Monday, March 19, 2007

BOCA RATON - Retired Federal Reserve Chairman Alan Greenspan, speaking at a Futures Industry Association annual conference here on Thursday, said the problems of the subprime mortgage market had more to do with home prices than easy credit.

"If we could wave a wand and housing prices go up 10 percent, the subprime mortgage problem would disappear," he said.

Well yeah, Al, and if I could wave a magic wand at my prick, I'd be one of the busiest, most-sought-after porn stars in the industry today. But wishes don't change reality.

Alan, you're just trying to salvage your reputation, which is going to drop down the toilet as the housing industry tanks, taking along construction, various other amounts of businesses that have grown to support the housing boom, and, if we're lucky, will just stop there. As it is, more and more economists are beginning to admit that we're going to have a recession; the only difference of opinion is whether said recession will be soft and short or longer and harsher. FWIW, as a pragmatic sort, I'm guessing it'll probably be extraordinarily harsh.

It's this kind of foolish optimism that got us where we are now; Greenspan encouraged these shitty loan practices during the whole of his last six years, in order to help ameliorate a ravaged dot-com tech-bubble burst and as a way to pull the economy along.

Now, I rent, but have owned and would contemplate buying here if I even ever thought I could afford a home here (the answer is no, unless my mother dies and leaves me piles of cash). Granted, I might just possibly be able to afford if I was willing to move somewhere more affordable, commute 50 miles round trip daily, and other sorts of things that I'm unwilling to do. I like walking to work, or riding my bike. I like that I can (realistically) get everywhere I want to go on foot (or by bike) in 5-10 minutes max. And, I especially like the savings in gas prices.

But, just like many places around the country, around here median annual income here is $54,200 and median house price is $315,750. Not good odds, and soon to get worse for many, many current home buyers and wanna-be home buyers.

I'm not looking forward to this coming recession. I think it will hurt many, many more people than it should (myself and my friends included), through higher prices for everything, and, as of today, with the OPEC ministers meeting turning out just so-so, it looks like gas will spiral again to $3 by late April/early May.

I don't look forward to $2.50 heads of lettuce.


Anonymous said...

As I see it things are not going to get better. Demographics my man demographics. The boomers are headed to retire, Gen X ers can barely afford rent and Gen ? are just screwed. Since the Gen X are less in numbers and having fewer kids the great ponzie scheme of housing will really come undone shortly. Whatcha think?

Anonymous said...

When Greenspan dropped the prime rate to 1 percent in reaction to the imploding dotcom market and 911 he flooded the USA with money. This cash went into increased debt to the average ameri-consumer, the housing market, and the reinflation of the stock market. Commodities climbed across the board, relative to the decline in the USD to to global currencys, notably the Euro. The recession that was to follow the the dotcom collapse was reinflated for a later day, and that day is near. For a few years people who own homes have been having FED manna drop form the sky. Folks have seen their real estate prices skyrocket, and have had a fun time "flipping" houses, turning domestic dwellings into big expensive securities. Many of these folks believe they made so much money because they are financial genuises trained off of TV infomercials...they will get a rude awakening as this unfolds. The housing casino is over and we have low wage people going into foreclosures over mortgages they cannot afford.Due to speculation, supply went way past demand. Real people live in real homes and either pay rent or mortgage payments.

Meanwhile, the twin US deficits continue to grow and the US risks losing investor confidence in its ability to rectify the situation, or balance its accounts. Although the FED does not want to raise interst rates, because that would further depress the housing market, it mught have to to seucre foreign funding to supply America with more credit so we can collectively consume more than we produce. A global recession and financial turbulence least thats my opinion.


SweaterMan said...

Gandhisxmas -

I believe you are right on the mark with the Fed having to raise interest rates; my question is with the rapidity which they will raise them.

I think Bernarke believes he can bring a very slow raise (say Fed interest at 8-9%) over the course of the next 3 to 4 to 5 years. The only question is whether East Asia will hold our debt that long or diversify into the Euro, Yen or ???? (is there anything else out there - the ruble?)

The one unfortunate crunch is that why I still see a 30% reduction in housing sale prices, which, unfortunately, given our area, doesn't mean shit.

I went to a bank 18 months ago to inquire about a house; best I could get was 112,500 - won't buy a double-wide around here. So housing sales prices slipping from 315K to 215K ain't gonna do shit for me (who is doing well, has a steady income and caould possibly afford things) - unless I took one of their "risky" loans, which I sure as shit am not about to do.Er

Anonymous said...

Hi Sweaterman,

I agree, the FED wants to incrementally raise interest rates as slowly as possible. The problem is they are not really in control anymore, given US deficits (trade & budget)and the need to attract foreign held US dollars that we are allowing to accumulate across the planet. IF the US experiences a capital strike from speculative funds or "hot money", rates will rise high enough to stop the bleeding, similar to what happens to insolvent developing nations.

