If I told you I had a PhD in History and a Masters in Commerce would it make a difference? Would everything I say instantly be gospel? Here we go again, now they are proclamations. Not ideas, not theories, proclamations. You're back to treating me with a lot less respect than I treat you with. If ones knowledge is strictly institutional, then why would that make what they say anymore credible? It's ludicrous. If you disagree with me, let's have the debate. Don't try to cut my position down by avoiding the meat of the argument, and implying that I am not a reputable source (which you can't confirm, or can you?) I'll reply to the rest of your post later. It's going to take at least an hour for me to read and digest it, time I don't have right away.
Housing has to bust or the rest of the economy needs to be inflated. So it's either recession or inflation. The Fed is smokimg crack on the housing bubble. Workers will start to demand wage increases to pay for inflated rent and houses. It will also cost the government more in welfare like section 8 and housing assistance payments. As the dollar goes down commodity prices go up and you have more inflation. In the end you will either have a recession or stagflation. It's a no win situation. Also the subprime mortgage bailout is not going to work. The borrowers paid far more than the houses were worth at the height of the bubble. A 10-15% drop in prices are going to put these people into negative equity and if they need to sell they will go into forclosure.
I'm not able to comment upon the other comments but this is a good observation which could impact the effort. My observations above suggested that the debt notes on the massive amts of more recent mortgage debt that this corrective action is intending to address won't wipe out the problems. I suggested that the value of the debt might drop to something like $0.80-.85 on the dollar rather than deep losses like the sale of a CDO at $0.27 on the dollar. To the extent that there are potential sellers of these homes that were bought at peak prices and that they may try to sell them within the 5 year time frame of the proposed correction during which it is possible that housing prices might drop....yup that could similarly effect this equation. I think that is the far smaller part of the equation though. The OP was about recession in general. The credit problem from these recent adjustable rate, high risk mortgages is astonishingly huge. The fact that so many investors across the board are holding these things and being impacted is spooky. My observations about the proposed corrective actions are simply that I think it is a quick and positive step to address the possibility that the volume of this stuff, the fact that its impact is foreseeable into the future (with adjusted rates being significantly raised) and the real possibility that losses in the financial sector could dramatically spread into very fast and dramatic reductions into very normal and everyday credit functions (factoring on receivables (by example)) have all come into play in pretty quick fashion. If huge financial institution losses are averted because of this action it will forestall a recession caused by a nationwide credit crunch. The last time a credit crunch recession happened was the late 1980's early 1990's. Nationwide credit was turned off in a virtual moment. It was astonishing how quickly the impact rolled from recognizing the problem to immediate restrictions on all types of lending from financial institutions. Once capital and credit dissappeared the nation rolled into recession. I do believe the administration is working to avoid that type of sequence of events. Look at it this way. In early 1991 Bush senior had approximately 90% public approval ratings as a result of Desert Storm. By summer and autumn of 1992 the mantra of the Clinton campaign for President was "its the economy stupid". That campaign simply tried to keep all its messages on the same issue. All they focused on was the significant fast impact that a credit crunch recession caused. I couldn't care less how this type of recession might affect elections. I do believe striving to avoid it would protect millions of jobs and income.
I thinking we are looking more and more like the 1970s and recessions caused by high inflation are a high possibility. Just saw on yahoo "Price of German beer to rise due to worldwide barley shortage" Gold is back to 1970 levels and oil and other commodity prices are going through the roof.
That sucks For the longest time gold was at amazingly low prices. For about a decade, prior to the increase in gold prices, gold stocks were the worst performing industry amongst publicly held companies.
It freezes the interest rate for 5 years, assume that the price goes down 10% for those 5 years they should be able to pay down enough to have positive equity in the house.
The reason behind the increase in gold isn't tied to inflation any more, it has more to do with the increase middle class in China and India who can now afford luxury items like gold jewelry.
