Perspectives on the global economic meltdown (Jan 26 2010)

rohitvats · Post by **rohitvats** » 30 Jul 2010 16:07

Going on a tangent here - while I don't know anything about the AIG Life Insurance biz, I do know that AIG RE Fund in India made some of the most stupid investment decisions and and are now left holding the lemon...

abhischekcc · Post by **abhischekcc** » 30 Jul 2010 16:27

^^^^

N^3,

UN data is collected from the respective governments (at least most of it that I know of).
So all inequality data is based on what India, Chinese, etc governments know.

How do we know that the poverty in rural China is any better OR worse than in India?
The Chinese government has a stranglehold on all data that comes out of the country.
The Chinese government has a vested interest is painting a good picture of the country for both internal and foreign audiences.

The Indian government, OTOH, does its best to paint as bad a picture of India as possible.

SwamyG · Post by **SwamyG** » 30 Jul 2010 19:30

RGE outlook's summary on Q3 for India is: {http://www.roubini.com/region/country/india.php}

India’s growth driver has shifted from fiscal and monetary stimulus to private demand. Capital inflows, reviving services and agriculture sector growth and high (though easing) industrial activity, pinned by consumer spending and rising capex, will boost India’s growth to 8.6% in 2010 and 8.5% in 2011. Faster-than-expected rebounds in domestic and foreign investment and private consumption, continued fiscal and structural reforms and infrastructure investment to ease supply-side constraints pose upside risks to growth. Meanwhile, global risk aversion and banking sector risks threaten to dampen portfolio inflows, external borrowings, asset markets and investment

.

As Vina rightly points out India does not have the same shackles any more. To throw out a tamil quote "rusi kanda poonai" {a cat with cultivated taste) is what one can think of India now. The population is gaining self-confidence, is more ambitious and demands more. If USA corporations benefited by the expansion of its population to the suburbia and catering to the needs of this new population, why cannot India make progress providing the needs (and wants) of the millions?

For India to continue to grow, we do not need a household to buy 2 cars every 5 years or so, but a household to buy one car; we do not need an individual to drink two 20oz bottles of coke everyday, but drink clean water, we don't need Indians to have 2000sqft house on half acre plot, but a livable shelter (rented would do). India, for all its recent growth, is still a vastly impoverished nation, millions depend on monsoon and agriculture.

India can use all the innovation the World offers, but what its people need are basic essentials. There in lies a great opportunity for business to cater; and the domestic demand is a tremendous driver of growth. The driver needs funds, and hopefully the changes after the 1990s will provide incentive for domestic funding.

Tanaji · Post by **Tanaji** » 30 Jul 2010 19:34

enqyoob:

I think you should read the entire thread. I dont think anyone is gloating at the disasters here, and if it does come across as that, its more due to the total conniving, fraudulent nature of the top echelon of the finance industry.

Do you really think that the practice of selling mortgages to those who couldnt afford it , bundling these same stinky mortgages as CDOs with other AAA mortgages and getting the rating companies to rate these as AAA was justified? Did you read up on the circumstances that led to the Lehmann crash, and how at that point, there were phantom stocks floating around i.e. more stocks than that were issued in system for Lehmann? And how a handful of bankers came together and saved Goldman Sachs but not Lehmann, purely based on who knew whom at that point?

Also, after the crash, the TARP and bailout money was pumped in to ensure ordinary people still got credit. It has been repeatedly proved that this has not happened, banks have used it either to pay their execs bonuses, or simply to get bad assets wiped off their sheets. Do you really think this is acceptable?

A sizeable number of people will now have to work till they die or till they are 70+, due to no fault of their own. Others have had their 401Ks hit massively.

In other words, people have seen that the whole system is/was corrupt from the very top, and they are getting away with it. Is it any wonder then that people are bitter and hope the finance MBA types get shafted?

Neshant · Post by **Neshant** » 30 Jul 2010 19:46

VikramS wrote:This is perhaps the first thing to come out of DC which will actually help Main St. instead of Wall St. And this is free-market in action. Whenever debt goes bad, the lender tries to restructure it to get as much back as they can. This is what is being planned; pure and simple capitalism at its best.

And help the housing market to find a sustainable bottom.

Govt rigging the markets is in no way helping it. Whenever the govt jumps in to 'help', it is creating a moral hazard as someone is helped at the expense of someone else.

In this case the person who rented a home believing housing to be overpriced and hoping to buy later at a much lower price gets hosed. He is forced to keep renting in spite of having made the correct assessment. This is not capitalism - its market rigging. Supposing the govt launched a program tommorrow to help home buyers pay for their groceries but not home renters, would that be fair?

