Outright nationalization is an unlikely option given that neither the current administration nor the presidential candidates could afford to support such a move in an election year.
Wating until after the election is pretty easy, though.
"In my opinion the markets relentless hounding of Freddie and FNMA stock indicates a collective belief that the fundamental manner in which these companies do business is about to be altered. I am not sure if that is today or tomorrow but the ever efficient market is discounting that possibility as we speak.
It is also interesting that the debt has barely budged. That speaks volumes and in the background we can hear the choir chanting soto voce,Bear Stearns. I think that the market expects that the nationalization of the GSE will follow the template of the Bear Stearns takeover. In that case the shareholders were thrown (aggressively) under the bus and debt holders survived. I think that will be the outcome here, too." [hat tip]
the Treasury Department or the Federal Reserve would come in and provide a liquidity backstop, in the form of a loan or guarantee to bondholders that they will be paid.
A guarantee that later explodes in the taxpayers' faces? No, let the market decide the value of the OLD bonds of Fannie and Freddie and give guarantees only to NEW bonds, to avoid the mortgage market freezing up completely.
We should nationalize only those businesses that would then become a public liability. Successful businesses that generate profits should stay in private hands. This is our American Christianity.
What happens to the stockholders is another question, but the bonds will be honored.
Why should they be "honored" if they don't have a federally guarantee to begin with? We shouldn't give present to the holders of old bonds, especially not in the current economic situation.
I'll tell you what happens if the gse's are allowed to fail.
Instead of the captial class usurping the lions share of added value profits, labor will command their just wages.
More likely, the Treasury Department or the Federal Reserve would come in and provide a liquidity backstop, in the form of a loan or guarantee to bondholders that they will be paid.
This is exactly equivalent to the Treasury or Fed simply buying the actual loans at par. (Either way, the Treasury would lose money if and only if the bonds defaulted.)
Great idea! Sign me up.
Gosh, it's almost as if the creation of these GSEs was some kind of mistake. Who would have thought?
Peter T
F&F finance 70% of loans for houses. Without them the home market dives another 50%.
I am opposed to distribute taxpayers' money to OLD bonds that had no guarantee. NEW bonds may be federally insured against a fee to the Treasury.
I disagree with your predictions about house prices: rents set a natural bottom to house prices, independent of the government, and 50% decrease seems too pessimistic to me.
They began as "nationalized" companies in the 30's and have enjoyed the benefits during the good times. Investors in their stock bear the risk and really should have known.
"Nationalization" is really a formality folks. I hope they get all the weasels out of the chicken coop at least....
Inflation may yet come... when people demand wages
different sectors of the economy have different bargaining strenghts.
Doctors and medical people should be reasonably protected.
Walmart workers & retail, not so much. Basically if your employer can train a guy off the street in under a month for your job, you're going to be hosed going forward.
Let's not forget that Bernanke and Paulson used F&F to bail out their banker friends. The banks sold F&F all kinds of toxic crap.
That mistake doesn't justify future mistakes. Protect the taxpayers from being hosed. Hose the bondholders instead (the stockholders should end up with nothing anyhow).
"Doctors and medical people should be reasonably protected."
Nope the only ones that will make out like a fat rat are the same ones that did in the 30's and that be federal government employees who manage to keep their jobs.
We are in a deflationary spiral. Prices are going up because we are now globalized.
On this, I agree with you. We will need the Treasury to provide some demand (e.g. repairing infrastructure), and taxpayers money shouldn't be wasted by "honoring" promises on Fannie bonds that were not given, to protect the Haves and neglect the Have-nots.
Fannie Mae has just reintroduced the 40 year mortgage to make housing more affordable. This according to Eric Englund is a desperate measure to keep expanding its own balance sheet in order to maintain its solvency. The company has a debt to equity ratio of 43-1, which is massive leverage. Fannie Mae retains a $900 billion mortgage portfolio and in addition guarantees $1.3 trillion in mortgage backed securities. Eric believes it is a matter of when, not if, the credit bubble bursts...
Highlighting IndyMac's problems, Senator Charles Schumer (D-NY) said in a statement released yesterday, "It is obvious that the breadth of the bad lending that has led to IndyMac's troubles happened over the last few years, not the last few days. In short, IndyMac was a junior version of Countrywide."
Maybe it ought to occur to someone in our government that two thirds of America just cannot afford to buy a house. Doesn't mean they must live in the street but if you go 2/3's or even beyond 1/2 of the way down the income ladder you come to a point where people earning that little money cannot afford to buy a house.
Stop trying to shoehorn them into property they can't afford.
The Debt Securities, together with interest thereon,
are not guaranteed by the United States and do not
constitute a debt or obligation of the United States
or of any agency or instrumentality thereof other
than Fannie Mae.
Fannie Mae, Universal Debt Facility Offering Circular, January 22, 2002.
I believe commodities will fall as well but I do not think commodities are a bubble.
Never said it was a bubble, what i meant was for those who think commodities are in a bubble. The prices have gotten ahead of itself.. for now. But then it will continue it's incline again.
Didn't mean to imply you did. This common wisdom wall street proffers through the main stream media gets my goat. I didn't want to be interpreted as saying that commodities were a bubble.
Material information for investors. Can you see shorts getting lawyers if the above material business information is false?
Of course, I'm not stupid. I won't get a vote and the GSEs will be recapitalized and the taxpayer will hold the bag. I posted the quote just for sarcasm value not because I ever believed a word of it.
thimblewhit = thimble--a small container used to hold a thumb while sewing, whit--a small dismissive sound made by blowing throgh pursed lips,,,ergo thimblewhit-- a small dismissive sound for a small problem easily dismissed.
While we are at it, we should nationalize some appreciating assets, too, the way other countries do. We tax payers have had enough of this market based crap we're taking.
The increase in yield spreads just might be the Chinese govt reducing its level of purchases. Guess I'll have to wait for Brad Setser's next report to find out, but if true this would be a major turning point.
See, the markets are down because Obama might become President.
Duh!
Dude, that guy's hair is ridiculous. And if you click on his name and read his bio...
Jerry lives in Boston, Pennsylvania, with his wife, Susan, and seven children. The Bowyers are currently engaged in a family project consisting of translating the books of Genesis, St. Johns Gospel and the early church creeds from Hebrew, Greek and Latin into English.
Could you imagine being one of those seven children? ...being forced into the fun "family project" of translating biblical texts from Greek and Latin into English...
Sorry, I can't come to your pool party... have to translate today!
The political class is shifting left. Were likely to get Obama and Nancy and Harry running the most advanced economy in the world next year. The investor class doesnt like what it sees coming. Thats why it is scaling back. Capital is going on strike, and we wont come back to the table until we see that we have a chance to a fair deal.
Oh, a fear of a 35% corporate tax rate is what's scaring foreign capital. And all along, I thought it was the 45% USD haircut...
I see some raised hands- back to Intro to Money and Banking and learn how they buy t-bonds with actual cost dollars printed by the Bureau of Printing and Engraving.
I believe they currently pay about $.05 per $100.
Now, how much to bail out Fannie and Freddie? Just buy some more bonds from Uncle Same and create some digidollars.
Crisis? We only have a temporary crisis- in the long run the prices from 2006 will seem cheap.
You just have to wait for that inflation. All of that money that we sent overseas to meet liquidity concerns in the R.O.W. will start showing up here. Um, Abu Dhabi bought a skyscraper. Well, now we know where there are waaaaay too many dollars.
As has been mentioned, anything that has a world market (chocolate, gold, silver, solar cells, cement, oil, corn, wheat, etc...) is going to go up in terms of dollars, 'cause a lot of folks have a lot of dollars.
Make our new visitors happy, they are going to be paying for your salvation;-P
Michael McKinlay writes:
The big question is : Will F&F's ahreholders get screwed?
They are already screwed. FRE a month ago was 24 and today 10. The shareholders are a very few percent of exposure. The bond holders are and always have been second in line to take losses. Indemnify them? I don't think there is enough money to be found. Face it, GSE label or not these bond holders need to be hurt for their yield seeking gambling. Some will bitch that they didn't know they were gambling and that's where that quote above comes in.
One thing no one seems to be asking is how the Fed govnt. would run FRE and FNM. It is preposterous to think that the Fed or the Treasury has the expertise to manage complex businesses of this sort. It would be a disaster if we put these companies in the hands of incompetent bureaucrats.
I dont know what is worse. Incompetent bureaucrats running the companies into the ground, or knowledgeable outsiders running them in a way that is mostly advantageous to their own interests, and having them fail anyway. I'd actually vote the former if I had to, but my first choice would be that they didnt exist. You think Franklin Raines and the like didnt know what they were doing when they smoothed earnings? Hell yeh, they did. And to think they had to do that sh&t just to live like kings. That makes me think they knew all about what was going on. The fact is they didnt care about the health of the firm. They didnt care if it all fell apart one day. They only cared about themselves and feeding at the trough.
just think of wages as a spread trade like any other asset class... up until 24 months ago , the spread was as wide as it ever could get...just look for the spread to tighten
I like the analogy, but....what's in the fundamentals to drive down the spread? To the contrary, it only looks like it would widen unless actively forced to do otherwise by intervention. And I know y'all don't like the i-word.
I think they decided no, but then again, it is alleged that Cindy McCain has been submerged in oil most of her life and that some have said she is potentially a vampire...go figure?
Michael, you utterly missed my point.
Money is not being destroyed. Merely credit.
One of the fallacies taught as a tautology in basic econ classes is that M1 matters. Well, with the creation of the shadow banking system, it no longer mattered.
What is happening now is a large house of cards is slowly tumbling down, and huge losses are materializing in a lot of balance sheets, because assumptions have failed about the fundamental nature of lending. If you lend long, you had better have a liquidity backstop for times when you get cashflow crunched. Now most of the entities suffering right now from lending long and borrowing short have no backstop. Too bad, then they fail like BSC.
Fannie and Freddie have an implicit backstop- Uncle Sam. Now Uncle will bail out the bondholders, because it has too, but it will also demand RTC style a pound of flesh- namely the shareholder value. On the other hand, if those bonds fail, the entire system of finance (oh say can you see money market accounts and internationally held agency bonds) fails.
Versteh?
So in other words, if they let Fannie and Freddie fail, the US Dollar fails, and then we got Weimar.
Not gonna happen right now. Or you can contemplate $100 a gallon gas and making $500 a day as a minimum wage for a little while.
Contemplate dollar reserve status when GSEs comprise a significant amount of foreign holdings.
It might be good for the US to have several of the big banks nationalized and some of the investment banks too. At least then one could be a customer without worrying about one's money disappearing due to management stupidity. Citigroup comes to mind and also Bank of America. Merrill Lynch, and Morgan Stanley might also benefit from government ownership. AIG too?
Argento, The devaluation of the dollar makes assets under its denomination less expensive to outside investors. The 35% bracket has been there for a long time and is not a time relative delta.
Nationalization is a canard. Every time that all of the MSM shills start spouting off the same line (in this case nationalization is the only option) you can be rest assured that this is not what is in the cards.
As someone said here a while back, when the MSM tells you something can't happen (a tech bubble, a housing bubble), it prolly is happening, and when they say that something is happening (global warming, iran nuke program) it prolly isn't. In this case, the MSM is now all spouting off simultaneously that an FNM nationalization is in the cards, so it prolly isn't. Even the bloggers seem unanimous in this line of reasoning. Weird.
In any event, a much more likely scenario is complete GSE collapse which the MSM says can't happen. This is because the pigmen (Fed and IB's) REALLY want to stiff the FCB's and pensions and take the $4TR book for pennies on the dollar. The only way this can happen is if the GSEs collapse and the RE market grinds to a halt. Then the pigmen can come in and give the FCB's 10 cents on the dollar for the book and they will gladly take it. Viola, mission accomplished! RE market gets back on track and the immense profits the IB's will make selling RE back to the peeps over the years will re-capitalize the financial system.
Of course, the downside is GD2. But that's going to happen anyway so no real problem there.
BG...China and Eastern Europe and SE Asian countries are all experiencing significant wage inflation. Increased wages in China means that it's less profitable to have your kid's bicycle made there instead of in the US especially when increased transport costs factor in. When some manufacturing moves back onshore, there will be some upward wage pressure in the US.
Anyone have any ideas which big banks will go under next?
Why the qualifier "big"? I suspect that there are a number of small fry that will go first, and $0 is as low as you can go no matter how many shares have been issued. Pikers like ABCW are sinking fast.
Northwest Airlines said Wednesday that it would cut 2,500 jobs, including pilots, flight attendants, mechanics and other employees, reflecting its reduction in flights in the wake of high fuel prices.
As far as house prices dropping because you can't get a loan, that is what is going on in Miami-Dade and Broward County, Florida right now, and has been going on for at least the last 6 months and probably from
August 9, 2007. You have to have virtually perfect credit and 20% down, because it is virtually impossible to get an accurate appraisal because there are no comps, not even too many REO comps.
The only lenders out there are hard equity lenders who are using their own money, are charging 10%, and demand an immense capital cushion, and
are still scared to death they are losing their money. People who bought at the wrong time but with 30% down at peak are wiped out. I tell people who come to me and put nothing down that they are lucky--they aren't losing much. True, the are temporarily losing their credit, but as their numbers grow, I think they will have access to credit sooner rather than later. That is, if we still have a banking system left to grant credit in a couple of years.
To follow up on what AllenM said, if you lend long using your own funds, you can afford to sit tight until the loans mature. Otherwise, at some point you yourself will be looking for a refi, and if the timing is wrong you can be hosed.
I expect some wealth transfer to those in manufacturing & manufacturing-related industries due to increased export competitiveness. No argument. It does not follow, as per the other comment, that "labor" as a whole will be bid up, or that (implicit in the "spread" talk) the returns to higher ed will narrow.
Not gonna happen right now. Or you can contemplate $100 a gallon gas and making $500 a day as a minimum wage for a little while.
No we won't. It'll be 6-euro gas and 10-euro minimum wage before we get Weimar. Having dollars in a mattress will be meaningless, having euros in a mattress may mean something.
(Just responding to the Weimar comment, not making any predictions.)
As far as house prices dropping because you can't get a loan, that is what is going on in Miami-Dade and Broward County, Florida right now,
Sort of local, no? I recently put out feelers for a loan in north-central TX and I'm still getting e-mails from people looking to give me money. That is with good credit and the expectation of a decent DP, but those are the conditions you describe as being of no particular use in FL at the moment.
