The Impact of Tighter Credit Standards on Lending and Output
Submitted by
CalculatedRisk on Wed, 05/07/2008 - 2:59pm (84 comments)
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New York assembly passes one year foreclosure moratorium bill
NY Assembly Passes One Year Foreclosure Moratorium Bill
Apparently the Empire state wants to be #1 in price declines, too.
Can't wait for RTCII.
Elvis writes:
Can't wait for RTCII.
Yeah my wife loves Roller Coaster Tycoon, too. Oh wait, that's RCT II, never mind.
Soros says impact of crisis on economy just starting
Soros Says Impact of Crisis on Economy Just Starting (Update3) - Bloomberg.com
"Soros says impact of crisis on economy just starting"
Soros, like Rosie, is an idiot. He has no idea what he is talking about. -- Donald Trump,
New York assembly passes one year foreclosure moratorium bill
Wow.
Is this even legal? It seems like there would be laws governing mortgages and other asset backed loans that ensure the rights of lenders to recover the value of the asset in the case of default.
Also what would this to price of mortgage loans on those houses?
Seems like this could backfire and send the lenders running away screaming from that area.
Sounds like Soros has been reading my newsletter:
Soros criticized what he called market fundamentalism,'' the idea that markets work themselves out.Markets don't tend toward equilibrium,'' he said. They actually go to excesses.''
...
Soros also reiterated his view that there is abubble element'' to global commodity prices. Commodities are in their seventh year of gains, with crude oil rising to a record above $123 a barrel today.
And this is news?
Industrial age discovery, I bet the first lender figured it out. Wait, I'll re read "The Richest Man in Babylon" or maybe "The Five Rings".
Any teenager can tell you that their TGP (Teen Domestic Product) depends directly on how much they can borrow or graft from mom and dad.
Won't be sending my kids to ANY ivy league college for that review. Maybe flipping burgers IS a good education. Did OK for Roy Kroc.
Seriously, credit shut off last year, consumer and commercial, prices dropping like a rock until there's enough cash to spread around. That simple. Musical chairs. Nothing to analyze.
Ray Kroc didn't flip burgers, he sold shake mixing machines. Sold a bunch to one customer, the McDonald brothers and figured they had a good business plan. Bought them out, franchised and died a very rich guy.
Why all this about Soros? If ever there was a perfect example of his theory of reflexivity, it has been the credit markets. Does anyone thing that it won't work in reverse?
We have been living in a false paradigm (of self reinforcing credit expansion) for so long, people can not imagine what reality really is.
Soros was way behind the curve in recognizing the credit phenomenon was a prime example of his own theory of reflexivity, but it does not mean he is wrong now. In fact, I think he is understimating how long the negative feedback into the system can go on.
His statement that markets tend not toward equilibrium, but away, is 100% correct. The same will prove true on the down side. Overshoot is inevitable.
Paulson says everything is ok. He thinks he can talk his fantasy into reality. God help the people that keep on spending hearing his words that everything will be fine soon.
Equity guys still don't get it. The IG and HY credit guys are happy right now thinking the worst is well past. The guys I talk to in consumer asset securitization are paralyzed watching the water withdraw from the beach and hear a funny noise coming from the watery horizon.
The consumer is falling apart and credit is his undoing. 401k hardship loans, increasing credit card balances and delinquencies are the metrics I am watching.
Oh...and of course the NY legistlature is made up of morons. Chain homedebtors to loans they can not afford, and screw the lenders at the same time. Do they not understand that you need new buyers to keep prices up? Their recent action wont make lenders too interested in making new loans. It will be fun to watch.
SC....how long do you think the recent surge in consumer credit can continue. We know that credit cards are taking up the ponzi slack from the home ATM....but consumer creditors are starting to get scared. How long before they take away the punchbowl? That is the final leg to be knocked out from under the consumer.
BrantW,
It would be fun to watch, but it will never pass. Kind of like it would be fun to watch the Cubs win the World Series, but it will never happen.
Ray Kroc didn't flip burgers, he sold shake mixing machines. Sold a bunch to one customer, the McDonald brothers and figured they had a good business plan. Bought them out, franchised and died a very rich guy.
sdtfs | 05.07.08 - 11:01 pm
And then he went into geothermal basements...
