidity abundance and speculative excess.
· “Wall Street Alchemy” – the transformation of risky loans into enticing securities/instruments - has played a momentous role in fostering myriad Bubbles.
· Unrelenting Credit and speculative excesses have masked a deeply maladjusted U.S. “services” Bubble Economy.
· The prolonged U.S. Credit Bubble and resulting interminable Current Account Deficits have cultivated myriad global Bubbles.
· Recessions are an integral aspect of Capitalistic development – and busts are proportional to the preceding booms.
· Today, speculative-based liquidity commands the financial markets and real economy, creating unparalleled fragility.
· Late-cycle “blow-off” excesses are the most perilous because of their deleterious affects upon the underlying structure of the financial system and economy.
Question: Can you provide a brief explanation of “Bubble Economies,” “Credit Bubbles” and some of your theory behind these concepts?
Bubble Economies are highly complex creatures. Clearly, they are dictated by financial excess - most notably a sustained inflation in the quantity of Credit. Substantial Bubble Economies develop over an extended period of time. The momentous variety are often nurtured by the interplay of extraordinary technological and financial innovation, and are almost always perceived at the time as so-called “miracle economies.” Both Credit and speculative excess play prominent roles, especially late in the cycle. Central bankers are likely to be caught confused and accommodating.
It is the nature of Credit that excess begets only greater excess. Major Bubbles are associated with exceptional yet generally unrecognized Credit system phenomenon (“Monetary Disorder”). It is imperative to appreciate that Bubble Economies are as seductive as they are dangerous. Credit excess causes different strains of inflation – rising consumer, commodity, and asset prices to note the most obvious. Asset inflation is the most dangerous, as there is no constituency to stand up and demand the Fed rein it in. Furthermore, the longer asset inflation and Bubbles run unchecked the greater their propensity to go to wild, destabilizing extremes – likely hamstringing policymakers in the process.
Bubble Economies become progressively distorted by inflations in incomes, corporate earnings, government receipts and spending, and Current Account Deficits. Inflationary spending, investment, and speculative financial flow distortions play prominent roles in progressive economic maladjustment. By the late stage of the Credit boom, inflation effects tend to be highly divergent and inequitable.
The greatest systemic danger arises when speculative-based liquidity comes to dominate financial flows and economic development, creating a highly Credit-dependent and unstable system. End of cycle market price distortions tend to create the greatest impairment to financial and economic systems. Bubbles are inevitably sustained only by ever-increasing Credit and speculative excess. Any bursting Bubble must be supplanted by a more pronounced one (or series of Bubbles). As we are witnessing these days, the great danger associated with central banks accommodating Credit and asset Bubbles is that a point of Acute Fragility will be reached – with policymaking gravitating toward prescriptions to sustain financial excess.
Question: You have discussed in the past a concept that you refer to as “The alchemy of Wall Street finance.” Can you describe it for us and relate it to our current environment?
There are two related concepts that are fundamental to our analytical framework – how we view Credit-induced booms and their inevitable busts. These are the “Alchemy of Wall Street Finance” and the “Moneyness of Credit.”
First, the “Alchemy of Wall Street Finance:” This is basically the process of transforming risky loans – loans that become increasingly risky throughout the life of the credit boom - into debt instruments that are appealing to the marketplace. This is very important, because as long as Credit instruments enjoy robust market demand they can be created in abundance – in an extreme case fueling a runaway Credit Bubble with dire consequences for the financial system and real economy.
Our second concept, “Moneyness of Credit,” also plays a central role in boom dynamics. If you think about contemporary “money”, it’s really not about the government printing press or Federal Reserve issuance. Instead, “money” is today largely the domain of private sector Credit and the Marketplace’s Perceptions of Safety and Liquidity. “Moneyness” always plays a prominent role in Credit booms, due to the unbounded capacity to inflate Credit instruments that are perceived as safe and liquid.
Think of it this way, a boom financed by junk bonds likely isn’t going to progress too far – market restraint will be imposed by limitations in demand for these risky Credits. On the other hand, a boom fueled by virtually endless quantities of highly-rated agency debt, ABS, MBS, commercial paper, repos and the like – instruments the market perceives as “money”-like no matter how many are issued – has the very real potential to get out of hand.
And this gets to the heart of the issue – the dangerous state of this Wall Street Alchemy. Over the life of the boom there has been a growing disconnect between the market’s perception of “moneyness” and the actual mounting risk associated with the underlying Credit instruments. Especially because of the heavy use of derivatives, sophisticated structures, and leveraging, along with Credit insurance and various guarantees throughout the intermediation process – the entire risk market became highly distorted and dysfunctional.
And we would argue that the market’s perception of “moneyness” has recently changed – and we believe this to be a momentous development. The market now has serious trust issues related to ratings, pricing, liquidity, leveraging, counter-party risk, Credit insurance, and sophisticated Wall Street structures in general. In short, Wall Street’s capacity to create contemporary “money” has been dramatically constrained.
Of late, the rapid growth of central bank and banking system balance sheets has taken up the slack. But this is only a temporary stop-gap. The unrecognized dilemma today is that to sustain our Bubble economy will require continuous huge quantities of Credit creation – and these loans are by nature high risk. Wall Street risk intermediation is impaired – the market today seeks risk avoidance and de-leveraging – and there is little alternative than the banking system turning to risky lender of last resort.
Question: So where are we today, and what are the ramifications for the current economy?
Putting it all together, a confluence of factors has created what we expect to be an ongoing highly unstable Credit backdrop. In the nomenclature of economist Hyman Minsky – we have today “Acute Financial Fragility” – as opposed to previous backdrops where the U.S. system, in particular, was positioned to weather periods of turmoil relatively well. Despite dogged global central bank interventions, we still fear the potential for the Credit market to seize up – with devastating economic consequences. And the combination of unusually frail financial and economic structures leaves us very fearful of a dollar crisis of confidence.
At the minimum, the bursting of the Mortgage Finance Bubble has instigated a serious tightening of mortgage Credit Availability, leading to escalating foreclosures, Credit losses, pressures on home prices, and ongoing marketplace illiquidity for MBS and mortgage-related debt instruments. A classic real estate bust will feed on itself, ensuring further havoc throughout mortgage finance and imperiling the over-borrowed consumer sector.
Question: There’s a lot of talk these days about the GSEs – their roles in market excess, previous financial crises, and the potential for GSE liquidity to come to the market’s rescue once again. What’s your view on these matters?
There is a key facet of GSE analysis that does not garner the attention it deserves – and it relates, importantly, to the stark contrast between the inherent stability of GSE obligations and the underlying instability of much of today’s debt market structures. Let me begin by sharing data I believe go far in illuminating recent acute financial fragility. Returning to the four-year period 1998 through ‘01, direct GSE borrowings expanded $1.2 TN versus a $788bn increase in outstanding asset-backed securities (ABS). Compare this to the three-years 2004 through ‘06, when GSE debt grew only $57bn while ABS ballooned almost $2.0 TN.
In developing his hypotheses of inherent financial instability, Hyman Minsky coined the terminology “Ponzi Finance.” It is crucial to appreciate that GSE-related debt (agency debt and MBS) behaves atypically during crisis: I refer to the GSEs as the “Anti-Ponzi Finance Units” – in that finance flows aggressively to this (quasi-government) asset class during periods of market tumult. The GSEs enjoyed basically unlimited capacity to expand liabilities during previous crises – 1994, 1998, 1999, 2000, 2001/02 – and their operations played a momentous role in repeatedly backstopping the Credit boom.
Today – the GSEs are constrained and their balance sheets will not play their typical prominent role in accommodating speculator deleveraging and system reliquefication. Furthermore, by far the greatest excesses over the past few years were in Wall Street “private-label” ABS/MBS – subprime and, more importantly, Alt-A, jumbo, interest-only and other mortgages that encouraged borrowers to reach for more home than they could afford.
So, from a GSE standpoint, these agencies played an instrumental role in fostering the Mortgage Finance Bubble. When, in 2004, the scandal-plagued GSEs faltered, Wall Street was keen to snatch control. Consequently, trillions of unstable non-GSE debt instruments now permeate the system. At the same time, the GSEs are today incapable of orchestrating their typical market liquidity operations. This helps explain the difference between previous relative stability during crises versus recent Acute Fragility – especially in Wall Street ABS, sophisticated leveraged strategies, and derivatives more generally.
And we don’t expect this dynamic to be easily reversed or even meaningfully mitigated. Central bank interventions will have minimal intermediate and long-term impact on the bursting Mortgage Finance Bubble. Liquidity today flows in abundance to gold, precious metals, crude oil, commodities and virtually any non-dollar asset market – where robust inflationary biases prevail – content to avoid Wall Street mortgage-related securities and exposures. The situation will only worsen as home price declines gather momentum and Credit losses escalate.
Question: So, it is your contention that the current crisis marks a major inflection point for the Credit system?
We strongly believe so. Going forward, markets will be decidedly more cautious when it comes to ratings and liquidity. “AAA” was perceived as “always liquid” – even in the midst of financial crisis. In reality, GSE-related debt and their ballooning balance sheets played a prominent role in fostering this fateful market misperception. Yet, over the past few years, the most egregious Credit excesses were in speculative leveraging of highly-rated non-GSE securitizations. This scheme is now over.
The bursting of the Mortgage Finance Bubble has ushered in a major tightening of mortgage Credit, which will lead to escalating foreclosures, Credit losses, home pricing pressures, and ongoing marketplace illiquidity for MBS and mortgage-related debt instruments. We see the so-called “subprime crisis” transforming over time to an expansive dislocation in “Alt-A”, jumbo and "exotic" mortgages.
There are now literally trillions - and growing - of suspect debt instruments and many multiples more in problematic derivative instruments. We suspect that the proliferation of sophisticated leveraged strategies created considerable demand for high-yielding mortgage products, and now these vehicles are trapped with losses and illiquidity. Worse yet, Credit insurance and guarantees in the tens of trillions have been written and, as the downside of the Credit cycle gains momentum, we expect this exposure to become a major systemic issue. In short, we see Credit “insurance” as a bull market phenomenon that will not stand the test of the impending Credit and economic downturns. In too many cases, Credit guarantees, “insurance,” and myriad other exposures have been “written” by thinly-capitalized speculators and financial operators. They will have little wherewithal in the event of a serious Credit event. This is a major evolving issue. We fear the entire Wall Street risk intermediation mechanism is at considerable risk.
Question: Can you wrap thing up with some summary comments?
To summarize, we believe the current fragile boom – one characterized by unprecedented imbalances and maladjustments – can only be sustained by ongoing massive Credit creation. In an increasingly risk-averse world, this poses a colossal risk intermediation challenge. Thus far, the confluence of a highly inflationary global backdrop, extraordinary central bank interventions, and a major expansion of U.S. banking system Credit has sufficed. We, however, view Fed and the U.S. banking system capabilities as constrained and aggressive actions feasible only over the short-term. Importantly, an impaired Wall Street risk intermediation mechanism – the main source of finance behind the past few years of “blow-off” excess - will be hard-pressed to meet challenges and new realities.
Likely, liquidity issues and faltering asset markets will instigate problematic de-leveraging upon highly over-leveraged Credit and economic systems. We expect significant unfolding tumult in the securitization, derivatives, and risk “insurance” marketplaces. We view ballooning Credit insurance and derivatives markets as a bull market phenomenon that won’t withstand the test of the downside of the Credit Cycle. We believe the stock market has of late benefited from a combination of complacency, misperceptions with respect to Fed capabilities, and its newfound status, by default, as favored risk asset class. We see US equities, in particular, highly susceptible to unfolding detrimental financial and economic forces. We expect the economy to soon succumb to recession. California and other inflated real estate Bubble markets are now poised to suffer severe price declines – residential as well as commercial. And we expect contemporary “Wall Street Finance” to face a crisis of confidence – to suffer on all fronts – liquidity, Credit losses and regulatory. Our faltering currency is, as well, a major issue.
· Markets are inherently susceptible to recurring bouts of instability and illiquidity.
· Wall Street financial innovation and expansion created what evolved into a precarious 20-year Credit cycle, replete with self-reinforcing liquidity abundance and speculative excess.
· “Wall Street Alchemy” – the transformation of risky loans into enticing securities/instruments - has played a momentous role in fostering myriad Bubbles.
· Unrelenting Credit and speculative excesses have masked a deeply maladjusted U.S. “services” Bubble Economy.
· The prolonged U.S. Credit Bubble and resulting interminable Current Account Deficits have cultivated myriad global Bubbles.
· Recessions are an integral aspect of Capitalistic development – and busts are proportional to the preceding booms.
· Today, speculative-based liquidity commands the financial markets and real economy, creating unparalleled fragility.
· Late-cycle “blow-off” excesses are the most perilous because of their deleterious affects upon the underlying structure of the financial system and economy.
Question: Can you provide a brief explanation of “Bubble Economies,” “Credit Bubbles” and some of your theory behind these concepts?
Bubble Economies are highly complex creatures. Clearly, they are dictated by financial excess - most notably a sustained inflation in the quantity of Credit. Substantial Bubble Economies develop over an extended period of time. The momentous variety are often nurtured by the interplay of extraordinary technological and financial innovation, and are almost always perceived at the time as so-called “miracle economies.” Both Credit and speculative excess play prominent roles, especially late in the cycle. Central bankers are likely to be caught confused and accommodating.
It is the nature of Credit that excess begets only greater excess. Major Bubbles are associated with exceptional yet generally unrecognized Credit system phenomenon (“Monetary Disorder”). It is imperative to appreciate that Bubble Economies are as seductive as they are dangerous. Credit excess causes different strains of inflation – rising consumer, commodity, and asset prices to note the most obvious. Asset inflation is the most dangerous, as there is no constituency to stand up and demand the Fed rein it in. Furthermore, the longer asset inflation and Bubbles run unchecked the greater their propensity to go to wild, destabilizing extremes – likely hamstringing policymakers in the process.
Bubble Economies become progressively distorted by inflations in incomes, corporate earnings, government receipts and spending, and Current Account Deficits. Inflationary spending, investment, and speculative financial flow distortions play prominent roles in progressive economic maladjustment. By the late stage of the Credit boom, inflation effects tend to be highly divergent and inequitable.
The greatest systemic danger arises when speculative-based liquidity comes to dominate financial flows and economic development, creating a highly Credit-dependent and unstable system. End of cycle market price distortions tend to create the greatest impairment to financial and economic systems. Bubbles are inevitably sustained only by ever-increasing Credit and speculative excess. Any bursting Bubble must be supplanted by a more pronounced one (or series of Bubbles). As we are witnessing these days, the great danger associated with central banks accommodating Credit and asset Bubbles is that a point of Acute Fragility will be reached – with policymaking gravitating toward prescriptions to sustain financial excess.
Question: You have discussed in the past a concept that you refer to as “The alchemy of Wall Street finance.” Can you describe it for us and relate it to our current environment?
There are two related concepts that are fundamental to our analytical framework – how we view Credit-induced booms and their inevitable busts. These are the “Alchemy of Wall Street Finance” and the “Moneyness of Credit.”
First, the “Alchemy of Wall Street Finance:” This is basically the process of transforming risky loans – loans that become increasingly risky throughout the life of the credit boom - into debt instruments that are appealing to the marketplace. This is very important, because as long as Credit instruments enjoy robust market demand they can be created in abundance – in an extreme case fueling a runaway Credit Bubble with dire consequences for the financial system and real economy.
Our second concept, “Moneyness of Credit,” also plays a central role in boom dynamics. If you think about contemporary “money”, it’s really not about the government printing press or Federal Reserve issuance. Instead, “money” is today largely the domain of private sector Credit and the Marketplace’s Perceptions of Safety and Liquidity. “Moneyness” always plays a prominent role in Credit booms, due to the unbounded capacity to inflate Credit instruments that are perceived as safe and liquid.
Think of it this way, a boom financed by junk bonds likely isn’t going to progress too far – market restraint will be imposed by limitations in demand for these risky Credits. On the other hand, a boom fueled by virtually endless quantities of highly-rated agency debt, ABS, MBS, commercial paper, repos and the like – instruments the market perceives as “money”-like no matter how many are issued – has the very real potential to get out of hand.
And this gets to the heart of the issue – the dangerous state of this Wall Street Alchemy. Over the life of the boom there has been a growing disconnect between the market’s perception of “moneyness” and the actual mounting risk associated with the underlying Credit instruments. Especially because of the heavy use of derivatives, sophisticated structures, and leveraging, along with Credit insurance and various guarantees throughout the intermediation process – the entire risk market became highly distorted and dysfunctional.
And we would argue that the market’s perception of “moneyness” has recently changed – and we believe this to be a momentous development. The market now has serious trust issues related to ratings, pricing, liquidity, leveraging, counter-party risk, Credit insurance, and sophisticated Wall Street structures in general. In short, Wall Street’s capacity to create contemporary “money” has been dramatically constrained.
Of late, the rapid growth of central bank and banking system balance sheets has taken up the slack. But this is only a temporary stop-gap. The unrecognized dilemma today is that to sustain our Bubble economy will require continuous huge quantities of Credit creation – and these loans are by nature high risk. Wall Street risk intermediation is impaired – the market today seeks risk avoidance and de-leveraging – and there is little alternative than the banking system turning to risky lender of last resort.
Question: So where are we today, and what are the ramifications for the current economy?
Putting it all together, a confluence of factors has created what we expect to be an ongoing highly unstable Credit backdrop. In the nomenclature of economist Hyman Minsky – we have today “Acute Financial Fragility” – as opposed to previous backdrops where the U.S. system, in particular, was positioned to weather periods of turmoil relatively well. Despite dogged global central bank interventions, we still fear the potential for the Credit market to seize up – with devastating economic consequences. And the combination of unusually frail financial and economic structures leaves us very fearful of a dollar crisis of confidence.
At the minimum, the bursting of the Mortgage Finance Bubble has instigated a serious tightening of mortgage Credit Availability, leading to escalating foreclosures, Credit losses, pressures on home prices, and ongoing marketplace illiquidity for MBS and mortgage-related debt instruments. A classic real estate bust will feed on itself, ensuring further havoc throughout mortgage finance and imperiling the over-borrowed consumer sector.