From Merrill Lynch's closing agency commentary today: "All that being said (and we think the crux of the issue), Fannie did successfully price the new issue 2yr Benchmark as planned. Merrill Lynch/boa/jpm were lead managers on the mortgage giant's $3bn 2yr Benchmark note program which priced this morning at CT2+74 or L-22.5 area. The total book was 17% oversubscribed and the majority of the buyers were Central Banks and Fund Managers."
Notice how the previous rescues the bondholders wound up in good shape... CFC/BAC, BSC/JPM, you wanted to own the bonds.
Wondering if this will follow the pattern. If FRE common gets down to kindergartner stage, the bonds (not the agencies themselves, actual FRE debt issuance) might be a call option on a bailout.
If they do go bad, they do.
Stop conflating losses with destruction of money. One is not the other. Yeah, fractional reserve banking creates large amounts of dollars, but they went into somebodies pocket. They don't just disappear.
Take a hundred dollar bill, burn it. That is destroying money. Default on a debt, and then wash it away with bk, well the money is gone, but it was spent and went into somebody else's pocket.
Don't keep conflating money and credit, it is novice level annoying.
Or grow up and understand what Public Debt, legal tender, and the Federal Reserve fractional ratio really mean now, versus some abstract taught wrong in college.
At least then one could be a customer without worrying about one's money disappearing due to management stupidity.
WTF? Where did government bureaucrats suddenly get this mystical intelligence? This is the same government who's balance sheet is in even worse shape than these banks!
GSEs will crash and someone will scoop up all the goods for pennies on the dollar. It will be sold to us as a necessary measure by the munificent buyers.
I agree with Russ, the Japanese Postal Bank comes to mind, along with Calpers;-}
Russ, I implied those numbers would be fleeting. The Euro is in no position to massively increase the amount of currency circulating sufficient to provide us with anything like an operating barter system. I would suspect it would be our neighbors to the north.
But hey, it is becoming obvious that we will bailout the GSEs to keep the dollar somewhat afloat.
As for the stock market, well, with bigger problems, they will start ignoring market crashes and volitility. After all, if the dollar goes, the fat cats won't be fat, and we will all be selling apples on street corners at this point.
Of course the banks and financials will fight this tooth and nail.
The healthy banks will tailor the legislation to their liking (just like before) - let the new GSE take the (new) risk. The dying banks already sold their teeth and nails as assets. The Fed or Treasury will be stuck will the old GSE's pile of whatever meaning the taxpayer holds the bag.
FICA will go up to 7.5% of a worker's pay (employers contribution stays the same), means testing to keep anyone with a solvent 401K or IRA from getting more than a couple hundred bucks at retirement time. C'mon, be creative!
Yes, Mish is predicting the nationalization of Fannie and Freddy...
This is the same Mish that has been unrelenting in his prediction of an imminent deflation since at least the year 2000, when house prices in my area were 1/3 of what they are now.
Why exactly would nationalizing the GSEs support the dollar? It seems to me the government will end up printing dollars, and the market will anticipate this.
That is, if we nationalize the GSEs, then we are explicitly acknowledging that the household sector cannot support its debts. Where then, pray tell, is the government going to get the money to repay these debts?
The obvious conclusion, given that our government runs a deficit, is that it won't be able to find the money. Therefore, they will print.
This will cause the dollar to crumble and U.S. interest rates to soar, IMO.
Our currency is based on a government guarantee. That guarantee is only as good as the the government's ability to underwrite the debt with taxes on the economy. When the economy tanks the governments ability to collect taxes becomes impaired and that guarantee of underwriting is worth less.
Without producing money free of debt by the government we only dig ourselves deeper into the whole of insolvency with more debt. Government money free of interest based on future tax receipts lubricates the economy while decreasing the debt structure on the government. Of course this debt free money must be monitored closely and backed by tax increases.
Fannie and Freddie have an implicit backstop- Uncle Sam. Now Uncle will bail out the bondholders, because it has too, but it will also demand RTC style a pound of flesh- namely the shareholder value. On the other hand, if those bonds fail, the entire system of finance (oh say can you see money market accounts and internationally held agency bonds) fails.
Somehow in this discussion the implied guarantee imputed to GSE MBS's has been implicitly transferred to GSE bonds. That, or folks are sloppily using "bonds" to described the mortgage-backed paper. Probably both?
I don't have any idea why failure of Fannie or Freddie bonds would cause the collapse of the world financial system. Large companies have failed before, and debtholders have taken enormous haircuts, without the world coming to an end.
And surely it's only the bonds (and the equity, of course) that are at risk of a total wipeout. There are still cashflows tied to those underlying mortgages; nobody's suggesting that no one will ever make a payment on an agency mortgage ever again.
Maybe those cashflows won't be enough to make all the MBS holders absolutely whole, but how big a haircut are we talking about? And how big a haircut could we reasonably expect to result in a total collapse of the world financial system?
I suppose I can see why bondholders would want to pretend there's some sort of doubly-implied guarantee of the debt they're holding, just like a lot of the shareholders on the message boards seemed to think there was some sort of triply-implied guarantee of the equity. And I can see why anybody who's at risk of a haircut would be screaming "OMG if this debt I'm holding doesn't get paid off at pat it'll be the end of civilization as we know it...."
We have sort of become a nation of whiners, he said. You just hear this constant whining, complaining about a loss of competitiveness, America in decline despite a major export boom that is the primary reason that growth continues in the economy, he said.
Weve never been more dominant; weve never had more natural advantages than we have today, he said. We have benefited greatly from the globalization of the economy in the last 30 years.
Whoever votes for McDepends the DELUDED FOOL should have their head examimed.
Well, not exactly. Um, you have forgotten that slight problem of where the currency originates.
The Fed. Now where do they get it?
From BEP. And what can they do with it? Give it to the banks for Tbonds, or GSEs, or anything. (Yup, anything. Greenie once said they would jokingly take oxen if that was what was necessary.) So, as long as some banks are solvent (and, note that when a bank is closed, the deposits get hived off to another bank, making it bigger), you can keep you system going. I note that what you seem to contemplate would be accurate in the pre 1930s style set up, but not today.
Life has changed.
So they can keep right on creating credit out of thin air and loaning into the system. Check out the meaning of a coupon pass by the Fed.
WTF? Where did government bureaucrats suddenly get this mystical intelligence? This is the same government who's balance sheet is in even worse shape than these banks!
Well it doesn't make any difference how bright government bankers are, a government bank would never go belly up by definition. So as a depositor you could put in as much as you wanted and not have to worry about depositor insurance, etc.
A friend of mine in Portugal has a lot of money on Barclays there. I told him to move it to the Portuguese government owned bank, the Caixa Geral de Depositos. It is safe there.
Wondering if this will follow the pattern. If FRE common gets down to kindergartner stage, the bonds (not the agencies themselves, actual FRE debt issuance) might be a call option on a bailout.
The Federal Reserve does not create money, banks do through checking deposits.
No matter what the Fed does it cannot force more private borrowing and the banks are loathe to because of worsening balance sheets and falling credit worthiness of borrowers.
The Euro is in no position to massively increase the amount of currency circulating sufficient to provide us with anything like an operating barter system.
Don't really need printed currency. Hardly anyone uses it today, what they use is assets expressed in terms of a currency (like dollars) that could just as easily be expressed in terms on another currency. (Or credit expressed in those terms.) If we go Weimar, the number of digits in the databases will be too small and it'll be too big of a task to convert the programs and files to bigger fields, so we'll just change the currency units. I suspect we'll use Euro to prevent faraud from the confusion if US dollar versus Canadian dollar. What'll probably happen is the use of currency will completely disappear, even the corner dope dealer will only take credit/debit cards or something like cell phone minutes. Gresham's law taken to it's next step - even fiat paper-and-ink is more materially valuable than electronic impulses, but the paper isn't trusted and is driven out.
So as a depositor you could put in as much as you wanted and not have to worry about depositor insurance, etc.
Yeah, but your purchasing power still goes down the same black hole. I can deposit $20K instead of buying a car, and 5 years later when I withdraw the $20K from the government bank I'll be able to finance a loaf of bread with it.
Can anyone explain to me how physical currency is relevant in any way? What fraction of economic transactions are carried out using currency? Personally, I haven't touched physical currency for at least a few weeks--I think the last time was when I put a dollar in a vending machine driving back from my vacation last May.
Now Uncle will bail out the bondholders, because it has too, (...) if those bonds fail, the entire system of finance (oh say can you see money market accounts and internationally held agency bonds) fails. (...) if they let Fannie and Freddie fail, the US Dollar fails, and then we got Weimar.
S&P said that if the US does BAIL-OUT Fannie and Freddie, then the US probably looses its AAA credit rating. That seems to indicate that any chance of Weimar rises more with a Bail-out, not with letting the GSE fail. Their old bonds certainly wouldn't be worthless, only worth less, due to the decrease in house prices. Maybe the bondholders get only 90 cent on the dollar, or even only 80, but not 0. The US Treasury has more important expenses than making the bondholders whole.
You know, I'm all for the occasional snark, but this is ridiculous...next somebody's going to post some "how a bill becomes law" notes from a high school civics course to prove that lobbyists don't influence legislation....
Wow, I just read this entire thread and I think my head is going to explode.
Two questions to which no one can agree:
Does the U.S. Government have the power to unilaterally increase the money supply?
If it does increase the money supply, will inflation result?
My aching head tells me that the answer to the first is 'yes' (simply because it's a fiat currency) and the answer to the second is 'yes' (because increased supply tends to decrease demand).
Mish is starting to go off the deep end. His piece on IndyMac was beyond sarcasm and just plain snide. It may be prudent to be ahead of the curve and raise the collective societal concern,but to revel about its destruction is over the line.
F&F are already national liabilities. Everything else is symantics.
Don't argue with AllenM, He knows it all. Problem is, like most people in the US, he doesn't know that Money = debt = Credit. Further, He thought (not sure if he still does) that the US gubbmint are going to hyperinflate out of this mess. Laughable, right?
The cost to inflate out of this mess will almost instantly make the US debt unserviceable. Inflation is a monetary phenomena, not a price phenomena. Look around... Deflation as far as the eye can see.
For those who think that rent equivalent prices will act as a bottom to the housing market please consider what the huge supply of vacant houses (up) will do to rent prices (down). What percentage of ones income will go into lodging once we hit bottom is anyones guess. Especially if unemployment is in excess of 10%. We could find ourselves with very inexpensive housing, leaving us with more to spend (which is what we like to do anyway). Just a thought...
Uncle Billy Gets Wonky writes:
Yalt, it is a little more complicated than that.
You're the one posting "Fed for kids" as if it was somehow going to clarify matters, and commenting that the rest of us are probably googling "money" because we're too ill-informed to follow the discussion.
As a general rule, I tend to skip over contributions from posters who can't be bothered to take their conversation partners seriously. I should probably follow that rule more consistently....
WASHINGTON A measurement of pending home sales fell to the third-lowest reading on record in May as the housing market's recovery continued to prove elusive.
The National Association of Realtors' seasonally adjusted index of pending sales for existing homes fell 4.7 percent to 84.7 from an upwardly revised April reading of 88.9. The index was 14 percent below year-ago levels.
"The overall decline in contract signings suggests we are not out of the woods by any means," NAR Chief Economist Lawrence Yun said.
The Federal Reserve reported Tuesday that consumer credit increased at an annual rate of 3.6 percent in May, roughly the same pace as logged in the prior month.
The pickup pushed total consumer debt up by $7.8 billion to $2.57 trillion. That was a bit more brisk than the $7 billion over-the-month increase economists were expecting.
The increase was led by much stronger demand for a category called revolving credit, which is primarily credit cards. Use of revolving credit rose at a 7.1 percent pace in May, a month where a flow of tax rebates helped to energize consumer spending. In April, consumers cut back on such credit at a 0.5 percent pace.
Still, the longer-term trend shows that consumers have been forced to charge more of their purchases on credit cards as banks have tightened lending standards on other types of loans.
Demand for non-revolving credit used to finance cars, vacations, education and other things, meanwhile, slowed to a pace of 1.6 percent in May. That was down from a growth rate of 6.1 percent in April and was the slowest since December.
Much of the newer housing has been built in suburb style configurations. YET the cost of gas has roughly doubled since many of these were envisioned and subsequently built.
I have been noticing that as the government/fed bails out their friends, the dollar goes down, especially against food and fuel.
This all adds up to the fact in my mind that we have a lot of ill configured housing for the future that is not only unfordable but is impractical. So housing is losing value because people can no longer at current income continue to pay for all the costs of living.
We are going thru a paradigm shift in this country and the debts we have incurred make little or no sense.
FNM and FRE are of the old paradigm and there is not a thing that can save them at this point.
Whether the government comes in and tries to save the bond holders is back assward. All that will do is shift the liability to the taxpayers but not relieve the underlying issues of having an over priced product that is wrong for the future.
High energy prices insure that suburbia is dying a slow death and there is nothing short of a new cheap source readily available and abundant energy that will save it.
Um, dust, what do you call printing up more money to fund the fed funny TAF, etc.
Now lets do that a little bigger with a couple of trillion in GSEs.
That is big credit creation by the fed in terms of digidollars.
Now, with all of that money in basically cash, you the PRC with $1 trillion plus of this stuff will do what with it? Buy resources to keep on building your country, like say iron ore. So, in an effort to ensure your commodity supplies, you bid top dollar. Now you have tied up all of those dollars for something that is no longer dependent on the value of the dollar. Success! You have passed the old maid. Now somebody else has to do something with those dollars- like buy the Chrysler building, or buy Chrysler. The problem is folks are only seeing the local destruction of credit and missing the tsunami of dollars that will repatriate due to a weaker dollar.
All fine and dandy to predict deflation in houses- I fully agree that it will occur for at least the next year (maybe two), but by then, inflation will start roaring along at a pace that makes all of this arguing quite mute.
Eventually prices for badly configured housing will reach a clearing point.
What needs to happen is the move to electric vehicles while completely revamping the grid. Cheaper fuel (electricity) and vehicles ( EVs can be produced at one half the cost ) will save these tracts for some time.
The longer the powers that be cling to the ICE ( internal combustion engine ) the worse the situation will get.