You're overlooking all of the people who bought with no down payment, or interest only mortgages. They will have negative equity when the rates reset as the cost of homes keep dropping. Gold has gone up almost 250% in the recent climb. The world's gold reserves surely today must be valued in the 100's of billions. Do you have any idea how many 14k and 18k gold rings people would have to buy, to even dent the value of gold trading on the commodity market? Not to mention, that many of these semi-affluent asians, are likely buying consumer goods like cars, cellphones, refrigerators and washing machines. I can't speak specifically for the Chinese (who are really a slave labor market anyways, it's a joke that anyone is becoming affluent there), but most asian countries have a tradition of the mother passing down her jewelry to her daughter, to be recast in a new design at the time of marriage. Gold is typically transferred through hereditary ownership. It's statements like these, that have no basis in fact, that make discussing economics with you so frustrating.
Let me add DECREASE of the middle class in America and INCREASE in of the middle class in China and India.
Subprime makes up only a small percentage of the overall mortgage market, while people may have put nothing down, overall the number that did that is very small when compared to the overall number of mortgages written in the last couple of years. There are millions of people in China leaving their farms for the city, because that’s where the jobs are, they are creating a middle class there. Howard Simons of Bianco Research says it’s a fallacy to think gold’s increase in recent years has anything to do with inflation. “Those who buy gold as a hedge against either inflation or dollar weakness have gotten the right results for the wrong reason,†he writes. “Restated, gold is an excellent hedge against a lack of yellow, shiny things.†http://blogs.wsj.com/marketbeat/2007/10/22/midday-tidbits-confidence-or-a-lack-thereof
Do you have the figures to back this assertion up? I have been dealing with China since 2002. I have associates that travel there on factory tours 4 times a year. You're terribly misguided on the issue of a middle class. Farmers are being sent to the cities to learn skilled trades, on 3 year guest worker programs. They receive room, board and little else. After 3 years, they MUST return to the farms. That's hilarious. I hope you don't have any money invested with this guy.
Who in the blue hell is Howard Simons? You can tell this guy doesn't know his face from his rear end.......yeah gold isn't a good hedge against inflation, its only been around for like 4,000 years. I can't think of a single paper currency that has lasted a thousand years...........can anyone else? Yeah, you let Howard Simons talk you out of buying gold, meanwhile he probably has it, what a load of BS...... The Wall Street journal is BS, they give bad financial advice. They tell you to sell when you should buy, and buy when you should sell, making millions off suckers.. The Wall Street journal, I bet these are the same "experts" who talked about what a "great idea" it was to "invest" in an ARM four years ago. Word for the wise: Don't listen to "experts" on TV or in the newspaper. Most of the time, they give you advice which only fattens their pockets, not yours. Gold vs paper? It is a no brainer.........
You just summed it up. For those with a brain its Gold for those without one is Paper! [Can you imagine some neo-con wearing paper grillz? Now that would be funny.]
The question is "How long can the china keeping sending cheap goods to the US without raising prices?" China is the deflationary force that is the counterweight to the devaluation of the dollar and high US inflation. The Chinese are in fact suffering devaluation of the Yuan with the dollar peg and have 11% inflation and massive fuel shortages due to the loss of buying power of the Yuan. That's already priced into the market.
