Let the "good" times roll!

[Ben Kenobi]

You have it backwards. Low interest rates were a response to the deflationary spiral not the cause of it. Japan lowered interest rates to almost zero in an attempt to increase economic activity and get out of the deflationary spiral. Low interest rates make money worth less and tend to increase inflation.

Yes, when they are in the range of a couple percent or so. Those are low interest rates. Interest rates of near zero aren't helpful and discourage people from investing their money, when they can earn a higher amount just keeping their money safe and not risking it.

Also it helped banks by allowing them to keep the bad loans on their books while paying almost nothing. The best action is to have a government board buy the loans, at a discounted rate, thus clearing the bad loans from the balance sheets of banks thus allowing them to restart lending. That was why the US bounced back from the 1987 liquidity crisis and why Japan suffered 12 years of stagnation when they failed to do this.

So in otherwords those who are in over their heads should count on other people to pay. I'm sorry. I wish I could afford a nice house like these people do, but I can't so I don't. I'd rather see the housing prices fall and then I might be able to get one anyways. Housing has been way too high in most places for a very long time, so it's been overdue that they would drop.

[Dinner]

City of debt shows US housing woe

By Michael Robinson
BBC World Service

The city of Stockton in California is at the centre of the mortgage crisis now sweeping America.

Because, with house prices tumbling, more people in Stockton face the repossession of their homes than anywhere else in the US.

But Stockton is also a place where you can really get a feel for the staggering amounts of money banks loaned during the boom - with few or no questions asked.

Lending frenzy

In his 25 years as an estate agent in Stockton, Kevin Moran had never seen anything like it as seemingly limitless bank loans sent house prices rocketing.

"It was crazy", he says. "People felt that if they didn't make a high enough offer on a house, it would be gone.

"Instead of saying 'What do you want to do on a Saturday? Let's go to the park', they'd say 'Let's go buy a house'".

At the height of the buying frenzy, in 2006, Will Trawick was selling new homes for a Stockton developer.

Faced with crowds of a hundred buyers, bank loans in hand, all chasing the 20 houses he might have on offer, he organised bingo-style lotteries.

"We had ping-pong balls with numbers, just like you'd see on a TV show", Mr Trawick recalls.

"Everybody would have a number. We'd put the ping-pong balls in, spin it and, you know 'Number 22! Yoo-hoo!' They'd jump up and yell, come on up and pick which home they wanted, and leave a deposit cheque".

It was not only home-buyers who banks were keen to lend to.

With house prices soaring, pretty well anyone who owned a home in Stockton suddenly found they had plenty of equity in their property - equity the banks were eager to convert into cash.

Steve Carrigan is in charge of economic development for Stockton. He says bank loans made it a party every day.

"People went to the bank and got a loan on the increase in the price of their home. They went out and spent all that money," he explains.

"Price of the home went up again, they went back to the bank and got another loan. They went out again and spent that money on cars and jewellery and furniture - whatever they wanted."

With the help of the banks, Mr Carrigan says, people in Stockton "spent their house".

But that is not how it was meant to be.

Rule dodging

After previous financial disasters caused by excessive bank lending, regulators developed rules to limit how many loans a bank could have on its balance sheet.

The rules are complex, but as a rough rule of thumb, they say that for every $1 (50 pence) of shareholder capital a bank has on its balance sheet, it can also have about $10 of loans.

But, as is clear from the torrent of home loans in Stockton and across America, banks were lending far more than that 10 to 1 ratio.

How had they managed to do it?

The first technique banks used to circumvent regulators' rules is known as "securitisation" - a way of a bank getting loans it had already made off its balance sheet.

They did this by selling their loans off to pension funds, insurance companies, even to other banks around the world.

Professor Nouriel Roubini, the head of a leading New York firm of economic analysts, says securitisation was key to helping banks avoid the regulators' 10:1 rule.

"You make a bunch of mortgages and then you package them and you sell it to someone else," he explains.

"Therefore it goes off the books and therefore you can make even more loans."

As a result, the amount of lending banks could do was "much more massive", he says.

Financial alchemy

The banks' loans should have been hard to sell because they were low quality - since they were issued with no questions asked, there was little assurance they could be repaid.

But the banks had an answer to that.