This entire crisis arose out of govt trying to 'help' people towards home ownership. Its noting more than trying to win votes.

SwamyG · Post by **SwamyG** » 30 Jul 2010 20:02

Neshant: You talk about "text book scam" and yet quote text book terms like "moral hazard"

Neshant · Post by **Neshant** » 30 Jul 2010 20:22

one does not need a textbook to know what is moral hazard.

one does need a textbook for keynesian economics as confusing explainations are required to justify why ripping off one guy at the expense of another is a good thing.

enqyoob · Post by **enqyoob** » 30 Jul 2010 22:04

I dont think anyone is gloating at the disasters here, and if it does come across as that, its more due to the total conniving, fraudulent nature of the top echelon of the finance industry.

Tanaji, u r "preaching fatwas to the madassa" there when you describe the total crookedness of Wall St etc., but who the heck thought they were White Knights anyway? Well, scratch that, because I did, since I also think the White Knights were totally corrupt horses' asses themselves.

But as for gloating, yup, some of the postors here are doing exactly that, and that is what I see as distasteful on this thread. It's sooooo "Milkmaid"ish, if you remember the ancient tale of the Milkmaid. There is nothing to gloat about in the financial disaster that has hit US taxpayers. I think the US is "ahead of the curve" in that too. The Indian system is "superior" in that too, and we are going to see the sheer depth of the crookedness any day now. In India it is taken as "chalta hai" that the babus should be treated as royalty, and no one asks how civil servants make enough money in a 25-year career to buy some of the most expensive real estate, build flats, send their brats abroad on poppa's baksheesh and still be able to travel around.

Regarding who to save and whom to let die, the best I can say is that they did a "triage" in 4Q 2008/early 2009 and made some swift decisions. For one thing, the fact that Lehman Bros was insolvent was in 400% reliable rumors several months before it became official, no surprise there. So I could argue that there was little hope of a bailout working there.

Goldman etc owned the Treasury Dept, I think it was Conflict of Interest, but since there are zillions of high-paid lawyers who have not been able to make that stick, I don't see the point in claiming it any more. For all that matters, note that most foreign policy disasters originate from Harvard and Brookings, yet no one seems to shut them down either and they continue to get the big M$$ from the govt, despite the conflict of interests there. In India this would not be seen as conflict at all, but just "tradition".

Besides, Lehman was already known to be collapsing, Bear-Stearns had gone under, and if Goldman went under that might have caused a chain reaction that was far worse - may have got to Fidelity etc and that WOULD have been a disaster.

As for loosening credit, well, the banks are merely following the Free Market and looking after themselves, what do you expect them to do other than that? It's the GOVERNMENT, and only the government, that is paid to look out for the rest of us.Shooting a few execs would have done no good - their replacements would have done the same.

VikramS · Post by **VikramS** » 30 Jul 2010 22:06

Neshant: This is not even close to the classic definition of moral hazard. Moral hazard was when the banks were bailed out where the rewards were theirs to keep but the risk was nationalized. Out here nothing is changing but the type of the loan where the interest rates are being bought down to market rates. And it is only going to reward people who have been playing by the rules (i.e. paying their mortgages even if they are under). In the big picture this is perhaps the most effective way of sending stimulus. The people who are hurt are the MBS holders who still are going to lose a few percentage points of returns. They in fact were benefiting from the moral hazard created by the backstop of the GSEs; it is great that they actually take some pain

.

And a person who is renting hoping for lower prices (like me) is a speculator and does not have to be rewarded for the gamble they took. Housing market has a lot of government support and to expect that the government will not interfere is inconsistent with the risk profile of that speculation.

Regarding AIG: The problem was that the banks very short of capital and another round of haircuts would have further weakened the credibility of the system. Also GS being the smartest banksters also bought CDS on AIG so if AIG went down without paying GS, other banks would have had to pony up for the CDS they wrote on AIG! So the AIG bailout essentially saved the system, not just GS.

paramu · Post by **paramu** » 30 Jul 2010 22:49

VikramS:

Shouldn't the government bail out those sensible people who did not purchase homes after realizing the scam that was going on? Will they increase the interest rate to its natural level after providing current interest rates to people who were paying their mortgage? Only an increase in interest rate can bring down the home prices to their natural levels.