BrantW... another 6 months until the largest banks curtail credit card limits as they did with HELOCs. Then Bernake will really have to be creative with TAF/TSLF etc. I believe they will have to inflate their way out of this mess as anything else is even more unpalatable to the masses. Inflation will be the ivory tower way out, but will decimate those on fixed incomes.
If you saw the Harper's article on "shadow statistics" and how CPI is 'inflation excluding inflation' then you can imagine where consumer confidence will be in 6-12 months.
Soros also reiterated his view that there is a ``bubble element'' to global commodity prices. Commodities are in their seventh year of gains, with crude oil rising to a record above $123 a barrel today.
I was doing a little research today on metal prices - I'm going to be asking for surcharges again soon (every three months we adjust metal cost - based on the prices we pay - they are still in skyrocket mode).
Everyone knows copper & gold & nickel are skyrocketing... but how about scrap steel?
Check this site Ohio Scrap Price Index... used to calculate the surcharge the State of Ohio will allow for rebar and such... prices have about doubled since mid-2007... I plotted it from 2001 on and it looks like a moon launch (~$70/gt to $530/gt in seven years? Half of that increase since last summer & 25% of it in the last couple months... inflation acceleration maybe?)... I was sickened by the chart.
And again... we aren't talking precious metal - we're talking ground up cars primarily from the Midwest.
Before anyone starts taking Ray Kroc's lead and getting into the geothermal basement business, they should probably get competent legal advice -- I suggest http://www.wikipedia.org!
Banks slow down when they reorganize, so do car companies and grocery stores.
dryfly,
So, after I go and tear down all the traffic signs and gutters in the neighborhood, where should I sell them?
And when is silver going back on its tear? I think it is, but when?
OT, but BTW, but I don't ever recall them saying "goodnight, Luke" on the Waltons. Was Luke in the basement along with other incestous offspring? Watching the NBA and just wondering.
Elvis writes:
dryfly,
So, after I go and tear down all the traffic signs and gutters in the neighborhood, where should I sell them?
Elvis | 05.07.08 - 11:36 pm | #
LOL - I was thinking the same thing... those junk yard dogs guarding all those junk yards better have armed back up or they are toast.
Can't speak for silver - maybe all that hot money is now chasing 'scrap'.
Calling this bizarro doesn't do it credit.
Right, dryfly. Scrap metal and dog steaks. Two for one.
"I believe they will have to inflate their way out of this mess as anything else is even more unpalatable to the masses. Inflation will be the ivory tower way out, but will decimate those on fixed incomes"
Well, I don't believe the damage can be contained to fixed income folks. With CC debt and other viariable rate debt tied to that same fuse a lot more people will be experiencing pain like they haven't in their lifetimes. Combined with rocketing food and fuel costs and the couple $Trillion in outstanding consumer debt there simply is no fix.
I'm not buying the inflation exit strategy, as a graceful way out.
Poll shows that majority of respondents are unsure about the central bank's ability to improve the economy.
"We are re-tooling the presses. Please dont give up on us yet." - FED
Americans question Fed's ability - May. 7, 2008
barely, so what happens? the US defaults on its debt and devalues its currency with the hope that manufacturing will make a resurgence?
There is nothing graceful about inflating out of this mess. It will be a disaster to people on fixed incomes and having low incomes.
So are you saying the value of a car could be increasing? While the value of a home is decreasing?
I'm confident the Fed can have money printed.
I guess here's my new phrase for the next whenever month... we are all fixed income now.
Does anyone really believe that wages will rise with inflation for those of us who are working and not on "fixed income"? Riiiiiight....... companies are going to pay more to employees because they'll have so much money since they have to pay more for material...
Okay, sorry but this is just my logical mind thinking...
I'm not buying the inflation exit strategy, as a graceful way out.
barely | 05.07.08 - 11:53 pm | #
Did he say it was gonna be graceful? I must have missed that part... a way out sure but as graceful an exit as a sorority girl at her first 'Martini Monday' at the neighboring frat house.
we are all fixed income now.
Or as my dog might say (if he could say)... we are all fixed now!