Morgan Stanley issues full US recession alert Morgan Stanley has issued a full recession alert for the US economy, warning of a sharp slowdown in business investment and a "perfect storm" for consumers as the housing slump spreads
From a newsletter I receive, --------------------------- Morgan Stanley Issues Full U.S. Recession Alert December 11th, 2007 What’s next? A prediction about the sun rising in the East? Via: Telegraph: Morgan Stanley has issued a full recession alert for the US economy, warning of a sharp slowdown in business investment and a “perfect storm†for consumers as the housing slump spreads. In a report “Recession Coming†released today, the bank’s US team said the credit crunch had started to inflict serious damage on US companies. “Slipping sales and tightening credit are pushing companies into liquidation mode, especially in motor vehicles,†it said. “Three-month dollar Libor spreads have jumped by 60 to 80 basis points over the last month. High yield spreads have widened even more significantly. The absolute cost of borrowing is higher than in June.†--------------------------- Straight Talk on the Mortgage Mess from an Insider December 8th, 2007 This is a good one. Highly recommended. Via: Market Watch: The ‘Pay-Option ARM implosion’ will carry on for a couple of years. In my opinion, this implosion will dwarf the ’sub-prime implosion’ because it cuts across all borrower types and all home values. Some of the most affluent areas in California contain the most Option ARMs due to the ability to buy a $1 million home with payments of a few thousand dollars per month. Wamu, Countrywide, Wachovia, IndyMac, Downey and Bear Stearns were/are among the largest Option ARM lenders. Option ARMs are literally worthless with no bids found for many months for these assets. These assets are almost guaranteed to blow up. 75% of Option ARM borrowers make the minimum monthly payment. Eighty percent-plus are stated income/asset. Average combined loan-to-value are at or above 90%. The majority done in the past few years have second mortgages behind them. --------------------------- Fed About to Drown U.S. Dollar Holders with “Liquidity†December 6th, 2007 Via: Bloomberg: Federal Reserve officials, who are forecast to lower their main interest rate next week, are signaling that they are looking for additional ways to increase credit to companies and consumers. The Fed may lower the discount rate — what it charges banks for short-term direct loans — by a quarter-point more than the benchmark rate after Vice Chairman Donald Kohn and San Francisco Fed President Janet Yellen publicly expressed frustration that previous rate cuts haven’t encouraged banks to lend to one another. Such a move would narrow the gap between the two rates — normally 1 percentage point — to a quarter-point. Economists said that may spur lending by easing the stigma of borrowing at the discount rate, letting firms claim they are taking advantage of a better deal. “The Fed has to re-liquefy the markets to reduce the risk of a financial accident,†said Lou Crandall, who used to work at the New York Fed and is now chief economist at Wrightson ICAP LLC, a Jersey City, New Jersey-based research firm that focuses on government debt. Policy makers are struggling to contain a crisis of confidence among banks that sent the cost of three-month loans between lenders to the highest in seven years. --------------------------- The Bail Out plan kicks in on the January 2008 resets We should know better by now. We should know that They’re just not going to let the thing go off the rails and crash in a single, violent event. The purpose of the American Corporate State is to externalize the costs of unthinkable plunder onto the backs of people who are mostly too tired, dumb and angry to understand anything that’s happening to them. Americans, in general, are content to flush more of their children’s futures down the gurgler and thank Christ for their big screen TVs. The tab, of course, is going to be paid by people who were stupid enough to manage their finances in a prudent manner. What handouts will the people who took fixed rate loan products during the bail out period get? Will they win the nanny state lotto as well? Through October, there were about 1.8 million foreclosure filings nationwide, compared with about 1.3 million in all of 2006, according to Irvine, Calif-based RealtyTrac Inc. With home loan defaults still rising, the trend is expected to worsen next year. --------------------------- Forcast: House Prices to Fall 30% in Some States December 7th, 2007 30% sounds like an upbeat assessment to me. Via: Reuters: Housing markets from Punta Gorda, Florida, to Stockton, California, will crash and suffer price drops of more than 30 percent before the housing crisis is over, a report from Moody’s Economy.com said on Thursday. On a