Question: There’s a lot of talk these days about the GSEs – their roles in market excess, previous financial crises, and the potential for GSE liquidity to come to the market’s rescue once again. What’s your view on these matters?
There is a key facet of GSE analysis that does not garner the attention it deserves – and it relates, importantly, to the stark contrast between the inherent stability of GSE obligations and the underlying instability of much of today’s debt market structures. Let me begin by sharing data I believe go far in illuminating recent acute financial fragility. Returning to the four-year period 1998 through ‘01, direct GSE borrowings expanded $1.2 TN versus a $788bn increase in outstanding asset-backed securities (ABS). Compare this to the three-years 2004 through ‘06, when GSE debt grew only $57bn while ABS ballooned almost $2.0 TN.
In developing his hypotheses of inherent financial instability, Hyman Minsky coined the terminology “Ponzi Finance.” It is crucial to appreciate that GSE-related debt (agency debt and MBS) behaves atypically during crisis: I refer to the GSEs as the “Anti-Ponzi Finance Units” – in that finance flows aggressively to this (quasi-government) asset class during periods of market tumult. The GSEs enjoyed basically unlimited capacity to expand liabilities during previous crises – 1994, 1998, 1999, 2000, 2001/02 – and their operations played a momentous role in repeatedly backstopping the Credit boom.
Today – the GSEs are constrained and their balance sheets will not play their typical prominent role in accommodating speculator deleveraging and system reliquefication. Furthermore, by far the greatest excesses over the past few years were in Wall Street “private-label” ABS/MBS – subprime and, more importantly, Alt-A, jumbo, interest-only and other mortgages that encouraged borrowers to reach for more home than they could afford.
So, from a GSE standpoint, these agencies played an instrumental role in fostering the Mortgage Finance Bubble. When, in 2004, the scandal-plagued GSEs faltered, Wall Street was keen to snatch control. Consequently, trillions of unstable non-GSE debt instruments now permeate the system. At the same time, the GSEs are today incapable of orchestrating their typical market liquidity operations. This helps explain the difference between previous relative stability during crises versus recent Acute Fragility – especially in Wall Street ABS, sophisticated leveraged strategies, and derivatives more generally.
And we don’t expect this dynamic to be easily reversed or even meaningfully mitigated. Central bank interventions will have minimal intermediate and long-term impact on the bursting Mortgage Finance Bubble. Liquidity today flows in abundance to gold, precious metals, crude oil, commodities and virtually any non-dollar asset market – where robust inflationary biases prevail – content to avoid Wall Street mortgage-related securities and exposures. The situation will only worsen as home price declines gather momentum and Credit losses escalate.
Question: So, it is your contention that the current crisis marks a major inflection point for the Credit system?
We strongly believe so. Going forward, markets will be decidedly more cautious when it comes to ratings and liquidity. “AAA” was perceived as “always liquid” – even in the midst of financial crisis. In reality, GSE-related debt and their ballooning balance sheets played a prominent role in fostering this fateful market misperception. Yet, over the past few years, the most egregious Credit excesses were in speculative leveraging of highly-rated non-GSE securitizations. This scheme is now over.
The bursting of the Mortgage Finance Bubble has ushered in a major tightening of mortgage Credit, which will lead to escalating foreclosures, Credit losses, home pricing pressures, and ongoing marketplace illiquidity for MBS and mortgage-related debt instruments. We see the so-called “subprime crisis” transforming over time to an expansive dislocation in “Alt-A”, jumbo and "exotic" mortgages.
There are now literally trillions - and growing - of suspect debt instruments and many multiples more in problematic derivative instruments. We suspect that the proliferation of sophisticated leveraged strategies created considerable demand for high-yielding mortgage products, and now these vehicles are trapped with losses and illiquidity. Worse yet, Credit insurance and guarantees in the tens of trillions have been written and, as the downside of the Credit cycle gains momentum, we expect this exposure to become a major systemic issue. In short, we see Credit “insurance” as a bull market phenomenon that will not stand the test of the impending Credit and economic downturns. In too many cases, Credit guarantees, “insurance,” and myriad other exposures have been “written” by thinly-capitalized speculators and financial operators. They will have little wherewithal in the event of a serious Credit event. This is a major evolving issue. We fear the entire Wall Street risk intermediation mechanism is at considerable risk.
Question: Can you wrap thing up with some summary comments?
To summarize, we believe the current fragile boom – one characterized by unprecedented imbalances and maladjustments – can only be sustained by ongoing massive Credit creation. In an increasingly risk-averse world, this poses a colossal risk intermediation challenge. Thus far, the confluence of a highly inflationary global backdrop, extraordinary central bank interventions, and a major expansion of U.S. banking system Credit has sufficed. We, however, view Fed and the U.S. banking system capabilities as constrained and aggressive actions feasible only over the short-term. Importantly, an impaired Wall Street risk intermediation mechanism – the main source of finance behind the past few years of “blow-off” excess - will be hard-pressed to meet challenges and new realities.
Likely, liquidity issues and faltering asset markets will instigate problematic de-leveraging upon highly over-leveraged Credit and economic systems. We expect significant unfolding tumult in the securitization, derivatives, and risk “insurance” marketplaces. We view ballooning Credit insurance and derivatives markets as a bull market phenomenon that won’t withstand the test of the downside of the Credit Cycle. We believe the stock market has of late benefited from a combination of complacency, misperceptions with respect to Fed capabilities, and its newfound status, by default, as favored risk asset class. We see US equities, in particular, highly susceptible to unfolding detrimental financial and economic forces. We expect the economy to soon succumb to recession. California and other inflated real estate Bubble markets are now poised to suffer severe price declines – residential as well as commercial. And we expect contemporary “Wall Street Finance” to face a crisis of confidence – to suffer on all fronts – liquidity, Credit losses and regulatory. Our faltering currency is, as well, a major issue.
28 September 2007
mike morgan in florida
” . . .we're in deep doodoo."
Robert Toll, CEO of Toll Brothers
Quote of the Week – Bob hit it on the head when talking about the Fed cut this week. And it really doesn’t matter what the Fed does at this point, because we are waist deep in doodoo. The only way out is through the doodoo, and it is going to get deeper and stinkier.
Market Conditions – I’ve received many phone calls and emails asking whether I prepared an Outlook last week. I did not because I have been on the road looking at communities and speaking with brokers, analysts, builders, etc. throughout the country. I am still on the road, so this week’s Outlook will be short and sweet. Strike that. Make it short and bitter. Very bitter.
I have decided to cut back on writing weekly updates. I might write one a month, but I might step back and not write publicly anymore. My clients are keeping me busy on specific projects, so I have little time to spend a full day putting together a weekly update for public consumption. Folks, we have reached a point in this cycle that is a surprise even to me. I will provide you with a brief recap.
When I first spoke about negative sales more than a year ago I was the butt of many jokes. I have the last laugh, and I am going to make it a full belly laugh. Analysts like Kim, Oppenheim, Whelan and Zelman refused to leave their plush offices and homes. They went on builder sponsored tours instead of ground zero tours in the trenches. They saw what they wanted to see. Many analysts had to balance banking relationships, and we know what that has led to. Now it is very clear that most builders are experiencing negative sales in communities throughout the country. Negative sales are what you see when you have more cancellations than you have sales. But that is just one color of the nightmare I am going to paint . . . and have been painting for three years now.
The deterioration of the housing markets over the past six week has been devastating. I really don’t care what we hear on the conference calls this week, because I’m here to tell you from ground zero, it is much worse than anyone has discussed, and it is going to get far worse than any of the builders wants to admit.
Of the top five builders, maybe two will make it through this crash. But maybe just one. And here’s why.
Inventory – Nothing new here. These greedy pikers built more homes than the country needed . . . and they knew it. They were selling to anyone and everyone, even when they knew the buyers were not qualified and the buyers were lying on signed documents. The pikers sucked up bonuses in the hundreds of millions of dollars, all the while telling everyone that everything was fine. Now we have enough inventory for the builders to totally stop building for 12-18 months. That’s what it would take to absorb the current inventory. We all know that’s not going to happen.
Prices – If you believe anyone telling you prices are stabilizing, or even showing signs of stabilizing, you are either on drugs or you have the IQ of a green mango. Prices are now in total free fall, with buyers and competing builders in complete control. The latter is more of the driving force in prices than buyers are now. Here’s a perfect example. We visited a Lennar community where prices for townhomes were $215,000. But the sales person made it clear we should make an offer. In fact, he told us Lennar accepted an offer of $190,000 just a week ago. Lennar was willing to take a 10%+ haircut before we even saw the unit. But before you assume that is the negative to this story, read on. We left Lennar and drove to the front of the community where Prime Builders was developing a townhome section just outside the gated section where Lennar and Centex built.
Prices on Prime’s townhomes were in the $250,000 range . . . but Lennar’s townhomes were 2,200sf while Prime’s were in the 1,600sf range. So Lennar was willing to sell at $87 per square foot, while Prime is asking $156 per square foot. When I told the Prime sales agent that Lennar was selling at under $200,000, she winced and had a very interesting explanation to share with us. But the bottom line was clear. Builders are cutting each other’s throats at this point of the cycle . . . and they have no choice. Darwin would tell you this is how the world works. We are going to see extinction with a lot of blood and guts.
The townhome example I just shared is not unique. I’ve seen and heard the same thing in other markets. In fact, I don’t think any markets are immune from the builder-on-builder fight to the death. We’re seeing builders slash prices and then before a buyer can even digest the price slash, the builder is throwing in incentives, additional price cuts . . . and telling you these prices are not real, because you can make an offer!
Psssttt . . . Don’t tell the builders, but not only are they competing with each other and the flippers they loaded up, but the banks are now a very, very, very reluctant competitor in the residential real estate market. Since banks are not in the business of owning, maintaining, renting and managing single family homes, they dump them. And I mean dump. More on this for my clients.
Sales – Ara has been filling your heads with “traffic” numbers. Sure, we saw traffic, but when I “ground-zero” this traffic, I get the real story. I’d say two thirds of the traffic is a false reading. Many of the folks I spoke with are neighbors that want a feel for what is happening to the price of homes in their back yards. Another segment of the traffic is people who have sipped the Kool-Aid. They think prices have fallen far enough, and builders are making such great deals . . . that they can now afford a home. I have news for them, they can’t. Prices are still higher than five years ago and mortgage rates are not what they appear to be. Even with the 50bps cut, mortgages are tougher to get and with that comes higher rates for the folks that do qualify. Let’s face it, subprime deals and all of the creative financing we saw is gone. I’d say Ara’s Deal of the Century will soon be known as Fake-Out of the Century, unless Hovnanian cuts prices further or buys down mortgages further. Personally, I don’t buy the numbers Hovnanian released. I was in the field during his Deal of the Century, and I didn’t see what his numbers portray. I challenge Ara and some of the others to spend a day in the field with me mystery shopping their communities and the communities of their competitors.
Here’s another problem with sales. Builders are actually killing the sales they already have on the books. As builders cut prices and pile on the incentives, folks that purchased homes a year ago are canceling contracts . . . or the builders are forced to honor the current slashed prices and increased discounts. Did I say a year ago? While that is true, even sales made 2-3 months ago are no moot. If you signed a contract two months ago with a $5,000 deposit, and the builders have dropped prices $20,000, you do the math.
That means the sales we saw a year ago or even a few months ago with healthy margins, will actually be closed at low or no margins. From here on out, the majority of sales for all builders will be no and negative margins. Maybe I should color that a bit. Builders are telling you they are still at decent margins . . . exclusive of impairments. Think about that, but not too hard if you’re in the mango category. This one’s not that difficult. More on just how bad this problem is for clients, including land and spec issues that compound the sales problems.
Who Survives – I’m not sure anymore. I thought I knew based on what I see at ground zero and the numbers in the models, but now I am turning over rocks and finding slimy, stinky stuff that is going to feed the slide to the sewer. There will be three groups of survivors.
Smart Guys – These are the guys that have managed and continue to manage down inventory, and are shutting down operations like a frog shuts down during the dry season. The faster these guys can get out of sight into the soft mud, the healthier they will be when the rains return. From what I see now, there are only a handful of these frogs out there right now.
Bullies – These guys have the arrogant attitude that they can build their competitors out of business. They may have Einstein IQs but there super-egos smush out any clear thinking of what is best for the company. These blockheads announced plans to build and compete aggressively on pricing. They thought they could continue building and dropping prices to force the competition out of business. Some of these knuckleheads still believe this. But the bullies never left their comfy offices and the comfort of their boats, beach/mountain homes and vacations. They just didn’t get it. I’m not saying that sarcastically. These CEOs and other execs were (and are) so full of themselves, that they missed the heart of the problem, and instead of taking their foot off the gas pedal, they pushed it to the floor. They felt they could go through the wall with more speed. If they had bothered to take a ground zero look before heading for the wall, they would have seen two things. The wall is not two feet thick. It is twenty-two feet thick and it is reinforced with rebar.
There might be one or two bullies that survive. They will not make it through the wall. They will come out the side, in pain, with broken bones and a big hurtin’ to their vain pride.
Crippled Fools – This will be the largest group. There are builders out there with no cohesive plan for sales, marketing, customer service or how to navigate the mines. They've grown too big and swallowed up the good and the bad. They now have severe indigestion and they are so fat and sloppy, they can barely move. It will be hit or miss for these fools, since they have not taken the time to sit down and formulate a plan. There is a big difference between being “reactive” and “proactive.” The first two groups are being proactive, even if the brains of the bullies have the density and contents of a coconut. The crippled fools will come limping out of this two ways. If they lose a leg or two, they will come out with a partner or two who may have only lost and eye or an arm. The second group will come out, but will probably shrivel up and die.
Who and What to Buy – No one, yet. The big boys can’t buy any of the builders, since the Street has not priced in the reality of the twenty-two foot, reinforced wall. The big boys can’t buy the debt, because the debt is also overpriced. I’ve had several calls from deep pockets that want to step in with a checkbook. My advice is simple. Wait. Look, touch, smell, don’t taste, squeeze, poke . . . giggle and wait. More specifics on who survives and who to watch for clients.
Florida – I have been on the road in Florida since my return from New Jersey. Let me cut to the chase. Bad. Ugly. And getting worse. Much worse. I hope that is enough color, because if you don’t get it, you never will. If you are a Stephen Kim or Dan Oppenheim follower, and you think the bad is getting better, you need a good smack up the side of the head and a kick in the pants. And as Forrest would say, “And that’s all I have to say about that.”
WCI – You’ve got to see Bal Harbour to believe it. The CO promised for the end of August is nowhere in sight. The building is still under construction. Prices continue to drop. I’m here to tell you this one doesn’t close this year and the can-rate is going to be ugly. I also hear the attorneys grumbling, so for the bankers expecting cash this year, think again. In fact, you guys might need a couple mangos, a couple coconuts, some ice, and a bottle of vodka. Throw these in a blender and suck it up boys. If you’re on Oceanside too, you might want to go to the top of the building and open a window.
New Jersey – I visited the Mid-Atlantic this week to look at a few areas. Let’s start with the Jersey Shore and Asbury Park. I actually grew up on the Jersey Shore and attended Asbury Park High School. It’s the home of Bruce Springsteen and it was a jewel back in the 20’s. Just one hour from New York by train and with a mile of beautiful beaches, you’d think this area would have sprung back to life.
Unfortunately, ever since 1969, Asbury Park has been on a slow and steady decline. The shops closed and moved to the regional malls. The old hotels of the 20’s became less and less attractive to summer vacationers. And the state started dumping mental health patients in the rooming houses and old hotels. Johnny Cash and many others sunk money into projects to revitalize the beach district of Asbury Park. They all flopped. How can you expect buyers to return, when seedy hotels, boarded up buildings and worse, are just a block from the planned condos and hotels.
So a few years ago at the height of the housing bubble, a new group stepped in with big dreams and bigger promises. I drove past newly constructed town home projects that were totally empty. I drove past several mid-rise condos that are going up on Ocean Avenue, and right across the street it looks like a war zone with dilapidated buildings. The boardwalk has been repaired, but without the shops of the 60’s and 70’s, it is nothing more than a hang out for bums and kids with nowhere else to go. It’s sad. Very sad.
For my clients, the photos speak for themselves. For the good folks reading this piece, I have included a photo of what the buyers of the condos are looking at, if they close and move in. I doubt anyone will move into some of these towers. And just like other projects in Asbury Park, they will either eventually be torn down or filled with welfare and displaced mental health tenants. Unfortunately, that’s just the way it is in Asbury Park.
Whenever I return to the Jersey Shore, it’s great to see all of the great things happening. It’s sad, but never unexpected, to see failure after failure in Asbury Park.
At the other end of the State, we have Atlantic City. Several clients have asked me for information on what it looks like at ground zero and what’s ahead. It’s quite simple - Atlantic City has seen better days. AC saw better days in the 20’s just like Asbury Park. But AC got another shot in the arm with gambling. As many of you know, I was an executive with the Trump Organization in Atlantic City in the 90’s. Even then, if you walked one block away from the casinos, you were in another world. One of desperation, cheap hookers, street vendors (drugs) and run down buildings. Not much has changed, and any hope of Atlantic City turning things around has disappeared. Gambling in Pennsylvania has already hit Atlantic City hard, and PA is just getting it together. I don’t expect any new casinos in Atlantic City, nor do I see the potential of any new investments that will help the industry or the surrounding communities.
Blowing Smoke Article of the Week – The Wall Street Journal’s Mike Corkery does it again, as he touts the virtues of the return of Ivy Zelman. The title of his article is fitting, “Expert on Housing Has Her own Nest.” More on the nest in a moment. Corkery makes it sound as if Ivy led the way when it comes to the housing issues. Well . . . before you run out and plunk money down on Ivy, I can assure you she came to the party reluctantly and very late. She also had a rather sloppy track record for quite a few years prior to leaving Credit Suisse.
Analysts like Ivy and the giant financial institutions these analysts worked for, may have played a larger role in the housing issues than one might think. While analysts were touting the virtures of the builders and bankers were putting together CDOs, SIVs and other packages, there were very few voices talking about the clouds forming. Personally, I can't seem to balance how the analysts refuse to paint the true picture, while the banking side continues to fund the problem. And isn't it funny how Credit Suisse just put on a housing conference, providing the builders with a global forum to sing their song . . . without anyone to ask the hard questions.