My spider senses say that that may happen. When people refinance at current rate, they must be adding clauses that will make defaulting of that newly financed mortgage extremely difficult (we have to see the refinancing agreement to confirm that). Refinancing must be a cleaning up process of the messy mortgage backed derivatives.

SwamyG · Post by **SwamyG** » 30 Jul 2010 22:52

Neshant wrote:one does not need a textbook to know what is moral hazard.

one does need a textbook for keynesian economics as confusing explainations are required to justify why ripping off one guy at the expense of another is a good thing.

For the greater common good. That is what Government is about no?

VikramS · Post by **VikramS** » 31 Jul 2010 01:44

paramu wrote:VikramS:

Shouldn't the government bail out those sensible people who did not purchase homes after realizing the scam that was going on? Will they increase the interest rate to its natural level after providing current interest rates to people who were paying their mortgage? Only an increase in interest rate can bring down the home prices to their natural levels.

My spider senses say that that may happen. When people refinance at current rate, they must be adding clauses that will make defaulting of that newly financed mortgage extremely difficult (we have to see the refinancing agreement to confirm that). Refinancing must be a cleaning up process of the messy mortgage backed derivatives.

paramu: There is nothing like the natural price of an asset. You can have an average price calculated over time, a ratio of prices of different assets to judge the relative valuation of an asset. But the current price is the price, and it is as natural or unnatural as the market it operates in. I know more than a few sensible people who thought that homes were overvalued in 1998, in 2000, in 2002 and finally bought in 2005 since they needed settle down for school etc.

Until the credit bubble, homes were not considered an ATM or an investment, but a place to live. The fact that they kept up with inflation helped increase value and wealth of homeowners. Most people do not buy a home to get rich; they buy a home to live. We are gradually going back to that era again.

In the meantime, the government is and should do everything to reduce asset price reduction. A system built on credit can not survive on deflating asset prices. So you will have a long period of stagnation to decline in prices till the equilibrium is restored to historic norms.

Also note that very little, if any of GSE backed loans are part of derivatives/CDOs etc. So that will not be affected at all by this effort. And I doubt that they will do anything to make defaults harder. Mortgages will continue to be non-recourse since if they change that no one will sign up. Remember, the effort here is to ensure that the number of defaults go down so the Treasury does not have to pump in more money to backstop the GSE issued bonds. A side-effect will be more free cash flow for the average American which is good for the economy and even the Treasury. The people taking the hit are those who speculated on MBS by assuming that the government guarantee makes them equivalent to Treasuries.

Prem · Post by **Prem** » 31 Jul 2010 03:23

http://globaleconomicanalysis.blogspot. ... s-for.html

So who will import capital?
Here the situation is dire. The second largest net importer of capital until now has been the group of highly-indebted trade-deficit countries of Europe – including Spain, Greece, Portugal, and Italy. The Greek crisis has caused a sudden stop to private capital inflows, as investors worry about insolvency, and it is only official lending that has prevented defaults. These countries are unlikely soon to see a resurgence of net capital inflows. The world’s second-largest net capital importer, in other words, is about to stop importing capital very suddenly. I discuss this more generally in my May 19 blog entry: Don’t misread the trade implications of the euro crisis for China.
This leaves the US. Because it has the largest trade deficit in the world it is also the world’s largest net importer of capital. So what will the US do?At first nothing. As net capital exporters try desperately to maintain or increase their capital exports, and deficit Europe sees net capital imports collapse, the only way the world can achieve balance without a sharp contraction in the capital-exporting countries is if US net capital imports surge. And at first they will surge. Foreigners, in other words, will buy more dollar assets, including USG bonds, than before.But remember that an increase in net US imports of capital is just the flip side of an increase in the US current account deficit. This means that the US trade deficit will inexorably rise as Germany, Japan and China try to keep up their capital exports and as European capital imports drop.

Neshant · Post by **Neshant** » 31 Jul 2010 04:37

VikramS wrote:Neshant: This is not even close to the classic definition of moral hazard. Out here nothing is changing but the type of the loan where the interest rates are being bought down to market rates. And it is only going to reward people who have been playing by the rules (i.e. paying their mortgages even if they are under). In the big picture this is perhaps the most effective way of sending stimulus.

And a person who is renting hoping for lower prices (like me) is a speculator and does not have to be rewarded for the gamble they took.

You have got the definition of a speculator ass backwards. Stimulus is not free mannar that falls from heaven. It comes at the expense of someone else. Why not give a stimulus to people who bought an overpriced car, or bought a boat, or bought a ..... everything has since declined in value.