national level, the housing market recession will continue through early 2009, said the report, co-authored by Mark Zandi, chief economist, and Celia Chen, director of housing economics. The report paints a worsening picture of the hard-hit housing sector, which is in the midst of its worst downturn since World War II. --------------------------- The Dollar’s Perfect Storm Worsens December 7th, 2007 If ECB raises and the Fed cuts… Via: MSN: On Nov. 13, I wrote that the U.S. dollar was being pummeled by a perfect storm. Just three weeks later, the storm is even stronger. The force of the winds punishing the dollar is building, and there’s a real danger that the currency will tumble out of control. What has changed so much in just three weeks? Inflation in Europe has picked up and is now above the range the European Central Bank has said it will tolerate. There’s a good chance the bank will raise short-term interest rates to 4.25% from 4% when it meets Thursday. With U.S. interest rates on hold or headed lower, the result would be another big boost to the euro, another hit to the dollar, a continued move away from the U.S. dollar by central banks in Asia, Russia and the Middle East, and higher prices for gold and, more importantly, oil. --------------------------- Iran Stops Selling Oil in U.S. Dollars December 9th, 2007 Via: Reuters: Iran has completely stopped selling any of its oil for U.S. dollars, an Iranian news agency reported on Saturday, citing the oil minister of the world’s fourth-largest crude producer. The ISNA news agency did not give a direct quote from Oil Minister Gholamhossein Nozari. A senior oil official last month said “nearly all†of Iran’s crude oil sales were now being paid for in non-U.S. currencies. For nearly two years, OPEC’s second biggest producer has been reducing its exposure to the dollar, saying the weak U.S. currency is eroding its purchasing power. Iranian President Mahmoud Ahmadinejad, who often rails against the West, has called the U.S. currency a “worthless piece of paper.†Foes since Iran’s 1979 Islamic revolution, Tehran and Washington are also at odds over Tehran’s disputed nuclear programme as well as over policy in Iraq. “In line with the policy of selling crude oil in currencies other than the U.S. dollar, currently the sale of our country’s oil in U.S. dollars has been completely eliminated,†ISNA reported after talking with Nozari. Nozari told ISNA: “In regards to the decrease in the dollar’s value and the loss exporters of crude oil have endured from this trend, the dollar is no longer a reliable currency.†--------------------------- Cleveland: 6000 Applicants for 300 Jobs… At WalMart December 11th, 2007 Via: Plain Dealer: As the world’s largest private employer, Wal-Mart is used to being greeted by large numbers of applicants almost every time it opens a new store. But the 6,000-plus people who applied for jobs at the new Supercenter in Cleveland’s Steelyard Commons took everyone, even Wal-Mart, by surprise. “We had to recount [the applications] three times,†said Mia Masten, Wal-Mart’s director of corporate affairs, Midwest division. When thousands of people compete for a few hundred ordinary jobs, trend watchers say it’s an indication not only of a less-than-stellar economy but also of a workforce short on marketable skills. The huge number of applicants wouldn’t have caught anyone’s eye had these been skilled, high-paying jobs, the types of positions that thousands of people always seek. But these were regular retail jobs with low-to-average wages and benefits, not the sort of positions typically in high demand. Target wouldn’t disclose the number of people who applied to work at its Steelyard Commons store. Sadly, few of the people interested in working at Cleveland’s first Wal-Mart actually got a job. Those 6,000 people were competing for some 300 positions. That means for every one person hired, 19 people walked away empty-handed. It could have been worse. In Illinois recently, Masten said, 25,000 and 15,000 people applied at two Wal-Mart stores in the Chicago area, and neither of those is a large Supercenter. … Amy Hanauer, executive director of Policy Matters Ohio, said she finds these ratios “deeply troubling,†reminiscent of bread lines in times of great poverty. She said the figures paint a bleak portrait of the regional job market and underscore the need for more and better employment opportunities. “That’s Depression-era kind of imagery,†she said. “. . . You can’t have an economy that works that way. It speaks to the need to generate a different kind of employment in Cleveland.â€
The run-up in home prices was fueled by house flippers and subprime lenders offering expensive loans for overpriced homes. Prices are up in some areas 250% and with a 5% drop in prices this year Congress and the Fed are calling for a billjillion dollar bailout.