As for the ground zero issues brewing over the last few years, Ivy tapped into me for quite a bit of information about the housing industry late in the game, but she never left the “nest” to come out and see ground zero. Ivy ran around on the guided tours offered by the builders, but that’s like asking a bank robber for a tour of the crime scene. With her team of cracker jack research analysts, she had massive amounts of data she could pump out. But having rear-view mirror data, and not being able to marry it to what is coming down the road is a major problem.
Ivy was socked away in her “nest” with her three pre-school children, while her research team was in New York and the builders were building in Florida, California, Arizona, Nevada, etc. And as Quirky Corkery points out, she will continue to work from her home in Cleveland, while her team remains in New York. The problem is . . . there’s not much going on with housing in Cleveland or New York, and using your kids as an excuse for not being able to get out in the field may have worked with Credit Suisse, but might not cut it in the real world.
Let’s forget about Ivy coming to the party late and failing to get out in the field at ground zero. Let’s look at the record. I asked Ivy why she didn’t come out and simply downgrade builders across the board. I asked why it seemed like she would downgrade one and upgrade another, and why she seemed to be almost neutral in her ratings. For those of you that know the game, her response will come as no surprise. Ivy told me she Credit Suisse required her to maintain an overall rating on the builders and she couldn’t simply downgrade them across the board. Maybe banking relationships are more important that coming out with what’s really happening and what the real long term fall out will be.
Analysts that sit in their offices (or at home with the kids) and think they can provide relevant information, are kidding themselves and their clients. Ivy comes across great on conference calls and she pumps out a lot of information. She’s a tough cookie, and I was always a bit shocked at her truck driver language on the phone, but her rear view analysis was not much different from the rest of the group. Coming across tough and pumping out volumes of data is not a replacement for field research and counter balancing what the builders tell you with what is happening – real-time in the real world.
Disclosure
Robert Toll, CEO of Toll Brothers
Quote of the Week – Bob hit it on the head when talking about the Fed cut this week. And it really doesn’t matter what the Fed does at this point, because we are waist deep in doodoo. The only way out is through the doodoo, and it is going to get deeper and stinkier.
Market Conditions – I’ve received many phone calls and emails asking whether I prepared an Outlook last week. I did not because I have been on the road looking at communities and speaking with brokers, analysts, builders, etc. throughout the country. I am still on the road, so this week’s Outlook will be short and sweet. Strike that. Make it short and bitter. Very bitter.
I have decided to cut back on writing weekly updates. I might write one a month, but I might step back and not write publicly anymore. My clients are keeping me busy on specific projects, so I have little time to spend a full day putting together a weekly update for public consumption. Folks, we have reached a point in this cycle that is a surprise even to me. I will provide you with a brief recap.
When I first spoke about negative sales more than a year ago I was the butt of many jokes. I have the last laugh, and I am going to make it a full belly laugh. Analysts like Kim, Oppenheim, Whelan and Zelman refused to leave their plush offices and homes. They went on builder sponsored tours instead of ground zero tours in the trenches. They saw what they wanted to see. Many analysts had to balance banking relationships, and we know what that has led to. Now it is very clear that most builders are experiencing negative sales in communities throughout the country. Negative sales are what you see when you have more cancellations than you have sales. But that is just one color of the nightmare I am going to paint . . . and have been painting for three years now.
The deterioration of the housing markets over the past six week has been devastating. I really don’t care what we hear on the conference calls this week, because I’m here to tell you from ground zero, it is much worse than anyone has discussed, and it is going to get far worse than any of the builders wants to admit.
Of the top five builders, maybe two will make it through this crash. But maybe just one. And here’s why.
Inventory – Nothing new here. These greedy pikers built more homes than the country needed . . . and they knew it. They were selling to anyone and everyone, even when they knew the buyers were not qualified and the buyers were lying on signed documents. The pikers sucked up bonuses in the hundreds of millions of dollars, all the while telling everyone that everything was fine. Now we have enough inventory for the builders to totally stop building for 12-18 months. That’s what it would take to absorb the current inventory. We all know that’s not going to happen.
Prices – If you believe anyone telling you prices are stabilizing, or even showing signs of stabilizing, you are either on drugs or you have the IQ of a green mango. Prices are now in total free fall, with buyers and competing builders in complete control. The latter is more of the driving force in prices than buyers are now. Here’s a perfect example. We visited a Lennar community where prices for townhomes were $215,000. But the sales person made it clear we should make an offer. In fact, he told us Lennar accepted an offer of $190,000 just a week ago. Lennar was willing to take a 10%+ haircut before we even saw the unit. But before you assume that is the negative to this story, read on. We left Lennar and drove to the front of the community where Prime Builders was developing a townhome section just outside the gated section where Lennar and Centex built.
Prices on Prime’s townhomes were in the $250,000 range . . . but Lennar’s townhomes were 2,200sf while Prime’s were in the 1,600sf range. So Lennar was willing to sell at $87 per square foot, while Prime is asking $156 per square foot. When I told the Prime sales agent that Lennar was selling at under $200,000, she winced and had a very interesting explanation to share with us. But the bottom line was clear. Builders are cutting each other’s throats at this point of the cycle . . . and they have no choice. Darwin would tell you this is how the world works. We are going to see extinction with a lot of blood and guts.
The townhome example I just shared is not unique. I’ve seen and heard the same thing in other markets. In fact, I don’t think any markets are immune from the builder-on-builder fight to the death. We’re seeing builders slash prices and then before a buyer can even digest the price slash, the builder is throwing in incentives, additional price cuts . . . and telling you these prices are not real, because you can make an offer!
Psssttt . . . Don’t tell the builders, but not only are they competing with each other and the flippers they loaded up, but the banks are now a very, very, very reluctant competitor in the residential real estate market. Since banks are not in the business of owning, maintaining, renting and managing single family homes, they dump them. And I mean dump. More on this for my clients.
Sales – Ara has been filling your heads with “traffic” numbers. Sure, we saw traffic, but when I “ground-zero” this traffic, I get the real story. I’d say two thirds of the traffic is a false reading. Many of the folks I spoke with are neighbors that want a feel for what is happening to the price of homes in their back yards. Another segment of the traffic is people who have sipped the Kool-Aid. They think prices have fallen far enough, and builders are making such great deals . . . that they can now afford a home. I have news for them, they can’t. Prices are still higher than five years ago and mortgage rates are not what they appear to be. Even with the 50bps cut, mortgages are tougher to get and with that comes higher rates for the folks that do qualify. Let’s face it, subprime deals and all of the creative financing we saw is gone. I’d say Ara’s Deal of the Century will soon be known as Fake-Out of the Century, unless Hovnanian cuts prices further or buys down mortgages further. Personally, I don’t buy the numbers Hovnanian released. I was in the field during his Deal of the Century, and I didn’t see what his numbers portray. I challenge Ara and some of the others to spend a day in the field with me mystery shopping their communities and the communities of their competitors.
Here’s another problem with sales. Builders are actually killing the sales they already have on the books. As builders cut prices and pile on the incentives, folks that purchased homes a year ago are canceling contracts . . . or the builders are forced to honor the current slashed prices and increased discounts. Did I say a year ago? While that is true, even sales made 2-3 months ago are no moot. If you signed a contract two months ago with a $5,000 deposit, and the builders have dropped prices $20,000, you do the math.
That means the sales we saw a year ago or even a few months ago with healthy margins, will actually be closed at low or no margins. From here on out, the majority of sales for all builders will be no and negative margins. Maybe I should color that a bit. Builders are telling you they are still at decent margins . . . exclusive of impairments. Think about that, but not too hard if you’re in the mango category. This one’s not that difficult. More on just how bad this problem is for clients, including land and spec issues that compound the sales problems.
Who Survives – I’m not sure anymore. I thought I knew based on what I see at ground zero and the numbers in the models, but now I am turning over rocks and finding slimy, stinky stuff that is going to feed the slide to the sewer. There will be three groups of survivors.
Smart Guys – These are the guys that have managed and continue to manage down inventory, and are shutting down operations like a frog shuts down during the dry season. The faster these guys can get out of sight into the soft mud, the healthier they will be when the rains return. From what I see now, there are only a handful of these frogs out there right now.
Bullies – These guys have the arrogant attitude that they can build their competitors out of business. They may have Einstein IQs but there super-egos smush out any clear thinking of what is best for the company. These blockheads announced plans to build and compete aggressively on pricing. They thought they could continue building and dropping prices to force the competition out of business. Some of these knuckleheads still believe this. But the bullies never left their comfy offices and the comfort of their boats, beach/mountain homes and vacations. They just didn’t get it. I’m not saying that sarcastically. These CEOs and other execs were (and are) so full of themselves, that they missed the heart of the problem, and instead of taking their foot off the gas pedal, they pushed it to the floor. They felt they could go through the wall with more speed. If they had bothered to take a ground zero look before heading for the wall, they would have seen two things. The wall is not two feet thick. It is twenty-two feet thick and it is reinforced with rebar.
There might be one or two bullies that survive. They will not make it through the wall. They will come out the side, in pain, with broken bones and a big hurtin’ to their vain pride.
Crippled Fools – This will be the largest group. There are builders out there with no cohesive plan for sales, marketing, customer service or how to navigate the mines. They've grown too big and swallowed up the good and the bad. They now have severe indigestion and they are so fat and sloppy, they can barely move. It will be hit or miss for these fools, since they have not taken the time to sit down and formulate a plan. There is a big difference between being “reactive” and “proactive.” The first two groups are being proactive, even if the brains of the bullies have the density and contents of a coconut. The crippled fools will come limping out of this two ways. If they lose a leg or two, they will come out with a partner or two who may have only lost and eye or an arm. The second group will come out, but will probably shrivel up and die.
Who and What to Buy – No one, yet. The big boys can’t buy any of the builders, since the Street has not priced in the reality of the twenty-two foot, reinforced wall. The big boys can’t buy the debt, because the debt is also overpriced. I’ve had several calls from deep pockets that want to step in with a checkbook. My advice is simple. Wait. Look, touch, smell, don’t taste, squeeze, poke . . . giggle and wait. More specifics on who survives and who to watch for clients.
Florida – I have been on the road in Florida since my return from New Jersey. Let me cut to the chase. Bad. Ugly. And getting worse. Much worse. I hope that is enough color, because if you don’t get it, you never will. If you are a Stephen Kim or Dan Oppenheim follower, and you think the bad is getting better, you need a good smack up the side of the head and a kick in the pants. And as Forrest would say, “And that’s all I have to say about that.”
WCI – You’ve got to see Bal Harbour to believe it. The CO promised for the end of August is nowhere in sight. The building is still under construction. Prices continue to drop. I’m here to tell you this one doesn’t close this year and the can-rate is going to be ugly. I also hear the attorneys grumbling, so for the bankers expecting cash this year, think again. In fact, you guys might need a couple mangos, a couple coconuts, some ice, and a bottle of vodka. Throw these in a blender and suck it up boys. If you’re on Oceanside too, you might want to go to the top of the building and open a window.
New Jersey – I visited the Mid-Atlantic this week to look at a few areas. Let’s start with the Jersey Shore and Asbury Park. I actually grew up on the Jersey Shore and attended Asbury Park High School. It’s the home of Bruce Springsteen and it was a jewel back in the 20’s. Just one hour from New York by train and with a mile of beautiful beaches, you’d think this area would have sprung back to life.
Unfortunately, ever since 1969, Asbury Park has been on a slow and steady decline. The shops closed and moved to the regional malls. The old hotels of the 20’s became less and less attractive to summer vacationers. And the state started dumping mental health patients in the rooming houses and old hotels. Johnny Cash and many others sunk money into projects to revitalize the beach district of Asbury Park. They all flopped. How can you expect buyers to return, when seedy hotels, boarded up buildings and worse, are just a block from the planned condos and hotels.
So a few years ago at the height of the housing bubble, a new group stepped in with big dreams and bigger promises. I drove past newly constructed town home projects that were totally empty. I drove past several mid-rise condos that are going up on Ocean Avenue, and right across the street it looks like a war zone with dilapidated buildings. The boardwalk has been repaired, but without the shops of the 60’s and 70’s, it is nothing more than a hang out for bums and kids with nowhere else to go. It’s sad. Very sad.
For my clients, the photos speak for themselves. For the good folks reading this piece, I have included a photo of what the buyers of the condos are looking at, if they close and move in. I doubt anyone will move into some of these towers. And just like other projects in Asbury Park, they will either eventually be torn down or filled with welfare and displaced mental health tenants. Unfortunately, that’s just the way it is in Asbury Park.
Whenever I return to the Jersey Shore, it’s great to see all of the great things happening. It’s sad, but never unexpected, to see failure after failure in Asbury Park.
At the other end of the State, we have Atlantic City. Several clients have asked me for information on what it looks like at ground zero and what’s ahead. It’s quite simple - Atlantic City has seen better days. AC saw better days in the 20’s just like Asbury Park. But AC got another shot in the arm with gambling. As many of you know, I was an executive with the Trump Organization in Atlantic City in the 90’s. Even then, if you walked one block away from the casinos, you were in another world. One of desperation, cheap hookers, street vendors (drugs) and run down buildings. Not much has changed, and any hope of Atlantic City turning things around has disappeared. Gambling in Pennsylvania has already hit Atlantic City hard, and PA is just getting it together. I don’t expect any new casinos in Atlantic City, nor do I see the potential of any new investments that will help the industry or the surrounding communities.
Blowing Smoke Article of the Week – The Wall Street Journal’s Mike Corkery does it again, as he touts the virtues of the return of Ivy Zelman. The title of his article is fitting, “Expert on Housing Has Her own Nest.” More on the nest in a moment. Corkery makes it sound as if Ivy led the way when it comes to the housing issues. Well . . . before you run out and plunk money down on Ivy, I can assure you she came to the party reluctantly and very late. She also had a rather sloppy track record for quite a few years prior to leaving Credit Suisse.
Analysts like Ivy and the giant financial institutions these analysts worked for, may have played a larger role in the housing issues than one might think. While analysts were touting the virtures of the builders and bankers were putting together CDOs, SIVs and other packages, there were very few voices talking about the clouds forming. Personally, I can't seem to balance how the analysts refuse to paint the true picture, while the banking side continues to fund the problem. And isn't it funny how Credit Suisse just put on a housing conference, providing the builders with a global forum to sing their song . . . without anyone to ask the hard questions.
As for the ground zero issues brewing over the last few years, Ivy tapped into me for quite a bit of information about the housing industry late in the game, but she never left the “nest” to come out and see ground zero. Ivy ran around on the guided tours offered by the builders, but that’s like asking a bank robber for a tour of the crime scene. With her team of cracker jack research analysts, she had massive amounts of data she could pump out. But having rear-view mirror data, and not being able to marry it to what is coming down the road is a major problem.
Ivy was socked away in her “nest” with her three pre-school children, while her research team was in New York and the builders were building in Florida, California, Arizona, Nevada, etc. And as Quirky Corkery points out, she will continue to work from her home in Cleveland, while her team remains in New York. The problem is . . . there’s not much going on with housing in Cleveland or New York, and using your kids as an excuse for not being able to get out in the field may have worked with Credit Suisse, but might not cut it in the real world.
Let’s forget about Ivy coming to the party late and failing to get out in the field at ground zero. Let’s look at the record. I asked Ivy why she didn’t come out and simply downgrade builders across the board. I asked why it seemed like she would downgrade one and upgrade another, and why she seemed to be almost neutral in her ratings. For those of you that know the game, her response will come as no surprise. Ivy told me she Credit Suisse required her to maintain an overall rating on the builders and she couldn’t simply downgrade them across the board. Maybe banking relationships are more important that coming out with what’s really happening and what the real long term fall out will be.
Analysts that sit in their offices (or at home with the kids) and think they can provide relevant information, are kidding themselves and their clients. Ivy comes across great on conference calls and she pumps out a lot of information. She’s a tough cookie, and I was always a bit shocked at her truck driver language on the phone, but her rear view analysis was not much different from the rest of the group. Coming across tough and pumping out volumes of data is not a replacement for field research and counter balancing what the builders tell you with what is happening – real-time in the real world.
Disclosure
24 September 2007
Peak Oil is past -- from the oil drum
Executive Summary:
Broad revision (from 1980 to 2004) by the EIA this month but not significant in amplitude.
Monthly production peaks are unchanged:
All Liquids: the peak is still July 2006 at 85.54 mbpd ( 0.11 mbpd), the year to date average production in 2007 (6 months) is 84.28 mbpd ( 0.02 mbpd), down 0.07 mbpd from 2006 for the same period.
Crude Oil + NGL: the peak date remains May 2005 at 82.09 mbpd ( 0.01 mbpd), the year to date average production for 2007 (6 months) is 81.20 mbpd ( 0.04 mbpd), down 0.06 mbpd from 2006.
Crude Oil + Condensate: the peak date remains May 2005 at 74.30 mbpd ( 0.15 mbpd), the year to date average production for 2007 (6 months) is 73.23 mbpd ( 0.14 mbpd), down 0.25 mbpd from 2006.
NGPL: the peak date is still February 2007 at 8.03 mbpd ( 0.21 mbpd), the year to date average production for 2007 (6 months) is 7.97 mbpd ( 0.18 mbpd), up 0.19 mbpd from 2006.
Decline in crude oil + condensate continues: June 2007 estimate for crude oil + condensate is 72.82 mbpd compared to 73.11 mbpd one year ago and 73.92 mbpd two years ago.
Average forecast: the average forecast for crude oil + NGL based on 13 different projections (Figure above) is showing a kind of production plateau around 81 +/- 4 mbpd with a decline after 2010 +/- 1 year.