If the free market operated as it should, there would be no stimulus, nor govt market rigging, nor fiddling around with interest rates by a joker up top - and no housing bubble to begin with. The only reason for stimulus is to win votes.

Housing prices and indeed everything should fall to what the *market* can support. Not what the govt can price fix it to. This is what a renter would expect in a free market but the definition of free market it seems only applies when the parasitic middleman (i.e. banking & financing) profits and not otherwise.

It seems the lessons from the bursting of over-priced real estate due to federal reserve meddling and govt rigging has already fallen by the wayside. Its always the case that a keynesian explaination involves a long excursion into confusion as to why a certain action that caused a problem should be the route to solving it.

I need a stimulus btw for a decline of my BP stock. I bought in, lost some and now need some sucker to make good my losses.

enqyoob · Post by **enqyoob** » 31 Jul 2010 05:08

Beautifully captures the 'thinking' that drove the Great Depression, leading to WW2.

Neshant · Post by **Neshant** » 31 Jul 2010 05:47

The great depression wasn't caused by anything other than central bank meddling around throughout the 20s. Bernanke himself admitted this.

It always starts with the meddling and when the problem arises, the solution proposed is more meddling. The reality is a free market does not need any of this distortion. Its only purpose is to insert a useless middleman into the equation with a pretender called a central banker claiming to know what's best for the economy. The reality is he is as clueless as everyone else.

SwamyG · Post by **SwamyG** » 31 Jul 2010 06:06

Neshant: There is no absolute free market anywhere. No country operates that way, even America

shyam · Post by **shyam** » 31 Jul 2010 08:16

^^^
Then why don't people admit that what we have is a rigged market? We can start different type of discussion after that.

Carl_T · Post by **Carl_T** » 31 Jul 2010 08:47

Best stimulus is by lowering taxes for the upper classes IMVHO and also eliminating tax loopholes - flat rate tax. Otherwise stimulus is just redistribution of capital from peoples' bank accounts to the state, when its not clear at all that the state is capable of investing that capital most efficiently.

Satya_anveshi · Post by **Satya_anveshi** » 31 Jul 2010 09:52

Given Obama's loan modification has failed, I wonder how the newly proposed automatic refinancing at current *rates* would help mitigate this situation. IMO, the idea seem to be about how to stop strategic defaults and/or even how to get potentially pissed off people out there calmed down and show some token benefits for them (spreading guilt).

Here are some of the related but not really well connected points. Consider them disjointed for now.

[*]Majority of the home sales (last decade) happened in the suburbs
[*]Majority of them are Bush era loans
[*]Majority of them were already made at historically low interest rates ( - do we agree on this?)
[*]Minority of them suckered into ARM kind of stuff ( - again agreeable? Nice to see distribution of long term fixed/ARM type loans of the total)
[*]After the burst, the home *values* took a huge beating; rates are still at rock bottom
[*]Unemployment situation continues to be chronic
[*]Even with good employment and ability to make payment, people have an option to strategically default
[*]If unemployment does not fare better, foreclosures will rise regardless of the *rates*

Now the question is even people who can and are making payments, how long will they make payments even if the rates are reduced to 4.5%?

a)Consider a 30Y $600K 8% home loan getting reduced to 4.5%:
Monthly Payment go from ~$4400 to ~$3000.

b)For 30Y $300K 8% (to 4.5%)
Monthly payments go from ~2200 to $1500

But if those homes fell 50% (as they happened in many areas particularly in population centers) with no hope of appreciation for another 10 years, do homeowners continue to honor even 4.5%? Even if the unemployment situation doesn't improve?

The other scenario to consider is reverting mortgages with current *values* at old rates compare with new proposed rates.

Funny thing I found is generally if your old mortgage is made at *risk free rate* (I mean really at the fed lending rate

), you are still worse off than having a new mortgage (new values) at new rates.

If Obama's Home Loan modification program and its spectacular failure is considered, I don't believe the above program will make much difference and definitely without unemployment situation improving.

enqyoob · Post by **enqyoob** » 31 Jul 2010 10:31

rates are still at rock bottom

I don't think that is quite true in general. There are few if any loans available at low rates, even for ppl with decent credit rating.

Trouble came partly because of the system of letting ppl buy homes with LOW EQUITY percentage, in order to sell ever-inflated megahomes. If you don't have much equity, your motivation to stay with the loan is that much lower, whereas if you have 20 to 25% already sunk in, you are not going to walk away just because the value plunged by 25% temporarily.