Recent Declines in Nonborrowed Reserves
The H.3 statistical release indicates that nonborrowed reserves of depository institutions have declined substantially since mid-December to a level that is now negative. This development reflects the provision of a large volume of reserves through the Term Auction Facility (TAF) and has no adverse implications for the availability of reserves to the banking system.
By definition, nonborrowed reserves are equal to total reserves minus borrowed reserves. Borrowed reserves are equal to credit extended through the Federal Reserve's regular discount window programs as well as credit extended through the TAF. To maintain a level of total reserves consistent with the Federal Open Market Committee's target federal funds rate, increases in borrowed reserves must generally be met by a commensurate decrease in nonborrowed reserves, which is accomplished through a reduction in the Federal Reserve's holdings of securities and other assets. The negative level of nonborrowed reserves is an arithmetic result of the fact that TAF borrowings are larger than total reserves.
How is that for an interesting comment?
You want money, post some illiquid paper and we give you liquid paper.
The Term Auction Facility and new GSEs will only replace existing money with new debt. It will not promote economic activity.
Until the financials are cleansed of their opaque securities will there be a beginning of new economic activity. Should they allow this to go on too long the demand destruction will take years if not decades to reverse.
Explain what "pushing on a string" is , in economists terms.
Because that's where Bernanke finds himself.
Stimulus Checks are one way to push a string (Congress, of course, not the Fed).
Overpaying for securities is another...one could argue that those helicopters are already flying (TAF and friends up through the BS bail out).
I submit that the credit crunch is causing massive deflation, but that Congress and the Fed will push those strings hard enough to register on the richter scale.
What's unknown is if the process can be reversed, but I think it's a given that we are going to find out....
Trouble with electric vehicles so far is the range and the batteries.
Plus the infrastructure isn't capable of that extra load at this point.
So the solutions are in the distance and distance is partly the problem with our current configuration. Cities like Portland Oregon are not having the same problems as Sacramento or San Diego because of their configuration.
The US has built itself into a unfordable mess on credit that has to be serviced. The only real answer is to take the losses and move on. Anything else is just digging the hole deeper. Hard to get out of a hole when you keep making it deeper.
The Stimulus checks were an addition to the economy, the TAF is not. Having said that it is money borrowed that only adds to our debt burden and pushes us closer to insolvency.
The TAF only replaces bad debt, it doesn't create money. As those toxic packages go bad the Fed will either have to repatriate the losses or eat the debt.
BB has already stated categorically that he will run the presses. Its idiotic to believe that the people who control the supply o cannot inflate away our little solvency problem.
"The Term Auction Facility and new GSEs will only replace existing money with new debt. It will not promote economic activity."
This depends on how strict your definition of money is. Mark Thoma and others have questioned whether our definition of money supply is too strict. The supply of money is a closed system...replacing illiquid valueless debt with liquid money results in at least a temporary increase in supply. Personally I think this shit is going to be rolled over indefinitely and eventually defaulted on.
As Troy says EVs can be charged overnight. The EV GM put out got 90 miles. Battery tech has improved appreciably since then.
The whole hitch is that the powers that be haven't figured out how to gouge the consumer enough yet. I'm sure battery leasing instead of ownership will help them get a start.
The powers that be have to be able to get their percentage to support their MIC. Things like solar and conservation scare the hell out of them.
The government still has to spend it. Even with all the deficit spending to date the economy is grinding to a halt.
What we have now is that we have to borrow $1 to get 94 cents worth of GDP because our trade gap is 6% and we have no savings.. This can't go on for long.
As far as I know, even Toyota is having a hard time getting batteries and all this about electric vehicles means living closer to work. BUT it is not today, it is tomorrow and by tomorrow I mean in 4 to 10 years to make any difference and by then much of the debt will have been extinguished in one way or another.
There are different level of guarantee that government can or may have to do. First, there is the mortgage that FNM/FRE guaranteed and sold on the market. This one our government has to guarantee. If not, our entire banking system will shut down since all banks hold some of these guaranteed mortage and use that as their capital. There will be no US economic system if our goevernment don't gurantee it. Second, it is the equity of FNM and FRE. It is very clear that these are not guarantee in any way.. Third and it is the sticky one, the preferred and other debt that FNM and FRE borrowed to fund their operation. If our governement does not make good on those loan, FNM and FRE is effectively BK and the equity holder will get nothing (which is fine). But who is going to take over the role that FNM and FRE did today? and HOw will the new company capitalilze their operation? I think the calculus on this one is the system stablibility. If our treasury secretary believe that it will affect our sytems, government will guarantee those debt...
Zimbabwe? Come on, get serious. Zimbabwe's collapse hasn't even taken down Zambia. The US goes down, they take everyone with them. Them as gots the bucks (15 million bbl/day x $140) have to step up to the plate and buy the paper. Buy it at a discount, but buy it. They have an enormous windfall from doing absolutely nothing and they can't afford to kill the goose who laid the golden egg. And there are enough bad guys out there that they need to be protected from. In the end, there's a decent chance if they buy the paper cheap and hold it for 10 years they might come out nicely ahead on the deal.
Krugman and the rest of the economists do not want to get to the heart of the problem ~ the privately owned and operated Federal Reserve.
All these "programs" will only drive us deeper in debt. We need a public central bank that will produce money, based on tax receipts, that carries no debt..
Michael, so what does JPM get from the TAF? Treasuries, which are promptly sold for cash. Take stuff the free market values at 60 cents, but may be worth more later, push it off at 95 cents to the Fed to hold at 2 percent per year, and book profits.
You, and mostof the other folks assume that the stuff shed to the TAF was bought at par- I suspect a ton of it was bought at market or below- then pushed over. See JPM takeunder of BSC.
Now, look at the credit links from the horses mouth, read BB's papers, then argue with me.
To pretend that Morgan or any of the other banks wouldn't be belly up right now without the privately owned and operated Federal Reserve taking junk and trading it for US Debt is ridiculous.
And to say that the paper that the Fed took is worth anywhere near 95 cents on the dollar now or ever is ludicrous.
Furthermore the Bonds are not sold, they are used as collateral for capital so their books can be audited without them being declared insolvent.
I'm not advocating for hard currency. I'm advocating for a Public Central Bank that produces money without debt based on the tax receipts of the United States.
A public Central Bank , not the privately owned and operated Federal Reserve, should be the beneficiary and arbiter of credit, not private banks.
The allowance of money creation by private banks for the federal government is the largest subsidy in history, from the people of the United States to the bankers themselves.
Bunk Michael, a ton of them are sold. of course they aren't worth 95 cents, but the fed ate 'em at that rate. As for belly up banks, most of them are quite solvent, as long as you don't make them mark to market seriously degraded bonds. Which is exactly what the TAF allows. What they are is illiquid. Which by definition every single bank is illiquid. Which is why you need a Fed.
There is a huge difference between A and B. Why the Fed shotgunned BSC into JPM's arms has more to do with the stability of the derivative market, after all forced unwinds would expose counterparty risk throughout the system. Bear didn't have access to the Fed, so when confidence was gone they were dead.
Bailing out Bear was a huge sea change for the Fed.
Bear still was not insolvent, and arguably would have got the shareholders more money, but the crisis of confidence was draining operating capital faster than Bear could think of liquidating.
Michael, then what do you base your currency on? Or is it just fiat? So tax receipts come in, in what form?
Don't say dollars, unless you mean just printing money, having the government spend it into the economy, and then collect taxes and retiring the currency.
Of course, due to leakage, the government will keep having to print more and more.
Do a couple of OLG models and you will see it requires a more sophisticated system.
A modified Euro partially backed would be more realistic and stable.
Bear was all about the derivatives. As of now there are more than 600 trillion in derivatives floating around and Morgan had a bunch with Bear and other banks.
Bear was the sacrificial lamb and the warning to others that the Fed was in charge. The Fed allowed those derivatives in the first place, as it did the securitization of debt. The Fed is trying to save itself. Any real investigation and the bankers monopoly on printing money would be in jeopardy.
The allowance of money creation by private banks for the federal government is the largest subsidy in history, from the people of the United States to the bankers themselves.
Do you want to abolish fractional reserve lending? If yes, would that not slow down growth (during the good times)?
there is the mortgage that FNM/FRE guaranteed and sold on the market. This one our government has to guarantee. If not, our entire banking system will shut down since all banks hold some of these guaranteed mortage and use that as their capital.
When bankers bought bad paper, it is the bankers' problem if they get only 80 cents on the dollar (Fannie and Freddie are insolvent, but their papers are not junk). If a banks fails, the FDIC will liquidate it and the shareholders get nothing - that is the right way to deal with insolvent banks. Without failing, a bank will take on more and more risk, and make the eventual failing worse.
Fractional Reserve banking is really leveraged debt banking. What this creates is a geometric debt pyramid that can never be repaid without crashing the money supply.
"When bankers bought bad paper, it is the bankers' problem if they get only 80 cents on the dollar (Fannie and Freddie are insolvent, but their papers are not junk). If a banks fails, the FDIC will liquidate it and the shareholders get nothing - that is the right way to deal with insolvent banks"
This is how you deal with one bank failure at a time. However, if you force all the banks to fall at the same time, who is left to clean up the mess? And who is going to provide capitals to restart the banking system again? I think it is the difference between sitting on the sideline to be an armchair quarterback (which all of us are) vs someone who is responsible to manage the system (that means they will have to put the systems back together and reboot it).. It is much easier for us to take the high road and demand the right thing to be done. But right things rarely is workable in real world (ever talk to a teenage about what the right thing they should do?)
Ok, I'm just a lil' country girl, who only half gets it all.
I have virtually all my money in a few equity index funds. Almost no bonds, and by "cash" I assume you mean something like savings accounts or CDs? I have a tiny bit of that.
Bottom line: what should a dummy like me, who isn't interested in becoming a day trader or even pretending to understand what the heck y'all are talking about with "ultrashorts" and "SRS" and all, what should I do with my savings?
If they're in stocks, aren't I at least somewhat protected from this Armageddon inflation y'all keep talking about? I mean, more so than putting it anywhere else?
As for geometric debt, that assumes it all survives. Reality is that a tremendous amount of debt is destroyed along the way. The only debt that never gets paid or destroyed is the treasury debt.
You should at least posit a Friedman style natural rate of growth for a money supply. That would be far more stable than anything you have advocated.
I never said that what I wrote was a complete proposal, as you well know ...
Yes, there would have to be monetary growth based on population growth, productivity and interest rates. Interest rates should be allowed to float on the market, not manipulated for the welfare of private banks. Credit should be allocated by category as per social need based on sustainability not auctioned for consumption.
Your attempt at discrediting the idea of a Public Central Bank based on money created without debt is a feeble one indeed.
AllenM - You are so far out of touch that its pointless to even talk to you. You think the FED can print money... BANG! You're toast dude. Its impossible to debate capital markets with someone who doesn't understand capital markets.
Who the heck cares about Misean? Go read Roubini, Mish, Minyanville, etc. Heck, go pick a finance blog and read about the credit destruction (which is money) to this point, 2nd inning or so, and prognostications of what is to come. You need the education.
Our Government cannot survive hyperinflation without putting the gun in their collective mouths and pulling the trigger. Period, end of debate. BB has said a lot about what he wants to do with this and that BUT HIS ACTIONS HAVE SET THE STAGE FOR A DEFLATIONARY SCENARIO. You just can't see it, I don't care if you know where to find federalreserve.com. If you can't interpret the data correctly its pointless.
Frankly not one of the strategies propounded by any of the giant brains here or elsewhere (myself included) comes with any guarantee, because the future is unknowable. You might as well convert it all to liquidity in the form of your favourite stimulant and enjoy the time of your life. At least you'll have some great memories.
I would just say that Greenspan was the one who set the stage for this debacle.
Bernanke has the hopeless job of using a mop to wipe up the flood of bad debt. He will try his best to preserve the privately owned and operated Federal Reserve System to no avail.
Dust, the Fed doesn't print money, they buy it at cost from BEP.
Small difference.
Asset deflation will happen. Especially in real dollar terms, such as they are.
But in nominal dollar terms there will eventually be sufficient inflation to erase this fiasco from the survivors balance sheets.
Mish expects Great Depression II to play out like number one. I expect a more argentina style outcome. Falling asset prices along with a falling dollar leading to stagflation that bites consumers in the butt. Now, what happens when the dollar looses it's reserve status? They disappear? No they are brought here to buy everything portable and not to waste those dollars. That is when the nominal inflation rate really rips.
Both of you don't seem to understand it is a fiat currency. Fiat. BB promised to drop dollars from helicopters. Well, how about getting congress to do bailout after bailout.
Gee, same effect.
Your real value of your house measured in gold or oil probably peaked in 2005. It will never reach that again in terms of real resources. But in fiat dollars, sure.
So since WWII we've had 60 years of pretty good times, with a 10 year span of inflation in the 70s and only 1 really bad recession (early 80s). Most people have done pretty well. You can say it was debt funded, but so what? We live our time on earth and we want to enjoy ourselves a bit now and then. Nothing wrong with that. Now let's suppose we have a rough time for the next few years, then patch things back together and go forward. Is the tradeoff worth it? I say yes. Let's just get it over with and move on.
Not every homeowner believes that obscene home prices enabled by toxic lending standards should be propped up by the gov. and it's agencies at any cost.
Those homeowners and current renters also vote.
You may wish the gov. to do everything and anything possible in an attempt to keep this bloated mess alive.
There are plenty of others who want it to correct and who will vote accordingly.
I've already checked Obama off my list because of his statements about the "gov. needing to provide a floor under house prices".
Don't kid yourself, there are plenty of people out there who would welcome a 50% discount and be jumping for joy for 80% off.
And with every other thing people buy inflating on a daily basis, buying a home "cheaply" becomes even more desirable than ever before.
I agree with much of your scenario except that unlike the 70s there will be no inflation in wages. In fact wages will not only go down in real terms but nominal terms as well. Better paying jobs will be lost and poorer paying jobs will prevail as it is now. Overall there will be fewer jobs.
What we are looking at is a depression, maybe not as bad as the 30s but with real unemployment in the high teens ...
With consumers being 70% of the economy the demise of a large percentage of consumers will of course mean a much diminished economy, unless of course the Government takes over as the nations banker, prints money without debt and begins paying down principle.
So you believe the rest of the world will de-couple from the US as we go down in flames? Mistake IMO.