23 September 2007
Don't blame Al - check the mirror
Which raises the question: just what the f*** was the public thinking when they bought half-million dollar houses on salaries under 60-K, taking out no-money-down, interest-optional balloon mortgages and other tricked-up contracts? The answer is: they walked into these arrangements with their eyes open because they thought they could get something for nothing. They thought the trend of steeply rising house prices would continue indefinitely and enable them to wiggle free of any hazard by flipping their houses to an endless supply of greater fools who would be there waiting to turn the very same trick. And the smoothies downstream in the mortgage and banking rackets were no less guided by avarice when they cooked up their formulas for bundling half-baked mortgages into tranches of tradeable securities. Easy Al may have failed to notice what was going on here, but then so did everybody else from The Wall Street Journal to the Securities and Exchange Commission.
This, of course, represents an insidious psychology. It could only happen in a culture that has come off the rails mentally, so to speak, as ours has in the sense that nobody has any sense of consequence, neither the leaders nor those who affect to follow the leaders. The leading religion in America is not evangelical Christianity, it is the worship of unearned riches, and its golden rule is the belief that is is possible to get something for nothing. Its holy shrines are Las Vegas and Wall Street. (And, by the way, has anybody heard the evangelical Christians complain about Las Vegas? They complain about a lot of things, but are themselves among the greatest believers in unearned riches -- given their preference for prayer over earnest effort in the service of solving life's problems.)
No, the American public, including the cheerleaders in the media, have only themselves to blame for the bitter harvest now underway in the asset and credit markets. And thus it would be a salutary thing for Baby Jeezus, or the forces of nature, or whatever powers guide the universe, to now kick the sh*t out of them, so to speak, financially, because that is exactly what the American public is full of, from top to bottom, from George W. Bush at his lonely desk on Pennsylvania Avenue to the pitiful, bankrupt householders of Orange County and Boca Raton.
http://jameshowardkunstler.typepad.com/clusterfuck_nation/
This, of course, represents an insidious psychology. It could only happen in a culture that has come off the rails mentally, so to speak, as ours has in the sense that nobody has any sense of consequence, neither the leaders nor those who affect to follow the leaders. The leading religion in America is not evangelical Christianity, it is the worship of unearned riches, and its golden rule is the belief that is is possible to get something for nothing. Its holy shrines are Las Vegas and Wall Street. (And, by the way, has anybody heard the evangelical Christians complain about Las Vegas? They complain about a lot of things, but are themselves among the greatest believers in unearned riches -- given their preference for prayer over earnest effort in the service of solving life's problems.)
No, the American public, including the cheerleaders in the media, have only themselves to blame for the bitter harvest now underway in the asset and credit markets. And thus it would be a salutary thing for Baby Jeezus, or the forces of nature, or whatever powers guide the universe, to now kick the sh*t out of them, so to speak, financially, because that is exactly what the American public is full of, from top to bottom, from George W. Bush at his lonely desk on Pennsylvania Avenue to the pitiful, bankrupt householders of Orange County and Boca Raton.
http://jameshowardkunstler.typepad.com/clusterfuck_nation/
22 September 2007
Friday arvo in the Titanic's Sydney suite
These superannuation managers employ investment and asset management professionals to ensure the funds are in the approved asset type consistent with the underlying mandate. They cannot be geared in any way. The returns above benchmark are the concern of the asset manager, whereas the returns of the overall superannuation is my friend's concern (ie switching from bonds to equities, credit to govt, short to long duration).
He has been arguing to reduce exposure to long end bonds and move to cash plus short end funds.
The asset managers said sure, except to get out of the existing fund he would have to cross a massive 80 point spread on some of the corporate bonds (apparently the fund marks the assets to "mid" - half way between the bid and the offer) and no one has actually crossed the spread on corporate bonds in the last 3 months. No one has bought or sold a corporate bond in Australia of any note in the last 3 months.
His candid discussion with the debt experts revealed that they think they are like the engineers in the Titanic whereas the guys in the equity markets are "like the 1st class passengers up on deck smokin' cigars". "One of us is wrong, and I don't think it's us" he said. He believes the Dow and S&P could reach 15 000 to 16 000 as part of the blow off top, that could be over within a few short weeks but that it was all valuation changes due to collapsing dollar prior to a massive collapse.
He has been arguing to reduce exposure to long end bonds and move to cash plus short end funds.
The asset managers said sure, except to get out of the existing fund he would have to cross a massive 80 point spread on some of the corporate bonds (apparently the fund marks the assets to "mid" - half way between the bid and the offer) and no one has actually crossed the spread on corporate bonds in the last 3 months. No one has bought or sold a corporate bond in Australia of any note in the last 3 months.
His candid discussion with the debt experts revealed that they think they are like the engineers in the Titanic whereas the guys in the equity markets are "like the 1st class passengers up on deck smokin' cigars". "One of us is wrong, and I don't think it's us" he said. He believes the Dow and S&P could reach 15 000 to 16 000 as part of the blow off top, that could be over within a few short weeks but that it was all valuation changes due to collapsing dollar prior to a massive collapse.
Leap 2020
As explained many times since the beginning of 2006 by LEAP/E2020's team of researchers, the main cause to the current systemic crisis is in the United States. This “end of the Western world as we've known it since 1945 ” anticipated by LEAP/E2020 in February 2006, is the collapse in all its dimensions (economic, monetary, financial, diplomatic, intellectual and strategic) of the central pillar of the 20th century world incarnated by the US. It is indeed in this country that is to be found the centre of the financial and banking crisis that has been affecting the whole planet since the middle of last summer. The pillar now lies on quick sands, and this of course implies that the global architecture is altogether subsiding, and then will collapse piece by piece.
In this 17th issue of GEAB, our team of researchers has therefore decided to focus on the analysis of the nature of the ongoing global systemic crisis (an analysis already well advanced for all GEAB subscribers) (1) and to publish an explanation in 1000 words only of the current crisis and its articulation with the systemic crisis altogether. We hope that this explanation, using a simple language, will help each and everyone to understand upcoming events. As indeed, and this is a key point, we now estimate that no ruling centre can stop the ongoing systemic crisis anymore, nor even limit the scope of its global impact (2).
Since 1945, and increasingly since the collapse of the Soviet bloc in 1989, the US economy became the single pillar of the entire international financial and banking system. After the August 15, 1971 severing of the US dollar convertibility to gold (3) (or to any other physical counterpart, thus available in limited quantities), the amount of US dollars in circulation worldwide increased dramatically. The emerging of new centres of industrial, technological and service production throughout the world, combined with weakening human resources training (and therefore productivity competitiveness) in the US, resulted in a dramatic increase of the US debt (public and private). Thanks to the creativity of financial operators, with the more of less naive complicity of the entire banking and financial chain (central banks, quoting agencies, financial media, politicians, economists, etc…), this debt progressively became the US main production.
US Household Debt Service Ratio - Source Contraryinvestor.com
With G.W. Bush and his ideological or business partners in Washington, the production of this type of « value » (debts) increased even more dramatically (4), under the active auspices of the Fed's president of that time, Alan Greenspan (5): public debt, real-estate debts, car debts, credit card debts (6),... in every field debt grew on as the good “produced” in greatest amount by the so-called dominant economy. Meanwhile the entire world kept on buying this new “made in USA” good, western elites in particular being completely fascinated by the incredible creativity of Wall Street and its backyard, the City of London.
For many years though, anyone owning two eyes to see (i.e. neither experts nor policy-makers whose eyes only read reports on reality and press releases) and crossing the United States could observe that, contrary to Europe or Asia, the country was in a process of generalised impoverishment: escheated infrastructures (7), free-falling education, growing poorly-trained immigration, increasing dependence on foreign energy, multiple technological retardation,… This statement inevitably raised a fundamental question: who would pay back, and how, this constantly growing colossal debt?
Debt Outstanding by Sector (1974-2006) – Sources: Federal Reserve / ITulip.com
However, until September 11th, until the catastrophic invasion of Iraq, until Katrina and the partial destruction of New-Orleans, and more recently until the Mississippi bridge collapse, everyone – in line with those « experts » - seemed willing to believe in the figures published by the system itself selling them its « debt » product, figures which of course guaranteed that all was well and the average debtor was solvent.
Then, little by little, with an acceleration starting a year ago, reality – this annoying parameter that often disturbs all equations carefully elaborated by experts and ideologists - invited itself to the financial and banking system. Bubble after bubble (Internet, housing, subprime), the attempts to increase the production of debt continued, with the hope that either the real economy would catch up with the level of the debt produced, or the rest of world would endlessly keep on buying US debts refinanced with new US debts (always more sophisticated, such as those famous CDOs, Collaterized Debt Obligations, invented to share risks while in fact they de facto infected the entire system).
However the bursting of the housing bubble triggered a fatal sequence, as the GEAB anticipated month after month since February 2006, progressively leading to mid-2007 and to banking and financial operators becoming aware that the ultimate debtor of this huge debt-producing plant (the US), i.e. the average US consumer, was either already insolvent or about to be (8), in a context of US recession (9).
From spring 2007 onward (tipping point of the global systemic crisis – see GEAB N°12 - February 20067), these large institutions began to try and evaluate their exposure, without taking the full measure of the crisis because, there again, habits, conformism, made them believe that there would be a « rebound in US economy », that « the fall in housing prices would not last », that « employment would stand firm”, that “corporate investment would respond”, etc… All of us read or heard these elements of wishful thinking presented as serious arguments by the big financial media and central banks themselves.
In the middle of summer 2007, large international banks had to admit it: a large proportion (though unquantifiable, the exact measure of the ongoing crisis being impossible to evaluate) of all those debts would never be paid back. It is very enlightening to observe the evolution of the market of « Commercial Papers », asset-backed (mostly financial ones), used in corporate financing and a key to understand the current banking and financial crisis. As shown on the chart below, it is a pure and simple collapse that started last August.
Asset-backed Commercial Paper Outstanding – through 08/22/2007
In consideration of their upcoming deadlines and unavoidable liabilities, large banks decided to start amassing real liquidities (and no longer pseudo-liquidities, such as most of those financial products sold to millions of savers in the past few years, ultimately US debt-backed) (10) rather than keep on financing operations likely to convey massive losses. In this field, they put an end to their mutual lending of funds, as, each of them being largely involved in US debt backed speculation, they now suspect one another to be more exposed and run the risk to go bankrupt.
And that's what it's all about! And that is the reason why the ECB is literally flooding European banks with liquidities. Jean-Claude Trichet probably remembers the collapse of Crédit Lyonnais (11). The subprime crisis is nothing but a trigger. Indeed the whole of the financial bubble based on US debt is bursting, because the US consumer is battered and the US economy is now in recessflation, as described by LEAP/E2020 in GEAB N°16 (June 2007). Behind those subprime mortgages, all US mortgages, car loans, credit cards… are now facing a dramatic increase in the default rate (the public debt follows the same trend as the US dollar and Treasuries keep on dropping).
In other words, the wisest people in the global banking and financial sphere (which excludes most of today's large international bank leaders) know that in the coming six months some entire sectors of activity and corresponding results will either vanish or experience record-losses.
- Foreign ownership of US debt - Source: US Department of the Treasury / Dollardaze
Given that the real economy is already infected not only in the US but all over the world, the collapse of the British, French and Spanish housing markets is next on this year's agenda, while Asia, China and Japan are about to face the simultaneous collapse of their exports to the US market and of the value of all their UD dollar-denominated assets (US currency, treasury bonds, corporate shares, etc…). The chart above is explicit about which countries will be hit hardest when the US debt bubble bursts, i.e. Japan, China, United Kingdom and countries exporting oil in US dollars.
Concerning future steps, LEAP/E2020 only has two interrogations: how many experts, central bankers, financial journalists, politicians fascinated by America will be able to understand this sequence of events that questions so deeply their vision of the world? And shall they understand soon enough, not wasting time expecting « jolts » and « rebounds » from an America that has not much left to do with mid-20th century' America.
A speed race between reality and theory is now open. All in all, a systemic crisis always boils down to such a race and the winner is always reality. Policy-makers, if they are lucid, can avoid a brutal and frontal collision with facts, thus sparing their populations from big damages. Throughout the planet, the months to come will enable to tell the wheat from the weeds in this matter.
LEAP/E2020 is convinced that the “US Very Great Depression” announced for 2007 is indeed next on History's agenda, and that it will have consequences incommensurable with the 1929 crisis, even though a number of indicators common to both crises started blinking a few months ago, and even though 1929 remains the last possible comparison in modern History (12).
---------
Notes:
(1) As regards the impact phase of the global systemic crisis, LEAP/E2020 now estimates that the third period of this phase as described in GEAB N°8 (10/15/2006) will in fact be a lot longer than anticipated by our teams at the time, and that it could spread until the beginning of 2009.
(2) The Fed's powerlessness in preventing a US recession, an accelerator of the ongoing crisis, will certainly not modify LEAP/E2020's opinion in this regard. Source: CNNMoney, 09/13/2007
(3) For more information: source Sherbrooke University, Canada.
(4) For an illustrated vision of this increase of US debts, it can be useful to visit this website: US National Debt Clock.
(5) Today Alan Greenspan would like to re-write history and claim that he has nothing to do with the financial rout currently sweeping away his country (source: New York Post, 09/14/2007); yet he was among the fervent promoters of one of the main triggers of today's crisis, i.e. adjustable rate mortgages (source Slate, 02/27/2004).
(6) The US consumer's rush on his credit card in an attempt to maintain his living standard, after he awoke from his dream of eternal mortgages, is about to entail new disappointments for large financial institutions in a few months time. Source: Sioux City Journal / AP, 14/09/2007
(7) For instance, the American Society of Civil Engineers estimated to USD 1,600 billion the investments required to put back into order US infrastructures (roads, harbours, airports, water supply and distribution, dams,…) over 5 years. Decades of collective incompetence have thus become a gigantic bill weighing on the future of each and every US citizen. Source: American Society of Civil Engineers.
(8) The US consumer's insolvency was described un GEAB N°9 (December 2006).
(9) The case of US car market, both collapsing and experiencing late payments on former sales, is eloquent. Source: The Colombus Dispatch, 09/02/2007
(10) Cf. on that matter, LEAP/E2020's advices in GEAB N°17 (September 2007)
(11) Cf. GEAB N°17
(12) Cf. GEAB N°17 on the comparison between 1929 crisis and 2007 crisis.
In this 17th issue of GEAB, our team of researchers has therefore decided to focus on the analysis of the nature of the ongoing global systemic crisis (an analysis already well advanced for all GEAB subscribers) (1) and to publish an explanation in 1000 words only of the current crisis and its articulation with the systemic crisis altogether. We hope that this explanation, using a simple language, will help each and everyone to understand upcoming events. As indeed, and this is a key point, we now estimate that no ruling centre can stop the ongoing systemic crisis anymore, nor even limit the scope of its global impact (2).
Since 1945, and increasingly since the collapse of the Soviet bloc in 1989, the US economy became the single pillar of the entire international financial and banking system. After the August 15, 1971 severing of the US dollar convertibility to gold (3) (or to any other physical counterpart, thus available in limited quantities), the amount of US dollars in circulation worldwide increased dramatically. The emerging of new centres of industrial, technological and service production throughout the world, combined with weakening human resources training (and therefore productivity competitiveness) in the US, resulted in a dramatic increase of the US debt (public and private). Thanks to the creativity of financial operators, with the more of less naive complicity of the entire banking and financial chain (central banks, quoting agencies, financial media, politicians, economists, etc…), this debt progressively became the US main production.
US Household Debt Service Ratio - Source Contraryinvestor.com
With G.W. Bush and his ideological or business partners in Washington, the production of this type of « value » (debts) increased even more dramatically (4), under the active auspices of the Fed's president of that time, Alan Greenspan (5): public debt, real-estate debts, car debts, credit card debts (6),... in every field debt grew on as the good “produced” in greatest amount by the so-called dominant economy. Meanwhile the entire world kept on buying this new “made in USA” good, western elites in particular being completely fascinated by the incredible creativity of Wall Street and its backyard, the City of London.
For many years though, anyone owning two eyes to see (i.e. neither experts nor policy-makers whose eyes only read reports on reality and press releases) and crossing the United States could observe that, contrary to Europe or Asia, the country was in a process of generalised impoverishment: escheated infrastructures (7), free-falling education, growing poorly-trained immigration, increasing dependence on foreign energy, multiple technological retardation,… This statement inevitably raised a fundamental question: who would pay back, and how, this constantly growing colossal debt?
Debt Outstanding by Sector (1974-2006) – Sources: Federal Reserve / ITulip.com
However, until September 11th, until the catastrophic invasion of Iraq, until Katrina and the partial destruction of New-Orleans, and more recently until the Mississippi bridge collapse, everyone – in line with those « experts » - seemed willing to believe in the figures published by the system itself selling them its « debt » product, figures which of course guaranteed that all was well and the average debtor was solvent.
Then, little by little, with an acceleration starting a year ago, reality – this annoying parameter that often disturbs all equations carefully elaborated by experts and ideologists - invited itself to the financial and banking system. Bubble after bubble (Internet, housing, subprime), the attempts to increase the production of debt continued, with the hope that either the real economy would catch up with the level of the debt produced, or the rest of world would endlessly keep on buying US debts refinanced with new US debts (always more sophisticated, such as those famous CDOs, Collaterized Debt Obligations, invented to share risks while in fact they de facto infected the entire system).
However the bursting of the housing bubble triggered a fatal sequence, as the GEAB anticipated month after month since February 2006, progressively leading to mid-2007 and to banking and financial operators becoming aware that the ultimate debtor of this huge debt-producing plant (the US), i.e. the average US consumer, was either already insolvent or about to be (8), in a context of US recession (9).
From spring 2007 onward (tipping point of the global systemic crisis – see GEAB N°12 - February 20067), these large institutions began to try and evaluate their exposure, without taking the full measure of the crisis because, there again, habits, conformism, made them believe that there would be a « rebound in US economy », that « the fall in housing prices would not last », that « employment would stand firm”, that “corporate investment would respond”, etc… All of us read or heard these elements of wishful thinking presented as serious arguments by the big financial media and central banks themselves.
In the middle of summer 2007, large international banks had to admit it: a large proportion (though unquantifiable, the exact measure of the ongoing crisis being impossible to evaluate) of all those debts would never be paid back. It is very enlightening to observe the evolution of the market of « Commercial Papers », asset-backed (mostly financial ones), used in corporate financing and a key to understand the current banking and financial crisis. As shown on the chart below, it is a pure and simple collapse that started last August.