So the breakdown in loan discipline that led to "zero down" type atrocities, is what should be blamed, even more than the "low-low rates". The same holds across the spectrum, to corporate junk bonds and "corporate takeovers" by entities who are not risking any significant resources of their own.

This is where the govt should have acted much earlier, but unfortunately the country was ruled by "Free Market" scam artists.

The "Free Market" stuff becomes extremely dangerous when extended as a dogma with no consideration of consequences. For instance, why do these Free Market types also favor defense spending (and taxation for that)? After all, the strong should be allowed to eat the weak, hey, and let Darwinian evolution rule? This process was predicted to lead to a strong, TFTA species, blue eyed, blond-bearded etc instead of having the planet ruled by small yellow or brown sdre types.

vera_k · Post by **vera_k** » 31 Jul 2010 10:42

Satya_anveshi wrote:Now the question is even people who can and are making payments, how long will they make payments even if the rates are reduced to 4.5%?

Whatever the interest rate, people will make payments as long as that is better than or only slightly worse than renting an equivalent property. The equity they have or don't have in their home does not play a role in this calculation. Apart from resetting interest rates, the GSE's can push out loan maturity dates to make this calculation work.

Hari Seldon · Post by **Hari Seldon** » 31 Jul 2010 11:21

The 'best' stimulus would be to

(i) print up a $trillion or two in FRNs (fed reserve notes) - these are not debt based monies but real equity backed by the full faith and H&D of the yooyes.

(ii) Send every household in the country a cheque of $50k+ or whatever you get when the above number is divided by the #households in the US. Not much different from sending monetised tax credits back to taxpayers, eh?

(iii) (Almost) immediately, those sunk in debt can repay the worst interest eating debt burden. Banks benefit too coz their loan portfolio quality improves dramatically.

(iv) savers benefit because now they can use that money (real money, NOT debt) to either save, or consume (with high money multiplier effects) taking up the local economy and boosting up prices of all asset classes (including realty) in proportion to consuming capacity and not to bubbly heights.

(v) Deflation can thus be stopped dead in its tracks (hopefully).

(vi) right now, the gubmint has printed and given that money (literally, given it away) to the scamsters and fraud-gawds of wall st for what in return? The money is sitting as reserves freezing up lending, velocity zero -> frustrating inflationistas, no multiplier effect and hence no stimulation in the khanomy anywhere etc etc In general, doing nobody on main street any good.

Its not without reason that hank paulson and co conjured an airtight "no oversight - judicial, congressional, regulatory or otherwise" of all their decisions in the runup to TARP I, and bludgeoned congress with dire warnings of ekhanomic armageddon when nationalizing (or taking into conservatorship, like for the GSEs) of all the defunct institutions, creating a clearing exchange for all derivative products and launching wide-ranging criminal prosecutions on the CXOs and boards of wall st giants was the obvious, natural and fair way to go.

But, I digress. And break my own cool-down a while oath.

Neshant · Post by **Neshant** » 31 Jul 2010 11:31

enqyoob wrote:This is where the govt should have acted much earlier, but unfortunately the country was ruled by "Free Market" scam artists.

It surely is a perfect piece of con artistry where price riggers, fiat counterfeiters and bailout hounds after years of blowing bubbles in the housing market suddenly invent a new definition of free market so as to claim it was responsible for sub prime housing.

First get rid of money counterfeiting and govts picking winners and losers - then discover the meaning of free market. Meantime, feel free to take full credit for the sub-prime housing fiasco because that's the byproduct of a RIGGED market, not a free market.

enqyoob wrote:After all, the strong should be allowed to eat the weak, hey, and let Darwinian evolution rule?

This is beginning to sound awfully like the Kashmir jehad crowd. They get big bucks from the central govt at the expense of other states, they go around killing and robbing the orchards and homes of minorities to drive them out - and then claim they are they ones who are oppressed!

So what now - a guy renting a cockroach infested dump is supposed to pay for your purchase an overpriced McMansion ? Defence is sorely needed against bailout hounds looking for some sucker pay for their idiotic decision on buying an overpriced house.

Neshant · Post by **Neshant** » 31 Jul 2010 11:53

The 'best' stimulus would be to

.... get rid of the central banking and fiat money.

Amen.

SwamyG · Post by **SwamyG** » 31 Jul 2010 19:45

shyam wrote:^^^
Then why don't people admit that what we have is a rigged market? We can start different type of discussion after that.