You have a lot of historical references in your posts. I hate when people say its different this time, but I fear that it is. Its much worse. Therefore, I do not frame my argument into a past economic era "category" of sorts.
What I will say is we will not recognize the system when we emerge from this mess. I don't think you grasp the severity at this point. You write like it will be a sharp "V" shaped downturn, while I like Roubini's "U" shaped downturn with an extended bottom.
Uh, congress did just have the treasury print up the checks. you think they sold special bonds?
Half the time they increase the debt limit is because SS keeps growing through fake payments. I love the file cabinet, I think that is the biggest fraud ever.
It's 1973, and you only get the end in 1981 if you hire a Volcker- otherwise pfffft.
We will get some temporary relief for a couple of years, just long enough to build up a nascent recovery, then clunk, another drop. Each drop puts us into a lower value for the dollar. What people tend to forget is that by the end of the 70s real estate had jumped five fold due to inflation in most places. And it was still behind the rate of inflation in lost purchasing power. Look at purchasing power. That usually tells the tale.
At $100 plus oil, the rest of the world is not only contemplating dropping us, I would argue they are in the process of doing it. It will take five years or more to see the changes being wrought.
I would agree with you that what we will have will be different, but not that drastically different than today.
Allen we borrowed the money for the stimulus checks. First we had to send the bill to the Fed so the Fed could fund the money. Then the Treasury sent out the checks.
So instead of just sending out the money, we borrowed it at interest to the benefit of the Fed who now has over 100 billion in treasuries that they can leverage to 1 trillion ...
Bankruptcy laws and courts exist for such cases. FNM and FRE are private busnesses that generate private profits -- this is one of the primary goals of their operation. Nothing should be done until one or the other or both actually decides it must enter bankruptcy.
As I recall, earlier this year Bill Gross of PIMCO said one reason he was buying (distressed) GSE securities was due to government backing. That sort of thing has to stop.
But the thing is...with Fannie, Freddie and the third GSE standing for 95% of current mortgages, they have the US economy by the balls insolvent as they may be. There is no altenative to them becoming nationalizes at massive cost to you, US taxpayers.
"As I recall, earlier this year Bill Gross of PIMCO said one reason he was buying (distressed) GSE securities was due to government backing. That sort of thing has to stop."
Right on, brother. These 100% gurarantees (implicit, explicit, whatever) are ruining the economic integrity of this country. No guarantee on MBS's would be best, but if the government is going to step in now, I hope they offer no more than 80% of current value. These bondholders need to be taught a lesson so that we can get back to rationality in the market. They've got to feel some pain or else we're going to be right back here again in a few years.
Ok so where do i put my money right now so it becomes more valuable as this deflation occurs?
Right now my money is devaluing rapidly and i have tremendous insentive to spend it quick! To hell with assett depreciation in the meanwhile i need to protect that cash!
"But the thing is...with Fannie, Freddie and the third GSE standing for 95% of current mortgages, they have the US economy by the balls insolvent as they may be. There is no altenative to them becoming nationalizes at massive cost to you, US taxpayers."
Sure there's an alternative. The bondholders eat it and everybody wins. Except the bondholders.
Sure there's an alternative. The bondholders eat it and everybody wins. Except the bondholders..
Well the stockholders will go first. Wipe them out. Then the bondholders. We need some nationalized businesses: banks, insurance companies, brokerages, etc., etc. so average Joe can put his money where he knows it will be safe (that he will get it back when he needs it). If private banks and insurance companies don't like it, so what. They brought the mess and consequent punishment on themselves.
What we have now is that we have to borrow $1 to get 94 cents worth of GDP because our trade gap is 6% and we have no savings.. This can't go on for long.
Well, if we borrow $1 and spend most of it on imports (oil, BRIC products) one shouldn't expect it to pop GDP at all....and you are right that this cannot go on for long....the money cannot just go anywhere. They'll have to borrow or print that $1 and direct it to domestic employment to prime the economy.
BTW - I'm not saying I like any of this....I just think those who are in charge have made it clear which they believe to be the lesser evil , and they've already demonstrated that they can literally give away money for free to people who can and will spend it....unfortunately on imports, which doesn't really help, but the fact remains that no one refuses to take their stimulus check. If you still don't think they can drop helicopter money, but not get people to pick it up and use it, you aren't paying attention.
BTW - Roubini, at the tail end of his CNBC visit, recommended investing in inflation protected securities, if I heard
him right.
From a strict monetarist perspective you are perplexing, and from an Austrian perspective, the same in my mind.
It was the Austrians who dispute Friedman's assertion that the Fed reducing money supply causing the depression - the argument is the rapid growth of credit in the 20's that ceased in the 30's caused demand to fall (and prices to drop).
The argument some are making now is the Fed won't create new dollars and new credit to substitute for all the other credit that has vanished (much of which was "imported" credit). Thus the total supply of cash + credit is going down and that is deflation. The price of credit will go up due to the reduced supply.
Mish expects Great Depression II to play out like number one. I expect a more argentina style outcome.
But these aren't diametrically opposed positions. Bottom line is individual purchasing power falls in either case. It's the "how long will it fall" that no one really knows.
I thought these were tax rebates?
Ie they took the money and
then instead of
spending it themselves they gave some
of it back?
You lost me at "instead of"...
Congress did not stop spending money as a result of the stimulus checks. They did not forgo anything. You are thinking this is Wealthy Uncle Sam giving you some weekend fun money. I'm thinking this is Drunk Unemployed Uncle Sam writing an overdraft check for $100, because he wants to borrow $20 cash since the bar won't cash his checks.
Outright nationalization is an unlikely option given that neither the current administration nor the presidential candidates could afford to support such a move in an election year.
Wating until after the election is pretty easy, though.
We should nationalize Exxon and Mobil as well.
[OT] CNBC article of the day:
Bowyer: The Coming Obama Recession - CNBC
See, the markets are down because Obama might become President.
Duh!
spreads to treasuries on Fannie two year notes
Disfunctional link?
liquidity backstop?
How do they get away with mincing terms.
Try solvency backstop.
Start small BSC, go big, IMB, go long FRE...
As a wag I read last week we've come to the point where the financials have become not 'too big to fail' but 'too big to save'!
The GSE's are definitely in this class.
From Across the Curve:
"In my opinion the markets relentless hounding of Freddie and FNMA stock indicates a collective belief that the fundamental manner in which these companies do business is about to be altered. I am not sure if that is today or tomorrow but the ever efficient market is discounting that possibility as we speak.
It is also interesting that the debt has barely budged. That speaks volumes and in the background we can hear the choir chanting soto voce,Bear Stearns. I think that the market expects that the nationalization of the GSE will follow the template of the Bear Stearns takeover. In that case the shareholders were thrown (aggressively) under the bus and debt holders survived. I think that will be the outcome here, too."
[hat tip]
A guarantee that later explodes in the taxpayers' faces? No, let the market decide the value of the OLD bonds of Fannie and Freddie and give guarantees only to NEW bonds, to avoid the mortgage market freezing up completely.
Mish is correct ...
F&F will have to be nationalized. Without them the housing market crashes 80%.
What happens to the stockholders is another question, but the bonds will be honored.
there is NO WAY OUT
what are finance professors going to teach first year students?
Where is the implicit guarantee going to come from.
We cannot continue to guarantee returns to the investor class without risk. It's the basis of a sound money policy.
We should nationalize only those businesses that would then become a public liability. Successful businesses that generate profits should stay in private hands. This is our American Christianity.
PonziMonetizaCoruptiCapatlism
F&F are now financing 70% of home sales. Without them the home market crashes.
Michael McKinlay:
Why should they be "honored" if they don't have a federally guarantee to begin with? We shouldn't give present to the holders of old bonds, especially not in the current economic situation.
Without them the housing market crashes 80%
I disagree. Nobody is handing out GSE funds for renters like me, but we still make the rent every month.
Housing can & may fall to equivalent rents, but no further.
Someone in Abu Dabi bought the Chrysler building?....jeez, how badly do you have to want to get rid of your dollars...
I'll tell you what happens if the gse's are allowed to fail.
Instead of the captial class usurping the lions share of added value profits, labor will command their just wages.
The "tough talk" that nationalization won't happen is to get those F&F bonds from weak hands to strong hands at the lowest possible price.
Peter T
F&F finance 70% of loans for houses. Without them the home market dives another 50%.
It not nationalization then a bailout for sure.
Either way it's the same thing to me.
At some point the cumulative pile of debt becomes immune to palliatives.
You can shift it around, rename it, put in on some other balance sheet but it doesn't go away!
More likely, the Treasury Department or the Federal Reserve would come in and provide a liquidity backstop, in the form of a loan or guarantee to bondholders that they will be paid.
This is exactly equivalent to the Treasury or Fed simply buying the actual loans at par. (Either way, the Treasury would lose money if and only if the bonds defaulted.)
Great idea! Sign me up.
Gosh, it's almost as if the creation of these GSEs was some kind of mistake. Who would have thought?
jeez, how badly do you have to want to get rid of your dollars...
400M bbl/month x ~$100/bbl is a lot of money to be sending to the oil producers.
FORTY BILLION.
EVERY MONTH.
Oh and if anyone thinks the commodities bull run or bubble is going to end. I seriously think they should reconsider and look at the data.
Inflation may yet come... when people demand wages, as is happening in europe.
SHORT BUCKY!
Michael McKinlay:
I am opposed to distribute taxpayers' money to OLD bonds that had no guarantee. NEW bonds may be federally insured against a fee to the Treasury.
I disagree with your predictions about house prices: rents set a natural bottom to house prices, independent of the government, and 50% decrease seems too pessimistic to me.
They began as "nationalized" companies in the 30's and have enjoyed the benefits during the good times. Investors in their stock bear the risk and really should have known.
"Nationalization" is really a formality folks. I hope they get all the weasels out of the chicken coop at least....
Let's not forget that Bernanke and Paulson used F&F to bail out their banker friends. The banks sold F&F all kinds of toxic crap.
Inflation may yet come... when people demand wages
different sectors of the economy have different bargaining strenghts.
Doctors and medical people should be reasonably protected.
Walmart workers & retail, not so much. Basically if your employer can train a guy off the street in under a month for your job, you're going to be hosed going forward.
Michael McKinlay:
That mistake doesn't justify future mistakes. Protect the taxpayers from being hosed. Hose the bondholders instead (the stockholders should end up with nothing anyhow).
BB
There will be no wage increases, quite the opposite. As good jobs are shed lower paying jobs , if you can get one will take their place.
We are in a deflationary spiral. Prices are going up because we are now globalized.
"Doctors and medical people should be reasonably protected."
Nope the only ones that will make out like a fat rat are the same ones that did in the 30's and that be federal government employees who manage to keep their jobs.
Peter T
Home owners vote. F&F will not be alllowed to fail.
PonziMonetizaCoruptiCapatlism,
...labor will command their just wages
Given that a good chunk of "labor" is made up of under-educated, ignorant thimblewits, I look forward to the day.
Michael McKinlay:
Deflation in housing assets and Inflation in soft commodities and such.
Ultimately i think it will be inflation, what goes around the world will make it's way back. Plus policies are helping this too.
Yes i know what you mean ..money + credit supply and not price inflation.
Michael McKinlay:
On this, I agree with you. We will need the Treasury to provide some demand (e.g. repairing infrastructure), and taxpayers money shouldn't be wasted by "honoring" promises on Fannie bonds that were not given, to protect the Haves and neglect the Have-nots.
Did anyone see this old snip?
http:// http://www.thelongwaveanalyst.ca...22_05_print.htm
Fannie Mae has just reintroduced the 40 year mortgage to make housing more affordable. This according to Eric Englund is a desperate measure to keep expanding its own balance sheet in order to maintain its solvency. The company has a debt to equity ratio of 43-1, which is massive leverage. Fannie Mae retains a $900 billion mortgage portfolio and in addition guarantees $1.3 trillion in mortgage backed securities. Eric believes it is a matter of when, not if, the credit bubble bursts...
When the proposed tax increase to pay for the bailout of bond holders comes to a public vote I know that I will not be voting in the affirmative.
BB
I believe commodities will fall as well but I do not think commodities are a bubble.
thimblewhits!
Bwahahhaha.
Thanks, I was about to disappear into the bunker.
Cheers,
Doctors and medical people should be reasonably protected.
Wait till the demand destruction occurs when we finally realize that Medicare became cash flow negative this year.
Highlighting IndyMac's problems, Senator Charles Schumer (D-NY) said in a statement released yesterday, "It is obvious that the breadth of the bad lending that has led to IndyMac's troubles happened over the last few years, not the last few days. In short, IndyMac was a junior version of Countrywide."
Peter T
The only way out of this mess is to nationalize the privately owned and operated Federal Reserve and produce money without debt.
Maybe it ought to occur to someone in our government that two thirds of America just cannot afford to buy a house. Doesn't mean they must live in the street but if you go 2/3's or even beyond 1/2 of the way down the income ladder you come to a point where people earning that little money cannot afford to buy a house.
Stop trying to shoehorn them into property they can't afford.
Halo, you flipping out again?
Cheers,
Misean writes:
thimblewhits!
Do expand, please, this is a new word to me.
The Debt Securities, together with interest thereon,
are not guaranteed by the United States and do not
constitute a debt or obligation of the United States
or of any agency or instrumentality thereof other
than Fannie Mae.
Fannie Mae, Universal Debt Facility Offering Circular, January 22, 2002.
Schumer Watch DefCon4,
New to me too. And damned funny. Much smaller than a half whit I suspect.
Cheers,
unit472
spilt milk ... the empty housing inventory will be around for some time ~ 4- 6 years.
Michael McKinlay writes:
I believe commodities will fall as well but I do not think commodities are a bubble.
Never said it was a bubble, what i meant was for those who think commodities are in a bubble. The prices have gotten ahead of itself.. for now. But then it will continue it's incline again.
Michael McKinlay:
Dude, enough with the caps already. We can hear you.
If it's that important, then grab your computer and shake it.
Gracias.
The end of a once great empire...
Given that a good chunk of "labor" is made up of under-educated, ignorant thimblewits, I look forward to the day.
thimblewits...rofl
just think of wages as a spread trade like any other asset class... up until 24 months ago , the spread was as wide as it ever could get..
just look for the spread to tighten.
Rob Dawg
Bear Stearns got guarantees. You think F&F won't?
4shzl, sorry about that - link is fixed. Thanks!
Best to all.