If the government didn't collect taxes it uses to subsidize the banks and investor losses, through Fannie Mae, Freddie Mac and Ginnie Mae, then these companies would have to be much more careful how they conduct their businesses. However, since they have these safety nets, they are happy to take outrageous risks, lie, cheat and steal handing out mortgages, and the hedge funds are happy to buy up these securities, knowing that when the bill comes due, the American taxpayer will be paying it. This is incorrect. In response to the .com bubble bursting, the FED's answer was to create a new bubble in the housing market by adding massive amounts of liquidity to the system. You're talking about the implements, and the symptoms, not the atmosphere and the environment. When there is excess liquidity in the market, so-called investors, tend to speculate, unaware that the rise in prices of stocks, are at the very least, fueled by an increase in the monetary supply, and the consequent inflation. In a system where liquidity in the market is based upon soundness of the investment, and changes in the consciousness of supply and demand, bubbles are much less likely to grow large, they burst quickly, and stability returns to the market in a very healthy manner post haste. As long as the government is using interest rates, credit availability and expansion of the monetary supply to fuel growth, rather than the natural processes of innovation, production and productivity gains, you will have an artificial market that is susceptible to natural corrections. I take it you have not read the "History of Money" that I linked for you some time back. I advise you at least peruse the first chapter to get not only an understanding of where I am coming from, but also some context, that although today's instruments are complex and hard to discern, they still rely on the basic fundamentals of economics and money. I would love to offer a long explanation of how money works, but I simply don't have that much time right now. First of all, innovation in our system is not the primary catalyst for credit expansion. This is a canard. Innovation results in lower prices. The cost of innovation is not always credit for R&D, expansion etc. It can be as simple as a change in process, working hours, or tighter accounting/production standards. The web is an excellent example of how creativity in an environment with low barriers to entry allow for all sorts of innovation. Some of it provides a financial gain, some of it a social gain, and some innovations provide both. As far as addressing "how business operates", there is an implication of regulation in that statement. Such as, corn is in short demand, so we will create an artificial supply to satisfy that demand either through subsidy, government bureaucracy, state created enterprise etc. However, a belief in the free market, would dictate that were there is an unfulfilled demand, supply will occur as the result of private investment until price stability was reached. It wouldn't be automatic, but it would be progressive towards a solution and it would occur with falling prices as the demand level was reached. Instead, through regulation, the demand is reached, but only at a higher "hidden" cost of these subsidies and interference. There are very few (if any) government enterprises that perform more efficiently than free market enterprise. The primary reason IMO, is that private enterprise is driven by profit and trends towards customer service and efficiency. Government subsidy creates largess and waste, without a focus on profitability, efficiency or service. Bad businesses fail, bad government gets more funding. Speculative booms and busts are unpredictable, but investment booms and busts rely on fundamentals. There is a big difference between speculating, and investing. That's why there are several men who are consistent winners. Not absolute winners, but consistently make goods calls. Because they are able to analyze the fundamentals and see investment as more than the NYSE, the DJ, S&P 500 etc. But aren't these private institutions, that have made bad business decisions, getting the bailout? I think the interest rate hold will have a negligible impact. The real issue here is that the housing market has devalued, and while holding the line on ARMs will keep payments low, houseowners will still be making payments on properties they have negative equity in. The whole idea behind these ARMs and interest only mortgages was to get into property, then when the principal comes due, or the rate resets, borrow agaist the equity of a house whose value has increased. It's one of the most crazy examples of speculating. You have to understand the idea of fractional reserve banking and how it creates credit in the system. You also have to be willing to appreciate that hard money has value of a different nature than fiat money. Please read the History of Money. You will really like it. I've addressed this numerous times, and Google will yield much information. If you would like me to go deeper into it, and my positions on the process, I would be happy to do so.
One factor that mitigates the housing bubble is that substanial funds subprime loses of European and Asian investors. The bijillions of dollars that are being lost came from the trade deficit dollars we are exporting. I figure that the US subprime borrowers will have soaked the European and Asian banks for at least a couple of trillion. The bad part is the the Asians and Europeans are wising up and the only bubble left is tulips.