Which people? The word that is also used is "controlled economy". Most of the people do not care what you, me or others call the economy. Society expects institutions to serve society's needs. Government, economy, marriage, temples ityadi are all the ones society evolved over centuries. I have said it several times I say it again, economy exists for the sake of people; people do not exist for the sake of economy. So is the case of the relationship between people and government. When thousands, if not millions, hurt then the society devises means to improve the lives of people. Most of the economic understanding and thoughts we have are from the West. And Western cultural influences makes an inroad. The "rights" of people take a far greater role than the concept of "duty". There needs to be a fine balance between these two, else governing or economy becomes unsustainable. When I say unsustainable, I mean losing the ability to sustain life without drastic corrections.

SwamyG · Post by **SwamyG** » 31 Jul 2010 19:55

All new "stimulus" is just pumping more steroids into a batter who has scored more than 600 home runs. Unless, there are great scientific breakthroughs, the globe has to see a new lower normal - reduced lifestyle for everybody across the globe. Understandably nobody would like to go to a hunter-gatherer society as we are so used to the modern luxuries. If we, as humans, do not gently roll down our lifestyle quality we will have to do it in harsher way. Clean water, food and energy are very important factors that will dictate how countries trade and fight. If we don't take care of our environment it will take "care" of us. Electric cars, renewable sources of energy ityadi will help us solve some of these problems.

kubhamanyu · Post by **kubhamanyu** » 31 Jul 2010 20:19

Sustainability Zindabad, SwamyG!

Bade · Post by **Bade** » 31 Jul 2010 21:22

People who followed wise counsel and bought smaller homes (townhome, condos) more than 10 years ago to make the mortgage bill as close to what it would to rent or even lesser for an equivalent apartment, are stuck in the same pigeon holes as the families have expanded in the meantime. Most sane ones and I know quite a few like me, who saw the ballooning prices in the 2003-2007 period and stayed put instead of upgrading with time. For this category of people whose incomes have not gone up by a factor of 2 in 10 years are going to have already a compromised quality of life

compared to similar people from two decades back. So the correction has already happened to a lot of us.

Any deflationary trend for housing with another 30% correction would not hurt any of us old small-home owners. I would not cry if I make only 10-20% equity out of a 10 yr old house instead of 100% as of now and still be able to move to a bigger home with much lower prices.

I am sure a lot of people are stuck in this band with little upward movement. So as long as prices do not fall drastically, the velocity of money is going to be extremely non-relativistic

with fewer transactions and the number of foreclosed and potentially for sale old homes growing with time. Effectively, people get stuck in the their home longer than they want to both at the high end as well as low end. Add to this the people who are not willing to relocate for new or better jobs, since selling their existing home can be problematic. It is a stalemate now in the housing market.

enqyoob · Post by **enqyoob** » 31 Jul 2010 21:34

"Sustainability" is social engineering by the market manipulators, hey? None of these things like electric cars can survive in a truly "Free" Market. Not solar power. not wind turbines. All are commie pinko liberal plots. For purity of the Free Market, you have to stand back and let everyone burn as much fossil fuel (and uranium, why not? Use it or lose it!) as they can afford, then when they run out, grab their weapons also bought on the Free Market, and go loot more fossil resources. When all of that runs out, kill others and boil them to extract the fat and burn that.

Whatever you do, even when you get boiled, remember that this is essential for the Purity of the Free Market!

I hope I have fairly captured what Neshant is trying to say. Otherwise his argument through this long thread seems a bit 404: he is bitter that the US government let the "Free Market" conduct excesses with absolutely no restraints (what else would the robber barons do with the Freedom of the Market?) until everything crashed, and then he is bitter that the government belatedly intervened to stop the crash by pumping cash into the economy. And he is bitter that (fill in all the blanks...)

So if I read his latest right, allowing the robber barons to conduct their excesses, corrupting everything from the banks to the rating agencies, is "market manipulation", and not the logical result of too much "Free"dom in the Market. The fault is all of the Central Bank that intervened to stop this fun-fest without allowing the life savings of the entire working class, AND their life insurance policies, AND their homes AND their jobs AND their retirement plans AND their medical coverage to all disappear. Gee! Yeah isn't that so spoilsport of the Government?

The common thread appears to be sheer bitterness, becoming increasingly shrill and irrational (hard to do!) through the pages.

Satya_anveshi · Post by **Satya_anveshi** » 31 Jul 2010 21:44

If you don't have much equity, your motivation to stay with the loan is that much lower, whereas if you have 20 to 25% already sunk in, you are not going to walk away just because the value plunged by 25% temporarily.