Asset-backed Commercial Paper Outstanding – through 08/22/2007
In consideration of their upcoming deadlines and unavoidable liabilities, large banks decided to start amassing real liquidities (and no longer pseudo-liquidities, such as most of those financial products sold to millions of savers in the past few years, ultimately US debt-backed) (10) rather than keep on financing operations likely to convey massive losses. In this field, they put an end to their mutual lending of funds, as, each of them being largely involved in US debt backed speculation, they now suspect one another to be more exposed and run the risk to go bankrupt.
And that's what it's all about! And that is the reason why the ECB is literally flooding European banks with liquidities. Jean-Claude Trichet probably remembers the collapse of Crédit Lyonnais (11). The subprime crisis is nothing but a trigger. Indeed the whole of the financial bubble based on US debt is bursting, because the US consumer is battered and the US economy is now in recessflation, as described by LEAP/E2020 in GEAB N°16 (June 2007). Behind those subprime mortgages, all US mortgages, car loans, credit cards… are now facing a dramatic increase in the default rate (the public debt follows the same trend as the US dollar and Treasuries keep on dropping).
In other words, the wisest people in the global banking and financial sphere (which excludes most of today's large international bank leaders) know that in the coming six months some entire sectors of activity and corresponding results will either vanish or experience record-losses.
- Foreign ownership of US debt - Source: US Department of the Treasury / Dollardaze
Given that the real economy is already infected not only in the US but all over the world, the collapse of the British, French and Spanish housing markets is next on this year's agenda, while Asia, China and Japan are about to face the simultaneous collapse of their exports to the US market and of the value of all their UD dollar-denominated assets (US currency, treasury bonds, corporate shares, etc…). The chart above is explicit about which countries will be hit hardest when the US debt bubble bursts, i.e. Japan, China, United Kingdom and countries exporting oil in US dollars.
Concerning future steps, LEAP/E2020 only has two interrogations: how many experts, central bankers, financial journalists, politicians fascinated by America will be able to understand this sequence of events that questions so deeply their vision of the world? And shall they understand soon enough, not wasting time expecting « jolts » and « rebounds » from an America that has not much left to do with mid-20th century' America.
A speed race between reality and theory is now open. All in all, a systemic crisis always boils down to such a race and the winner is always reality. Policy-makers, if they are lucid, can avoid a brutal and frontal collision with facts, thus sparing their populations from big damages. Throughout the planet, the months to come will enable to tell the wheat from the weeds in this matter.
LEAP/E2020 is convinced that the “US Very Great Depression” announced for 2007 is indeed next on History's agenda, and that it will have consequences incommensurable with the 1929 crisis, even though a number of indicators common to both crises started blinking a few months ago, and even though 1929 remains the last possible comparison in modern History (12).
---------
Notes:
(1) As regards the impact phase of the global systemic crisis, LEAP/E2020 now estimates that the third period of this phase as described in GEAB N°8 (10/15/2006) will in fact be a lot longer than anticipated by our teams at the time, and that it could spread until the beginning of 2009.
(2) The Fed's powerlessness in preventing a US recession, an accelerator of the ongoing crisis, will certainly not modify LEAP/E2020's opinion in this regard. Source: CNNMoney, 09/13/2007
(3) For more information: source Sherbrooke University, Canada.
(4) For an illustrated vision of this increase of US debts, it can be useful to visit this website: US National Debt Clock.
(5) Today Alan Greenspan would like to re-write history and claim that he has nothing to do with the financial rout currently sweeping away his country (source: New York Post, 09/14/2007); yet he was among the fervent promoters of one of the main triggers of today's crisis, i.e. adjustable rate mortgages (source Slate, 02/27/2004).
(6) The US consumer's rush on his credit card in an attempt to maintain his living standard, after he awoke from his dream of eternal mortgages, is about to entail new disappointments for large financial institutions in a few months time. Source: Sioux City Journal / AP, 14/09/2007
(7) For instance, the American Society of Civil Engineers estimated to USD 1,600 billion the investments required to put back into order US infrastructures (roads, harbours, airports, water supply and distribution, dams,…) over 5 years. Decades of collective incompetence have thus become a gigantic bill weighing on the future of each and every US citizen. Source: American Society of Civil Engineers.
(8) The US consumer's insolvency was described un GEAB N°9 (December 2006).
(9) The case of US car market, both collapsing and experiencing late payments on former sales, is eloquent. Source: The Colombus Dispatch, 09/02/2007
(10) Cf. on that matter, LEAP/E2020's advices in GEAB N°17 (September 2007)
(11) Cf. GEAB N°17
(12) Cf. GEAB N°17 on the comparison between 1929 crisis and 2007 crisis.
21 September 2007
Chief strategist at CLSA predicts record gold run - Times Online
Chief strategist at CLSA predicts record gold run - Times Online: "t would be the biggest run on gold since the attempted French invasion of Britain of 1797 that sent prices through the roof. The precious metal, long a safe haven for investors, yesterday was predicted by a leading analyst to quadruple within three years as buyers seek shelter from prolonged turmoil in mainstream financial markets. According to Christopher Wood, chief strategist at the broker CLSA, market ructions and a collapse of the dollar could send gold prices to more than $3,400 an ounce within the next three years. Gold futures last night hit a 28-year high at $733 an ounce, but are more than $100 short of the record. Mr Wood said that the sub-prime conflagration would be the catalyst for a wider breakdown in markets. However, Wood predicted that investors would soon realise that the sub-prime crisis is simply the catalyst of a much wider breakdown, arguing that it has been the “Archduke Ferdinand assassination event” that sparks a bigger calamity. “This is not a sub-prime crisis. Sub-prime has merely exposed the bigger scam of structured finance; a scam that is about pretending that bad credit is good credit,” he said"
US rate cut decried as 'socialism for Wall St' - ABC News (Australian Broadcasting Corporation)
US rate cut decried as 'socialism for Wall St' - ABC News (Australian Broadcasting Corporation): "A timely correction or an encouragement to further irrational exuberance? Opinion is divided on the United States Federal Reserve's decision to slash official interest rates by 0.5 per cent. Stockmarkets around the globe rallied on the news - the cut was deeper than they had been expecting. The Fed justified it on the basis that the global credit crunch threatened to intensify the serious US housing downturn. But some doubt that the intervention will stop a recession. Others argue that it will make matters worse."
20 September 2007
Satyajit Das is laughing.
Satyajit Das is laughing. It appears I have said something very funny, but I have no idea what it was. My only clue is that the laugh sounds somewhat pitying.
One of the world's leading experts on credit derivatives (financial instruments that transfer credit risk from one party to another), Das is the author of a 4,200-page reference work on the subject, among a half-dozen other tomes. As a developer and marketer of the exotic instruments himself over the past 30 years. He seemed like the ideal industry insider to help us get to the bottom of the recent debt crunch -- and I expected him to defend and explain the practice.
I started by asking the Calcutta-born Australian whether the credit crisis was in what Americans would call the "third inning." This was pretty amusing, it seemed, judging from the laughter. So I tried again. "Second inning?" More laughter. "First?"
Still too optimistic. Das, who knows as much about global money flows as anyone in the world, stopped chuckling long enough to suggest that we're actually still in the middle of the national anthem before a game destined to go into extra innings. And it won't end well for the global economy.
An epic bear market
Das is pretty droll for a math whiz, but his message is dead serious. He thinks we're on the verge of a bear market of epic proportions.
The cause: Massive levels of debt underlying the world economy system are about to unwind in a profound and persistent way.
He's not sure if it will play out like the 13-year decline of 90% in Japan from 1990 to 2003 that followed the bursting of a credit bubble there, or like the 15-year flat spot in the U.S. market from 1960 to 1975. But either way, he foresees hard times as an optimistic era of too much liquidity, too much leverage and too much financial engineering slowly and inevitably deflates.
Like an ex-mobster turning state's witness, Das has turned his back on his old pals in the derivatives biz to warn anyone who will listen -- mostly banks and hedge funds that pay him consulting fees -- that the jig is up.
Rather than joining the crowd that blames the mess on American slobs who took on more mortgage debt than they could afford and have endangered the world by stiffing lenders, he points a finger at three parties: regulators who stood by as U.S. banks developed ingenious but dangerous ways of shifting trillions of dollars of credit risk off their balance sheets and into the hands of unsophisticated foreign investors; hedge and pension fund managers who gorged on high-yield debt instruments they didn't understand; and financial engineers who built towers of "securitized" debt with math models that were fundamentally flawed.
"Defaulting middle-class U.S. homeowners are blamed, but they are merely a pawn in the game," he says. "Those loans were invented so that hedge funds would have high-yield debt to buy."
The liquidity factory
Das' view sounds cynical, but it makes sense if you stop thinking about mortgages as a way for people to finance houses and think about them instead as a way for lenders to generate cash flow and create collateral during an era of a flat interest-rate curve. Although subprime U.S. loans seem like small change in the context of the multitrillion-dollar debt market, it turns out these high-yield instruments were an important part of the machine that Das calls the global "liquidity factory." Just like a small amount of gasoline can power an entire truck given the right combination of spark plugs, pistons and transmission, subprime loans became the fuel that underlays derivative securities many, many times their size.
Here's how it worked: In olden days, like 10 years ago, banks wrote and funded their own loans. In the new game, Das points out, banks "originate" loans, "warehouse" them on their balance sheet for a brief time, then "distribute" them to investors by packaging them into derivatives called collateralized debt obligations, or CDOs, and similar instruments. In this scheme, banks don't need to tie up as much capital, so they can put more money out on loan.
The more loans that were sold, the more they could use as collateral for more loans, so credit standards were lowered to get more paper out the door -- a task that was accelerated in recent years via fly-by-night brokers now accused of predatory lending practices.
Buyers of these credit risks in CDO form were insurance companies, pension funds and hedge-fund managers from Bonn to Beijing. Because money was readily available at low interest rates in Japan and the United States, these managers leveraged up their bets by buying the CDOs with borrowed funds.
So if you follow the bouncing ball, borrowed money bought borrowed money. And then because they had the blessing of credit-ratings agencies relying on mathematical models suggesting that they would rarely default, these CDOs were in turn used as collateral to do more borrowing.
In this way, Das points out, credit risk moved from banks, where it was regulated and observable, to places where it was less regulated and difficult to identify.
Turning $1 into $20
The liquidity factory was self-perpetuating and seemingly unstoppable. As assets bought with borrowed money rose in value, players could borrow more money against them, and it thus seemed logical to borrow even more to increase returns. Bankers figured out how to strip money out of existing assets to do so, much as a homeowner might strip equity from his house to buy another house.
These triple-borrowed assets were then in turn increasingly used as collateral for commercial paper -- the short-term borrowings of banks and corporations -- which was purchased by supposedly low-risk money market funds.
According to Das' figures, up to 53% of the $2.2 trillion commercial paper in the U.S. market is now asset-backed, with about 50% of that in mortgages.
When you add it all up, according to Das' research, a single dollar of "real" capital supports $20 to $30 of loans. This spiral of borrowing on an increasingly thin base of real assets, writ large and in nearly infinite variety, ultimately created a world in which derivatives outstanding earlier this year stood at $485 trillion -- or eight times total global gross domestic product of $60 trillion.
Without a central governmental authority keeping tabs on these cross-border flows and ensuring a standard of record-keeping and quality, investors increasingly didn't know what they were buying or what any given security was really worth.
A painful unwinding
Now here is where the U.S. mortgage holder shows up again. As subprime loan default rates doubled, in contravention of what the models forecast, the CDOs those mortgages backed began to collapse. Because they were so hard to value, banks and funds started looking at all CDOs and other paper backed by mortgages with suspicion, and refused to accept them as collateral for the sort of short-term borrowing that underpins today's money markets.
Through late last month, according to Das, as much as $300 billion in leveraged finance loans had been "orphaned," which means that they can't be sold off or used as collateral.
One of the wonders of leverage is that it amplifies losses on the way down just as it amplifies gains on the way up. The more an asset that is bought with borrowed money falls in value, the more you have to sell other stuff to fulfill the loan-to-value covenants. It's a vicious cycle. In this context, banks' objective was to prevent customers from selling their derivates at a discount because they would then have to mark down the value of all the other assets in the debt chain, an event that would lead to the need to make margin calls on customers already thin on cash.
Now it may seem hard to believe, but much of the past few years' advance in the stock market was underwritten by CDO-type instruments which go under the heading of "structured finance." I'm talking about private-equity takeovers, leveraged buyouts and corporate stock buybacks -- the works.
So to the extent that the structured finance market is coming undone, not only will those pillars of strength for equities be knocked away, but many recent deals that were predicated on the easy availability of money will likely also go bust, Das says.
That is why he considers the current market volatility much more profound than a simple "correction" in prices. He sees it as a gigantic liquidity bubble unwinding -- a process that can take a long, long time.
While you might think that the U.S. Federal Reserve can help prevent disaster by lowering interest rates dramatically, as they did Wednesday, the evidence is not at all clear.
The problem, after all, is not the amount of money in the system but the fact that buyers are in the process of rejecting the entire new risk-transfer model and its associated leverage and counterparty risks.
Lower rates will not help that. "At best," Das says, "they help smooth the transition."
The fine print
Das notes that Japan in the 1990s lowered interest rates to zero and the country still suffered through a prolonged recession. His timetable for the start of the next serious phase of the unwinding is later this year or early 2008. . . . Das' most readable book for laypeople is "Traders, Guns & Money," an amusing exposé of high finance, published last year. Das occasionally writes a blog at his publisher's Web site. Also available are a boxed set of his reference books on derivatives and his book specifically on CDOs. . . .
Perhaps the oddest line on the subject by a world leader was uttered by Luiz Inacio Lula da Silva, the president of Brazil. Asked if he was worried about the effects of the credit crunch in his country, he dismissively called it "an eminently American crisis" caused by people trying to make a lot of "third-class money." . . . CDOs were first widely used back in the late 1980s by Drexel Burnham Lambert junk-bond king Michael Milken to sell off damaged and previously unsellable debt in a way that was more palatable to customers.
One of the world's leading experts on credit derivatives (financial instruments that transfer credit risk from one party to another), Das is the author of a 4,200-page reference work on the subject, among a half-dozen other tomes. As a developer and marketer of the exotic instruments himself over the past 30 years. He seemed like the ideal industry insider to help us get to the bottom of the recent debt crunch -- and I expected him to defend and explain the practice.
I started by asking the Calcutta-born Australian whether the credit crisis was in what Americans would call the "third inning." This was pretty amusing, it seemed, judging from the laughter. So I tried again. "Second inning?" More laughter. "First?"
Still too optimistic. Das, who knows as much about global money flows as anyone in the world, stopped chuckling long enough to suggest that we're actually still in the middle of the national anthem before a game destined to go into extra innings. And it won't end well for the global economy.
An epic bear market
Das is pretty droll for a math whiz, but his message is dead serious. He thinks we're on the verge of a bear market of epic proportions.
The cause: Massive levels of debt underlying the world economy system are about to unwind in a profound and persistent way.
He's not sure if it will play out like the 13-year decline of 90% in Japan from 1990 to 2003 that followed the bursting of a credit bubble there, or like the 15-year flat spot in the U.S. market from 1960 to 1975. But either way, he foresees hard times as an optimistic era of too much liquidity, too much leverage and too much financial engineering slowly and inevitably deflates.
Like an ex-mobster turning state's witness, Das has turned his back on his old pals in the derivatives biz to warn anyone who will listen -- mostly banks and hedge funds that pay him consulting fees -- that the jig is up.
Rather than joining the crowd that blames the mess on American slobs who took on more mortgage debt than they could afford and have endangered the world by stiffing lenders, he points a finger at three parties: regulators who stood by as U.S. banks developed ingenious but dangerous ways of shifting trillions of dollars of credit risk off their balance sheets and into the hands of unsophisticated foreign investors; hedge and pension fund managers who gorged on high-yield debt instruments they didn't understand; and financial engineers who built towers of "securitized" debt with math models that were fundamentally flawed.
"Defaulting middle-class U.S. homeowners are blamed, but they are merely a pawn in the game," he says. "Those loans were invented so that hedge funds would have high-yield debt to buy."
The liquidity factory
Das' view sounds cynical, but it makes sense if you stop thinking about mortgages as a way for people to finance houses and think about them instead as a way for lenders to generate cash flow and create collateral during an era of a flat interest-rate curve. Although subprime U.S. loans seem like small change in the context of the multitrillion-dollar debt market, it turns out these high-yield instruments were an important part of the machine that Das calls the global "liquidity factory." Just like a small amount of gasoline can power an entire truck given the right combination of spark plugs, pistons and transmission, subprime loans became the fuel that underlays derivative securities many, many times their size.
Here's how it worked: In olden days, like 10 years ago, banks wrote and funded their own loans. In the new game, Das points out, banks "originate" loans, "warehouse" them on their balance sheet for a brief time, then "distribute" them to investors by packaging them into derivatives called collateralized debt obligations, or CDOs, and similar instruments. In this scheme, banks don't need to tie up as much capital, so they can put more money out on loan.
The more loans that were sold, the more they could use as collateral for more loans, so credit standards were lowered to get more paper out the door -- a task that was accelerated in recent years via fly-by-night brokers now accused of predatory lending practices.
Buyers of these credit risks in CDO form were insurance companies, pension funds and hedge-fund managers from Bonn to Beijing. Because money was readily available at low interest rates in Japan and the United States, these managers leveraged up their bets by buying the CDOs with borrowed funds.
So if you follow the bouncing ball, borrowed money bought borrowed money. And then because they had the blessing of credit-ratings agencies relying on mathematical models suggesting that they would rarely default, these CDOs were in turn used as collateral to do more borrowing.
In this way, Das points out, credit risk moved from banks, where it was regulated and observable, to places where it was less regulated and difficult to identify.
Turning $1 into $20
The liquidity factory was self-perpetuating and seemingly unstoppable. As assets bought with borrowed money rose in value, players could borrow more money against them, and it thus seemed logical to borrow even more to increase returns. Bankers figured out how to strip money out of existing assets to do so, much as a homeowner might strip equity from his house to buy another house.