What about the possibility of JPM stepping in to take over F&F? They'll absorb the first $2B and then the Fed will guarantee the remainder.
Which about wipes out the Fed balance sheet.
Time to go long JPM!
BB,
Didn't mean to imply you did. This common wisdom wall street proffers through the main stream media gets my goat. I didn't want to be interpreted as saying that commodities were a bubble.
Housing can & may fall to equivalent rents, but no further.
Troy
renters will not be able to provide a floor if they get get financing to buy a house...
most renters (like most home owners) arent sitting on a couple hundred K
I heard that Bernanke is going to be the new pitch spokesman for a children's bath soap...Mr. Bubble.
ades
As the economy tanks "equivalent rents" may be far lower.
Rob Dawg
Bear Stearns got guarantees. You think F&F won't?
Material information for investors. Can you see shorts getting lawyers if the above material business information is false?
Of course, I'm not stupid. I won't get a vote and the GSEs will be recapitalized and the taxpayer will hold the bag. I posted the quote just for sarcasm value not because I ever believed a word of it.
thimblewhit = thimble--a small container used to hold a thumb while sewing, whit--a small dismissive sound made by blowing throgh pursed lips,,,ergo thimblewhit-- a small dismissive sound for a small problem easily dismissed.
On a more serious note.
If the upshot of all of this mess is that we have to nationalize housing, then I want to see the mortgage honchos lined up and shot.
On PBS.
Which can go Pay-per-view to make some cash, 'cuz their funding's going to hell for the next several years.
"I heard that Bernanke is going to be the new pitch spokesman for a children's bath soap...Mr. Bubble."
Mr. Spiral, Mr. Bubbles is already taken.
Rob Dawg
The big question is : Will F&F's ahreholders get screwed?
While we are at it, we should nationalize some appreciating assets, too, the way other countries do. We tax payers have had enough of this market based crap we're taking.
The increase in yield spreads just might be the Chinese govt reducing its level of purchases. Guess I'll have to wait for Brad Setser's next report to find out, but if true this would be a major turning point.
Nemo writes:
[OT] CNBC article of the day:
Bowyer: The Coming Obama Recession - CNBC
See, the markets are down because Obama might become President.
Duh!
Dude, that guy's hair is ridiculous. And if you click on his name and read his bio...
Jerry lives in Boston, Pennsylvania, with his wife, Susan, and seven children. The Bowyers are currently engaged in a family project consisting of translating the books of Genesis, St. Johns Gospel and the early church creeds from Hebrew, Greek and Latin into English.
Could you imagine being one of those seven children? ...being forced into the fun "family project" of translating biblical texts from Greek and Latin into English...
Sorry, I can't come to your pool party... have to translate today!
Housing can & may fall to equivalent rents, but no further.
Troy
Countrywide is allowing people to stay in REOs for free. What exactly is the OER for "free?"
Michael McKinlay good catch, I misunderstood Troy....
Oddly enough there is no good website that describes "equivalent rents"
bad wiki!
Anyone have any ideas which big banks will go under next?
The political class is shifting left. Were likely to get Obama and Nancy and Harry running the most advanced economy in the world next year. The investor class doesnt like what it sees coming. Thats why it is scaling back. Capital is going on strike, and we wont come back to the table until we see that we have a chance to a fair deal.
Oh, a fear of a 35% corporate tax rate is what's scaring foreign capital. And all along, I thought it was the 45% USD haircut...
Well, now who thinks the fed can go broke?
I see some raised hands- back to Intro to Money and Banking and learn how they buy t-bonds with actual cost dollars printed by the Bureau of Printing and Engraving.
I believe they currently pay about $.05 per $100.
Now, how much to bail out Fannie and Freddie? Just buy some more bonds from Uncle Same and create some digidollars.
Crisis? We only have a temporary crisis- in the long run the prices from 2006 will seem cheap.
You just have to wait for that inflation. All of that money that we sent overseas to meet liquidity concerns in the R.O.W. will start showing up here. Um, Abu Dhabi bought a skyscraper. Well, now we know where there are waaaaay too many dollars.
As has been mentioned, anything that has a world market (chocolate, gold, silver, solar cells, cement, oil, corn, wheat, etc...) is going to go up in terms of dollars, 'cause a lot of folks have a lot of dollars.
Make our new visitors happy, they are going to be paying for your salvation;-P
Someday this war's gonna end...
Michael McKinlay writes:
The big question is : Will F&F's ahreholders get screwed?
They are already screwed. FRE a month ago was 24 and today 10. The shareholders are a very few percent of exposure. The bond holders are and always have been second in line to take losses. Indemnify them? I don't think there is enough money to be found. Face it, GSE label or not these bond holders need to be hurt for their yield seeking gambling. Some will bitch that they didn't know they were gambling and that's where that quote above comes in.
Argento writes:
I thought it was the 45% USD haircut...
It the barber is not careful, the customer will be bald soon.
BB ~ bad banks ?
brand new website for bad banks ...the Implode-O-Meter.
The Mortgage Lender Implode-O-Meter - tracking the housing finance breakdown, related to Alt-A and subprime mortgages, lending fraud, predatory lending, housing bubble, mortgage banking, foreclosures, debt, consolidation, lawyers, class-action lawsuits
Would an explicit guarantee of F & F paper at (maybe) .70 on the dollar be a realistic possibility?
AllenM
Money is being destroyed. Money overseas is being held in bonds that will increase in value as M1 crashes.
The only question is will the US become insolvent?
This is why we need to nationalize the privately owned and operated Federal Reserve and produce more money without producing more unserviceable debt
One thing no one seems to be asking is how the Fed govnt. would run FRE and FNM. It is preposterous to think that the Fed or the Treasury has the expertise to manage complex businesses of this sort. It would be a disaster if we put these companies in the hands of incompetent bureaucrats.
Charlie Poole
management at F&F will be retained and probably given bonuses. only shareholders and tax payers will be screwed.
Michael,
Credit is being destroyed.
Not money.
There is a difference.
What you have to understand is the value of that money in the eyes of foreign holders is being destroyed.
You can have a declining M1 and still have inflation.
You just have to understand the differences in the actual constituents.
After all, people withdrawing cash and putting it under the mattress could cause banks to fail, but it wouldn't destroy money.
Think about it.
Someday this war's gonna end...
Will anyone care if it "costs the taxpayers $1 Trillion?"
It's not like we're actually paying that debt.
Just make it go away. Now. That's our motto.
AllenM
Credit contraction means a falling M1, the other measures of liquidity are useless in the real economy and become worthless without the economy.
I dont know what is worse. Incompetent bureaucrats running the companies into the ground, or knowledgeable outsiders running them in a way that is mostly advantageous to their own interests, and having them fail anyway. I'd actually vote the former if I had to, but my first choice would be that they didnt exist. You think Franklin Raines and the like didnt know what they were doing when they smoothed earnings? Hell yeh, they did. And to think they had to do that sh&t just to live like kings. That makes me think they knew all about what was going on. The fact is they didnt care about the health of the firm. They didnt care if it all fell apart one day. They only cared about themselves and feeding at the trough.
i dohn wanna gubmint samframsisko libbral gubmint god jesuschrist sens yu ta HELL baylowt!!!
huh? Have you been eating spoiled cheese again?
Instead of the captial class usurping the lions share of added value profits, labor will command their just wages.
LOL! Labor is about to learn just how much of their wages were purchsed on credit.
Re: i dohn wanna gubmint samframsisko libbral gubmint god jesuschrist sens yu ta HELL baylowt!!!
F&F finance 70% of loans for houses. Without them the home market dives another 50%.
They'll still be around to finance loans, or another GSE/agency will be created to do it. But interest rates and down payments will be a lot higher.
PMCC,
just think of wages as a spread trade like any other asset class... up until 24 months ago , the spread was as wide as it ever could get...just look for the spread to tighten
I like the analogy, but....what's in the fundamentals to drive down the spread? To the contrary, it only looks like it would widen unless actively forced to do otherwise by intervention. And I know y'all don't like the i-word.
Anonymouse ,
Here is the Obama promo video you were looking for: YouTube - Rohff ft natty - Le son ki tue
I think they decided no, but then again, it is alleged that Cindy McCain has been submerged in oil most of her life and that some have said she is potentially a vampire...go figure?
"When the proposed tax increase to pay for the bailout of bond holders comes to a public vote I know that I will not be voting in the affirmative."
Don't worry, it will be some obscure rider attached to a totally un-related bill called something like "Make USA Safe" or "Buy America"
Michael, you utterly missed my point.
Money is not being destroyed. Merely credit.
One of the fallacies taught as a tautology in basic econ classes is that M1 matters. Well, with the creation of the shadow banking system, it no longer mattered.
What is happening now is a large house of cards is slowly tumbling down, and huge losses are materializing in a lot of balance sheets, because assumptions have failed about the fundamental nature of lending. If you lend long, you had better have a liquidity backstop for times when you get cashflow crunched. Now most of the entities suffering right now from lending long and borrowing short have no backstop. Too bad, then they fail like BSC.
Fannie and Freddie have an implicit backstop- Uncle Sam. Now Uncle will bail out the bondholders, because it has too, but it will also demand RTC style a pound of flesh- namely the shareholder value. On the other hand, if those bonds fail, the entire system of finance (oh say can you see money market accounts and internationally held agency bonds) fails.
Versteh?
So in other words, if they let Fannie and Freddie fail, the US Dollar fails, and then we got Weimar.
Not gonna happen right now. Or you can contemplate $100 a gallon gas and making $500 a day as a minimum wage for a little while.
Contemplate dollar reserve status when GSEs comprise a significant amount of foreign holdings.
Someday this war's gonna end...
It might be good for the US to have several of the big banks nationalized and some of the investment banks too. At least then one could be a customer without worrying about one's money disappearing due to management stupidity. Citigroup comes to mind and also Bank of America. Merrill Lynch, and Morgan Stanley might also benefit from government ownership. AIG too?
I don't really see any way out of this eventual mess without dumping a huge amount of tax money into them.
If we let these GSEs kaput, the contagion that follows can take down the entire US credit market.
Argento, The devaluation of the dollar makes assets under its denomination less expensive to outside investors. The 35% bracket has been there for a long time and is not a time relative delta.
Russ
How long will it take to create another GSE?
Of course the banks and financials will fight this tooth and nail. They want that market.
There won't be another GSE, not with Senate Republicans filibustering and Pension Funds loaded down with F&F bonds.
Nationalization is a canard. Every time that all of the MSM shills start spouting off the same line (in this case nationalization is the only option) you can be rest assured that this is not what is in the cards.
As someone said here a while back, when the MSM tells you something can't happen (a tech bubble, a housing bubble), it prolly is happening, and when they say that something is happening (global warming, iran nuke program) it prolly isn't. In this case, the MSM is now all spouting off simultaneously that an FNM nationalization is in the cards, so it prolly isn't. Even the bloggers seem unanimous in this line of reasoning. Weird.
In any event, a much more likely scenario is complete GSE collapse which the MSM says can't happen. This is because the pigmen (Fed and IB's) REALLY want to stiff the FCB's and pensions and take the $4TR book for pennies on the dollar. The only way this can happen is if the GSEs collapse and the RE market grinds to a halt. Then the pigmen can come in and give the FCB's 10 cents on the dollar for the book and they will gladly take it. Viola, mission accomplished! RE market gets back on track and the immense profits the IB's will make selling RE back to the peeps over the years will re-capitalize the financial system.
Of course, the downside is GD2. But that's going to happen anyway so no real problem there.
BG...China and Eastern Europe and SE Asian countries are all experiencing significant wage inflation. Increased wages in China means that it's less profitable to have your kid's bicycle made there instead of in the US especially when increased transport costs factor in. When some manufacturing moves back onshore, there will be some upward wage pressure in the US.
BB,
Anyone have any ideas which big banks will go under next?
Why the qualifier "big"? I suspect that there are a number of small fry that will go first, and $0 is as low as you can go no matter how many shares have been issued. Pikers like ABCW are sinking fast.
most renters (like most home owners) arent sitting on a couple hundred K
Most renters (UN-like most homeowners) aren't sitting on a couple hundred K of debt. Renters are in a better position - free of negative equity.
Northwest Airlines said Wednesday that it would cut 2,500 jobs, including pilots, flight attendants, mechanics and other employees, reflecting its reduction in flights in the wake of high fuel prices.
BladeRunner the film depicting a dystopian Los Angeles in November 2019
just may happen a bit sooner
Blade Runner - Wikipedia, the free encyclopedia
AllenM
With fractional reserve banking money is credit!
Every dollar you hold is debt. Without banks producing dollars through loans money evaporates as loans are paid and defaulted on.
As far as house prices dropping because you can't get a loan, that is what is going on in Miami-Dade and Broward County, Florida right now, and has been going on for at least the last 6 months and probably from
August 9, 2007. You have to have virtually perfect credit and 20% down, because it is virtually impossible to get an accurate appraisal because there are no comps, not even too many REO comps.
The only lenders out there are hard equity lenders who are using their own money, are charging 10%, and demand an immense capital cushion, and
are still scared to death they are losing their money. People who bought at the wrong time but with 30% down at peak are wiped out. I tell people who come to me and put nothing down that they are lucky--they aren't losing much. True, the are temporarily losing their credit, but as their numbers grow, I think they will have access to credit sooner rather than later. That is, if we still have a banking system left to grant credit in a couple of years.
When Talbot wrote his book in 2004, he was all over this...that book is what opened my eyes to the problems at FNM and FRE
RIP America's Debt-Based Monetary system
1980's - 2008
Done in by the extreme greed of capitalist pigs feeding at the obscenely leveraged debt liquidity trough.
To follow up on what AllenM said, if you lend long using your own funds, you can afford to sit tight until the loans mature. Otherwise, at some point you yourself will be looking for a refi, and if the timing is wrong you can be hosed.
KFP,
I expect some wealth transfer to those in manufacturing & manufacturing-related industries due to increased export competitiveness. No argument. It does not follow, as per the other comment, that "labor" as a whole will be bid up, or that (implicit in the "spread" talk) the returns to higher ed will narrow.
Kung Fu Panda
If the loans don't go bad!
Amazon.com: The Coming Crash in the Housing Market : 10 Things You Can Do Now to Protect Your Most Valuable Investment (9780071422208): John R. Talbott: Books
Not gonna happen right now. Or you can contemplate $100 a gallon gas and making $500 a day as a minimum wage for a little while.