This sounds right. But consider how far this strategy is going to be right/sustainable in the current market conditions. During the Bush era vast number of home were *being* constructed and yet the teaser rates, lowest possible down payments, complete neglect of the credit history kind of practices were employed. Of course that is past.

Now there is a glut of inventory already available (and still per some reports at least 60% of new homes from peak periods are being constructed). Per some more reports 4.5 M homes are currently out there and many millions more delinquent and soon to be on short sale. These are readily available homes either on balance sheet of banks or held by GSE/govt. General people have max'd out on their credit and rotating them from one card to the other there are only significantly minority of people still having 20% down.

What this suggests is that home values will stay under for sometime to come.

Satya_anveshi · Post by **Satya_anveshi** » 31 Jul 2010 22:07

If we agree that one of the primary goals of Fed is to manage rates to smoothen out ups and down in the economic activity and bring about sustainable long term growth then consider the following questions:

[*]Has Fed been able to manage rates that are appropriate during the last two decades?
[IMO, the verdict out there is that rates have been too low and represented interests of various parties including *the govt*]
[*]Is housing activity in US controlled by Govt? [IMO, this is clearly the case when the brokers, dealers, banks pass out the mortgage on the balance sheets of GSEs]
[*]Would the situation have been different if banks were really lending the money they have and maintain those on their balance sheets?[IMO, yes]
[*]If we consider investment banks trying to make CDOs out of mortgages and selling them to *investors*, who are these investors? If these investors are SWFs, Pension funds, those funds managed by govt agencies of various countries then we can say that interests other than getting the best return possible drove those decisions. (this is my current understanding and willing to correct)

So, how can be say that free market is even one of the culprit to what we saw during the crisis? Here we pretty much see end-to-end govt interventions in *investment* decisions. Hardly a case for free market.

kubhamanyu · Post by **kubhamanyu** » 31 Jul 2010 22:13

What would be sustainable growth of economy, and wouldn't that be dependent on the state of the prosperity, e.g. "efficiency mode" for the prosperous, and "afterburner mode" for those not? Does the "freemarket" naturally lead to this dynamic -- sorry if basic question, can go to another thread if needed.

enqyoob · Post by **enqyoob** » 31 Jul 2010 22:15

Bade: I suspect that a lot of old fogeys saw the irrational spiral of the "Free Market" in housing, and instead pumped every penny they could to pay off their mortgage and get the heck OUT of the loan system. So they lost out on a lot of the fancy FreeMarKhanomics mumbo jumbo, while the Smart Ones speculated on 1% down on their $2M homes and lived in terminal luxury. Yeah, such a shame, no late-model leased Lexus MegaSUV, no 70-inch plasma home theater on Home Equity Loans, no golf-club membership on credit, etc.

And fortunately there was that much less of their money sitting in those speculative REITs and Derivative Products when the crash hit. Maybe they remembered what happened to "New Free Market" theories in 2002-2003, or October 1987.

So if one bought one's house for $X, 20 years ago, to live in it as one was originally supposed to do, and just lived in it and paid off the loan, well... one missed the spike where one could have sold for 4x and "moved up" with a Creatively Financed deal to a 6x house, but one also missed the crash in fund values, and as for the crash down to 2x in value, well... that's still a 100% gain in 20 years, not so terribly bad.

The generation that lived through the 1930s explained it to me very simply once, on a train, like the Gambler explaining:

Keep your Standard of Living a few years behind your Net Worth.

Satyanweshi:********** (Temporary Sanity Break): ***************

The T. Rowe Price Newsletter, which tends to be pretty sane, told me in early 2010 that the "glut" was a few months worth at worst, and was expected to get eaten up as the building starts went way down, cutting into new supply. This is borne out by anecdotal evidence. There is a billboard in Dera ScarlettBibi Khan that gives the latest count of the number of homes for sale in the metro area. it has come way down from circa 110,000 when I quit looking in early 2008, to around 74,000 when I last saw it a week or so ago. Standard average in good times is around 95,000.

Look at the huge Fidelity Real Estate Fund FRESX - it was at 37 or so in EARLY 2007, when it peaked, and it had already dropped to around 30 by October 2007, so clearly people saw the crash coming. Same as for the shares of AVTR, a large real estate firm whose share price topped out at around 85 and then started the trip down.

Today FRESX is around 23 (I haven't looked at AVTR since I bailed out with slight tail-burns and then stayed scared to go back in). It shows 63% appreciation YTD, plus a very healthy rise in 2009. I think the low was below 10, and it took an awful lot of bloody-mindedness to buy there.