These triple-borrowed assets were then in turn increasingly used as collateral for commercial paper -- the short-term borrowings of banks and corporations -- which was purchased by supposedly low-risk money market funds.
According to Das' figures, up to 53% of the $2.2 trillion commercial paper in the U.S. market is now asset-backed, with about 50% of that in mortgages.
When you add it all up, according to Das' research, a single dollar of "real" capital supports $20 to $30 of loans. This spiral of borrowing on an increasingly thin base of real assets, writ large and in nearly infinite variety, ultimately created a world in which derivatives outstanding earlier this year stood at $485 trillion -- or eight times total global gross domestic product of $60 trillion.
Without a central governmental authority keeping tabs on these cross-border flows and ensuring a standard of record-keeping and quality, investors increasingly didn't know what they were buying or what any given security was really worth.
A painful unwinding
Now here is where the U.S. mortgage holder shows up again. As subprime loan default rates doubled, in contravention of what the models forecast, the CDOs those mortgages backed began to collapse. Because they were so hard to value, banks and funds started looking at all CDOs and other paper backed by mortgages with suspicion, and refused to accept them as collateral for the sort of short-term borrowing that underpins today's money markets.
Through late last month, according to Das, as much as $300 billion in leveraged finance loans had been "orphaned," which means that they can't be sold off or used as collateral.
One of the wonders of leverage is that it amplifies losses on the way down just as it amplifies gains on the way up. The more an asset that is bought with borrowed money falls in value, the more you have to sell other stuff to fulfill the loan-to-value covenants. It's a vicious cycle. In this context, banks' objective was to prevent customers from selling their derivates at a discount because they would then have to mark down the value of all the other assets in the debt chain, an event that would lead to the need to make margin calls on customers already thin on cash.
Now it may seem hard to believe, but much of the past few years' advance in the stock market was underwritten by CDO-type instruments which go under the heading of "structured finance." I'm talking about private-equity takeovers, leveraged buyouts and corporate stock buybacks -- the works.
So to the extent that the structured finance market is coming undone, not only will those pillars of strength for equities be knocked away, but many recent deals that were predicated on the easy availability of money will likely also go bust, Das says.
That is why he considers the current market volatility much more profound than a simple "correction" in prices. He sees it as a gigantic liquidity bubble unwinding -- a process that can take a long, long time.
While you might think that the U.S. Federal Reserve can help prevent disaster by lowering interest rates dramatically, as they did Wednesday, the evidence is not at all clear.
The problem, after all, is not the amount of money in the system but the fact that buyers are in the process of rejecting the entire new risk-transfer model and its associated leverage and counterparty risks.
Lower rates will not help that. "At best," Das says, "they help smooth the transition."
The fine print
Das notes that Japan in the 1990s lowered interest rates to zero and the country still suffered through a prolonged recession. His timetable for the start of the next serious phase of the unwinding is later this year or early 2008. . . . Das' most readable book for laypeople is "Traders, Guns & Money," an amusing exposé of high finance, published last year. Das occasionally writes a blog at his publisher's Web site. Also available are a boxed set of his reference books on derivatives and his book specifically on CDOs. . . .
Perhaps the oddest line on the subject by a world leader was uttered by Luiz Inacio Lula da Silva, the president of Brazil. Asked if he was worried about the effects of the credit crunch in his country, he dismissively called it "an eminently American crisis" caused by people trying to make a lot of "third-class money." . . . CDOs were first widely used back in the late 1980s by Drexel Burnham Lambert junk-bond king Michael Milken to sell off damaged and previously unsellable debt in a way that was more palatable to customers.
18 September 2007
why the Titanic was actually a securitisation
10 reasons as to why the Titanic was actually a securitisation instrument:
1) The downside was not immediately apparent.
2) It went underwater rapidly despite assurances it was unsinkable.
3) Only a few wealthy people got out in time.
4) The structure appeared iron-clad.
5) Nobody really understood the risk.
6) The disaster happened overnight London time.
7) Nobody spent any time monitoring the risk.
8) People spent a lot trying to lift it out of the water.
9) People who actually made money were not in original deal.
10) Despite the disaster, people still went on other ships.
1) The downside was not immediately apparent.
2) It went underwater rapidly despite assurances it was unsinkable.
3) Only a few wealthy people got out in time.
4) The structure appeared iron-clad.
5) Nobody really understood the risk.
6) The disaster happened overnight London time.
7) Nobody spent any time monitoring the risk.
8) People spent a lot trying to lift it out of the water.
9) People who actually made money were not in original deal.
10) Despite the disaster, people still went on other ships.
Remember Mises
There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.
Human Action - Ludwig Mises
human action
Human Action - Ludwig Mises
human action
15 September 2007
Safe Haven | HUI Upleg Cycles
Safe Haven | HUI Upleg Cycles: "By this designation, uplegs 2, 4, and 6 were massive uplegs while 3 and 5 were consolidation uplegs. And the recent provisional 7th upleg was also likely a consolidation upleg. If this proves to be the case, then we are now due for the next massive upleg. And if the upcoming upleg 8 is indeed massive, PM-stock investors and speculators have the opportunity to reap absolutely enormous gains in the next 6 to 12 months."
Financial Sense "Liquid Energy" by Elliott Gue 09/14/2007
Financial Sense "Liquid Energy" by Elliott Gue 09/14/2007: "In the most recent issue of The Energy Strategist, I took a detailed look at the Asian coal markets and how Australia is a key beneficiary of growing Asian coal trade. Much of the same is true for natural gas: Australia is fast becoming a major exporter of LNG to Asia. The nation is politically stable, and unlike many other resource rich countries, the government has been fair and transparent in its treatment of resource access and taxation. As a result, Australia has benefited from a massive increase in investment on the part of global energy firms. Source: EIA Australia’s natural gas production is set to increase at an annualized pace of 4.3 percent out to 2030. This is the fastest production growth projected for any country, anywhere in the world. The vast majority of that gas will be exported. In fact, Australia alone accounts for all the gas production growth forecast for the developed world out to 2030. I’ve studied the Australian market in recent years because the country's geographic proximity to Asia makes it an obvious beneficiary of rising Asian energy demand. The only problem is that Australian stocks have been tough for most US and Canada-based investors to access. But that's changing. Interactive Brokers recently gave account holders direct access to Australian stocks for a tiny commission.
Other brokers are considering following that move. And I've noticed that some of the US shares of Australian firms traded on the over-the-counter market have begun to pick up volume lately.
There are a number of ways to play the gas growth theme. One is to buy into the companies that supply compression equipment and provide engineering services necessary to build out LNG infrastructure--mainly gas liquefaction and regasification terminals. And I'm also looking more carefully at a number of Australian and US firms that will be big producers of LNG in coming years.
Other brokers are considering following that move. And I've noticed that some of the US shares of Australian firms traded on the over-the-counter market have begun to pick up volume lately.
There are a number of ways to play the gas growth theme. One is to buy into the companies that supply compression equipment and provide engineering services necessary to build out LNG infrastructure--mainly gas liquefaction and regasification terminals. And I'm also looking more carefully at a number of Australian and US firms that will be big producers of LNG in coming years.
13 September 2007
Cold turkey for financial addiction
Sep 13, 2007
AsiaTimes
By James Cumes
The time for financial detoxification seems to have come. Indeed, it seems to be long past due.
The addiction started with the junk-bond craze and the smart takeover merchants of the 1980s. Those junkies were on relatively soft drugs and they were fringe people - most of the serious investors and financial institutions saw them as market outlaws or barely legal cowboys. They were what I then called "adventurers, marauders and buccaneers". Some crossed the line and were convicted on serious criminal charges.
In 1988, in How to Become a Millionaire, I asked, "How true is it that 'what is happening in the financial markets today bears the same relationship to what happened in the "go-go years" of the 1960s as Caesar's Palace bears to the local bingo game'?" Were we, I asked, "turning the financial markets into a huge casino"?
In the years that followed, we all should have gotten the answer. Soft drugs gave way to hard. Addiction spread. The drugs diversified; so did the addicts. Into the 1990s and dramatically more so into the 21st century, many of those in the top-drawer financial world became addicted. Many became more, more became most, and most in the past few years became all: the biggest and most respectable financial institutions, financiers, creative investors and even regulators joined in with a sense of benevolent enthusiasm that defied any remaining scaremongers.
When everyone in the house is crazy, only the sane seem like fools. So it was when the financial addiction spread everywhere. Then everyone who was not taking his daily dose of heroin or cocaine became the fringe-dweller, the oddball, the brake on progress, the party-pooper at the greatest no-cash-down, how-to-spend-it shindig that our planet has ever known. Debt piled on debt everywhere: in households, corporations, public finances and international deficits, in magnitudes that had never been even glimpsed in the most creative imaginations before.
But the universality of drug-taking does not mean that deadly drugs will not harm and cannot kill.
The deadly nature of the addiction was obscured by the extraordinary variety, complexity and obfuscatory nature of much of the so-called structured finance: credit derivatives, commercial paper, hedge funds, CDOs, CDSs, SIVs, ABCP and the rest. They all looked not only creative but also splendidly professional and expertly managed. Mathematicians joined their creative genius to that of accountants and others to conjured up "models" that were guaranteed, reliable, blue-chip, fail-safe.
Even the most respected rating agencies spread their Alpha ratings around with such glorious abandon that anything else seemed to have gone out of style. Such was the chorus of acceptance that these instruments came to be regarded, above all, as secure as the banks or non-bank issuing or trading institutions confidently presented themselves as being.
So the final accolade was conferred on financial instruments that, in any world except one in which the entire population had gone crazy, would have been condemned as the deadly instruments of financial, moral and other ruin that they surely were - and are now proving themselves to be.
As one analyst writes: "Before this mess finally ends, there are going to be scores more hedge funds, pension plans, mortgage lenders, and possibly even banks carted out in a wagon wishing they never heard the terms 'swap', 'swaption', 'conduit', 'MBS', 'CDO', 'CDS', 'SIV', 'Mark to Market' and probably a dozen other terms as well."
Perhaps the credit derivatives, in all their manifestations, were the most addictive. They were as modern and creative as the latest technological marvel. From the initial concept in the late 1990s, they gave a dream ride to the mostly young, very smart people who were able to ride to financial glory on a tide that quickly swept along even the most staid, respectable and financially distinguished institutions in the United States and, in surprising measure, also around the world.
If some were spared addiction in the early years, they became fewer and fewer right up to July 2007. The regulators, including central banks, international agencies and others, did not regulate the ever thicker jungle of financial enterprises and their innovative financial products because, more and more, the addicts lay outside the banking system and therefore largely or wholly outside their jurisdiction.
The banks did not stay aloof from "structured finance" of virtually every kind, but they managed their participation in it, for the most part, in ways that avoided interference by the regulators - if, that is, the regulators might have been disposed to interfere. Increasingly, they accepted some form of "moral hazard", just as major banks at the very top of the financial heap did in their dealings with Enron in the course of its fraud and failure at the end of the 20th century and into the 21st.
So the addiction grew and spread without restraint - it became a sort of global financial frenzy sans frontieres - and the law-enforcement officers, having no powers of enforcement and/or no will to enforce, either cheered them on or snored at their desks.
Until now. Even yet, they are not wide awake, but they have now begun to stir.
When they do become fully alive to what has happened, they will be even more appalled at the terrifying financial situation that confronts them than many of us among the non-addicted are now. Their attempt to resolve that situation in any way that can be called acceptable will reveal both their culpable negligence in the past and, ultimately, their despair of finding any "cure", any "magic elixir" or any "soft landing" in the period ahead.
They will discover that they and the speculators, high rollers and just plain gamblers in global finance have been indulging an addiction for which there can be no painless detoxification. The addiction has persisted for too long and has become too deep and widespread.
To begin with, the addiction is too huge. The "value" of the creative financial paper circulating the globe is calculated, as close as one of our "experts" can reasonably count it, to be US$480 trillion. The Bank for International Settlements puts its count at $600 trillion. In fact, we do not know what the precise sum may be, but we do know that it is so mind-boggling that it seems to lie outside all reality.
What is certain is that somewhere in that massive sum are debts that have to be repaid and creditors who have to be satisfied; and we know that it is a domino game. If the creditors of the first debtor aren't satisfied, then they will become, in their turn, defaulting debtors for their own creditors; and so on down the line and around a global mulberry bush.
Global gross national product s calculated to be about $50 trillion a year. So the figure of $480 trillion is close to 10 times the entire global annual GNP, and $600 trillion is about 12 times. Alternatively, we can say that the "notional value" of the various pieces of financial paper circling the globe at the moment is probably somewhere between 40 and 60 years of the United States' GNP. It is several times the estimated market value of aggregate global wealth.
How much of this is double-counting? How much of it requires the liquidation of real assets to satisfy a structured-finance debt? We don't know, just as we don't know the answers to many of the magnitudes involved in what is undoubtedly the greatest, most complex and most intimidating financial problem that national economies or the global economy as a whole have ever faced. William Wordsworth wrote about "huge trunks, and each particular trunk a growth of intertwisted fibers serpentine up-coiling, and inveterately convolved". He could well have been writing about current financial instruments and the "system" they have contrived.
The unease, verging on panic, about subprime mortgages has given us a glimpse of what is ahead. But let us be very clear, it has been only a glimpse. Subprime securitized mortgages are only a relatively tiny part of the huge credit and debt structure involved in what we may group under the generic name of derivatives. They include credit derivatives, hedge funds, private-equity deals, mutual funds, pension funds and the whole gamut of financial instruments that have flooded not only US markets but markets around the world, especially in the past five to 10 years.
However, if the subprime crisis has given us only a glimpse, it has also given us a terrifying preview of what is yet to come. The first clear point is that the various pieces of financial paper do represent debts that have to be repaid or somehow liquidated. Creditors demand their money, and debtors must find the money to pay them, with the penalty for default heavy losses, with possible bankruptcy. The latter is especially likely in a world in which credit has become tight.
The second crucial point is that we don't know the "value" of the financial paper except in nominal or notional terms. On the books of the debtor it is "marked to his model"; and, most likely, on the books of the creditor, it is "marked to the model" of the creditor in the same way, or even more advantageously. However, the only thing that really matters in the end is how it is or will be "marked to market" at the moment of time when the market is called upon to pass judgment by giving it a cash value.
In this regard, we should note that financial assets worth trillions of dollars are from over-the-counter (OTC) transactions for which there is not and never has been any "market" to mark them to. They will not have an authentic market value until the moment comes for the deals to be liquidated in one way or another.
In a bull market, financial paper might be sold well above the "mark to model" price; but it is not at that point that the holder might be most likely to sell - or, most important, be forced to sell. It is when the market has become nervous, when confidence has been diminished and when the bears have begun to crowd the markets that the price will become most relevant and crucial.
Then, with the markets as we have seen them in the past two months, the price of the securitized paper is likely, as one analyst put it, to go "Pouf!" In other words, as we have seen with some of the paper of such a previously highly respected firm as Bear Stearns or a major bank such as BNP Paribas, the paper can become or be seen to be worthless, or very nearly so.
Does that result in real losses? For someone, it certainly does, however much the institution may say that it is in a position to bear those losses - of a few billion, tens of billions or, in some cases, hundreds of billions of dollars. Recently, the spotlight has been on subprime mortgages; but this is only because the collapse - the inability to pay outstanding debt - happened to appear there first.
We should have expected that. The mortgages, or a high percentage of them, were, it would seem deliberately - certainly with a high degree of studied negligence - designed to fail. They did fail; but the important thing is that, even in the wider housing-mortgage market, prime mortgages have been failing too - and they will continue to fail.
Household debt in the US and some other countries is more enormous and potentially more crippling that it has ever been before. In more and more instances, the mortgagee will be unable to service his debt - a real debt, whose failure, in aggregate, will have a real impact on the national and global financial situation and, eventually but fairly rapidly, on the productive economy.
So the infection will become an epidemic that will spread to the whole housing market; and markets other than housing have been deeply involved in the structured-finance caper. Credit derivatives of all kinds, a rapidly proliferating range of hedge funds, private-equity groups and the rest have shown no hesitation to exploit smart financial and above all, highly leveraged opportunities wherever they may have been offering.
Most of that enterprise has thrived - and can thrive only - in a booming market in which more money flows into the schemes than goes out; so there is a Ponzi element in much of current creative financial enterprise that makes its collapse as inevitable and potentially as destructive of value as the subprime mortgage debacle has been.
When the net inflow of funds into these schemes becomes a net outflow, the whole structure must inevitably begin to crumble. Hedge funds have been particularly - perhaps we can say, inherently - susceptible to collapse. Thousands have come into existence in recent years; and thousands of them have gone out of business. That has happened characteristically even when markets were booming. In recent years, those who exited the business were fewer than those who entered.
But now that the boom has turned more clearly in the direction of a bust, hedge funds heading for the exits have been increasing in numbers. If the exits are not crowded yet, it won't be long before they will be. Only those in the more traditional style of hedge funds - hedging genuinely for themselves and others who may be their clients - may survive.
One analyst has suggested that the current credit crunch has given us a chance "to see the hedge-fund emperors without their clothes". It has also been "an opportunity for investors to get some insight into an industry whose activities are often cloaked in secrecy and which has wandered far from its original purpose of hedging volatility" (Sharon Reier). That original purpose was to manage market risk by, for example, hedging long and short positions with modest leverage.
The contrast with the funds as between 6,000 and 10,000 of them have now evolved is stark. Even of the widely respected "quants" - the computerized quantitative or black-box models of the mathematical whizzes - Donald Pinto, an experienced hedge-fund manager himself, is quoted as saying, "The programs are quite sophisticated. They do work in stable markets, but they have a fundamental weakness. There is no room for judgment. When markets behave erratically - as they have recently - the inability to use common sense to make investment decisions, combined with a high level of leverage, is a recipe for disaster."
With the hedge-fund industry claimed currently to be the volatile repository of about $1.7 trillion, this can only give cause for acute alarm.
The fragility of the "system" can be seen further by analyzing each of the various elements contained in what is high-risk, speculative, "ownership" investment. That "investment" looks principally to profits through asset appreciation. The prices of assets are driven up because of a speculative fever and that fever, as in many asset-price booms of the past, is embedded in a conviction or expectation that it will feed on itself to drive prices to ever more feverish and ultimately unsustainable heights.