"barely, so what happens? "
Well, inflating out of this disaster is like flooring the accelerator when you're already heading straight into a wall at 100mph. The crash will just be that much more spectacular. I think the credit fueled society is going to need to adjust and might as well force the issue - Volker style. Velocity won't be pretty to watch. That's just my view...
"a way out sure but as graceful an exit as a sorority girl at her first 'Martini Monday' at the neighboring frat house.
In the morning with one shoe and no bra.
Heh... are you all ready for the walk of shame?
The dollar is getting stronger. Soon, Bernanke will have to challenge Japan for the carry trade. A full point cut would seem to be in order. For starters. Look out below.
I hope Volker is alive in 2 years to impose sanity on this mess which will be needed. I don't see how the US has any choice but to devalue the balances of what consumer owe to banks, what banks owe to the government and what the government owes to the Japanese, Chinese, Saudis, SWFs...
Unless we can corner some hot new technology or lets say, eradicate dependence on oil? So inflation it is.
We should all buy farms that are run off solar power. Night all!
I think the credit fueled society is going to need to adjust and might as well force the issue - Volker style.
We'll get our Volcker Moment... the minute the Fed Boss thinks the system is stable enough to take the medicine... I bet that day is closer than any of us imagine... Pressure the banks to recapitalize even if diluted so as to be able to weather the storm and then let her rip.
Idoc suggested it won't happen before the election (he's probably right) and my guess is they won't have to jack all the way to Volcker levels to get the result (we're weaker now)... but I'd bet we see them start squeezing soon after the election. We'll learn if McCain really has a temper then...
That damn election is screwing us.
We are not alone.
Sterling tumbles as expectations of an interest rate cut increase
"A cut is certainly possible but would be dangerous given current inflationary risks."
Sterling tumbles as expectations of an interest rate cut increase - Telegraph
Dryfly,
We gotta get with it, we are being stripped to build the future in the Far East. Get used to it, we don't need steel we can no longer afford.
I suspect scrap is pricing in the expected 50% dollar devaluation that the Chinese are starting to contemplate.
After all, every bit you get now is cheaper than what it will cost later. What has happened is that nearly all of the cost push is taking place overseas!!! So, no inflation until the finished goods hit the stores. Geez, that takes a lot longer than it used to when most of the stuff was made right down the block.
Food moves faster, that stuff moves likes greased lightning when prices move. Wait until this fall to see some spectacular meat prices due to corn.
Unlike the retail guy, I believe we shall see some stunning percentage increases in food.
Energy dictates that everything will increase too.
The rising costs of building stuff are going to make a weird situation shortly with houses and commercial selling below replacement costs.
Someday this war's gonna end....
"Wait until this fall to see some spectacular meat prices due to corn."
Do meat prices decline when demand declines because prices are too high? I think they would and the cattle raisers will get slaughtered (pun intended).
"And again... we aren't talking precious metal - we're talking ground up cars primarily from the Midwest."
Dryfly, I agree this is a very scary series. The fact that your manufacturers are referencing them is a fact, but would you happen to know how these prices are discovered?
One thing's for sure, there is a negligible hoarding component (junk yard dogs and all), and probably a tenuous, at best, relationship with any exchange traded futures market.
Nice find, CR, those charts showing the impact on GDP and loans of tightening credit standards.
AllenM - I think you are right, meat is going to go through the roof (especially beef)... and the mechanism isn't what people expect. It won't be 'beef ranchers passing feed increases through' as much as integrated beef & farmers saying...
'Screw this growing corn to feed my cows crap... I'm just gonna grow corn and sell it for Big Ka Ching at the elevator... wooo hooo... then party at the local indian casino until NEXT planting season... no more wading through half frozen cow poop all year for me... no sir... its plant & harvest & make the big money!'
I've actually heard that - paraphrased of course. As fewer and fewer raise cattle due to its unattractive 'spreads'... the price will go up. A LOT.
Dryfly, I agree this is a very scary series. The fact that your manufacturers are referencing them is a fact, but would you happen to know how these prices are discovered?
No I don't - but I found other articles supporting the same result (similar increases though not identical numbers suggesting it isn't just one 'thinly reported' source).
Where I'm from its hard to plant corn where cattle graze. No, make that almost impossible.