No we won't. It'll be 6-euro gas and 10-euro minimum wage before we get Weimar. Having dollars in a mattress will be meaningless, having euros in a mattress may mean something.
(Just responding to the Weimar comment, not making any predictions.)
Lawyerliz,
As far as house prices dropping because you can't get a loan, that is what is going on in Miami-Dade and Broward County, Florida right now,
Sort of local, no? I recently put out feelers for a loan in north-central TX and I'm still getting e-mails from people looking to give me money. That is with good credit and the expectation of a decent DP, but those are the conditions you describe as being of no particular use in FL at the moment.
From Merrill Lynch's closing agency commentary today: "All that being said (and we think the crux of the issue), Fannie did successfully price the new issue 2yr Benchmark as planned. Merrill Lynch/boa/jpm were lead managers on the mortgage giant's $3bn 2yr Benchmark note program which priced this morning at CT2+74 or L-22.5 area. The total book was 17% oversubscribed and the majority of the buyers were Central Banks and Fund Managers."
Reread last sentence please.
Thanks for the link, Crispy... I was just going to ask about Talbot
Notice how the previous rescues the bondholders wound up in good shape... CFC/BAC, BSC/JPM, you wanted to own the bonds.
Wondering if this will follow the pattern. If FRE common gets down to kindergartner stage, the bonds (not the agencies themselves, actual FRE debt issuance) might be a call option on a bailout.
If they do go bad, they do.
Stop conflating losses with destruction of money. One is not the other. Yeah, fractional reserve banking creates large amounts of dollars, but they went into somebodies pocket. They don't just disappear.
Take a hundred dollar bill, burn it. That is destroying money. Default on a debt, and then wash it away with bk, well the money is gone, but it was spent and went into somebody else's pocket.
Don't keep conflating money and credit, it is novice level annoying.
Or grow up and understand what Public Debt, legal tender, and the Federal Reserve fractional ratio really mean now, versus some abstract taught wrong in college.
Someday this war's gonna end...
At least then one could be a customer without worrying about one's money disappearing due to management stupidity.
WTF? Where did government bureaucrats suddenly get this mystical intelligence? This is the same government who's balance sheet is in even worse shape than these banks!
To Darth Toll:
Amen, brother!
GSEs will crash and someone will scoop up all the goods for pennies on the dollar. It will be sold to us as a necessary measure by the munificent buyers.
I agree with Russ, the Japanese Postal Bank comes to mind, along with Calpers;-}
Russ, I implied those numbers would be fleeting. The Euro is in no position to massively increase the amount of currency circulating sufficient to provide us with anything like an operating barter system. I would suspect it would be our neighbors to the north.
But hey, it is becoming obvious that we will bailout the GSEs to keep the dollar somewhat afloat.
As for the stock market, well, with bigger problems, they will start ignoring market crashes and volitility. After all, if the dollar goes, the fat cats won't be fat, and we will all be selling apples on street corners at this point.
Someday this war's gonna end...
Of course the banks and financials will fight this tooth and nail.
The healthy banks will tailor the legislation to their liking (just like before) - let the new GSE take the (new) risk. The dying banks already sold their teeth and nails as assets. The Fed or Treasury will be stuck will the old GSE's pile of whatever meaning the taxpayer holds the bag.
FICA will go up to 7.5% of a worker's pay (employers contribution stays the same), means testing to keep anyone with a solvent 401K or IRA from getting more than a couple hundred bucks at retirement time. C'mon, be creative!
Yes, Mish is predicting the nationalization of Fannie and Freddy...
This is the same Mish that has been unrelenting in his prediction of an imminent deflation since at least the year 2000, when house prices in my area were 1/3 of what they are now.
AllenM
All currency in circulation, all M1 is produced by debt monetized by banks through checking accounts.
Once the banks stop lending there is no money to pay the interest on the money already lent and yet more loans go bad.
Credit is shrinking by the trillions as credit card, HELOCS, corporate lines of credit are being cut if not denied altogether.
When some manufacturing moves back onshore, there will be some upward wage pressure in the US.
Yeah, once all the mortgage-brokers-turned-bicycle-makers are absorbed. That'll be a few years.
Why exactly would nationalizing the GSEs support the dollar? It seems to me the government will end up printing dollars, and the market will anticipate this.
That is, if we nationalize the GSEs, then we are explicitly acknowledging that the household sector cannot support its debts. Where then, pray tell, is the government going to get the money to repay these debts?
The obvious conclusion, given that our government runs a deficit, is that it won't be able to find the money. Therefore, they will print.
This will cause the dollar to crumble and U.S. interest rates to soar, IMO.
AllenM
Our currency is based on a government guarantee. That guarantee is only as good as the the government's ability to underwrite the debt with taxes on the economy. When the economy tanks the governments ability to collect taxes becomes impaired and that guarantee of underwriting is worth less.
Without producing money free of debt by the government we only dig ourselves deeper into the whole of insolvency with more debt. Government money free of interest based on future tax receipts lubricates the economy while decreasing the debt structure on the government. Of course this debt free money must be monitored closely and backed by tax increases.
BB writes:
"Anyone have any ideas which big banks will go under next?"
All of them.
That is, they will either print or issue a lot of Treasuries. Either way, it will put downard pressure on bucky.
AllenM writes:
Fannie and Freddie have an implicit backstop- Uncle Sam. Now Uncle will bail out the bondholders, because it has too, but it will also demand RTC style a pound of flesh- namely the shareholder value. On the other hand, if those bonds fail, the entire system of finance (oh say can you see money market accounts and internationally held agency bonds) fails.
Somehow in this discussion the implied guarantee imputed to GSE MBS's has been implicitly transferred to GSE bonds. That, or folks are sloppily using "bonds" to described the mortgage-backed paper. Probably both?
I don't have any idea why failure of Fannie or Freddie bonds would cause the collapse of the world financial system. Large companies have failed before, and debtholders have taken enormous haircuts, without the world coming to an end.
And surely it's only the bonds (and the equity, of course) that are at risk of a total wipeout. There are still cashflows tied to those underlying mortgages; nobody's suggesting that no one will ever make a payment on an agency mortgage ever again.
Maybe those cashflows won't be enough to make all the MBS holders absolutely whole, but how big a haircut are we talking about? And how big a haircut could we reasonably expect to result in a total collapse of the world financial system?
I suppose I can see why bondholders would want to pretend there's some sort of doubly-implied guarantee of the debt they're holding, just like a lot of the shareholders on the message boards seemed to think there was some sort of triply-implied guarantee of the equity. And I can see why anybody who's at risk of a haircut would be screaming "OMG if this debt I'm holding doesn't get paid off at pat it'll be the end of civilization as we know it...."
Phil Gramm McCains Econ Brain
We have sort of become a nation of whiners, he said. You just hear this constant whining, complaining about a loss of competitiveness, America in decline despite a major export boom that is the primary reason that growth continues in the economy, he said.
Weve never been more dominant; weve never had more natural advantages than we have today, he said. We have benefited greatly from the globalization of the economy in the last 30 years.
Whoever votes for McDepends the DELUDED FOOL should have their head examimed.
Yup, all currency in circulaition.
Well, not exactly. Um, you have forgotten that slight problem of where the currency originates.
The Fed. Now where do they get it?
From BEP. And what can they do with it? Give it to the banks for Tbonds, or GSEs, or anything. (Yup, anything. Greenie once said they would jokingly take oxen if that was what was necessary.) So, as long as some banks are solvent (and, note that when a bank is closed, the deposits get hived off to another bank, making it bigger), you can keep you system going. I note that what you seem to contemplate would be accurate in the pre 1930s style set up, but not today.
Life has changed.
So they can keep right on creating credit out of thin air and loaning into the system. Check out the meaning of a coupon pass by the Fed.
Someday this war's gonna end...
WTF? Where did government bureaucrats suddenly get this mystical intelligence? This is the same government who's balance sheet is in even worse shape than these banks!
Well it doesn't make any difference how bright government bankers are, a government bank would never go belly up by definition. So as a depositor you could put in as much as you wanted and not have to worry about depositor insurance, etc.
A friend of mine in Portugal has a lot of money on Barclays there. I told him to move it to the Portuguese government owned bank, the Caixa Geral de Depositos. It is safe there.
Wondering if this will follow the pattern. If FRE common gets down to kindergartner stage, the bonds (not the agencies themselves, actual FRE debt issuance) might be a call option on a bailout.
Sounds about right.
AllenM
The Federal Reserve does not create money, banks do through checking deposits.
No matter what the Fed does it cannot force more private borrowing and the banks are loathe to because of worsening balance sheets and falling credit worthiness of borrowers.
The Euro is in no position to massively increase the amount of currency circulating sufficient to provide us with anything like an operating barter system.
Don't really need printed currency. Hardly anyone uses it today, what they use is assets expressed in terms of a currency (like dollars) that could just as easily be expressed in terms on another currency. (Or credit expressed in those terms.) If we go Weimar, the number of digits in the databases will be too small and it'll be too big of a task to convert the programs and files to bigger fields, so we'll just change the currency units. I suspect we'll use Euro to prevent faraud from the confusion if US dollar versus Canadian dollar. What'll probably happen is the use of currency will completely disappear, even the corner dope dealer will only take credit/debit cards or something like cell phone minutes. Gresham's law taken to it's next step - even fiat paper-and-ink is more materially valuable than electronic impulses, but the paper isn't trusted and is driven out.
(The doomsday sceanarios are fun to think about.)
So as a depositor you could put in as much as you wanted and not have to worry about depositor insurance, etc.
Yeah, but your purchasing power still goes down the same black hole. I can deposit $20K instead of buying a car, and 5 years later when I withdraw the $20K from the government bank I'll be able to finance a loaf of bread with it.
Can anyone explain to me how physical currency is relevant in any way? What fraction of economic transactions are carried out using currency? Personally, I haven't touched physical currency for at least a few weeks--I think the last time was when I put a dollar in a vending machine driving back from my vacation last May.
Attn: Michael McKinlay
Two links for you. Please read and understand before posting again:
FRB: Federal Reserve Kids Page
FED101 - Money
AllenM:
S&P said that if the US does BAIL-OUT Fannie and Freddie, then the US probably looses its AAA credit rating. That seems to indicate that any chance of Weimar rises more with a Bail-out, not with letting the GSE fail. Their old bonds certainly wouldn't be worthless, only worth less, due to the decrease in house prices. Maybe the bondholders get only 90 cent on the dollar, or even only 80, but not 0. The US Treasury has more important expenses than making the bondholders whole.
You know, I'm all for the occasional snark, but this is ridiculous...next somebody's going to post some "how a bill becomes law" notes from a high school civics course to prove that lobbyists don't influence legislation....
Wow, I just read this entire thread and I think my head is going to explode.
Two questions to which no one can agree:
Does the U.S. Government have the power to unilaterally increase the money supply?
If it does increase the money supply, will inflation result?
My aching head tells me that the answer to the first is 'yes' (simply because it's a fiat currency) and the answer to the second is 'yes' (because increased supply tends to decrease demand).
Uncle Billy Gets Wonky
LOL!
Explain what "pushing on a string" is , in economists terms.
Because that's where Bernanke finds himself.
With the economy unraveling, hundreds of billions being written off and noone knowing exactly what toxic garbage the banks own, where is the bottom?
Yalt, it is a little more complicated than that. The fed changed their definition of money in 2006 because it was starting to make them look bad.
It's very quiet in here. Why do I have the feeling everyone is out there googleing "money"?
Mish is starting to go off the deep end. His piece on IndyMac was beyond sarcasm and just plain snide. It may be prudent to be ahead of the curve and raise the collective societal concern,but to revel about its destruction is over the line.
F&F are already national liabilities. Everything else is symantics.
Nanook writes:
Does the U.S. Government have the power to unilaterally increase the money supply?
If it does increase the money supply, will
inflation result?
More on Gramm...
The Texas Observer > John McCain's Gramm Gamble by Patricia Kilday Hart -
Hey Michael McKinlay -
Don't argue with AllenM, He knows it all. Problem is, like most people in the US, he doesn't know that Money = debt = Credit. Further, He thought (not sure if he still does) that the US gubbmint are going to hyperinflate out of this mess. Laughable, right?
The cost to inflate out of this mess will almost instantly make the US debt unserviceable. Inflation is a monetary phenomena, not a price phenomena. Look around... Deflation as far as the eye can see.
For those who think that rent equivalent prices will act as a bottom to the housing market please consider what the huge supply of vacant houses (up) will do to rent prices (down). What percentage of ones income will go into lodging once we hit bottom is anyones guess. Especially if unemployment is in excess of 10%. We could find ourselves with very inexpensive housing, leaving us with more to spend (which is what we like to do anyway). Just a thought...
Uncle Billy Gets Wonky writes:
Yalt, it is a little more complicated than that.
You're the one posting "Fed for kids" as if it was somehow going to clarify matters, and commenting that the rest of us are probably googling "money" because we're too ill-informed to follow the discussion.
As a general rule, I tend to skip over contributions from posters who can't be bothered to take their conversation partners seriously. I should probably follow that rule more consistently....
Well at least Michael took it in good fun. Good hunting, Yalt.
Dustdevil writes:
Problem is, like most people in the US, he doesn't know that Money = debt = Credit.
Further, He thought (not sure if he still does) that the US gubbmint are going to hyperinflate out of this mess. Laughable, right?
~~~~~~~~
~ Yep , then there's the leverage of that debt of over 10 to 1. So when it goes bad, it goes bad 10 times as fast.
What they don't comprehend is that this is a systemic failure, not a bunch of one offs ...
Housing and Credit Bubbles continue floating...
WASHINGTON A measurement of pending home sales fell to the third-lowest reading on record in May as the housing market's recovery continued to prove elusive.
The National Association of Realtors' seasonally adjusted index of pending sales for existing homes fell 4.7 percent to 84.7 from an upwardly revised April reading of 88.9. The index was 14 percent below year-ago levels.
"The overall decline in contract signings suggests we are not out of the woods by any means," NAR Chief Economist Lawrence Yun said.
The Federal Reserve reported Tuesday that consumer credit increased at an annual rate of 3.6 percent in May, roughly the same pace as logged in the prior month.
The pickup pushed total consumer debt up by $7.8 billion to $2.57 trillion. That was a bit more brisk than the $7 billion over-the-month increase economists were expecting.