These booms persist only as long as funds are there to nourish them. If the flow of those funds diminishes or, more particularly, if their flow is reversed, the booms have historically and characteristically been prone to sharp collapse.
The present financial situation is more complex than any we have known before and has tended to draw in all markets - for stocks, real estate, currencies, gold, commodities and the rest - if only because what we may call the broad category of "derivatives" characteristically "derives" from those markets. Despite this spread and complexity, we may still postulate that the fundamentals of market behavior remain the same.
It is in that context that we might consider some elements in the present global financial situation. One such element is the carry trade. Its essence is that money is borrowed in a market where borrowing costs are low and invested in markets where returns are high. This has meant borrowing, for example, in Japan or Switzerland and investing in, for example, Australia or New Zealand - or, for that matter, Iceland or the United States.
The carry trade has apparent advantages. It is part of the financial regalia that enables the high-consumption economies to keep right on consuming; but that coddling of debt-based consumption also has its price, particularly by creating huge trade and payments deficits and by stimulating the export not of products of domestic industry but of the industry itself.
The US dollar, for example, loses value vis-a-vis "producer" currencies and commodities, its role as a reserve currency is undermined, and volatility - on which speculation thrives - replaces the stability derived from, for example, gold or the system based on the dollar, which in turn was related to gold, contemplated under Bretton Woods. Stability is replaced by an anarchy that encourages movement away from production and fixed-capital investment into asset-price speculation and "ownership" investment.
Another part of the price is that the tap might be turned off at any moment, and perhaps quite sharply, if the carry trade reverses - and, sooner or later, reverse is what it certainly will do. If the Japanese yen appreciates or threatens to appreciate sufficiently or if interest rates in Japan move up significantly, a robust carry trade will rapidly become a robust unloading exercise.
The outcome can then be that asset-price booms are sharply collapsed and, down the line a little, consumers too are required to adapt themselves to more Spartan living. The export-driven economies, which are based on high consumer-export markets, will also be hurt. So the markets will carry the impact of speculative volatility from one point to another.
As part of this, we might just take a quick look at the way in which the housing market in Australia has appeared to evolve. Recent years brought a frenetic boom to Australian residential property, especially in Sydney and, to a lesser but significant degree, in Perth. The boom then showed signs of slowing, again especially in Sydney.
That tendency to slow still applies to the Sydney market, although prices even there have recently seemed to be moving up again. However, what seems to be especially worthy of note at this point is that prices in the capitals of most of the other Australian states seem to be heading or to have already gone into frenetic mode. This is despite affordability for houses and apartments having declined dramatically for the average buyer. So it would seem that much, at least, of the persistent boom in housing is due to speculation rather than to demand from the consuming public.
That suggests that funds have been flowing into the housing market, presumably in a quest for capital gains through asset-price inflation. Where have these funds come from? Frankly, I do not know from any reliable data available to me; but a reasonable hypothesis may be that some of it is foreign money, possibly from the carry trade, seeking to find profitable outlets for the money borrowed cheaply in - most likely - Japan.
The housing that is being bought in Australia, except possibly some in Sydney, would seem to be different from the largely alpha-luxury property that, for example, is being bought in London by foreign money seeking speculative outlets for investable funds; but something the same kind of speculative stimuli may be producing much the same kind of ultimately unsustainable property boom in Australia.
In either the Australian or the London case, a collapse of the housing market - along probably with a collapse of other asset markets - is inevitable. It is a question only of when rather than if.
That "when" might now be rather close. It could get under way as early as the next couple of months. October and November have seemed to be dangerous for events of this kind in the past. The US stock-exchange crashes of 1929 and 1987 are examples. The current nervousness on Wall Street and stock markets around the world may quickly flow on to asset markets everywhere.
Central banks now recognize the dangers of a meltdown in credit markets and seem ready to do whatever they can to prevent it. They have already made available to banks at least half a trillion dollar-equivalent loans to give them extra liquidity. The US Federal Reserve has cut the discount rate. They have kept the more general interest rate, or "bank rate", on hold, and some might be about to reduce it.
But the feature that is perhaps of most significance and that carries the most startling risks is their willingness, already demonstrated by the Fed, to accept "securitized" paper, even relatively high-risk collateralized mortgage paper, as security for their loans to the banks. That process would seem to mean that that paper would become, in some measure, a substitute for Treasury bills or similar securities of other central banks that have been used in traditional open-market operations in the past.
Already the limited acceptance of this paper is a token of its extraordinary evolution toward respectability. The junk bonds or creations of what I once called the "adventurers, marauders and buccaneers" have now been endorsed by central banks as seeming to belong in the same ball-park of acceptability as gilts or Treasuries.
This may be, on the one hand, the only real way to deal effectively with the disruption to credit that this paper has caused and threatens further to cause on a vastly greater scale. Only in this way, perhaps, can the vast burden of intrinsically speculative debt be "neutralized". On the other hand, if the practice is indulged in any sufficient way for it to be effective in its "neutralizing" function, it will destroy the US dollar and perhaps other currencies and put the entire global financial system as we have known it at grave risk.
To make "liquidity" available to the banking system is not to be certain that the banking system will use it in a way to keep the credit markets adequately open to normal commercial business. At the same time, if the central bank proves willing to accept any amount of this securitized paper, then it would mean the injection of mountains of paper currency into the financial system, presumably starting with the United States but possibly or probably extending to other major financial markets and ultimately polluting the entire global system.
If the "notional value" of derivatives is something of the order of $600 trillion, we do not have to postulate that the central banks will absorb and "neutralize" all of this paper. Even if they were to absorb only 10% of the notional value, this would amount to about $60 trillion - more than the GNP of the entire world economy.
The figures are so staggering in themselves that the mind boggles; but perhaps the even more important thing is that we - and the central banks - cannot know the true extent of the problem that confronts them. Will they have to accept "only" 10% of this paper or will 1% turn out to be enough? If only 1%, what impact would acceptance of paper to that amount - $6 trillion - have in unfreezing the credit markets?
Would it also mean that central banks would have embarked on a course of hyperinflation that would make the US dollar and possibly several other major currencies worthless? There would then have to be an issue of new currencies as there was after the hyperinflation in Germany in the 1920s. There would also have to be a fundamental renegotiation of the ways in which the global financial system would operate.
All of that would take time. While it was going on, national economies and the global economy could be brought near to standstill. Economies might have to resort to some form of barter as the only way in which trade could continue securely to take place. Unemployment would become socially devastating. Many personal fortunes would disappear. There would be a whole reordering of societies and of relations among countries that might offer the most terrifying outcomes in terms of conflict of all kinds, including wars - civil, regional and worldwide.
Some analysts have been contending that the prospect of a depression - another great depression of global dimensions - has been feared for so long now that it will not be allowed to happen. That is too optimistic. Governments and central bankers will not want it to happen, but they have so far failed so miserably to prevent or deter us from stampeding to the brink that, whatever their motives may be, they seem now unlikely to be able to stop us from going over the edge.
Therefore, the best that we can hope for now may be that governments, central banks and others will apply such palliatives as they can without allowing their support of speculation to add further to destruction of the global economy and financial system, while at the same time embarking on national and international measures to restore primacy and vigor to fixed-capital investment, productivity and production in the real economy, national and global.
That raises the question of the impact and its extent that financial collapse will have on the real economy - the productive economy. The short answer is that it must inevitably be somewhere in a range from severe to devastating.
The immediate depressive effect of what we have already is likely to be sharp and severe. Employment in the United States appears already to have moved down sharply. This is largely in housing and construction, which contributed so much to growth in the recovery and boom years after 2001, and in associated industries such as durable goods, retailing and distribution, real-estate agencies and associated professional and legal services.
Consumer demand, which drew so much of its vitality from the housing boom, will be severely hit. Credit-card debt will have to be wound down. Auto credit is likely to diminish both in demand and supply, and the auto industry could suffer severely. So the impact of credit problems will flow through the US economy and must also impact on the trade that the United States will be able to conduct with the rest of the world.
The dollar is almost certain to decline in value, perhaps precipitously, especially in gold and key-commodity terms, and force a reduction in demand for imported goods. This will be in part beneficial for US exports; but domestic industries, especially in the more basic consumer sectors, are unlikely to be able to replace, at least in the short term, supplies from overseas. No longer the consumer without limit, the US will almost certainly infect other countries with its slowdown, recession or depression, and that in turn will reduce growth, investment, employment and output around the world.
Even the boom in commodities, though it might survive more robustly than other sectors, will certainly be affected and diminished, as demand collapses in other sectors. In other words, we are likely to see the characteristic snowball effect on trade and growth that we have experienced in similar - though almost certainly less devastating - circumstances in the past.
Some countries, such as China, which have more effective regulatory control of their economies as well as the inherent size and strength to "go it more nearly alone" may transit the worst of the coming crisis less painfully than some others.
To emerge from this crisis or complex of crises, we will need to resume attitudes of mind and policy that we had after 1945. After 20 years of world depression and world war, there was then a widespread passion for rebuilding national economies and the world economy on a sound basis of stability and growth, through multilateral cooperation for peaceful change.
Now we need to restore value to what produced real income and wealth for us in the past. We will need national institutions which can help us restore that value; and we will need to rebuild our international institutions. The United Nations and the host of associated or independent international institutions have proved to be useless or worse than useless, especially over the past three to four decades.
Their achievement has been to bring us to the brink of a tragedy - economic and financial in its outward aspects, but with deep political and strategic implications - which threatens to be the most cataclysmic to confront us during all the years since the advent of the Industrial Revolution.
So in a sense, the task that confronted us in 1945 is the task that confronts us again: to rebuild the world to a better pattern of economic and financial policies and practices, and to do so cooperatively and imaginatively, with the participation of all those of whatever backgrounds who share our objectives of positive and peaceful change. It is a huge task. It calls for cooperation among all countries and all regions, all races and all faiths if we are to see our way through it safely.
In tackling that task, we must start now. We have just seen an Asia-Pacific Economic Cooperation summit in Sydney that has been an exercise in futility, both in discussing vital issues in ways that could serve no purpose and ignoring issues whose neglect could bring us to the brink of self-destruction of much of human civilization. The APEC meeting reflected the impotence and irrelevance that a plethora of international gatherings and self-styled "summits" have displayed in recent decades. We must not persist in flagrant indulgence in this empty, exhibitionist futility.
The process of building new and effective international economic institutions was set out some years ago in my proposals for "Victory Over Want" (VOW). These proposals have been developed further in my proposals for a World Economic Authority and a World Development Authority put forward in my latest book, America's Suicidal Statecraft: The Self-destruction of a Superpower. There are other proposals being put forward, many of which are worthy of careful and urgent consideration.
However, with the best will in the world and with the utmost cooperation among the world's major powers, creating effective international agencies will take time. Until then, it seems inevitable that we cannot avoid some elements of a "cold-turkey" detoxification from the addiction to which our economic and financial policies have delivered us.
That "cold-turkey" detox threatens to be the most painful experience that the national economies and the world economy as a whole have suffered in the two or three centuries of the Industrial Revolution. It must be our objective, therefore, to keep this phase as short as we possibly can and to move to the phase of rebuilding through effective national and international measures and institutions as soon as may be practicable.
That is the imperative that we should now acknowledge and should seek to satisfy with all the energy, creativity and urgency we can contrive.
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Dr James Cumes is the author of America's Suicidal Statecraft, as well as other fiction and non-fiction works.
RE: My email to McCulley (shorter)... Thomas
NEW 9/12/2007 8:16:19 AM
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Paul:
Your article on not bailing out Wall Street, but bailing out Main Street implicitly removes culpability from Main Street. The modern day consumer could use a little less--actually, a lot less--resiliency. As far as the eye can see there are lessons to be learned. Credit isn't tight. When I was a young punk with a full time job at Cornell, I was turned down for my first credit card. My college room mate and recently retired Senior VP at Goldman (Rick Sherlund) was turned down for his first credit card. My brother, while working at Arthur Young, was also on the rejection list. My house was 20% down and maximum 28% of gross salary. Now THAT's tight credit. Main Street needs to sober up (start saving, stop spending), and it won't happen as long as the tap keeps getting opened up. Consumers shouldn't get a put; they should get a kick in the butt. The system (especially central bankers who should know better) has become very purge-averse. Modern day purging is exemplified by lost pension plans and corporate restructuring; I think it should be liquidating companies (like a few airlines) that can't meet their obligations. Creative destruction and fault lines in California are metaphors of each other. Pay now or pay later.
But that's just one amateur's opinion. Sorry for the rant. I've read too many articles stuffed with pleas for help and promises to repent.
AsiaTimes
By James Cumes
The time for financial detoxification seems to have come. Indeed, it seems to be long past due.
The addiction started with the junk-bond craze and the smart takeover merchants of the 1980s. Those junkies were on relatively soft drugs and they were fringe people - most of the serious investors and financial institutions saw them as market outlaws or barely legal cowboys. They were what I then called "adventurers, marauders and buccaneers". Some crossed the line and were convicted on serious criminal charges.
In 1988, in How to Become a Millionaire, I asked, "How true is it that 'what is happening in the financial markets today bears the same relationship to what happened in the "go-go years" of the 1960s as Caesar's Palace bears to the local bingo game'?" Were we, I asked, "turning the financial markets into a huge casino"?
In the years that followed, we all should have gotten the answer. Soft drugs gave way to hard. Addiction spread. The drugs diversified; so did the addicts. Into the 1990s and dramatically more so into the 21st century, many of those in the top-drawer financial world became addicted. Many became more, more became most, and most in the past few years became all: the biggest and most respectable financial institutions, financiers, creative investors and even regulators joined in with a sense of benevolent enthusiasm that defied any remaining scaremongers.
When everyone in the house is crazy, only the sane seem like fools. So it was when the financial addiction spread everywhere. Then everyone who was not taking his daily dose of heroin or cocaine became the fringe-dweller, the oddball, the brake on progress, the party-pooper at the greatest no-cash-down, how-to-spend-it shindig that our planet has ever known. Debt piled on debt everywhere: in households, corporations, public finances and international deficits, in magnitudes that had never been even glimpsed in the most creative imaginations before.
But the universality of drug-taking does not mean that deadly drugs will not harm and cannot kill.
The deadly nature of the addiction was obscured by the extraordinary variety, complexity and obfuscatory nature of much of the so-called structured finance: credit derivatives, commercial paper, hedge funds, CDOs, CDSs, SIVs, ABCP and the rest. They all looked not only creative but also splendidly professional and expertly managed. Mathematicians joined their creative genius to that of accountants and others to conjured up "models" that were guaranteed, reliable, blue-chip, fail-safe.
Even the most respected rating agencies spread their Alpha ratings around with such glorious abandon that anything else seemed to have gone out of style. Such was the chorus of acceptance that these instruments came to be regarded, above all, as secure as the banks or non-bank issuing or trading institutions confidently presented themselves as being.
So the final accolade was conferred on financial instruments that, in any world except one in which the entire population had gone crazy, would have been condemned as the deadly instruments of financial, moral and other ruin that they surely were - and are now proving themselves to be.
As one analyst writes: "Before this mess finally ends, there are going to be scores more hedge funds, pension plans, mortgage lenders, and possibly even banks carted out in a wagon wishing they never heard the terms 'swap', 'swaption', 'conduit', 'MBS', 'CDO', 'CDS', 'SIV', 'Mark to Market' and probably a dozen other terms as well."
Perhaps the credit derivatives, in all their manifestations, were the most addictive. They were as modern and creative as the latest technological marvel. From the initial concept in the late 1990s, they gave a dream ride to the mostly young, very smart people who were able to ride to financial glory on a tide that quickly swept along even the most staid, respectable and financially distinguished institutions in the United States and, in surprising measure, also around the world.
If some were spared addiction in the early years, they became fewer and fewer right up to July 2007. The regulators, including central banks, international agencies and others, did not regulate the ever thicker jungle of financial enterprises and their innovative financial products because, more and more, the addicts lay outside the banking system and therefore largely or wholly outside their jurisdiction.
The banks did not stay aloof from "structured finance" of virtually every kind, but they managed their participation in it, for the most part, in ways that avoided interference by the regulators - if, that is, the regulators might have been disposed to interfere. Increasingly, they accepted some form of "moral hazard", just as major banks at the very top of the financial heap did in their dealings with Enron in the course of its fraud and failure at the end of the 20th century and into the 21st.
So the addiction grew and spread without restraint - it became a sort of global financial frenzy sans frontieres - and the law-enforcement officers, having no powers of enforcement and/or no will to enforce, either cheered them on or snored at their desks.
Until now. Even yet, they are not wide awake, but they have now begun to stir.
When they do become fully alive to what has happened, they will be even more appalled at the terrifying financial situation that confronts them than many of us among the non-addicted are now. Their attempt to resolve that situation in any way that can be called acceptable will reveal both their culpable negligence in the past and, ultimately, their despair of finding any "cure", any "magic elixir" or any "soft landing" in the period ahead.
They will discover that they and the speculators, high rollers and just plain gamblers in global finance have been indulging an addiction for which there can be no painless detoxification. The addiction has persisted for too long and has become too deep and widespread.
To begin with, the addiction is too huge. The "value" of the creative financial paper circulating the globe is calculated, as close as one of our "experts" can reasonably count it, to be US$480 trillion. The Bank for International Settlements puts its count at $600 trillion. In fact, we do not know what the precise sum may be, but we do know that it is so mind-boggling that it seems to lie outside all reality.
What is certain is that somewhere in that massive sum are debts that have to be repaid and creditors who have to be satisfied; and we know that it is a domino game. If the creditors of the first debtor aren't satisfied, then they will become, in their turn, defaulting debtors for their own creditors; and so on down the line and around a global mulberry bush.
Global gross national product s calculated to be about $50 trillion a year. So the figure of $480 trillion is close to 10 times the entire global annual GNP, and $600 trillion is about 12 times. Alternatively, we can say that the "notional value" of the various pieces of financial paper circling the globe at the moment is probably somewhere between 40 and 60 years of the United States' GNP. It is several times the estimated market value of aggregate global wealth.
How much of this is double-counting? How much of it requires the liquidation of real assets to satisfy a structured-finance debt? We don't know, just as we don't know the answers to many of the magnitudes involved in what is undoubtedly the greatest, most complex and most intimidating financial problem that national economies or the global economy as a whole have ever faced. William Wordsworth wrote about "huge trunks, and each particular trunk a growth of intertwisted fibers serpentine up-coiling, and inveterately convolved". He could well have been writing about current financial instruments and the "system" they have contrived.
The unease, verging on panic, about subprime mortgages has given us a glimpse of what is ahead. But let us be very clear, it has been only a glimpse. Subprime securitized mortgages are only a relatively tiny part of the huge credit and debt structure involved in what we may group under the generic name of derivatives. They include credit derivatives, hedge funds, private-equity deals, mutual funds, pension funds and the whole gamut of financial instruments that have flooded not only US markets but markets around the world, especially in the past five to 10 years.
However, if the subprime crisis has given us only a glimpse, it has also given us a terrifying preview of what is yet to come. The first clear point is that the various pieces of financial paper do represent debts that have to be repaid or somehow liquidated. Creditors demand their money, and debtors must find the money to pay them, with the penalty for default heavy losses, with possible bankruptcy. The latter is especially likely in a world in which credit has become tight.
The second crucial point is that we don't know the "value" of the financial paper except in nominal or notional terms. On the books of the debtor it is "marked to his model"; and, most likely, on the books of the creditor, it is "marked to the model" of the creditor in the same way, or even more advantageously. However, the only thing that really matters in the end is how it is or will be "marked to market" at the moment of time when the market is called upon to pass judgment by giving it a cash value.
In this regard, we should note that financial assets worth trillions of dollars are from over-the-counter (OTC) transactions for which there is not and never has been any "market" to mark them to. They will not have an authentic market value until the moment comes for the deals to be liquidated in one way or another.
In a bull market, financial paper might be sold well above the "mark to model" price; but it is not at that point that the holder might be most likely to sell - or, most important, be forced to sell. It is when the market has become nervous, when confidence has been diminished and when the bears have begun to crowd the markets that the price will become most relevant and crucial.
Then, with the markets as we have seen them in the past two months, the price of the securitized paper is likely, as one analyst put it, to go "Pouf!" In other words, as we have seen with some of the paper of such a previously highly respected firm as Bear Stearns or a major bank such as BNP Paribas, the paper can become or be seen to be worthless, or very nearly so.
Does that result in real losses? For someone, it certainly does, however much the institution may say that it is in a position to bear those losses - of a few billion, tens of billions or, in some cases, hundreds of billions of dollars. Recently, the spotlight has been on subprime mortgages; but this is only because the collapse - the inability to pay outstanding debt - happened to appear there first.
We should have expected that. The mortgages, or a high percentage of them, were, it would seem deliberately - certainly with a high degree of studied negligence - designed to fail. They did fail; but the important thing is that, even in the wider housing-mortgage market, prime mortgages have been failing too - and they will continue to fail.
Household debt in the US and some other countries is more enormous and potentially more crippling that it has ever been before. In more and more instances, the mortgagee will be unable to service his debt - a real debt, whose failure, in aggregate, will have a real impact on the national and global financial situation and, eventually but fairly rapidly, on the productive economy.
So the infection will become an epidemic that will spread to the whole housing market; and markets other than housing have been deeply involved in the structured-finance caper. Credit derivatives of all kinds, a rapidly proliferating range of hedge funds, private-equity groups and the rest have shown no hesitation to exploit smart financial and above all, highly leveraged opportunities wherever they may have been offering.
Most of that enterprise has thrived - and can thrive only - in a booming market in which more money flows into the schemes than goes out; so there is a Ponzi element in much of current creative financial enterprise that makes its collapse as inevitable and potentially as destructive of value as the subprime mortgage debacle has been.
When the net inflow of funds into these schemes becomes a net outflow, the whole structure must inevitably begin to crumble. Hedge funds have been particularly - perhaps we can say, inherently - susceptible to collapse. Thousands have come into existence in recent years; and thousands of them have gone out of business. That has happened characteristically even when markets were booming. In recent years, those who exited the business were fewer than those who entered.
But now that the boom has turned more clearly in the direction of a bust, hedge funds heading for the exits have been increasing in numbers. If the exits are not crowded yet, it won't be long before they will be. Only those in the more traditional style of hedge funds - hedging genuinely for themselves and others who may be their clients - may survive.
One analyst has suggested that the current credit crunch has given us a chance "to see the hedge-fund emperors without their clothes". It has also been "an opportunity for investors to get some insight into an industry whose activities are often cloaked in secrecy and which has wandered far from its original purpose of hedging volatility" (Sharon Reier). That original purpose was to manage market risk by, for example, hedging long and short positions with modest leverage.
The contrast with the funds as between 6,000 and 10,000 of them have now evolved is stark. Even of the widely respected "quants" - the computerized quantitative or black-box models of the mathematical whizzes - Donald Pinto, an experienced hedge-fund manager himself, is quoted as saying, "The programs are quite sophisticated. They do work in stable markets, but they have a fundamental weakness. There is no room for judgment. When markets behave erratically - as they have recently - the inability to use common sense to make investment decisions, combined with a high level of leverage, is a recipe for disaster."
With the hedge-fund industry claimed currently to be the volatile repository of about $1.7 trillion, this can only give cause for acute alarm.
The fragility of the "system" can be seen further by analyzing each of the various elements contained in what is high-risk, speculative, "ownership" investment. That "investment" looks principally to profits through asset appreciation. The prices of assets are driven up because of a speculative fever and that fever, as in many asset-price booms of the past, is embedded in a conviction or expectation that it will feed on itself to drive prices to ever more feverish and ultimately unsustainable heights.
These booms persist only as long as funds are there to nourish them. If the flow of those funds diminishes or, more particularly, if their flow is reversed, the booms have historically and characteristically been prone to sharp collapse.
The present financial situation is more complex than any we have known before and has tended to draw in all markets - for stocks, real estate, currencies, gold, commodities and the rest - if only because what we may call the broad category of "derivatives" characteristically "derives" from those markets. Despite this spread and complexity, we may still postulate that the fundamentals of market behavior remain the same.
It is in that context that we might consider some elements in the present global financial situation. One such element is the carry trade. Its essence is that money is borrowed in a market where borrowing costs are low and invested in markets where returns are high. This has meant borrowing, for example, in Japan or Switzerland and investing in, for example, Australia or New Zealand - or, for that matter, Iceland or the United States.
The carry trade has apparent advantages. It is part of the financial regalia that enables the high-consumption economies to keep right on consuming; but that coddling of debt-based consumption also has its price, particularly by creating huge trade and payments deficits and by stimulating the export not of products of domestic industry but of the industry itself.
The US dollar, for example, loses value vis-a-vis "producer" currencies and commodities, its role as a reserve currency is undermined, and volatility - on which speculation thrives - replaces the stability derived from, for example, gold or the system based on the dollar, which in turn was related to gold, contemplated under Bretton Woods. Stability is replaced by an anarchy that encourages movement away from production and fixed-capital investment into asset-price speculation and "ownership" investment.
Another part of the price is that the tap might be turned off at any moment, and perhaps quite sharply, if the carry trade reverses - and, sooner or later, reverse is what it certainly will do. If the Japanese yen appreciates or threatens to appreciate sufficiently or if interest rates in Japan move up significantly, a robust carry trade will rapidly become a robust unloading exercise.
The outcome can then be that asset-price booms are sharply collapsed and, down the line a little, consumers too are required to adapt themselves to more Spartan living. The export-driven economies, which are based on high consumer-export markets, will also be hurt. So the markets will carry the impact of speculative volatility from one point to another.
As part of this, we might just take a quick look at the way in which the housing market in Australia has appeared to evolve. Recent years brought a frenetic boom to Australian residential property, especially in Sydney and, to a lesser but significant degree, in Perth. The boom then showed signs of slowing, again especially in Sydney.
That tendency to slow still applies to the Sydney market, although prices even there have recently seemed to be moving up again. However, what seems to be especially worthy of note at this point is that prices in the capitals of most of the other Australian states seem to be heading or to have already gone into frenetic mode. This is despite affordability for houses and apartments having declined dramatically for the average buyer. So it would seem that much, at least, of the persistent boom in housing is due to speculation rather than to demand from the consuming public.
That suggests that funds have been flowing into the housing market, presumably in a quest for capital gains through asset-price inflation. Where have these funds come from? Frankly, I do not know from any reliable data available to me; but a reasonable hypothesis may be that some of it is foreign money, possibly from the carry trade, seeking to find profitable outlets for the money borrowed cheaply in - most likely - Japan.
The housing that is being bought in Australia, except possibly some in Sydney, would seem to be different from the largely alpha-luxury property that, for example, is being bought in London by foreign money seeking speculative outlets for investable funds; but something the same kind of speculative stimuli may be producing much the same kind of ultimately unsustainable property boom in Australia.
In either the Australian or the London case, a collapse of the housing market - along probably with a collapse of other asset markets - is inevitable. It is a question only of when rather than if.
That "when" might now be rather close. It could get under way as early as the next couple of months. October and November have seemed to be dangerous for events of this kind in the past. The US stock-exchange crashes of 1929 and 1987 are examples. The current nervousness on Wall Street and stock markets around the world may quickly flow on to asset markets everywhere.
Central banks now recognize the dangers of a meltdown in credit markets and seem ready to do whatever they can to prevent it. They have already made available to banks at least half a trillion dollar-equivalent loans to give them extra liquidity. The US Federal Reserve has cut the discount rate. They have kept the more general interest rate, or "bank rate", on hold, and some might be about to reduce it.
But the feature that is perhaps of most significance and that carries the most startling risks is their willingness, already demonstrated by the Fed, to accept "securitized" paper, even relatively high-risk collateralized mortgage paper, as security for their loans to the banks. That process would seem to mean that that paper would become, in some measure, a substitute for Treasury bills or similar securities of other central banks that have been used in traditional open-market operations in the past.
Already the limited acceptance of this paper is a token of its extraordinary evolution toward respectability. The junk bonds or creations of what I once called the "adventurers, marauders and buccaneers" have now been endorsed by central banks as seeming to belong in the same ball-park of acceptability as gilts or Treasuries.
This may be, on the one hand, the only real way to deal effectively with the disruption to credit that this paper has caused and threatens further to cause on a vastly greater scale. Only in this way, perhaps, can the vast burden of intrinsically speculative debt be "neutralized". On the other hand, if the practice is indulged in any sufficient way for it to be effective in its "neutralizing" function, it will destroy the US dollar and perhaps other currencies and put the entire global financial system as we have known it at grave risk.
To make "liquidity" available to the banking system is not to be certain that the banking system will use it in a way to keep the credit markets adequately open to normal commercial business. At the same time, if the central bank proves willing to accept any amount of this securitized paper, then it would mean the injection of mountains of paper currency into the financial system, presumably starting with the United States but possibly or probably extending to other major financial markets and ultimately polluting the entire global system.
If the "notional value" of derivatives is something of the order of $600 trillion, we do not have to postulate that the central banks will absorb and "neutralize" all of this paper. Even if they were to absorb only 10% of the notional value, this would amount to about $60 trillion - more than the GNP of the entire world economy.
The figures are so staggering in themselves that the mind boggles; but perhaps the even more important thing is that we - and the central banks - cannot know the true extent of the problem that confronts them. Will they have to accept "only" 10% of this paper or will 1% turn out to be enough? If only 1%, what impact would acceptance of paper to that amount - $6 trillion - have in unfreezing the credit markets?
Would it also mean that central banks would have embarked on a course of hyperinflation that would make the US dollar and possibly several other major currencies worthless? There would then have to be an issue of new currencies as there was after the hyperinflation in Germany in the 1920s. There would also have to be a fundamental renegotiation of the ways in which the global financial system would operate.
All of that would take time. While it was going on, national economies and the global economy could be brought near to standstill. Economies might have to resort to some form of barter as the only way in which trade could continue securely to take place. Unemployment would become socially devastating. Many personal fortunes would disappear. There would be a whole reordering of societies and of relations among countries that might offer the most terrifying outcomes in terms of conflict of all kinds, including wars - civil, regional and worldwide.
Some analysts have been contending that the prospect of a depression - another great depression of global dimensions - has been feared for so long now that it will not be allowed to happen. That is too optimistic. Governments and central bankers will not want it to happen, but they have so far failed so miserably to prevent or deter us from stampeding to the brink that, whatever their motives may be, they seem now unlikely to be able to stop us from going over the edge.
Therefore, the best that we can hope for now may be that governments, central banks and others will apply such palliatives as they can without allowing their support of speculation to add further to destruction of the global economy and financial system, while at the same time embarking on national and international measures to restore primacy and vigor to fixed-capital investment, productivity and production in the real economy, national and global.
That raises the question of the impact and its extent that financial collapse will have on the real economy - the productive economy. The short answer is that it must inevitably be somewhere in a range from severe to devastating.
The immediate depressive effect of what we have already is likely to be sharp and severe. Employment in the United States appears already to have moved down sharply. This is largely in housing and construction, which contributed so much to growth in the recovery and boom years after 2001, and in associated industries such as durable goods, retailing and distribution, real-estate agencies and associated professional and legal services.
Consumer demand, which drew so much of its vitality from the housing boom, will be severely hit. Credit-card debt will have to be wound down. Auto credit is likely to diminish both in demand and supply, and the auto industry could suffer severely. So the impact of credit problems will flow through the US economy and must also impact on the trade that the United States will be able to conduct with the rest of the world.
The dollar is almost certain to decline in value, perhaps precipitously, especially in gold and key-commodity terms, and force a reduction in demand for imported goods. This will be in part beneficial for US exports; but domestic industries, especially in the more basic consumer sectors, are unlikely to be able to replace, at least in the short term, supplies from overseas. No longer the consumer without limit, the US will almost certainly infect other countries with its slowdown, recession or depression, and that in turn will reduce growth, investment, employment and output around the world.
Even the boom in commodities, though it might survive more robustly than other sectors, will certainly be affected and diminished, as demand collapses in other sectors. In other words, we are likely to see the characteristic snowball effect on trade and growth that we have experienced in similar - though almost certainly less devastating - circumstances in the past.
Some countries, such as China, which have more effective regulatory control of their economies as well as the inherent size and strength to "go it more nearly alone" may transit the worst of the coming crisis less painfully than some others.
To emerge from this crisis or complex of crises, we will need to resume attitudes of mind and policy that we had after 1945. After 20 years of world depression and world war, there was then a widespread passion for rebuilding national economies and the world economy on a sound basis of stability and growth, through multilateral cooperation for peaceful change.
Now we need to restore value to what produced real income and wealth for us in the past. We will need national institutions which can help us restore that value; and we will need to rebuild our international institutions. The United Nations and the host of associated or independent international institutions have proved to be useless or worse than useless, especially over the past three to four decades.
Their achievement has been to bring us to the brink of a tragedy - economic and financial in its outward aspects, but with deep political and strategic implications - which threatens to be the most cataclysmic to confront us during all the years since the advent of the Industrial Revolution.
So in a sense, the task that confronted us in 1945 is the task that confronts us again: to rebuild the world to a better pattern of economic and financial policies and practices, and to do so cooperatively and imaginatively, with the participation of all those of whatever backgrounds who share our objectives of positive and peaceful change. It is a huge task. It calls for cooperation among all countries and all regions, all races and all faiths if we are to see our way through it safely.
In tackling that task, we must start now. We have just seen an Asia-Pacific Economic Cooperation summit in Sydney that has been an exercise in futility, both in discussing vital issues in ways that could serve no purpose and ignoring issues whose neglect could bring us to the brink of self-destruction of much of human civilization. The APEC meeting reflected the impotence and irrelevance that a plethora of international gatherings and self-styled "summits" have displayed in recent decades. We must not persist in flagrant indulgence in this empty, exhibitionist futility.
The process of building new and effective international economic institutions was set out some years ago in my proposals for "Victory Over Want" (VOW). These proposals have been developed further in my proposals for a World Economic Authority and a World Development Authority put forward in my latest book, America's Suicidal Statecraft: The Self-destruction of a Superpower. There are other proposals being put forward, many of which are worthy of careful and urgent consideration.
However, with the best will in the world and with the utmost cooperation among the world's major powers, creating effective international agencies will take time. Until then, it seems inevitable that we cannot avoid some elements of a "cold-turkey" detoxification from the addiction to which our economic and financial policies have delivered us.
That "cold-turkey" detox threatens to be the most painful experience that the national economies and the world economy as a whole have suffered in the two or three centuries of the Industrial Revolution. It must be our objective, therefore, to keep this phase as short as we possibly can and to move to the phase of rebuilding through effective national and international measures and institutions as soon as may be practicable.
That is the imperative that we should now acknowledge and should seek to satisfy with all the energy, creativity and urgency we can contrive.
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Dr James Cumes is the author of America's Suicidal Statecraft, as well as other fiction and non-fiction works.
RE: My email to McCulley (shorter)... Thomas
NEW 9/12/2007 8:16:19 AM
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Paul:
Your article on not bailing out Wall Street, but bailing out Main Street implicitly removes culpability from Main Street. The modern day consumer could use a little less--actually, a lot less--resiliency. As far as the eye can see there are lessons to be learned. Credit isn't tight. When I was a young punk with a full time job at Cornell, I was turned down for my first credit card. My college room mate and recently retired Senior VP at Goldman (Rick Sherlund) was turned down for his first credit card. My brother, while working at Arthur Young, was also on the rejection list. My house was 20% down and maximum 28% of gross salary. Now THAT's tight credit. Main Street needs to sober up (start saving, stop spending), and it won't happen as long as the tap keeps getting opened up. Consumers shouldn't get a put; they should get a kick in the butt. The system (especially central bankers who should know better) has become very purge-averse. Modern day purging is exemplified by lost pension plans and corporate restructuring; I think it should be liquidating companies (like a few airlines) that can't meet their obligations. Creative destruction and fault lines in California are metaphors of each other. Pay now or pay later.
But that's just one amateur's opinion. Sorry for the rant. I've read too many articles stuffed with pleas for help and promises to repent.
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