BTW, I'm from a shanty town outside of South Africa.
Elvis writes:
Where I'm from its hard to plant corn where cattle graze. No, make that almost impossible.
Elvis | 05.08.08 - 12:30 am | #
Ever see a CAFO? You can put all your cattle on an acre or two and feed them all the corn you can grow on a couple thousand acres.
It isn't pretty.
For Elvis...
A CAFO...
Trust me, I know all about those, but they aren't good for growing corn. At least, not until most of the nitrogen diffuses out of the soil.
Some Banks' Loan-Loss Estimates Use Rose-Tinted Housing Data
"Wachovia Corp.'s (WB) and Washington Mutual Inc.'s (WM) embrace of a government home-price index may help their reports of expected mortgage losses appear less dire than competitors'. In recent weeks, Wachovia and WaMu have cited housing data from the Office of Federal Housing Enterprise Oversight when detailing their exposure to the crumbling U.S. housing market. Yet a rival index, the S&P/Case-Shiller Home Price Indices, is a good deal more gloomy, and also the popular choice among other large banks."
CNNMoney.com: 404 Page Not Found
Does anyone know if there are publicly available statistics reporting the percentage of credit card limits utilized? I think that would be a very interesting metric to monitor. I had a large balance card which I paid off and was rewarded by a reduced credit limit -- sort of like reducing HELOC limits.
Washington Mutual is a dead bank walking after the acquisition of Golden West (?) Mortgage at the perfectly worst time.
Las Vegas bank shuts down
"A Las Vegas bank voluntarily shut its doors in late April due to worsening economic conditions, a first for Southern Nevada's usually vibrant banking community. Fifth Street Bank had been operating for about a year before bank officers decided to notify depositors and state officials of the decision. Neither state regulators nor bank Chief Executive Officer Philip LaChapelle knew of any instance in which a bank had voluntarily closed, although bank regulators periodically take over and shut down failing banks."
shut itself down.
Not so vibrant anymore.
I shudder for the Las Vegas region.
Trust me, I know all about those, but they aren't good for growing corn. At least, not until most of the nitrogen diffuses out of the soil.
Elvis | 05.08.08 - 12:38 am | #
They don't try to grow on the CAFO, they never move them or reclaim the feedlot for growing... they plant the corn on land all around then harvest the corn to feed the cattle inside their CAFO. It was a practice that developed when corn was cheap and farmers were looking for 'value added'.
When corn was $2/bu (~4 cents a pound) and beef was selling for 70 cents/pound it made sense... takes about 10 pounds of corn to produce one pound of beef... that produces a pretty nice 'spread'... about 30 cents per pound of beef. So farmers put feedlots on their land all over the Midwest.
Now do the same math with $5 corn and beef at about 90 cents - current prices - and you see they LOSE a dime for every pound of beef they produce.
Meanwhile the ethanol mills will take every $5 bushel you can grow so you sell the cattle and forward contract with ADM to take all the corn. You exit the CAFO biz.
At some point Mr Market realizes there are way too few cows compared to demand and sends a very disturbing 'price signal' to us shoppers.
That's the mechanism...
So let them eat squirrel.
So the GDP hit from the Q407 LIBOR shock should co-incide with the near bottom of Q406 tightening of lending standards at the end of the summer. As Monte Burns would say, excellent.
So those who will need to borrow to 're-organize" their biz as the slowdown really kicks in will not be able to.
Looks like September-Nov. is gonna make for one heckuva deal making environment, either shotgun wedding consolidations or cash only deals.
Don't crazy deal days usually signal a top, this would be the last legs of any bear rally?
Cattle should already be climbing as folks brought em to slaughter early because of feed & transport expenses, didn't they?
Dryfly,
OT but about steel. I have a friend who sells primarily a steel consumer discretionary product. He received a 5% price increase effective 4/15/08. Today he received another notice of another 10% price increase effective 6/15/08 (and the 10% is on top of the 5%). He said another manufacturer just went up 12%. Good thing there is no inflation. This is starting to remind me of the 1970's when anything less than an 8% raise was a subtle hint for you to look for another job. This is not going to end well.
As the farmers say, "Corn is fu&ing expensive and that is what my cows like to eat. If corn prices keep going up, I'm going to have to sell my wife and start fu9ing my cow instead."