To make their risky loans appear attractive to buyers, banks used complex financial engineering to repackage them so they looked super-safe and paid returns well above what equivalent super-safe investments offered.

Even savvy Wall Street veteran and billionaire Wilbur Ross could not figure out what was happening.

"What they were fundamentally doing was taking a $100 pile of low quality securities and creating something they could sell to investors for $103," he says.

"So there was an alchemy - making more price than there was value."

Banks even found ways to get loans off their balance sheets without selling them at all.

They devised bizarre new financial entities - called Special Investment Vehicles or SIVs - in which loans could be held technically and legally off balance sheet, out of sight, and beyond the scope of regulators' rules.

So, once again, SIVs made room on balance sheets for banks to go on lending.

Final countdown

As long as house prices went on rising, few people raised questions about the potential risks in the structures the banks had created.

Everyone was making too much money to be worried.

But then in 2007, when American house prices began to plummet, the true dangers began to be revealed.

Banks had got round regulators' rules by selling off their risky loans, but because so many of the securitised loans were bought by other banks, the losses were still inside the banking system.

Loans held in SIVs were technically off banks' balance sheets, but when the value of the loans inside SIVs started to collapse, the banks which set them up found that they were still responsible for them.

So losses from investments which might have appeared outside the scope of the regulators' 10:1 rule, suddenly started turning up on bank balance sheets.

No-one knows how big the losses from investments based on American mortgages will eventually prove to be - estimates now range from $200bn upwards.

The problem now facing many of the biggest lenders is that when losses appear on banks' balance sheets, the regulator's 10:1 rule comes back into play because losses reduce a banks' shareholder capital.

2008 pain

Professor Roubini says that even at the low end of the estimates the potential impact on the rest of the economy is massive.

"If you have a $200bn loss, that reduced your capital by $200bn, you have to reduce your lending by 10 times as much," he explains.

"So you could have a reduction of total credit to the economy of two trillion dollars".

The professor predicts that a reduction of credit on that scale will trigger a recession in America which could become global as the contagion spreads through the banking system worldwide.

Which is why, faced with these gaping and growing holes in their shareholders' capital, some of the biggest US banks are selling off shares to China, Singapore, or wealthy Gulf oil states, in an attempt to repair the damage.

Some American politicians are already complaining about such sales but, for all our sakes, we had better hope the banks' last ditch strategy succeeds in avoiding at least some of the probable pain to come in 2008.

http://news.bbc.co.uk/2/hi/business/7164898.stm

[DanS]

What that article says is true, but incomplete. For one, enough non-banks were sold this stuff such that the impact of the implosion on the banking system is somewhat less (investors, once burned, are twice shy, of course). Also, some banks are being recapitalized with billions from overseas.

[Imran Siddiqui]

Exactly and I think that's what some of these people aren't realizing. Yes, for some they'll get much better rates on houses, but that also means the banks are LOSING a lot of money. Credit falls as banks are bleeding out money from people defaulting on their properties all over the place. And banks just want to rid themselves of these properties and don't have the time to wait around for equivalent prices (not that they'll get them in this market).

[Agathon]

I love it how you people think this can be solved by regulation. How do you think that regulations get slack in the first place? It's not as if capital takes note of the regulations and simply says "yassuh", rather it corrupts the political process to warp and remove them, and eventually there's a crunch.

That's why all attempts to get rid of the boom/bust cycle are doomed in the long run. It's not a one way street. By all means regulate now it is too late.

[faded glory]

Originally posted by DinoDoc
It's what happens when stupid people decide to get houses they can't afford and other stupid people decide to let them.

fuck off poindexter troll.

Situations change. I really hope nothing bad ever happens to you.

[aneeshm]

Originally posted by DAVOUT
I would like to hear the market lovers explaining how this is part of the game.

I'd love to see how artificially depressed interest rates (causative of this crisis) are part of the game, too.

Originally posted by DinoDoc
It's what happens when stupid people decide to get houses they can't afford and other stupid people decide to let them.

QFT.

[aneeshm]

Originally posted by Oerdin

The problem is the lenders and people who qualified for loans who, by regulations prior to 1994, wouldn't have legally been able to make or accept such loans.

Look, lenders didn't force the borrower to borrow, did they? Did they hold a gun to the borrower's head, and tell him to borrow or die? Did they tell the borrower that the rates would stay constant? Wasn't the risk clear to the borrower in the first place?