True, FRESX is mostly focused on REITs that kept a lot of cash and started buying low, and may be more focused on office space than homes, but the point is that there has been quite a long recovery rise already.

And hey, if it weren't for government intervention, the market would quite probably have collapsed entirely and half the companies in Dera ScarlettBibi would have closed over the past year.

kubhamanyu · Post by **kubhamanyu** » 31 Jul 2010 22:18

Ha, thanks for that enqyoob! My polished and clean Grease Car is getting many converts at different social levels!
PS: We totally refused to be drawn into ARM-twisting interest rates and boy do we think we got out of this reasonably ok, unless as bade says this totally tanks again. Many of our brighter than us friends, without sarcasm, were not so lucky. Who isn't tempted to "get ahead" but the rippers exploited just that, in a total repetition of standard freemarket practice.

Neshant · Post by **Neshant** » 31 Jul 2010 22:40

Satya_anveshi wrote:Now there is a glut of inventory already available (and still per some reports at least 60% of new homes from peak periods are being constructed). Per some more reports 4.5 M homes are currently out there and many millions more delinquent and soon to be on short sale. These are readily available homes either on balance sheet of banks or held by GSE/govt. General people have max'd out on their credit and rotating them from one card to the other there are only significantly minority of people still having 20% down.

What this suggests is that home values will stay under for sometime to come.

I've heard there are as many as 19 million homes vacant and maybe more from the banking shadow inventory being withheld from the market. Certainly if prices went up, all the idiots who bought overpriced homes will be rushing to offload their houses on the market as nobody believes it will ever reach the heights it did.

My view is that housing prices will decline in real terms till 2012 and then bump along the bottom for a good 5 to 8 years with government 'stimulating' aka ripping off A and giving to B all the way.

Bailout hounds will be demanding other people be taxed heavily to pay for their stupid decision for buying a debt shack. Passing the bill onto some sucker down the line will become more common so make sure you put your hard earned money out of reach from thieves.

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Satya_anveshi · Post by **Satya_anveshi** » 31 Jul 2010 22:51

Who am I to stop you from taking a sanity break.

Home Sales Dip as Unsold Inventory Persists

Inventories of unsold homes rose by 2.5% in June to 3.99 million. That is 8.9 months' supply at the current sales pace, up from 8.3 months in May and the highest level since August 2009.

"We've been adding more inventory than we've been selling... That's a worrisome sign in a month when we were paying people to buy homes," said Stan Humphries, chief economist at Zillow.com, a real-estate website.

Sure we can choose who to believe, national association of realtors or the REITs that are in the business of seek investments to run their ponzies.

enqyoob · Post by **enqyoob** » 31 Jul 2010 22:52

Look at it this way: If the GOTUS REALLY WANTS, they can do the "pumping" into buying renewable power generators and price supports for green cars, even as they squeeze fossil taxes on the other side. In 2 years flat, the US would be seen as the Xanadu of renewable energy (already shows much faster growth than Germany etc), and the conversion would come at amazing speed.

Or they could insanely "pump" to put up solar power satellites. Or build a lot more nuke plants.

All of these would be terrible blows against Free Market Purity, but if you stop and think for a moment, so are most "Free Market Revolutions". The Internet came from a DARPA project, cellphones came from DARPA projects, airliners came from strategic bombers, TV came from war machines, u name it, tech innovation came from government spending and market manipulation.

OTOH, they could solve unemployment much easier by calling up reserves to go take over KSA, Eyeran and Venezuela.

enqyoob · Post by **enqyoob** » 31 Jul 2010 22:56

True, Satyanweshi, but note that the REITs go on hard numbers (verified by none other than Standard and Poor

) while the National Association of Realtors is going to sound gloom and doom and get sellers to slash prices so that Realtors get more business - and entice buyers by claiming "Buy NOW! Sale Ends Tomorrow!" Free Market in operation.

Also, T. Rowe Price hasn't come out with an update recently, and April 2010 - July 2010 does seem to be turning out pretty bleak. Since I have nothing to Sell High, and no )$( to Buy Low, all I can do is sit and watch.

Satya_anveshi · Post by **Satya_anveshi** » 31 Jul 2010 23:22

Hard numbers - yes, yes, that's what they say (and said). Moi jigri dost works in one and recently (less than 3 months ago) they were trying to go IPO (exit) -and failed. They are sitting on what they thought gold mine of investments and now when I meet him I carry a towel on my sholder to obsorb his tears.