CR,
Like your site but give some thought to modulating your comments. Very little here to the point. Seems more like a BS session.
This was a good post and one with a lot of implications. If the banks are indeed tightening up-my anecdotal evidence in Phoenix indicates that's indeed the case-then it has some important implications. I continue to believe that commercial real estate is the next shoe to fall. Here's a link to a previous article on the subject-http://blog.metro-real-estate.com/?p=345.
Keep up the good work and try and encourage everyone to get back to the point.
Seven habits finance regulators must acquire
By Martin Wolf
FT.com / Columnists / Martin Wolf - Seven habits finance regulators must acquire
The saying around the Barnett Shale (large nat gas deposit around Dallas Texas) is "he is so rich he can afford to be in the cattle business".
Tom hasn't heard about our after midnight freedom rides...
Cattle should already be climbing as folks brought em to slaughter early because of feed & transport expenses, didn't they?
Alec | 05.08.08 - 1:01 am | #
I think that process is well underway - however when there is a 'big slaughter' & inventory reduction then usually prices go down temporarily... at first... then shoot up like crazy once the 'pipeline' is empty.
I sure haven't noticed low beef prices & haven't heard about severe shortages at the packing plants either... so my guess is we are still early in this shake out.
But I'm not really sure - I don't watch cattle futures very tightly.
TL,
What is the point? Keep reminding us of what you think the point is, and we will keep making fun of you.
My name is Clyde, and I iz subprime. I am unemployed, can't sell my house due to my wife and a clueless realtor, and I am obsessed by my large (relative to my net worth) put option portfolio. I warned on these pages for Ben not to cut, and I could very well end up making more on my shorts than I will undoubtedly lose on my shelter. But not until after the election methinks.
Who among you has more trust in their fellow man they did 8 years ago? I have this adorable Cape Cod....
FFDIC writes:
Tom hasn't heard about our after midnight freedom rides...
FFDIC | 05.08.08 - 1:07 am | #
For Tom...
What's really bad is it's 'After Midnight' somewhere all the time!
All I know is steak is really expensive unless you buy the green stuff in the bargin bin. Gas or steak? Demand is going down. Even if there is less supply, prices can't go up or people will become involuntary vegetarians or domestic pet eaters.
Martin Wolf has some interesting things to say:
So what is to be done? There is a part of me quite a large part, in fact that says: Forget regulation: it will never work. Apart from normal laws against fraud, let the financial system live and die by the laws of competitive markets. If businesses fail, let them simply go down, with all their shareholders, customers and employees. Meanwhile, we will remind users constantly of the dangers.
I suspect this approach might give us a better financial system than the one we have today. But it is one we cannot have because governments will not dare let us, as experience with Northern Rock and Bear Stearns has reminded us. The public, governments feel, must be protected from banks and banks must be protected from themselves. Finance is deemed far too important to be left to the market.
"The public, governments feel, must be protected from banks and banks must be protected from themselves. "
Sounds like teenage sex to me.
ac - regulations will not work if they are not enforced. We have seen that with the FDIC which has plenary powers already but failed to use them during the Bush years. Bush installed a banker, Don Powell, from Texas of all places - the fox to guard the hen house and Powell failed Americans by trying to give banks everything they wanted. We will pay a huge price for his mistakes and loyalty to Bush.
Dudes,
Get a life.
Elvis, it was Wachovia that bought Golden West at the top, not WaMu. ...not that WaMu doen't have plenty of it's own problems...
OT
Dry,
June 08 futures are @ 91.8(last recent high was Oct07 @ 96), Apr 09 are @ 107.
Tom Lindmark,
It's past 11 in Phoenix, these late threads are known to wander; chill.
How wonderful!
After helping in no small part in putting us into this mess in the name of greed and fast money, now the banks will tighten everything in sight, unless you are Buffet or Gates, hence prolonging the recession.
And these guys resist being regulated? Got some bad news for these clowns: next administration is sure to spank them silly. Could not happen to a nicer bunch.
After all, banks are there to service the real economy. During the last 2 decades, we got that completely backwards...and paying the price in more way than one.
Tom Lindmark Sux!
Last again.