The increase was led by much stronger demand for a category called revolving credit, which is primarily credit cards. Use of revolving credit rose at a 7.1 percent pace in May, a month where a flow of tax rebates helped to energize consumer spending. In April, consumers cut back on such credit at a 0.5 percent pace.
Still, the longer-term trend shows that consumers have been forced to charge more of their purchases on credit cards as banks have tightened lending standards on other types of loans.
Demand for non-revolving credit used to finance cars, vacations, education and other things, meanwhile, slowed to a pace of 1.6 percent in May. That was down from a growth rate of 6.1 percent in April and was the slowest since December.
Seems that people are thinking to linearly.
Much of the newer housing has been built in suburb style configurations. YET the cost of gas has roughly doubled since many of these were envisioned and subsequently built.
I have been noticing that as the government/fed bails out their friends, the dollar goes down, especially against food and fuel.
This all adds up to the fact in my mind that we have a lot of ill configured housing for the future that is not only unfordable but is impractical. So housing is losing value because people can no longer at current income continue to pay for all the costs of living.
We are going thru a paradigm shift in this country and the debts we have incurred make little or no sense.
FNM and FRE are of the old paradigm and there is not a thing that can save them at this point.
Whether the government comes in and tries to save the bond holders is back assward. All that will do is shift the liability to the taxpayers but not relieve the underlying issues of having an over priced product that is wrong for the future.
High energy prices insure that suburbia is dying a slow death and there is nothing short of a new cheap source readily available and abundant energy that will save it.
And there is none on the horizon.
Um, dust, what do you call printing up more money to fund the fed funny TAF, etc.
Now lets do that a little bigger with a couple of trillion in GSEs.
That is big credit creation by the fed in terms of digidollars.
Now, with all of that money in basically cash, you the PRC with $1 trillion plus of this stuff will do what with it? Buy resources to keep on building your country, like say iron ore. So, in an effort to ensure your commodity supplies, you bid top dollar. Now you have tied up all of those dollars for something that is no longer dependent on the value of the dollar. Success! You have passed the old maid. Now somebody else has to do something with those dollars- like buy the Chrysler building, or buy Chrysler. The problem is folks are only seeing the local destruction of credit and missing the tsunami of dollars that will repatriate due to a weaker dollar.
All fine and dandy to predict deflation in houses- I fully agree that it will occur for at least the next year (maybe two), but by then, inflation will start roaring along at a pace that makes all of this arguing quite mute.
FRB: G.19 Release--Consumer Credit--November 6, 2009
Shows consumer credit continues to expand, refuting your thesis,
And further looking at the H6, you are starting to look downright silly.
FRB: H.6 Release--Money Stock and Debt Measures--December 3, 2009
Where is the massive destruction of deposits?
Where is the massive destruction of credit?
All I see is a lull, with more to come.
I also note that currency in circulation is increasing, up 1.6% since Jan 1.
Now what deflation?
From a strict monetarist perspective you are perplexing, and from an Austrian perspective, the same in my mind.
Look at the data, look at the long term trends, and tell me when we stop printing money and act like a an old fashioned gold standard system.
Misean would die laughing reading that.
Someday this war's gonna end...
economicminor | 07.09.08 - 7:53 pm
Eventually prices for badly configured housing will reach a clearing point.
What needs to happen is the move to electric vehicles while completely revamping the grid. Cheaper fuel (electricity) and vehicles ( EVs can be produced at one half the cost ) will save these tracts for some time.
The longer the powers that be cling to the ICE ( internal combustion engine ) the worse the situation will get.
Michael, and for the finish:
FRB: H.3 Release--Nonborrowed Reserves
Recent Declines in Nonborrowed Reserves
The H.3 statistical release indicates that nonborrowed reserves of depository institutions have declined substantially since mid-December to a level that is now negative. This development reflects the provision of a large volume of reserves through the Term Auction Facility (TAF) and has no adverse implications for the availability of reserves to the banking system.
By definition, nonborrowed reserves are equal to total reserves minus borrowed reserves. Borrowed reserves are equal to credit extended through the Federal Reserve's regular discount window programs as well as credit extended through the TAF. To maintain a level of total reserves consistent with the Federal Open Market Committee's target federal funds rate, increases in borrowed reserves must generally be met by a commensurate decrease in nonborrowed reserves, which is accomplished through a reduction in the Federal Reserve's holdings of securities and other assets. The negative level of nonborrowed reserves is an arithmetic result of the fact that TAF borrowings are larger than total reserves.
How is that for an interesting comment?
You want money, post some illiquid paper and we give you liquid paper.
That is by definition providing money.
Someday this war's gonna end...
AllenM
The Term Auction Facility and new GSEs will only replace existing money with new debt. It will not promote economic activity.
Until the financials are cleansed of their opaque securities will there be a beginning of new economic activity. Should they allow this to go on too long the demand destruction will take years if not decades to reverse.
Stimulus Checks are one way to push a string (Congress, of course, not the Fed).
Overpaying for securities is another...one could argue that those helicopters are already flying (TAF and friends up through the BS bail out).
I submit that the credit crunch is causing massive deflation, but that Congress and the Fed will push those strings hard enough to register on the richter scale.
What's unknown is if the process can be reversed, but I think it's a given that we are going to find out....
Michael McKinlay
Trouble with electric vehicles so far is the range and the batteries.
Plus the infrastructure isn't capable of that extra load at this point.
So the solutions are in the distance and distance is partly the problem with our current configuration. Cities like Portland Oregon are not having the same problems as Sacramento or San Diego because of their configuration.
The US has built itself into a unfordable mess on credit that has to be serviced. The only real answer is to take the losses and move on. Anything else is just digging the hole deeper. Hard to get out of a hole when you keep making it deeper.
Plus the infrastructure isn't capable of that extra load at this point.
actually it is with overnight charging incentives, I think
KnotRP
The Stimulus checks were an addition to the economy, the TAF is not. Having said that it is money borrowed that only adds to our debt burden and pushes us closer to insolvency.
The TAF only replaces bad debt, it doesn't create money. As those toxic packages go bad the Fed will either have to repatriate the losses or eat the debt.
BB has already stated categorically that he will run the presses. Its idiotic to believe that the people who control the supply o cannot inflate away our little solvency problem.
"The Term Auction Facility and new GSEs will only replace existing money with new debt. It will not promote economic activity."
This depends on how strict your definition of money is. Mark Thoma and others have questioned whether our definition of money supply is too strict. The supply of money is a closed system...replacing illiquid valueless debt with liquid money results in at least a temporary increase in supply. Personally I think this shit is going to be rolled over indefinitely and eventually defaulted on.
New dollar here we come.
liquid money should read liquid cash equivalents (hey in my mind they are the same thing),
economicminor | 07.09.08 - 8:21 pm
As Troy says EVs can be charged overnight. The EV GM put out got 90 miles. Battery tech has improved appreciably since then.
The whole hitch is that the powers that be haven't figured out how to gouge the consumer enough yet. I'm sure battery leasing instead of ownership will help them get a start.
The powers that be have to be able to get their percentage to support their MIC. Things like solar and conservation scare the hell out of them.
squeezed
Bernanke can run the presses all he wants but if nobody wants to borrow it and the banks don't want to lend it , it will never get into the economy.
it will never get into the economy.
There is a Third Way, the Mugabe-style:
Fed wires money into government accounts and takes treasuries in return.
I can assure you that this money will get into the economy. ~$500B of it already has this way.
Troy
The government still has to spend it. Even with all the deficit spending to date the economy is grinding to a halt.
What we have now is that we have to borrow $1 to get 94 cents worth of GDP because our trade gap is 6% and we have no savings.. This can't go on for long.
So > batteries!
Who makes them?
Anyone got a list of mfgs and R&D companies?
As far as I know, even Toyota is having a hard time getting batteries and all this about electric vehicles means living closer to work. BUT it is not today, it is tomorrow and by tomorrow I mean in 4 to 10 years to make any difference and by then much of the debt will have been extinguished in one way or another.
I personally hope we don't do a Zimbabwe.
economicminor
site for electric vehicles
http://www.evworld.com/
My understanding is that there are batteries available. It is the production facilities for the EVs them selves that are behind.
There are different level of guarantee that government can or may have to do. First, there is the mortgage that FNM/FRE guaranteed and sold on the market. This one our government has to guarantee. If not, our entire banking system will shut down since all banks hold some of these guaranteed mortage and use that as their capital. There will be no US economic system if our goevernment don't gurantee it. Second, it is the equity of FNM and FRE. It is very clear that these are not guarantee in any way.. Third and it is the sticky one, the preferred and other debt that FNM and FRE borrowed to fund their operation. If our governement does not make good on those loan, FNM and FRE is effectively BK and the equity holder will get nothing (which is fine). But who is going to take over the role that FNM and FRE did today? and HOw will the new company capitalilze their operation? I think the calculus on this one is the system stablibility. If our treasury secretary believe that it will affect our sytems, government will guarantee those debt...
Zimbabwe? Come on, get serious. Zimbabwe's collapse hasn't even taken down Zambia. The US goes down, they take everyone with them. Them as gots the bucks (15 million bbl/day x $140) have to step up to the plate and buy the paper. Buy it at a discount, but buy it. They have an enormous windfall from doing absolutely nothing and they can't afford to kill the goose who laid the golden egg. And there are enough bad guys out there that they need to be protected from. In the end, there's a decent chance if they buy the paper cheap and hold it for 10 years they might come out nicely ahead on the deal.
Michael McKinlay,
Do not underestimate Bernanke's creativity or the financial system's instinct for temporary self-preservation.
I find it interesting that Krugman also thinks new-deal-like government spending would have prevent the japanese deflationary recession.
squeezed
Krugman and the rest of the economists do not want to get to the heart of the problem ~ the privately owned and operated Federal Reserve.
All these "programs" will only drive us deeper in debt. We need a public central bank that will produce money, based on tax receipts, that carries no debt..
I wonder if congress is in such a hurry to pass the $300 billion bailout legislation to make sure swallow bad debt before Freddy and Fanny bankrupt...
Michael, so what does JPM get from the TAF? Treasuries, which are promptly sold for cash. Take stuff the free market values at 60 cents, but may be worth more later, push it off at 95 cents to the Fed to hold at 2 percent per year, and book profits.
You, and mostof the other folks assume that the stuff shed to the TAF was bought at par- I suspect a ton of it was bought at market or below- then pushed over. See JPM takeunder of BSC.
Now, look at the credit links from the horses mouth, read BB's papers, then argue with me.
Someday this war's gonna end...
Michael, after the dollar dies, there will be five minutes of opportunity for a hard currency, and then it will be gone. This isn't the 18th century.
Someday this war's gonna end...
AllenM
To pretend that Morgan or any of the other banks wouldn't be belly up right now without the privately owned and operated Federal Reserve taking junk and trading it for US Debt is ridiculous.
And to say that the paper that the Fed took is worth anywhere near 95 cents on the dollar now or ever is ludicrous.
Furthermore the Bonds are not sold, they are used as collateral for capital so their books can be audited without them being declared insolvent.
AllenM
I'm not advocating for hard currency. I'm advocating for a Public Central Bank that produces money without debt based on the tax receipts of the United States.
A public Central Bank , not the privately owned and operated Federal Reserve, should be the beneficiary and arbiter of credit, not private banks.
The allowance of money creation by private banks for the federal government is the largest subsidy in history, from the people of the United States to the bankers themselves.
Bunk Michael, a ton of them are sold. of course they aren't worth 95 cents, but the fed ate 'em at that rate. As for belly up banks, most of them are quite solvent, as long as you don't make them mark to market seriously degraded bonds. Which is exactly what the TAF allows. What they are is illiquid. Which by definition every single bank is illiquid. Which is why you need a Fed.
There is a huge difference between A and B. Why the Fed shotgunned BSC into JPM's arms has more to do with the stability of the derivative market, after all forced unwinds would expose counterparty risk throughout the system. Bear didn't have access to the Fed, so when confidence was gone they were dead.
Bailing out Bear was a huge sea change for the Fed.
Bear still was not insolvent, and arguably would have got the shareholders more money, but the crisis of confidence was draining operating capital faster than Bear could think of liquidating.
Someday this war's gonna end...
Michael, then what do you base your currency on? Or is it just fiat? So tax receipts come in, in what form?
Don't say dollars, unless you mean just printing money, having the government spend it into the economy, and then collect taxes and retiring the currency.
Of course, due to leakage, the government will keep having to print more and more.
Do a couple of OLG models and you will see it requires a more sophisticated system.
A modified Euro partially backed would be more realistic and stable.
Someday this war's gonna end...
AllenM
LOL
Bear was all about the derivatives. As of now there are more than 600 trillion in derivatives floating around and Morgan had a bunch with Bear and other banks.
Bear was the sacrificial lamb and the warning to others that the Fed was in charge. The Fed allowed those derivatives in the first place, as it did the securitization of debt. The Fed is trying to save itself. Any real investigation and the bankers monopoly on printing money would be in jeopardy.
Michael McKinlay:
Do you want to abolish fractional reserve lending? If yes, would that not slow down growth (during the good times)?
AllenM wins this debate. Very lucid explanations. I appreciate it.
AllenM
There are several other models of monetary structure that could be used.
The important point is that the creation of money would be of benefit to the government and by extension to the people not the private banks.
Why should the public pay interest on what is rightfully theirs under the Constitution, the creation of currency?
xofruitcake:
When bankers bought bad paper, it is the bankers' problem if they get only 80 cents on the dollar (Fannie and Freddie are insolvent, but their papers are not junk). If a banks fails, the FDIC will liquidate it and the shareholders get nothing - that is the right way to deal with insolvent banks. Without failing, a bank will take on more and more risk, and make the eventual failing worse.
Peter T
Fractional Reserve banking is really leveraged debt banking. What this creates is a geometric debt pyramid that can never be repaid without crashing the money supply.
I suggest you watch this video : Money as Debt
Google Videos Error
"When bankers bought bad paper, it is the bankers' problem if they get only 80 cents on the dollar (Fannie and Freddie are insolvent, but their papers are not junk). If a banks fails, the FDIC will liquidate it and the shareholders get nothing - that is the right way to deal with insolvent banks"
This is how you deal with one bank failure at a time. However, if you force all the banks to fall at the same time, who is left to clean up the mess? And who is going to provide capitals to restart the banking system again? I think it is the difference between sitting on the sideline to be an armchair quarterback (which all of us are) vs someone who is responsible to manage the system (that means they will have to put the systems back together and reboot it).. It is much easier for us to take the high road and demand the right thing to be done. But right things rarely is workable in real world (ever talk to a teenage about what the right thing they should do?)
Ok, I'm just a lil' country girl, who only half gets it all.
I have virtually all my money in a few equity index funds. Almost no bonds, and by "cash" I assume you mean something like savings accounts or CDs? I have a tiny bit of that.
Bottom line: what should a dummy like me, who isn't interested in becoming a day trader or even pretending to understand what the heck y'all are talking about with "ultrashorts" and "SRS" and all, what should I do with my savings?
If they're in stocks, aren't I at least somewhat protected from this Armageddon inflation y'all keep talking about? I mean, more so than putting it anywhere else?
Lol Michael, Waaay to simplistic.
You just posited the gold standard again.
As for geometric debt, that assumes it all survives. Reality is that a tremendous amount of debt is destroyed along the way. The only debt that never gets paid or destroyed is the treasury debt.
You should at least posit a Friedman style natural rate of growth for a money supply. That would be far more stable than anything you have advocated.
Someday this war's gonna end...
AllenM
I never said that what I wrote was a complete proposal, as you well know ...
Yes, there would have to be monetary growth based on population growth, productivity and interest rates. Interest rates should be allowed to float on the market, not manipulated for the welfare of private banks. Credit should be allocated by category as per social need based on sustainability not auctioned for consumption.
Your attempt at discrediting the idea of a Public Central Bank based on money created without debt is a feeble one indeed.
AllenM - You are so far out of touch that its pointless to even talk to you. You think the FED can print money... BANG! You're toast dude. Its impossible to debate capital markets with someone who doesn't understand capital markets.
Who the heck cares about Misean? Go read Roubini, Mish, Minyanville, etc. Heck, go pick a finance blog and read about the credit destruction (which is money) to this point, 2nd inning or so, and prognostications of what is to come. You need the education.
Our Government cannot survive hyperinflation without putting the gun in their collective mouths and pulling the trigger. Period, end of debate. BB has said a lot about what he wants to do with this and that BUT HIS ACTIONS HAVE SET THE STAGE FOR A DEFLATIONARY SCENARIO. You just can't see it, I don't care if you know where to find federalreserve.com. If you can't interpret the data correctly its pointless.
"what should I do with my savings?"
Frankly not one of the strategies propounded by any of the giant brains here or elsewhere (myself included) comes with any guarantee, because the future is unknowable. You might as well convert it all to liquidity in the form of your favourite stimulant and enjoy the time of your life. At least you'll have some great memories.
Dustdevil
I would just say that Greenspan was the one who set the stage for this debacle.
Bernanke has the hopeless job of using a mop to wipe up the flood of bad debt. He will try his best to preserve the privately owned and operated Federal Reserve System to no avail.
Dust, the Fed doesn't print money, they buy it at cost from BEP.
Small difference.
Asset deflation will happen. Especially in real dollar terms, such as they are.
But in nominal dollar terms there will eventually be sufficient inflation to erase this fiasco from the survivors balance sheets.
Mish expects Great Depression II to play out like number one. I expect a more argentina style outcome. Falling asset prices along with a falling dollar leading to stagflation that bites consumers in the butt. Now, what happens when the dollar looses it's reserve status? They disappear? No they are brought here to buy everything portable and not to waste those dollars. That is when the nominal inflation rate really rips.
Both of you don't seem to understand it is a fiat currency. Fiat. BB promised to drop dollars from helicopters. Well, how about getting congress to do bailout after bailout.
Gee, same effect.
Your real value of your house measured in gold or oil probably peaked in 2005. It will never reach that again in terms of real resources. But in fiat dollars, sure.
Someday this war's gonna end...
So since WWII we've had 60 years of pretty good times, with a 10 year span of inflation in the 70s and only 1 really bad recession (early 80s). Most people have done pretty well. You can say it was debt funded, but so what? We live our time on earth and we want to enjoy ourselves a bit now and then. Nothing wrong with that. Now let's suppose we have a rough time for the next few years, then patch things back together and go forward. Is the tradeoff worth it? I say yes. Let's just get it over with and move on.
Wasn't asking for guarantees, just wondering what y'all were doing with your bux. Guess I'll go try over with the Bogleheads...
Michael McKinley-
Not every homeowner believes that obscene home prices enabled by toxic lending standards should be propped up by the gov. and it's agencies at any cost.
Those homeowners and current renters also vote.
You may wish the gov. to do everything and anything possible in an attempt to keep this bloated mess alive.
There are plenty of others who want it to correct and who will vote accordingly.
I've already checked Obama off my list because of his statements about the "gov. needing to provide a floor under house prices".
Don't kid yourself, there are plenty of people out there who would welcome a 50% discount and be jumping for joy for 80% off.
And with every other thing people buy inflating on a daily basis, buying a home "cheaply" becomes even more desirable than ever before.
I particularly liked the stimulus checks.
That was a helicopter drop. Plain and simple.
What you underestimate is the power of fiat to be created. A gold standard tied the hands of the fed during the genesis of the first great depression.
There is no gold standard, only the confidence of our creditors. Now, as long as the dollar is the reserve currency, all is well.
When that blows we drop down to the next level. Now, remember, this is not 1930- they will prod congress into spending awesome amounts of money.
Gee, we are fighting a war and not paying for it too.
Someday this war's gonna end...
"Fannie Mae writes:
Wasn't asking for guarantees, just wondering what y'all were doing with your bux."
I'm investing in drugs to treat Alzheimers.
AllenM
I agree with much of your scenario except that unlike the 70s there will be no inflation in wages. In fact wages will not only go down in real terms but nominal terms as well. Better paying jobs will be lost and poorer paying jobs will prevail as it is now. Overall there will be fewer jobs.
What we are looking at is a depression, maybe not as bad as the 30s but with real unemployment in the high teens ...
With consumers being 70% of the economy the demise of a large percentage of consumers will of course mean a much diminished economy, unless of course the Government takes over as the nations banker, prints money without debt and begins paying down principle.
Fannie Mae writes:
Wasn't asking for guarantees, just wondering what y'all were doing with your bux. Guess I'll go try over with the Bogleheads...
Get it out of the USD, till it stops depreciating.
Equities look really bad now as the decline looks set to continue.
I own stock in south american beer companies, canadian oil companies, a chinese solar stock, a rockies nat gas company and other assorted things.
Some of the what I own will do poorly in this current market, but I have enough that can survive.
Concentration will kill you in this environment, too much in one area and you are vulnerable to an adverse event.
Money is like manure, spread it around and watch it grow, mostly overseas.
my 2 cents- my real estate has 30 year fixed loans.
Someday this war's gonna end...
"If the upshot of all this is that we nationalize housing then I want to see all the mortgage honchos lined up and shot."
Homedad, lets add all the "regulators" to that batch of fine folks, like Congress and the Fed, and I'm right there with you.
They were the aiders and abbetters, as they still are.
AllenM
"I particularly liked the stimulus checks."
The question is: Why did we have to borrow our own money? Why couldn't the Congress just have the Treasury send out the checks? It's our money.
Yes it is inflationary but so is fractional reserve banking at 10 to 30 times leverage.
It was to give the bankers another slice of our pie that they did nothing to deserve.
Some good analysis on banks:-
http://boombustblog.com/content/view/303/34/
AllenM -
So you believe the rest of the world will de-couple from the US as we go down in flames? Mistake IMO.
You have a lot of historical references in your posts. I hate when people say its different this time, but I fear that it is. Its much worse. Therefore, I do not frame my argument into a past economic era "category" of sorts.
What I will say is we will not recognize the system when we emerge from this mess. I don't think you grasp the severity at this point. You write like it will be a sharp "V" shaped downturn, while I like Roubini's "U" shaped downturn with an extended bottom.
Keep reading.
Uh, congress did just have the treasury print up the checks. you think they sold special bonds?
Half the time they increase the debt limit is because SS keeps growing through fake payments. I love the file cabinet, I think that is the biggest fraud ever.
Someday this war's gonna end...
The Wall Street Journal is reporting that the Treasury is making contingency plans for the bankruptcy of these two outfits.
US government discusses Fannie and Freddie bankruptcy
They go out of their way to play this down. Fannie and Freddie are in big trouble.
Dust, not a V, more like from 1973 thru 1981.
It's 1973, and you only get the end in 1981 if you hire a Volcker- otherwise pfffft.
We will get some temporary relief for a couple of years, just long enough to build up a nascent recovery, then clunk, another drop. Each drop puts us into a lower value for the dollar. What people tend to forget is that by the end of the 70s real estate had jumped five fold due to inflation in most places. And it was still behind the rate of inflation in lost purchasing power. Look at purchasing power. That usually tells the tale.
At $100 plus oil, the rest of the world is not only contemplating dropping us, I would argue they are in the process of doing it. It will take five years or more to see the changes being wrought.
I would agree with you that what we will have will be different, but not that drastically different than today.
Someday this war's gonna end...
AllenM
Allen we borrowed the money for the stimulus checks. First we had to send the bill to the Fed so the Fed could fund the money. Then the Treasury sent out the checks.
So instead of just sending out the money, we borrowed it at interest to the benefit of the Fed who now has over 100 billion in treasuries that they can leverage to 1 trillion ...
But you knew that ...
Bankruptcy laws and courts exist for such cases. FNM and FRE are private busnesses that generate private profits -- this is one of the primary goals of their operation. Nothing should be done until one or the other or both actually decides it must enter bankruptcy.
As I recall, earlier this year Bill Gross of PIMCO said one reason he was buying (distressed) GSE securities was due to government backing. That sort of thing has to stop.
So what?
Or we raised the debt limit and pulled it off of the FICA payments.
Big deal, like that debt will ever be paid back through higher taxes.
I was hopeful until Greenspan started "worrying" about running out of bonds.
Then I knew that they would never return to a rational system of federal finance.
At that point, it was obvious we are going to face increasing amounts of federal debt, and lower value for the dollar.
Try not to laugh every time Paulson babbles about the strong dollar policy.
Guiding lower.
Someday this war's gonna end...
But the thing is...with Fannie, Freddie and the third GSE standing for 95% of current mortgages, they have the US economy by the balls insolvent as they may be. There is no altenative to them becoming nationalizes at massive cost to you, US taxpayers.
"As I recall, earlier this year Bill Gross of PIMCO said one reason he was buying (distressed) GSE securities was due to government backing. That sort of thing has to stop."
Right on, brother. These 100% gurarantees (implicit, explicit, whatever) are ruining the economic integrity of this country. No guarantee on MBS's would be best, but if the government is going to step in now, I hope they offer no more than 80% of current value. These bondholders need to be taught a lesson so that we can get back to rationality in the market. They've got to feel some pain or else we're going to be right back here again in a few years.
Ok so where do i put my money right now so it becomes more valuable as this deflation occurs?
Right now my money is devaluing rapidly and i have tremendous insentive to spend it quick! To hell with assett depreciation in the meanwhile i need to protect that cash!
"But the thing is...with Fannie, Freddie and the third GSE standing for 95% of current mortgages, they have the US economy by the balls insolvent as they may be. There is no altenative to them becoming nationalizes at massive cost to you, US taxpayers."
Sure there's an alternative. The bondholders eat it and everybody wins. Except the bondholders.
Sure there's an alternative. The bondholders eat it and everybody wins. Except the bondholders..
Well the stockholders will go first. Wipe them out. Then the bondholders. We need some nationalized businesses: banks, insurance companies, brokerages, etc., etc. so average Joe can put his money where he knows it will be safe (that he will get it back when he needs it). If private banks and insurance companies don't like it, so what. They brought the mess and consequent punishment on themselves.
...yet.
But once the balance sheet runs dry, money creation will be a necessity.
It's default or devalue, from here on out....
What we have now is that we have to borrow $1 to get 94 cents worth of GDP because our trade gap is 6% and we have no savings.. This can't go on for long.
Well, if we borrow $1 and spend most of it on imports (oil, BRIC products) one shouldn't expect it to pop GDP at all....and you are right that this cannot go on for long....the money cannot just go anywhere. They'll have to borrow or print that $1 and direct it to domestic employment to prime the economy.
BTW - I'm not saying I like any of this....I just think those who are in charge have made it clear which they believe to be the lesser evil , and they've already demonstrated that they can literally give away money for free to people who can and will spend it....unfortunately on imports, which doesn't really help, but the fact remains that no one refuses to take their stimulus check. If you still don't think they can drop helicopter money, but not get people to pick it up and use it, you aren't paying attention.
BTW - Roubini, at the tail end of his CNBC visit, recommended investing in inflation protected securities, if I heard
him right.
"and they've already demonstrated that they can literally give away money for free to people who can and will spend it"
I thought these were tax rebates? Ie they took the money and then instead of spending it themselves they gave some of it back?
From a strict monetarist perspective you are perplexing, and from an Austrian perspective, the same in my mind.
It was the Austrians who dispute Friedman's assertion that the Fed reducing money supply causing the depression - the argument is the rapid growth of credit in the 20's that ceased in the 30's caused demand to fall (and prices to drop).
The argument some are making now is the Fed won't create new dollars and new credit to substitute for all the other credit that has vanished (much of which was "imported" credit). Thus the total supply of cash + credit is going down and that is deflation. The price of credit will go up due to the reduced supply.
Mish expects Great Depression II to play out like number one. I expect a more argentina style outcome.
But these aren't diametrically opposed positions. Bottom line is individual purchasing power falls in either case. It's the "how long will it fall" that no one really knows.
We will get some temporary relief for a couple of years
So it's not a U its a W.
You lost me at "instead of"...
Congress did not stop spending money as a result of the stimulus checks. They did not forgo anything. You are thinking this is Wealthy Uncle Sam giving you some weekend fun money. I'm thinking this is Drunk Unemployed Uncle Sam writing an overdraft check for $100, because he wants to borrow $20 cash since the bar won't cash his checks.
The best way to think about the stimulus checks is as supplemental wage income for those most impacted negatively by global wage arbitrage.
It's an attempt to keep US consumer purchasing power afloat while managing the dollar devaluation / price-of-everything-you-need inflation.
I expect more of this sort of thing,
unless protectionism kicks in real
hard.