As for alternatives to the USD the Euro is it for now, but a global financial meltdown would bring trouble to all fiat currencies, tehir values being based on the faith and trust that debt held by nation states issuing notes can be repaid. I dont know what would happen, but possibly a massive realignment of currency values..i.e. drop in the USD, rise in the Yuan, rise in the Arab League's gold based dinar, decrease in the Yen, who knows. What is known is that global capitalism would stall dramatically, being cut off of an effective medium of exchange.

With a global currency crisis, funds will fly into commodities, that is, real things that real people use that have real value. Gold, Silver, coffee, etc...back to premodern barter, selling corn for industrial machinery.

Yes, around here housing is not so much in the flippers market but those who rent out their homes and vacationers. If the economy goes belly up, these homes will flood the market, because these folks are by and large leveraged by massive debt, not owning their assets outright...the race to become liquid can do amazing things to markets of low liquidity, like housing.

As for housing loans, yes, the wife and I looked into this as well and got pretty much the same deal as you were offered. This shows the irrationality and contradictions of the housing market.

But who knows, not me, thats for sure. Will it be hyperinflation of a slow but ever increasing deflation. Either way the outlook isnt good.


BadTux said...

The problem here is one of deflation. If we get some major bank collapses due to the subprime thing, then a) the Federal government is going to have to step in and print major sums of money, or b) major sums of money are going to just *vaporize* out of the economy, causing deflation and causing the Federal Reserve to have to *cut* interest rates in order to re-inflate the economy. It took the Japanese central bank a decade and *negative* interest rates in order to re-inflate the Japanese economy after *their* real estate price crash, and a major bank collapse here in the United States could have the same effect. I don't think people who bitched about the S&L bailout and the bank bailout of the 1980's knew what the U.S. government was trying to avoid when they did that. Yeah, it was expensive as hell. But deflation means *DEPRESSION*, because it means that people are now no longer capable of repaying money lent in cheap dollars with now-more-expensive deflated dollars, at which point you get a deflationary spiral as banks collapse and the entire economy devolves to a barter economy.

At this point in time, I don't think there's any amount of dicking around with interest rates that's going to make a damned bit of difference. When the collapses start, things are going to go to hell in a handbasket. The Federal Reserve is going to have to start printing money with all the fervant abandon of a Weimar Republic finance ministry to bail out all those investors in collateralized securities for their now-disappeared collateral, or else the entire economy collapses into a deflationary spiral that makes 1929 look like child's play. $2.50 heads of lettuce? Crap, by the time this is over, you might need a wheelbarrow to carry enough cash to the grocery to get a head of lettuce...

-- Badtux the Apocalyptic Penguin

SweaterMan said...


I'm only hoping for a slow slide instead of a steep cliff. In other words, I don't want to pay $2.50 for lettuce this week, $4.79 next week, $6.29 the week after, and then ratcheting to $11.00 a head after a month.

If you want to tell me lettuce will be $11.00 a head in the year 2014 (just to pick a year); that's cool (not really), as long as overall average wages rise enough to meet that price.

I, personally, don't see that happening. If I have to go ask my boss for a 75% raise just so I can eat "rabbit food" I can tell you that that sure as shit ain't happening.

Anonymous said...

Hello all,

I think the interesting question is what will lead to deflation. Given the depression era scenerio, major world powers were involved in "beggar thy neighbor policies", each pursuing monetary policies meant to lower the value of theri currencies relative to others. Meanwhile, reduced value of currencies created inflationary conditions to where we have the classical example of hyper-inflation as it took off in Weimar Germany. As inflation grew and demand waned due to lack of purchasing power, this set off the deflationary spiral---continuing lower prices and lower demand that fed off one another until economies of the world ground to a halt. So I am wondering is inflation, or hyper-inflation a precursor to the deflationary spiral.

The US has inflated its currency dramatically in the last 35 years, halting it in the early 1980s to prop up the value of the USD-(while also causing a recession in the US). This act however also led to the reduction of production costs for US manufacturing as it compelled MNCs to move production offshore to exploit cheap labor and raw materials. The US has been able to stave off inflation due to the globalization of production, allowing the US economy to enjoy the fruits provided by developing nations who one- are trapped in debt bondage to globals IFIs, two- devalued their currencies relative to the USD,- three- liberalized their productive capacity to foreign investors, four- sold state owned operations to foreign investors.

What I think this has done is one- allowed excess finance in the US (inflation) to be exported to developing nations to find a return, and two- propped up the US dollar to slow the inflationary conditions in the US, thus proppoing up living standards at the expense of the developing world.

If the USD were to drop,relative to currencies in the developing world, then US purchasing power would implode, creating a global deflation. The US has already inflated its money supply, reducing its own debt burden at the expense of others (again, beggar thy neighbor").

But again who knows. I think this is mostly correct but there are always different ways of looking at the trends. In truth nobody really has a clue about what global finance will do, thus crises and "surprises" are regular features of this new era. Whay will be next, derivative explosions? The sub-prime crises moving to prime mortgages? A capital strike on US debt?