If, in spite of all this, if some people decided to take tough loans, and lenders decided to make stupid loans, then it is the foolishness of both parties that is to blame.

Another reason is that the Fed has artificially depressed interest rates, which make these higher-paying loans all the more attractive to institutions who should have jacked up the rates much earlier and in smaller increments.

Note: IANAE, so take with a pinch of salt.

[aneeshm]

Why is everyone so anxious to protect people from the consequences of their own stupid choices? Is reality something that is optional, or something that can be abstracted away given a sufficiently crafty government? One good market crash where the government doesn't bail anyone out, and the institutions and individuals will stay on the straight and narrow for a long, long time. It's repeated bailouts which promote irresponsibility, by making people think that the government is God and that it'll bail them out whenever the going gets tough.

Point is, if the government decides to bail fools out, someone has to pay for it (TANSTAAFL), and it's usually the people who are the least to blame for the crisis in the first place.

[aneeshm]

Originally posted by Patroklos
I don't care if people who took unrealistic teaser rates lose their homes. They NEED/SHOULD lose their homes.

I care. I don't like it when that happens.

But I see that as the best of a really bad set of options.

[SlowwHand]

Manufacturing sector contracts

12:15 PM CST on Wednesday, January 2, 2008


Associated Press


NEW YORK — The U.S. manufacturing economy unexpectedly contracted in December, ending a streak of 10 consecutive months of growth and sinking to its lowest point in almost five years, a private research group said Wednesday. The decline suggests that the overall economy may be weakening faster than some economists predicted.

The figures are closely watched because a slowdown in factory production can translate to job cuts, which in turn reduces consumer spending — a major component of the economy.

The Institute for Supply Management, a Tempe, Ariz.-based private research group, said its manufacturing index registered 47.7 last month, down 3.1 percentage points from the 50.8 recorded in November. A reading above 50 indicates growth; below that spells contraction.

The December results were weaker than the 50.9 expected by analysts polled by Thomson/IFR Markets. Last month was the first that manufacturing has failed to grow since January 2007, when the index was 49.3. It has been four years and eight months since the index was lower than in December; it hit 46.4 in April 2003.

The results sent stocks falling in morning trading as investors worried that the slowdown in manufacturing would spread to the overall economy. The Dow Jones industrials fell more than 100 points by midmorning.

Meanwhile, the Commerce Department reported Wednesday that construction spending edged up slightly in November as the continued housing slump was offset by record spending on government and business projects. Spending was up 0.1 percent in November to a seasonally adjusted annual rate of $1.165 trillion. Spending had fallen by 0.4 percent in October.

Many economists believe the U.S. economy grew at an anemic rate of about 1.5 percent in the final quarter of the year and that it could slow to 0.5 percent or less in this first three months this year. A growing number expect a recession because of turmoil in the housing market and continuing tight credit conditions.

The chairman of ISM’s manufacturing business survey committee, Norbert Ore, said supply executives reported that slower demand was more of a problem than excess inventory. The survey found weakness in new orders and production, which reversed in December after reporting growth in November.

“The recent trend has been toward slower growth,” Ore said in a statement. “However, December was apparently a very tough month.”

[SlowwHand]

Oil prices touch $100 a barrel 12:10 PM CT

Watch and wait. It will hit $200.

[Imran Siddiqui]

One good market crash where the government doesn't bail anyone out, and the institutions and individuals will stay on the straight and narrow for a long, long time.

Yes, because that sure happened with the Panic of 1873 and then 1893 and 1907... all crippling recessions in the US economy. But I'm sure they learned their lessons, as they continued the same crap.

There is a reason there was such a groundswell of support for action by the government in 1932 (well, aside from the fact if FDR didn't do something, socialist revolution may have been right around the corner). Because people were sick and tired of having a crippling downturn in the economy (makes our recessions look like nothing... double digit unemployment was the norm in these panics) every 10-20 or so years.

[DinoDoc]

Originally posted by faded glory
fuck off poindexter troll.

Situations change. I really hope nothing bad ever happens to you.

The Apolyton Jesus is mad at me!

Just because situations change didn't keep the loan you got from being stupid and a rip off. I don't even care if one can pay for it as Oerdin claims to be able to do.

[Dinner]

Claims... :roleyes: