"Dumping snow into the river after a blizzard, New York City"
Ilargi: Happy new year to all of you. May you be loving and careful!
I’d like to start off the year with another piece on the US housing situation as it looks to be heading into 2011, and its relation to the overall economy. In an interesting quote I read, economist Patrick Newport at IHS Global Insight says: "The economy has to recover for the housing market to recover, not the other way around." Thought I'd throw that in there, because it seems to get lost in translation from time to time.
Talking of quotes, I was going through the material I read the past few days, and I couldn't find a proper way to cut short the quotes and still provide you with the story as I see it, in a way that would be both comprehensive and clarifying. In other words, I think it's the quotes that tell the story, and without them the story is just not there. So this is going to be a long one, and I think the least I can do is to say as little as possible, and just let you absorb the data. And I sincerely hope that after you've gone through them, you’ll see the story I’m talking about.
Many people claim Stoneleigh and I must be crazy, and doomers and all that, for predicting an 80%+ drop in real estate values, but we in turn can't seem to understand why home prices would fall "only" 20% from here, or why they would fall "just" 40%, as Mish suggested for instance. We think that more than 20% is in the cards just because of the bubble coming back to earth; we think 40% is certain because of the bubble bursting, and we think 80%+ will then happen because the bursting bubble will take the entire financial system down with it. Pretty simple really.
But enough about us. Let’s hear some witnesses:
First off, L. Randall Wray, a Professor of Economics at the University of Missouri-Kansas City, who's co-operated quite a bit with Bill Black over the past year, throws more oil on the fire of foreclosure fraud, albeit from his own particular angle. Wray's claim is that Mortgage-Backed Securities are not backed by anything, since the MERS electronic securitization facility carried from its inception a number of plainly illegal concepts. Therefore, he says, most if not all US foreclosures are illegal, and all MBS are unsecured debt that the issuers will have to buy back - to the tune of trillions of dollars. Which entirely dooms the main US banks.
According to L. Randall Wray, lenders may have the right to collect debt on certain loans, if they can prove ownership of the loan, but they can't foreclose unless and until they have a clear record (chain) of all transactions the loans went through, through their entire existence. And MERS effectively killed that chain.
Caveat: I am not a US lawyer, and neither is Wray. But I have no reason to doubt that he understands his field, if not the fine details. My take-away is that there is much more to come over the next year in legal challenges and political wrangling. Illegal is illegal, no matter how much power Wall Street has in Washington; laws would have to be changed in order to prevent the chain of events Wray talks about from unfolding.
Please read him with care:
Why Mortgage-Backed Securities Aren't (Backed by Securities): How MERS Toasted the BanksI have argued that MERS, a creation of the mortgage banking industry, has effectively destroyed the institution of private property in America. Ironically, MERS was created to facilitate quick and easy and cheap securitization of mortgages -- what are called mortgage-backed securities. In fact, what it did was to eliminate any backing of the securities by mortgages. Of the total securitized asset universe, something like $7 trillion are (supposedly) backed by residential mortgages.
However, MERS helped to delink the securities from the mortgages. At best, they are unsecured debt -- there is no property backing the securities. What this means is that foreclosure is not permitted. As I have said before, it is likely that most or even all foreclosures occurring in the US are illegal seizures of property -- home thefts. We are talking about 100,000 completed home thefts per month, with another 250,000 new foreclosures started to steal homes every month. Projections are that 13 million homes will have been "foreclosed" (read: stolen) by 2012.
Worse, from the perspective of the banks, they've got to take back all the fraudulent MBSs, most of which are toxic.[..]
1. A valid "mortgage" requires a ("wet signature") note and a security instrument; these must be kept together, and any subsequent transfer of lien rights to the security instrument must be recorded at the appropriate public office. The mortgage note must be properly indorsed each time the mortgage is transferred. In the era of securitized mortgages this can be a dozen times or more. If ever presented for foreclosure, endorsements should demonstrate a clear chain of title, from origination through to foreclosure; and this should match the records at the public office.
2. MERS intended to provide an electronic registry of all mortgages. By appointing a "vice president" in every financial firm, it believed that all transfers of lien rights among these firms were "in house". Hence it operated on the belief that no subsequent public recording was necessary, and no further endorsement of the mortgage note was necessary for in-house transfers of the payment intangible as it kept a record of transfers of the mortgage. It claimed to be a nominee of these firms (purported to hold the mortgage) but also to be the holder of the mortgages including the "Unidentified Indorsees In Blank" -- mortgages that were never properly endorsed over to purchasers.
We know, however, that MERS recommended that mortgage servicers retain notes, so MERS's claim to be the holder rests on its claim that appointed VPs are employees. But these employees are not an agent/employee of the "Unidentified Indorsee In Blank", nor are they paid by MERS or in any way supervised by MERS.
3. This practice is in violation of numerous laws. Property law requires filing sales in the public record. Notes must be affixed (permanently) to the security instrument -- a mortgage without the note has been ruled a "nullity" by the Supreme Court. MERS's recommended business practice (with the servicer retaining the note) would make the mortgages a "nullity". A complete chain of title is required to foreclose on property -- every sale of a mortgage must be endorsed over to the purchaser, and properly recorded. Without this, it is illegal to foreclose on property -- no matter how many payments the homeowner has missed.
4. However, if the notes can be found and if MERS can provide records, it is possible that the mortgages can be made valid ("proved up") for purposes of collecting upon the indebtedness, but foreclosure would not be possible without a valid continuous perfected mortgage showing a chain of title from origination through to the current party trying to enforce the mortgage note. Any break in the chain of endorsements along with any break in the chain of title renders the Power of Sale clause in the security instrument to be a nullity and therefore no party can foreclose on the real property.
5. If the notes cannot be found and a Lost Note Affidavit can not reestablish the indebtedness, then foreclosure is not possible and collecting of the indebtedness is also not possible. Homeowners still can be sued for collection of owed moneys upon a "proved up" note or lost note affidavit but a current perfected lien is required to foreclose.
6. However since the mortgage-backed securities are governed by PSAs (pooling and service agreements), the practices above make the securities unsecured debt and there is no solution. The securities are no good. (This would be a Representation & Warrant violation as the MBSs stated that a secured indebtedness was to be purchased, but since the Trustees of the securitization would not have the notes, the securities cannot be "secured".)
What does all this mean? In plain simple language, the banks are royally screwed. They cannot foreclose on the properties. Holders of the "mortgage-backed" securities can turn them back to the banks because they are actually unsecured debt. In previous pieces I have also explained why MERS's recommended practice also violates US tax code -- so back taxes are owed. And we know that the mortgages stuffed into the securities did not meet the "reps" of the PSAs.
So, in short, banks have got to take the whole lot of toxic waste securities back. Trillions of dollars worth. The banks are toast. There is no cooking of the books that will turn this blackened toast back to bread.
Ilargi: Next, Ron Robins at Investing for the Soul argues that credit in the US is vanishing. This is a point that continues to be a hard one for most people. Why would credit disappear? After all, it’s been there all their lives. The reality, however, is that the credit system we've known until here has already gone. What’s left is the Treasury and the Federal Reserve lending you your own money, for which you’ll be charged twice: first, through Wall Street, which gets your money at 0.0078% and lends it back to you at some 5% for mortgages and 29-odd% for credit cards, and second, when the government pays back the Federal Reserve for "offering" you your own money this way, with interest.
Can't win this game, no matter what:
Severe Debt Scarcity Coming to USIf US consumers believe it difficult to borrow now, just wait! In the next few years credit conditions are likely to go back seventy years when private debt was difficult to obtain. Most Americans intuitively believe there is too much debt at every level of society. But the economic and political vested interests do not want them worried about that. They want to give them credit to infinity to keep this economic mess from imploding. The US Federal Reserve’s new round of quantitative easing (QE2) is clear evidence of that. However, Americans are right about their inordinate debt load, and future economic conditions are likely to create a severe debt scarcity.
The principal reasons for the coming debt scarcity are that ‘debt saturation’—where total income cannot support total debt—has arrived, say some analysts; also, the growing understanding that adding new debt may not increase GDP—it could decrease it; and that the banks and financial system are a train wreck in waiting, eventually being forced to mark their assets to market, thus creating for them massive asset write-downs and strangling their lending ability.
On the subject of consumption, the renowned economist David Rosenberg in The Globe & Mail on August 16 stated that "U.S. household debt-income ratio peaked in the first quarter of 2008 at 136 per cent. The ratio currently sits at 126 per cent, but the pre-2001 norm was 70 per cent. To get down to this normalized ratio again, debt would have to be reduced by about $6-trillion. So far, nearly $600-billion of bad household debt has been destroyed." This data reaffirms Americans growing aversion to debt, that debt has become too onerous, and is suggestive of debt saturation.
Replacing declining consumer debt is the exponential growth of US government debt. For 2009 and 2010, the combined US government’s fiscal deficits required or require borrowing an extra $2.7 trillion or so. Yet with all that spending—combined with about $2 trillion of ‘money printing’ from the US Federal Reserve (the Fed)—it created only around $1 trillion in increased economic growth! [..]
A further, major reason for the coming debt scarcity will be the tremendously impaired financial condition of the banks. The values assigned to many bank assets are fictional according to numerous experts. QE2 is about many things but one of them is aimed at delaying the potential for implosion of the banking system. In 2009, the Financial Accounting Standards Board (FASB) caved in to government and banking industry lobbyists to allow many bank assets to be ‘marked to fantasy’ and not ‘marked to market.’
This viewpoint is best expressed by highly respected Associate Professor William Black (and formerly a senior regulator who nailed the banks during the savings and loan debacle) and Professor L. Randall Wray, who wrote an article on October 22 in The Huffington Post, entitled, "Foreclose on the Foreclosure Fraudsters, Part 1: Put Bank of America in Receivership."
They wrote that, "FASB's new rules allowed the banks (and the Fed, which has taken over a trillion dollars in toxic mortgages as wholly inadequate collateral) to refuse to recognize hundreds of billions of dollars of losses. This accounting scam produces enormous fictional ‘income’ and ‘capital’ at the banks."
Ilargi: Then, Steven Hansen of Econintersect would like to correct a few numbers and ideas emanating from the National Association of Realtors, which managed to see positive trends recently - as it always seems to do -:
21% Decline in December 2010 Existing Homes Sales ForecastThe above graph shows the YoY trend lines between December 2008, December 2009, and Econintersect’s projected 326,000 existing home sales for December. Using this methodology, last month Econintersect had projected November existing home sales at 360,000 – and the actual November existing home sales were 353,000.In December 2009, existing home sales were 413,000 – and this December 2010 projected home sales of 326,000 represents a decline of 21% YoY.
There is no truth that there is an “improvement” or “gradual recovery” of any kind underway in existing home sales. This absence of buyers will only tend to put downward pressure on home prices. The NAR manipulation of the data is based on no more than wishful thinking.
Ilargi: Let’s move on to Amy Lee for the Huffington Post, who links unemployment, housing (through Case/Shiller) and consumer spending. Important, even though, honestly, everyone should have grasped this by now:
As Home Prices Drop, 'Serious Reasons To Worry' About Economy"If home prices continue on this pace down, I think the economy has serious reasons to worry," Yale economist Robert J. Shiller -- and co-creator of the Case-Shiller Index -- told the Wall Street Journal in a recent interview. Bad news in the housing market could ripple through to consumer spending, which has recently shown heartening gains this holiday season. Consumer spending makes up about 70 percent of the economy.
"Our concern on the double-dip is the consumer and the fate of the consumer," said Allen Sinai, chief economist at Decision Economics, Inc. "I think the lack of stable prices is a negative consumer fundamental for spending." With unemployment mired at 9.8 percent, the housing market is hinged upon the job market. "The economy has to recover for the housing market to recover, not the other way around," said Patrick Newport, an economist with IHS Global Insight.
Homes remain a major part of many Americans' wealth -- households held $6.4 trillion of home equity at the end of the third quarter, according to a Federal Reserve report. "It's unfortunate because a lot of families have all their wealth in their house, all their savings," said Sinai. "Household spending in general is hurt. There's a restraint on consumer spending."
Ilargi: On to the heavy hitters. Peter Schiff writes in the Wall Street Journal that home prices are likely to break through trendlines on the downside, even as these already spell a 20%+ drop in prices. And he does it well. The only thing I don't agree with is that the drop would halt there. Really, what is there to stop prices from falling further once we get to that point? Can anyone explain? You need to understand what impact a 20%+ drop in home prices would have on the financial system, the banks, and on society as a whole. The amount of underwater homes would soar, the amount of owner equity would plunge. Take it from there.
US Home Prices Are Still Too HighMost economists concede that a lasting general recovery is unlikely without a recovery in the housing market. A marked increase in defaults and foreclosures from today's already elevated levels could produce losses that overwhelm banks and trigger another, deeper financial crisis. Study after study has shown that defaults go up when falling prices put mortgage holders "underwater." As a result, the trajectory of home prices has tremendous economic significance.
Earlier this year market observers breathed easier when national prices stabilized. But the "robo-signing"-induced slowdown in the foreclosure market, the recent upward spike in home mortgage rates, and third quarter 2010 declines in the Standard & Poor's Case–Shiller home-price index—including very bad October numbers reported this week—have sparked concerns that a "double dip" in home prices is probable. A longer-term view of home price trends should sharply magnify this fear.
Even those economists worried about renewed price dips would be unlikely to believe that the vicious contractions of 2007 and 2008 (where prices fell about 30% nationally in just two years) could return. But they underestimate how distorted the market had become and how little it has since normalized.
By all accounts, the home price boom that began in January 1998, when the previous 1989 peak was finally surpassed, and topped out in June 2006 was extraordinary. The 173% gain in the Case-Shiller 10-City Index (the only monthly data metric that predates the year 2000) in those nine years averaged an eye-popping 19.2% per year. As we know now, those gains had very little to do with market fundamentals, and everything to do with distortionary government policies that set off a national mania for real-estate wealth and a torrent of temporarily easy credit.
If we assume the bubble was artificial, we can instead imagine that home prices should have followed a more traditional path during that time. In stock-market terms, prices should have followed a trend line. When you do these extrapolations (see lower line in the nearby chart), a sobering picture emerges.
In his book "Irrational Exuberance," Yale economist Robert Shiller (co-creator of the Case-Shiller indices along with economists Karl Case and Allan Weiss), determined that in the 100 years between 1900 and 2000, home prices in the U.S. increased an average 3.35% per year, just a tad above the average rate of inflation. This period includes the Great Depression when home prices sank significantly, but it also includes the frothy postwar years of the 1950s and '60s, as well as the strong market of the early-to-mid 1980s, and the surge in the late '90s.
In January 1998 the 10-City Index was at 82.7. If home prices had followed the 3.35% annual 100 year trend line, then the index would have arrived at 126.7 in October 2010. This week, Case-Shiller announced that figure to be 159.0. This would suggest that the index would need to decline an additional 20.3% from current levels just to get back to the trend line.
How has the market found the strength to stop its descent? No one is making the case that fundamentals have improved. Instead, there is widespread agreement that government intervention stopped the free fall. The home buyer's tax credit, record low interest rates, government mortgage-assistance programs, and the increased presence of Fannie Mae, Freddie Mac and the Federal Housing Administration in the mortgage-buying business have, for now, put something of a floor under house prices. Without these artificial props, prices would have likely continued to fall.
Where would prices go if these props were removed? Given the current conditions in the real-estate market, with bloated inventories, 9.8% unemployment, a dysfunctional mortgage industry and shattered illusions of real-estate riches, does it makes sense that prices should simply fall back to the trend line? I would argue that they should overshoot on the downside.
With a bleak economic prospect stretching far out into the future, I feel that a 10% dip below the 100-year trend line is a reasonable expectation within the next five years, particularly if mortgage rates rise to more typical levels of 6%. That would put the index at 114.02, or prices 28.3% below where we are now. Even a 5% dip would put us at 120.36, or 24.32% below current prices. If rates stay low, price dips may be less severe, but inflation will be higher.
From my perspective, homes are still overvalued not just because of these long-term price trends, but from a sober analysis of the current economy. The country is overly indebted, savings-depleted and underemployed. Without government guarantees no private lenders would be active in the mortgage market, and without ridiculously low interest rates from the Federal Reserve any available credit would cost home buyers much more. These are not conditions that inspire confidence for a recovery in prices.
In trying to maintain artificial prices, government policies are keeping new buyers from entering the market, exposing taxpayers to untold trillions in liabilities and delaying a real recovery. We should recognize this reality and not pin our hopes on a return to price normalcy that never was that normal to begin with.
Ilargi: Gary Shilling talks about the same trendlines Peter Schiff addresses, and moreover adds the same notion we at The Automatic Earth have been talking about all along (as does Schiff): When prices come off a huge high, they’ll first fall to their trendline, and then fall below it. Any physicist can tell you how it (i.e. oscillation) works, but in economics that is not that easy, apparently. Forever up, for some reason, is taken seriously.
And Now House Prices Will Drop Another 20%This huge and growing surplus inventory of houses will probably depress prices considerably from here, perhaps another 20% over the next several years. That would bring the total decline from the first quarter 2006 peak to 42%. This may sound like a lot, but it would return single-family house prices, corrected for general inflation and also for the tendency of houses to increase in size over time, back to the flat trend that has held since 1890.
We are strong believers in reversions to the mean, especially when it has held for over a century and through so many huge changes in the economy in those years—two world wars and the 1930s Depression, the leap in government regulation and involvement in the economy, the economic transformation from an agricultural base to manufacturing and then to services, the post- World War II population shift from cities to suburbs, the western and southern transfer of population and economic strength, the movement from renting to homeownership and the accompanying spreading of mortgage financing, etc.
Furthermore, our forecast of another 20% fall in house prices may be conservative. Prices may well end up back on their long- term trendline, but fall below in the meanwhile. Just as they way overshot the trend on the way up, they may do so on the way down, as is often the case in cycles. Furthermore, another big house price decline will spike delinquencies and foreclosures leading to more REO sales by lenders, which will further depress prices. Our analysis indicates that a further 20% drop in prices will push the number of homeowners who are under water from 23% to 40%, resulting in more strategic defaults, more REO, etc.
At that point, the remaining home equity of those with mortgages would be wiped out on average. That, in turn, would impair already-depressed consumer confidence and their willingness and ability to spend, to say nothing of residential construction. In California, epicenter of the housing boom-bust, construction jobs dropped 43% from June 2006 to June of this year, compared to a 28% decline nationwide, and the unemployment rate in the Golden State jumped to 12.3% in June, far above the 9.5% rate nationally.
Ilargi: And finally, foreclosures are going nowhere but up. Suzanne Kapner in Financial Times has this:
US mortgage foreclosures rise sharplyUS mortgage foreclosures jumped in the third quarter as fewer borrowers qualified for loan modifications that would have reduced their monthly payments, bank regulators have said. The rise in repossessions and decline in loan modifications are further signs that problems in the US housing market are persisting, in spite of forecasts by some analysts of a recovery before the year-end.
The number of homes entering foreclosure rose 31 per cent compared with the second quarter and 3.7 per cent compared with the year-earlier period, the Office of the Comptroller of the Currency and the Office of Thrift Supervision said. These newly foreclosed homes will add to a growing backlog of 1.2m properties already in some stage of repossession, a 4.5 per cent increase over the second quarter and 10 per cent more than the previous year.
As of the end of the third quarter, 187,000 homes completed the foreclosure process, a 14.7 per cent increase over the second quarter and a 57.5 per cent jump from the same period a year ago. As these properties come on the market, they are expected to depress home prices by between 5 per cent and 10 per cent over the next year, economists said.
Ilargi: So what can I say after all that? How about: are there any questions? Is the picture still not clear?
The entire US housing system, lenders, builders, borrowers, the whole thing, is in grave danger, and that means both the financial system and the economy at large are as well. We're looking at not just one or two, but a whole series of reinforcing feedback loops. Which neither Obama nor Geithner nor Bernanke have any control over, other than fleetingly and temporarily.
And that will be the story of 2011.
Well, that and, of course, the euro crumbling, Japan deflating, China inflating, cities, counties and states defaulting, violent street protests, millions more Americans sinking into abject poverty, misery and hardship, and so on.
Thing is, you can’t have a 60+% homeownership rate, facing more mayhem after home prices already fell 30%, and then expect your society to keep humming along, or even recover. 2010 has been all about delay of execution. In 2011 we'll get to choose our last supper.
Have a great year, but please do be careful out there. And if you're thinking of getting a mortgage loan: don't. Just don't.
Why Mortgage-Backed Securities Aren't (Backed by Securities): How MERS Toasted the Banks
by L. Randall Wray - Benzinga
In a series of pieces I have argued that MERS, a creation of the mortgage banking industry, has effectively destroyed the institution of private property in America. Ironically, MERS was created to facilitate quick and easy and cheap securitization of mortgages -- what are called mortgage-backed securities. In fact, what it did was to eliminate any backing of the securities by mortgages. Of the total securitized asset universe, something like $7 trillion are (supposedly) backed by residential mortgages.
However, MERS helped to delink the securities from the mortgages. At best, they are unsecured debt -- there is no property backing the securities. What this means is that foreclosure is not permitted. As I have said before, it is likely that most or even all foreclosures occurring in the US are illegal seizures of property -- home thefts. We are talking about 100,000 completed home thefts per month, with another 250,000 new foreclosures started to steal homes every month. Projections are that 13 million homes will have been "foreclosed" (read: stolen) by 2012.
Worse, from the perspective of the banks, they've got to take back all the fraudulent MBSs, most of which are toxic.
In what follows I want to present the most favorable case for the mortgage industry. That is to say, I will ignore fraud and criminal conspiracies. Let us look at the current predicament as if it resulted from a series of monumental errors. With that in mind, what is the best-case scenario? First a caveat: I am not a lawyer nor am I an investigative reporter. I have relied on my perusal of reported evidence, plus a discussion with James McGuire who has put together an entirely convincing argument that the securitizations of mortgages resulted in securities that are not backed by mortgages. I urge interested readers to go to his website.
With that caveat, let us work through the problems now facing the banks.
1. A valid "mortgage" requires a ("wet signature") note and a security instrument; these must be kept together, and any subsequent transfer of lien rights to the security instrument must be recorded at the appropriate public office. The mortgage note must be properly indorsed each time the mortgage is transferred. In the era of securitized mortgages this can be a dozen times or more. If ever presented for foreclosure, endorsements should demonstrate a clear chain of title, from origination through to foreclosure; and this should match the records at the public office.
2. MERS intended to provide an electronic registry of all mortgages. By appointing a "vice president" in every financial firm, it believed that all transfers of lien rights among these firms were "in house". Hence it operated on the belief that no subsequent public recording was necessary, and no further endorsement of the mortgage note was necessary for in-house transfers of the payment intangible as it kept a record of transfers of the mortgage. It claimed to be a nominee of these firms (purported to hold the mortgage) but also to be the holder of the mortgages including the "Unidentified Indorsees In Blank" -- mortgages that were never properly endorsed over to purchasers.
We know, however, that MERS recommended that mortgage servicers retain notes, so MERS's claim to be the holder rests on its claim that appointed VPs are employees. But these employees are not an agent/employee of the "Unidentified Indorsee In Blank", nor are they paid by MERS or in any way supervised by MERS.
3. This practice is in violation of numerous laws. Property law requires filing sales in the public record. Notes must be affixed (permanently) to the security instrument -- a mortgage without the note has been ruled a "nullity" by the Supreme Court. MERS's recommended business practice (with the servicer retaining the note) would make the mortgages a "nullity". A complete chain of title is required to foreclose on property -- every sale of a mortgage must be endorsed over to the purchaser, and properly recorded. Without this, it is illegal to foreclose on property -- no matter how many payments the homeowner has missed.
4. However, if the notes can be found and if MERS can provide records, it is possible that the mortgages can be made valid ("proved up") for purposes of collecting upon the indebtedness, but foreclosure would not be possible without a valid continuous perfected mortgage showing a chain of title from origination through to the current party trying to enforce the mortgage note. Any break in the chain of endorsements along with any break in the chain of title renders the Power of Sale clause in the security instrument to be a nullity and therefore no party can foreclose on the real property.
So long as there is no fraud affecting the mortgage note, then rights to enforce the indebtedness can be further negotiated. If there is no break in the chain, when fraud is shown affecting the security instrument (such as robo-signers, etc), this does not affect the rights to enforce the mortgage note -- but such fraud will affect the validity of the security instrument perhaps making foreclosure impossible. Fraud affecting the mortgage note would affect the right to foreclose.
5. If the notes cannot be found and a Lost Note Affidavit can not reestablish the indebtedness, then foreclosure is not possible and collecting of the indebtedness is also not possible. Homeowners still can be sued for collection of owed moneys upon a "proved up" note or lost note affidavit but a current perfected lien is required to foreclose.
6. However since the mortgage-backed securities are governed by PSAs (pooling and service agreements), the practices above make the securities unsecured debt and there is no solution. The securities are no good. (This would be a Representation & Warrant violation as the MBSs stated that a secured indebtedness was to be purchased, but since the Trustees of the securitization would not have the notes, the securities cannot be "secured".)
What does all this mean? In plain simple language, the banks are royally screwed. They cannot foreclose on the properties. Holders of the "mortgage-backed" securities can turn them back to the banks because they are actually unsecured debt. In previous pieces I have also explained why MERS's recommended practice also violates US tax code -- so back taxes are owed. And we know that the mortgages stuffed into the securities did not meet the "reps" of the PSAs.
So, in short, banks have got to take the whole lot of toxic waste securities back. Trillions of dollars worth. The banks are toast. There is no cooking of the books that will turn this blackened toast back to bread.
Severe Debt Scarcity Coming to US
by Ron Robins - Investing for the Soul
If US consumers believe it difficult to borrow now, just wait! In the next few years credit conditions are likely to go back seventy years when private debt was difficult to obtain. Most Americans intuitively believe there is too much debt at every level of society. But the economic and political vested interests do not want them worried about that. They want to give them credit to infinity to keep this economic mess from imploding. The US Federal Reserve’s new round of quantitative easing (QE2) is clear evidence of that. However, Americans are right about their inordinate debt load, and future economic conditions are likely to create a severe debt scarcity.
The principal reasons for the coming debt scarcity are that ‘debt saturation’—where total income cannot support total debt—has arrived, say some analysts; also, the growing understanding that adding new debt may not increase GDP—it could decrease it; and that the banks and financial system are a train wreck in waiting, eventually being forced to mark their assets to market, thus creating for them massive asset write-downs and strangling their lending ability.
The realization that debt saturation has arrived will not surprise many people. But understanding that new debt can decrease economic activity might surprise them. And the numbers illustrate this possibility. In Nathan’s Economic Edge, Nathan states, "in the third quarter of 2009 each dollar of debt added produced NEGATIVE 15 cents of productivity, and at the end of 2009, each dollar of new debt now SUBTRACTS 45 cents from GDP!"
In fact Nathan also shows that for decades, each new dollar of debt produces less and less in return, from a return of close to $0.90 in the mid 1960s to about $0.20 by 2007. One explanation for this is that as societal debt increased it focused disproportionately on consumption rather than productive enterprise, whose return appears greater.
On the subject of consumption, the renowned economist David Rosenberg in The Globe & Mail on August 16 stated that "U.S. household debt-income ratio peaked in the first quarter of 2008 at 136 per cent. The ratio currently sits at 126 per cent, but the pre-2001 norm was 70 per cent. To get down to this normalized ratio again, debt would have to be reduced by about $6-trillion. So far, nearly $600-billion of bad household debt has been destroyed." This data reaffirms Americans growing aversion to debt, that debt has become too onerous, and is suggestive of debt saturation.
Replacing declining consumer debt is the exponential growth of US government debt. For 2009 and 2010, the combined US government’s fiscal deficits required or require borrowing an extra $2.7 trillion or so. Yet with all that spending—combined with about $2 trillion of ‘money printing’ from the US Federal Reserve (the Fed)—it created only around $1 trillion in increased economic growth!
One may argue that the phenomenal US government borrowings will provide returns far into the future and that the present low economic returns are due to not funding areas with potentially better returns. Some economists say that spending on infrastructure and education provides the best returns. However, with economists such as Nobel Laureate Paul Krugman and numerous others predicting huge continuing deficits for years ahead, and with a Japan-like slump in economic activity, the odds are likely that any new borrowed dollar will continue to provide only poor returns for years to come.
A further, major reason for the coming debt scarcity will be the tremendously impaired financial condition of the banks. The values assigned to many bank assets are fictional according to numerous experts. QE2 is about many things but one of them is aimed at delaying the potential for implosion of the banking system. In 2009, the Financial Accounting Standards Board (FASB) caved in to government and banking industry lobbyists to allow many bank assets to be ‘marked to fantasy’ and not ‘marked to market.’
This viewpoint is best expressed by highly respected Associate Professor William Black (and formerly a senior regulator who nailed the banks during the savings and loan debacle) and Professor L. Randall Wray, who wrote an article on October 22 in The Huffington Post, entitled, "Foreclose on the Foreclosure Fraudsters, Part 1: Put Bank of America in Receivership." They wrote that, "FASB's new rules allowed the banks (and the Fed, which has taken over a trillion dollars in toxic mortgages as wholly inadequate collateral) to refuse to recognize hundreds of billions of dollars of losses. This accounting scam produces enormous fictional ‘income’ and ‘capital’ at the banks."
However, the Federal Reserve may be realizing that it might not have been such a good idea to buy some of these ‘toxic’ securities. Bloomberg reported on October 19 that, "citing alleged failures by Countrywide to service loans properly… Pacific Investment Management Co., BlackRock Inc. and the Federal Reserve Bank of New York are seeking to force Bank of America Corp. to repurchase soured mortgages packaged into $47 billion of bonds by its Countrywide Financial Corp. unit, people familiar with the matter said."
Also, on November 2, CNBC reported that Citigroup could be liable for huge amounts of toxic security buy-backs as well. "If all four mortgage acquisition channels turn out to be equally as defective… Citi's liability for repurchases could soar to about $100 billion dollars at a 60 per cent defect rate - and to around $133 billion dollars at an 80 per cent defect rate."
Clearly, such numbers are staggering. These, as well as many other banks and financial entities, could collapse. Politically, in the present circumstances, it would be difficult for the US government to provide massive new funds to support the financial system. Therefore, it will be up to the Fed to decide what to do.
If the Fed prints ever increasing amounts of new money to try to moderate the financial collapse, hyperinflation could be the result. If it does not print massive amounts of new money, a deflationary depression could be born.
In high inflationary or hyperinflationary conditions, few will want to lend as they get paid back in dollars that are declining very rapidly in value. In a deflationary episode, lending is reduced due to huge loan losses. Therefore, during either, and/or after such events, debt scarcity will be in full force.
Data indicates that American consumers do not want to increase their debt. Debt saturation is occurring, and with it a declining return on each borrowed dollar—even for the US government. Most significantly, the banks and the financial system will probably soon experience a new round of massive real estate related losses and subsequent financial institutions’ bankruptcies. Thus, a new major financial crisis will likely soon engulf America, greatly impairing its lending facilities and creating a severe scarcity of debt.
Howard Davidowitz Destroys The Recovery Illusion, Debunks The Consumer Renaissance
"We went $2 trillion dollars in the hole this year. $2 trillion! $2 trillion!! To produce this. And unemployment went up! To 9.8[%]. We spent $2 trillion. We're printing money, we're going bananas.
And this Bernanke is sitting... I Mean, if interest rates go up a point, he’s bankrupt. I mean, all of this, everything he bought is going to be underwater, all these mortgage-backled securities are underwater, the whole country is underwater.....
21% Decline in December 2010 Existing Homes Sales Forecast
by Steven Hansen - Econintersect
Analysis by Econintersect indicates a continuing decline in existing home sales YoY based on the pending home sales data released by the National Association of Realtors. The NAR, using rose colored glasses and innovative seasonal adjustment techniques, has implied the opposite. The headlines for the November 2010 pending home sales:Pending home sales rose again in November, with the broad trend over the past five months indicating a gradual recovery into 2011, according to the National Association of REALTORS®.The Pending Home Sales Index, a forward-looking indicator, rose 3.5 percent to 92.2 based on contracts signed in November from a downwardly revised 89.1 in October. The index is 5.0 percent below a reading of 97.0 in November 2009. The data reflects contracts and not closings, which normally occur with a lag time of one or two months.
Lawrence Yun, NAR chief economist, said historically high housing affordability is boosting sales activity. "In addition to exceptional affordability conditions, steady improvements in the economy are helping bring buyers into the market," he said. "But further gains are needed to reach normal levels of sales activity."
"If we add 2 million jobs as expected in 2011, and mortgage rates rise only moderately, we should see existing-home sales rise to a higher, sustainable volume," Yun said. "Credit remains tight, but if lenders return to more normal, safe underwriting standards for creditworthy buyers, there would be a bigger boost to the housing market and spillover benefits for the broader economy."
The 30-year fixed-rate mortgage is forecast to rise gradually to 5.3 percent around the end of 2011; at the same time, unemployment should drop to 9.2 percent.For perspective, Yun said that the U.S. has added 27 million people over the past 10 years. "However, the number of jobs is roughly the same as it was in 2000 when existing-home sales totaled 5.2 million, which appears to be a sustainable figure given the current level of employment," he explained.
"All the indicator trends are pointing to a gradual housing recovery," Yun said. "Home price prospects will vary depending largely upon local job market conditions. The national median home price, however, is expected to remain stable even with a continuing flow of distressed properties coming onto the market, as long as there is a steady demand of financially healthy home buyers."
Existing-home sales are projected to rise about 8 percent to 5.2 million in 2011 from 4.8 million in 2010, with an additional gain of 4 percent in 2012. The median existing-home price could rise 0.6 percent to $173,700 in 2011 from $172,700 in 2010, which was essentially unchanged from 2009.
"As we gradually work off the excess housing inventory, supply levels will eventually come more in-line with historic averages, and could allow home prices to rise modestly in the range of 2 to 3 percent in 2012," Yun said.Econintersect uses unadjusted data in most of its analysis – and that is the case for NAR produced data here. The graph below uses a one month offset on the pending home sales data, and graphs it against the unadjusted NAR home sales data.
The above graph shows the YoY trend lines between December 2008, December 2009, and Econintersect’s projected 326,000 existing home sales for December. Using this methodology, last month Econintersect had projected November existing home sales at 360,000 – and the actual November existing home sales were 353,000.In December 2009, existing home sales were 413,000 – and this December 2010 projected home sales of 326,000 represents a decline of 21% YoY.
There is no truth that there is an “improvement” or “gradual recovery” of any kind underway in existing home sales. This absence of buyers will only tend to put downward pressure on home prices. The NAR manipulation of the data is based on no more than wishful thinking.
As Home Prices Drop, 'Serious Reasons To Worry' About Economy
by Amy Lee - Huffington Post
Home prices have dropped across America more than expected, in a slide that has led some experts to predict that housing is headed for a double-dip. Yet despite a glut of homes lingering in foreclosure proceedings, analysts say that a recovery in the housing market will, in large part, depend on an overall economic recovery.
Data released this week from the Standard & Poors/Case-Shiller index across 20 major U.S. cities fell 1.3% in October from September, the third straight national decline. Six cities -- Atlanta, Miami, Seattle, Tampa, Charlotte, North Carolina, and Portland, Oregon -- have hit new lows since the housing market began to struggle in 2006 and 2007. Atlanta showed the steepest decline, with prices falling 2.9 percent from the prior month.
"If home prices continue on this pace down, I think the economy has serious reasons to worry," Yale economist Robert J. Shiller -- and co-creator of the Case-Shiller Index -- told the Wall Street Journal in a recent interview. Bad news in the housing market could ripple through to consumer spending, which has recently shown heartening gains this holiday season. Consumer spending makes up about 70 percent of the economy.
"Our concern on the double-dip is the consumer and the fate of the consumer," said Allen Sinai, chief economist at Decision Economics, Inc. "I think the lack of stable prices is a negative consumer fundamental for spending." With unemployment mired at 9.8 percent, the housing market is hinged upon the job market. "The economy has to recover for the housing market to recover, not the other way around," said Patrick Newport, an economist with IHS Global Insight.
Homes remain a major part of many Americans' wealth -- households held $6.4 trillion of home equity at the end of the third quarter, according to a Federal Reserve report. "It's unfortunate because a lot of families have all their wealth in their house, all their savings," said Sinai. "Household spending in general is hurt. There's a restraint on consumer spending."
The latest data has led some to predict that home prices are headed for a double-dip. "The double-dip is almost here [...] There is no good news in October's report," David M. Blitzer, the Chairman of the Index Committee at S&P said in a press release. "Home prices across the country continue to fall. The trends we have seen over the past few months have not changed."
A broad housing market decline, many experts say, could continue through 2011. "We expect house prices to decline again slightly in 2011. We're projecting ultimately they'll bottom in the third quarter of next year" said Alex Miron, an associate economist at Moody's Analytics. "We're expecting peak-to-trough decline of more than 30 percent." But not everyone believes that a housing double-dip is inevitable. The 2010 numbers look particularly grim because of the expiration of the first-time home buyer credit in April, according to Stuart Hoffman, chief economist at PNC.
"I think the bottom line is, the drop in the past couple of months is comparing [numbers] to a year ago, exaggerated by the supposed expiration of house credit, and the actual expiration," said Hoffman. The drop in home prices was accompanied by an increase in the number of foreclosures in the third quarter. Newly initiated foreclosures went up to 382,000 in the third quarter, at 31.2 percent spike from the second quarter, according to a report by the Office of of the Comptroller of the Currency and the Office of Thrift Supervision.
As a mass of foreclosed homes hits the market, home prices are likely to languish. "Until the market works through those [homes], the house prices are going to be flat [or] down," said Miron. He pointed to the growing number of homes that are owned by a lender, but have gone through the default process and have failed to sell at auction. "These are the homes that are most likely to be sold at bargain basement prices," he said. "There are almost 1 million, and the number has been rising for the past three years."
US Home Prices Are Still Too High
by Peter Schiff - Wall Street Journal
Have To Decline Another 20% Just To Get Back To The Historical Trend Line
Most economists concede that a lasting general recovery is unlikely without a recovery in the housing market. A marked increase in defaults and foreclosures from today's already elevated levels could produce losses that overwhelm banks and trigger another, deeper financial crisis. Study after study has shown that defaults go up when falling prices put mortgage holders "underwater." As a result, the trajectory of home prices has tremendous economic significance.
Earlier this year market observers breathed easier when national prices stabilized. But the "robo-signing"-induced slowdown in the foreclosure market, the recent upward spike in home mortgage rates, and third quarter 2010 declines in the Standard & Poor's Case–Shiller home-price index—including very bad October numbers reported this week—have sparked concerns that a "double dip" in home prices is probable. A longer-term view of home price trends should sharply magnify this fear.
Even those economists worried about renewed price dips would be unlikely to believe that the vicious contractions of 2007 and 2008 (where prices fell about 30% nationally in just two years) could return. But they underestimate how distorted the market had become and how little it has since normalized.
By all accounts, the home price boom that began in January 1998, when the previous 1989 peak was finally surpassed, and topped out in June 2006 was extraordinary. The 173% gain in the Case-Shiller 10-City Index (the only monthly data metric that predates the year 2000) in those nine years averaged an eye-popping 19.2% per year. As we know now, those gains had very little to do with market fundamentals, and everything to do with distortionary government policies that set off a national mania for real-estate wealth and a torrent of temporarily easy credit.
If we assume the bubble was artificial, we can instead imagine that home prices should have followed a more traditional path during that time. In stock-market terms, prices should have followed a trend line. When you do these extrapolations (see lower line in the nearby chart), a sobering picture emerges. In his book "Irrational Exuberance," Yale economist Robert Shiller (co-creator of the Case-Shiller indices along with economists Karl Case and Allan Weiss), determined that in the 100 years between 1900 and 2000, home prices in the U.S. increased an average 3.35% per year, just a tad above the average rate of inflation. This period includes the Great Depression when home prices sank significantly, but it also includes the frothy postwar years of the 1950s and '60s, as well as the strong market of the early-to-mid 1980s, and the surge in the late '90s.
In January 1998 the 10-City Index was at 82.7. If home prices had followed the 3.35% annual 100 year trend line, then the index would have arrived at 126.7 in October 2010. This week, Case-Shiller announced that figure to be 159.0. This would suggest that the index would need to decline an additional 20.3% from current levels just to get back to the trend line.
How has the market found the strength to stop its descent? No one is making the case that fundamentals have improved. Instead, there is widespread agreement that government intervention stopped the free fall. The home buyer's tax credit, record low interest rates, government mortgage-assistance programs, and the increased presence of Fannie Mae, Freddie Mac and the Federal Housing Administration in the mortgage-buying business have, for now, put something of a floor under house prices. Without these artificial props, prices would have likely continued to fall.
Where would prices go if these props were removed? Given the current conditions in the real-estate market, with bloated inventories, 9.8% unemployment, a dysfunctional mortgage industry and shattered illusions of real-estate riches, does it makes sense that prices should simply fall back to the trend line? I would argue that they should overshoot on the downside.
With a bleak economic prospect stretching far out into the future, I feel that a 10% dip below the 100-year trend line is a reasonable expectation within the next five years, particularly if mortgage rates rise to more typical levels of 6%. That would put the index at 114.02, or prices 28.3% below where we are now. Even a 5% dip would put us at 120.36, or 24.32% below current prices. If rates stay low, price dips may be less severe, but inflation will be higher.
From my perspective, homes are still overvalued not just because of these long-term price trends, but from a sober analysis of the current economy. The country is overly indebted, savings-depleted and underemployed. Without government guarantees no private lenders would be active in the mortgage market, and without ridiculously low interest rates from the Federal Reserve any available credit would cost home buyers much more. These are not conditions that inspire confidence for a recovery in prices.
In trying to maintain artificial prices, government policies are keeping new buyers from entering the market, exposing taxpayers to untold trillions in liabilities and delaying a real recovery. We should recognize this reality and not pin our hopes on a return to price normalcy that never was that normal to begin with.
Gary Shilling: And Now House Prices Will Drop Another 20%
by Gary Shilling - A. Gary Shilling & Co., Business Insider
Housing: Great Expectations vs. RealityLast spring, many believed that not only was the housing collapse over but that a robust rebound was underway. Investors were crowding into foreclosed house sales and bidding up prices in California, often the bellwether state for new trends. The tax credit of up to $8,000 for new homebuyers that expired in April spurred buyers and promised to kick-start housing activity nationwide. TheHomeAffordable Modification Program was trumpeted by the Administration to help 3 million to 4 million homeowners with underwater mortgages by paying lenders to reduce monthly payments to manageable size and then paying homeowners to continue to make those payments.
But then a funny—or not so funny—thing happened on the way to housing recovery...
Yes, with mortgage rates so low, houses look "cheap". And for a while this seemed to be helping...
Image: Gary Shilling
With low mortgage rates and collapsed house prices, the National Association of Realtors’ Housing Affordability Index had leaped to all-time highs.
Earlier this year, sales of existing homes skyrocketed (temporarily)
Image: Gary Shilling
The revival of home sales early this year proved to have less follow- through after the tax credit expired in April than did the previous expiration last November. Existing home sales subsequently fell to a new low, so the tax credits had only “borrowed” sales from future months with no lasting impact.
And housing starts finally bottomed
Image: Gary Shilling
And house prices seem to have bottomed, too. But...
Image: Gary Shilling
Don't forget about unemployment. Old measures of "affordability" no longer apply...
Image: Gary Shilling
It’s also become clear that the NAR’s Housing Affordability Index in the earlier post-World War II years is not relevant to today’s conditions. Back then, unemployment rates were usually much lower than now (Chart 7, page 4) and the current threats of layoffs, wage and benefit cuts and being forced into part-time jobs were almost nonexistent. Who ventures into homeownership if he doesn’t know the size of his next paycheck or even if he’ll have one?Also, with almost a quarter of all homeowners with mortgages under water with their mortgage principals exceeding the value of their houses, many can’t sell their existing abodes even if they wanted to buy other houses.
Mortgage refinancings are up, and they're helping, but most homeowners can't refinance
Image: Gary Shilling
About 60% of all borrowers with 30-year fixed-rate mortgages could lower their interest costs by one percentage point at current rates. But only 38% could actually refinance due to tighter lending standards.Nevertheless, lower mortgage rates have encouraged many whose mortgages aren’t under water to refinance them. Some are even paying down their mortgages to bring them above water so they can refinance at lower interest rates. Mortgage applications to refinance have jumped lately, but remain well below the levels of early 2009.
Closing fees in refinancings, however, are an important offset to the reduction in mortgage rates. Closing costs in July were 37% higher on average nationwide than last year’s $2,739.
And don't forget that we now have MUCH TIGHTER lending requirements -- so much so that Fannie and Freddie and FHA now have to underwrite almost all mortgages
Image: Gary Shilling
At the same time, the house price collapse and subprime mortgage meltdown has led to a drastic tightening in lending requirements. In contrast to the no-document loose-lending practices of yesteryear, just listen to what it takes today to qualify for a mortgage. You’ll need a job and at least two recent paystubs, two years of W-2 forms, proof of other assets you own and your tax returns.Then there is the property appraisal, which has morphed from ultra-liberal to excruciatingly conservative. So the appraisal may be well below your purchase price, especially in markets with falling prices, so you’ll have to come up with more cash for the downpayment or convince the seller to cut his price.
Downpayments have also leaped from the zero or even negative levels of the housing salad days, and Federal Housing Administration-insured loans as low as 3.5% require up-front mortgage insurance payments of 2.25%. Your alternative is essentially a loan insured by Fannie Mae or Freddie Mac since the Government-Sponsored Enterprises account for almost all new mortgages today (see chart above).
Mortgages with downpayments under 20% require mortgage insurance and mortgage insurers insist on FICO credit scores of at least 680 out of 850 and charge $300 to $1,000 per year for every $100,000 borrowed. Estimates are that almost a third of Americans can't qualify for a mortgage because of low credit scores.
And now everyone knows that house prices CAN actually fall
Image: Gary Shilling
Most of all, the NAR’s Housing Affordability Index is largely irrelevant today because in contrast with the earlier post-World War II years, prospective buyers know that house prices can, and do, fall.Who wants to buy an expensive asset with a big mortgage that may be worth much less shortly? And the financial leverage created by a mortgage magnifies the risk tremendously. Someone who buys a house with 5% down sees their equity wiped out if the price falls only 5%. So the fall in house prices and mortgage rates, which have driven up the NAR’s measure of affordability, have been offset by stronger forces.
So, too, will any future increases in the affordability index in all likelihood. The Fed may embark on further purchases of mortgage securities, which could reduce mortgage rates further, but the central bank will probably only act in response to additional economic weakness that will discourage homebuyers. The further declines in house prices we foresee will make them cheaper, but also convinces prospective owners that they are even worse investments.
The rebound in house prices is also suspect and may have peaked out (see chart above). Furthermore, both the previous decline and subsequent reversal probably overstate reality. Earlier, the many sales of foreclosed houses or by distressed homeowners tended to be lower-priced houses and, therefore, depressed average prices. The recent swoon in Los Angeles house prices compared with the early 1990s drop suggests this is true. Conversely, the recent rebound may be overstating reality since, as our good friend and great housing analyst Tom Lawler has noted, the homebuyer tax credit may have induced some to pay up to beat the deadline and to favor higher priced “traditional” house sales over “distressed” homes.
Tom also points out that the Case- Shiller price index for July, which showed increases in 13 of the 20 metro areas (not seasonally adjusted), was based on transactions from April to June and, therefore, included tax credit- related settlements in May and June. Also, seasonally-adjusted data reveals declines in 16 of 20 metro areas and a small 0.1% fall from June to July. Another Home Value Index compiled by Zillow reports that prices nationwide fell in July from June, the 49th consecutive monthly fall. That puts them down 24% from the May-June 2006 peak, similar to the 28% drop in the Case-Shiller index.
And then there's the still-massive number of foreclosures, which will keep pressure on prices
Image: Gary Shilling
The Administration’s HAMP initiative, introduced in April 2009, has been a huge disappointment...But while mortgage modifications were attempted, lenders and servicers were basically forced by the government to suspend foreclosures. Now, as that program unwinds, foreclosures will again jump (Chart 12). Ironically, foreclosure rates have moderated recently because lenders tightened their standards in mid-2008 when housing and mortgages were in free fall. In 2009, two-thirds of all FHA- guaranteed new loans were to borrowers with credit scores over 660, up from 45% in 2008.
Nevertheless, lenders have been loosening in recent months. In January, Fannie initiated a program that allows first-time homebuyers to put down $1,000 or 1% of the purchase price, whichever is greater. In the first half of this year, credit card companies sent out 84.8 million offers to American subprime borrowers, up from 43.7 million a year earlier. In the second quarter of this year, 8% of new car oans were to borrowers with the lowest rank of credit scores, up from 6.2% in the fourth quarter of 2009.
The percent of mortgages past due is still climbing...
Image: Gary Shilling
Nevertheless, look for delinquencies (Chart 13) and foreclosures to spike in the slow economic growth, high unemployment quarters that probably lie ahead.
The number of bank-owned houses is still climbing (more future inventory)
Image: Gary Shilling
Already, Real Estate Owned by lenders due to foreclosures—perhaps the most hated term among bankers—is climbing (Chart 14). Estimates are that a major share of the 7 million houses that have delinquent mortgages or are in some stage of foreclosure, as well as those yet to come, will be dumped on the market, adding to the already huge excessive inventory glut. Some 4.5 million loans are now in foreclosure or at least 90 days delinquent.
Mortgage delinquencies are linked to job losses... and the number of weekly unemployment claims is still too high
Image: Gary Shilling
Mortgages delinquent 30 days, many of which will probably end in foreclosure, have risen lately. They peaked in the first quarter of 2009 at 3.77%, then fell to 3.31% at the end of 2009, but have since risen to 3.51%, according to Tom Lawler.He goes on to observe that 30-day delinquencies are linked to initial claims for unemployment insurance, which fell last year but subsequently leveled off and are now rising (Chart 15). Also, the delinquencies are rising as weak borrowers with modified loans again miss payments. Fitch Rating believes that 65% to 75% of mortgages modified under HAMP will redefault within 12 months.
"Distressed" sales are still high (prices slashed to move inventory)
Image: Gary Shilling
Indeed, bank-owned houses for sale jumped 12% in August from July when newly-initiated foreclosures jumped 25% to a six- year high.Unlike most homeowners, banks tend to slash prices to unload REO quickly. As a result, average prices fell rapidly in 2008 when lenders sold foreclosed houses at low prices, as noted earlier. By January 2009, the share of distressed sales leaped to 45% of the national total (Chart 16). With the default moratorium on foreclosures due to HAMP, the distressed share has fallen on balance more recently, coinciding with the flattening in prices. But now with HAMP unwinding, foreclosures will probably leap, REO sales at low prices jump, and average prices resume their slide.
The homeownership rate (percent of households that are homeowners) continues to decline, probably headling back to its long-term average
Image: Gary Shilling
Back in the salad days of 10% annual price appreciation, a homeowner and/or investor who put down 5% enjoyed a wonderful 200% return on his investment per year, neglecting taxes, interest and maintenance. But that hapless homeowner who bought at the peak lost all of his downpayment six times over as prices fell 30%.No wonder that the homeowner rate, which spurted from its 64% norm to 69%, is now back to 66.9% in the second quarter and probably on its way back to 64% (Chart 18).
Meanwhile, household formation is lower than it was during the boom
Image: Gary Shilling
The converse of the ownership rate is the rental rate, which obviously fell from 36% to 31% and is now back up to 33.1%. We’ll explore the newfound zeal to rent vs. own later.Meanwhile, we’ll consider another important component of the equation, household formation. Many believe that household formation and, therefore, demand for either owned or rented housing units is closely linked to population growth. A Beazer Homes official said recently that demographics would normally produce household growth of around 1.5 million a year.
But note that those trendless series are extremely volatile, ranging from a peak of almost 2.3 million at annual rates in the current cycle to less than 500,000 recently. Household formation is similarly volatile (Chart 19), not surprising since a household is defined as one or more people living in a separate dwelling unit and not in jail, college, an institution or an army barracks. So household formation is affected by the lust for house appreciation, income growth, employment prospects, family size, mortgage availability and all the other factors that determine the desirability of owning or renting.
Image: Gary Shilling
With the negative zeal for homeownership of late and weak incomes and high unemployment deterring renting, household formation has been weak.No wonder that the vacancy rate for single- and multi-family housing units remains high (Chart 21). Of course,
As they lose their jobs and houses, many Americans are "doubling up"--moving in with friends and relatives. This further reduces demand for housing.
Image: Gary Shilling
Of course, homeowners thrown out of their abodes by foreclosures can continue to be separate households by renting houses and apartments, but many of those and other discouraged folks are shrinking households—and adding to vacant housing units—by doubling up with family and friends.The Census Bureau reports that in the last two years, multi-family households jumped 11.6% ( Chart 22) while total households rose a mere 0.6%. Those aged 25-34 living with parents—many of them “boomerang kids” who have returned home—increased by 8.4% to 5.5 million. Not surprising, 43% of those were below the poverty line of $11,161 for an individual.
The number of houses for sale is still abnormally high... and house prices, like everything else, are a function of supply and demand
Image: Gary Shilling
As we’ve stated repeatedly in many, many past Insights, excess inventories are the mortal enemy of house prices. And those excess inventories are huge.Notice (Chart 23) that, over time, new and existing inventories listed for sale have averaged about 2.5 million. So, we reason, that’s the normal working inventory level and anything over and above 2.5 million is excess.
At the peak of 5 million reached in October 2007, that excess was 2.5 million. It subsequently fell but with the recent jump, the total is 4.0 million, implying excess inventories of 1.5 million.
That’s a lot considering the average annual build of 1.5 million houses. So the inventories over and above normal working levels equals one year's average demand. But wait! There’s more!
As noted earlier, as foreclosures pick up with the ending of the mortgage modification-related moratorium on lender takeovers, “shadow” inventory will become visible as many of those bereaved of their abodes join friends and family.
Furthermore, if we take the Total Housing Inventory numbers published by the Census Bureau at face value—and Tom Lawler, a very careful housing analyst concludes that it takes more than the faith of a mustard seed to do so—there are a lot of housing units that are likely to be listed for sale as owners give up trying to wait out the housing bust.
Recently, my wife told me of a friend who finally listed her house for sale right after Labor Day and got nary a nibble in the following three weeks. Then she was further discouraged when two other similar houses in her neighborhood were listed.
When you count "shadow inventory", the imbalance looks even worse
Image: Gary Shilling
Between the first quarter of 2006, the peak of house sales, and the second quarter of this year, the number of housing units, net of teardowns, conversions to non-housing uses and other removals, rose 5.7 million.Of that total, 1.1 million were added to the pool of vacant units listed for rent or sale, 2.8 million were occupied by new households and so on down the list. Of the 1.3 million increase in those Held Off the Market, the 1.1 million rise in the “Other” category is the one of interest. This component has leaped from the earlier norm of about 2.6 million to 3.7 million in the second quarter (Chart 25).
This rapid rise, coinciding with the collapse in housing, suggests strongly that many of these houses are indeed shadow inventory, units withheld in hopes ofhigher prices but highly likely to emerge from the woodwork sooner or later.
If we assume that half the 1.1 million increase since the housing peak in the first quarter o f2006 are shadow inventory, the total excess jumps from 1.5 million to 2 million at present, and is likely to rise further.
THE BOTTOM LINE: House prices probably have another 20% to fall
Image: Gary Shilling
This huge and growing surplus inventory of houses will probably depress prices considerably from here, perhaps another 20% over the next several years. That would bring the total decline from the first quarter 2006 peak to 42%.This may sound like a lot, but it would return single-family house prices, corrected for general inflation and also for the tendency of houses to increase in size over time, back to the flat trend that has held since 1890 ( Chart 26).
We are strong believers in reversions to the mean, especially when it has held for over a century and through so many huge changes in the economy in those years—two world wars and the 1930s Depression, the leap in government regulation and involvement in the economy, the economic transformation from an agricultural base to manufacturing and then to services, the post- World War II population shift from cities to suburbs, the western and southern transfer of population and economic strength, the movement from renting to homeownership and the accompanying spreading of mortgage financing, etc.
Furthermore, our forecast of another 20% fall in house prices may be conservative. Prices may well end up back on their long- term trendline (Chart 26), but fall below in the meanwhile. Just as they way overshot the trend on the way up, they may do so on the way down, as is often the case in cycles. Furthermore, another big house price decline will spike delinquencies and foreclosures leading to more REO sales by lenders,which will furthe rdepress prices. Our analysis indicates that a further 20% drop in prices will push the number of homeowners who are under water from 23% to 40%, resulting in more strategic defaults, more REO, etc.
If house prices DO fall another 20%, a lot more homeowner equity will be wiped out
Image: Gary Shilling
At that point, the remaining home equity of those with mortgages would be wiped out on average (Chart 27. That, in turn, would impair already-depressed consumer confidence and their willingness and ability to spend, to say nothing of residential construction.In California, epicenter ofthe housing boom-bust, construction jobs dropped 43% from June 2006 to June of this year, compared to a 28% decline nationwide, and the unemployment rate in the Golden State jumped to 12.3% in June, far above the 9.5% rate nationally.
No wonder REALTORS are so depressed
Image: Gary Shilling
It’s not surprising that the confidence of those involved in residential real estate is low and declining. The NAR Realtor Confidence Index is again plunging (Chart 30). A neutral reading for this index is 50, and it's now 24.1. In June, 42% of realtors expected prices in their areas to fall in the next 12 months compared with 33% in May.
Fannie and Freddie are ending up owning more and more foreclosed houses (at taxpayer expense). This is prolonging the problem...
Image: Gary Shilling
Fannie and Freddie are also allowing homeowners who face foreclosure and qualify for mortgage modification to stay in their houses for up to a year by renting them. The goals are to help those folks, keep the homes occupied to avoid deterioration, realize some positive cash flow and keep more houses off the market. The rents, at market rates, are often lower than their monthly mortgage payments. Still, these programs simply add to shadow house inventory, which will be revealed as those one-year leases mature and foreclosures are implemented.Due to foreclosures, Fannie and Freddie owned 191,000 houses at the end of June, double the year- earlier total (Chart 33). And the inventory is growing as they take back houses faster than they sell them. Newly-initiated foreclosures at Fannie and Freddie rose to 150,000 in July, up 60% from April, as borrowers failed to qualify for loan modifications. And they are encouraging the lenders of the mortgages they guarantee to seize foreclosed houses more rapidly to avoid them deteriorating or being trashed. Fannie took a $13 billion charge in the second quarter for cleaning pools, mowing lawns and other carrying costs on the properties it owns.
Given all this, it's not surprising that few folks are planning to buy new houses...
Image: Gary Shilling
As noted earlier, traffic through new homes by prospective buyers is again falling, according to home builders (Chart 37).
And that new mortgage applications remain back at 1990s levels
Image: Gary Shilling
New mortgage applications for home purchases continue to drop (Chart 38).
And that the number of people planning to buy a house in the next six months continues to drop
Image: Gary Shilling
US mortgage foreclosures rise sharply
by Suzanne Kapner - Financial Times
US mortgage foreclosures jumped in the third quarter as fewer borrowers qualified for loan modifications that would have reduced their monthly payments, bank regulators have said. The rise in repossessions and decline in loan modifications are further signs that problems in the US housing market are persisting, in spite of forecasts by some analysts of a recovery before the year-end.
The number of homes entering foreclosure rose 31 per cent compared with the second quarter and 3.7 per cent compared with the year-earlier period, the Office of the Comptroller of the Currency and the Office of Thrift Supervision said. These newly foreclosed homes will add to a growing backlog of 1.2m properties already in some stage of repossession, a 4.5 per cent increase over the second quarter and 10 per cent more than the previous year.
As of the end of the third quarter, 187,000 homes completed the foreclosure process, a 14.7 per cent increase over the second quarter and a 57.5 per cent jump from the same period a year ago. As these properties come on the market, they are expected to depress home prices by between 5 per cent and 10 per cent over the next year, economists said. The regulators also found home retention actions, such as interest and principal reductions, fell 17 per cent from the year earlier, mainly because of a sharp drop in modifications run by the government’s home affordable modification programme (Hamp).
Hamp modifications totalled 504,648 as of November, well short of the government’s 3m target. Even when borrowers receive loan modifications, they are redefaulting at high rates. According to a report by the Congressional Oversight Panel, 40 per cent of borrowers who receive a Hamp modification are expected to redefault over the next five years.
Bruce Krueger, the OCC’s head mortgage expert, said the decline in Hamp modifications was partially due to a smaller pool of loans eligible for change. But Mark Zandi, the chief economist of Moody’s Analytics, said that explanation only told part of the story. The problem, he said, was the "inadequacy of loan modification programmes". Hamp, for instance, must compete with private modification programmes offered by banks, which tend to provide borrowers with smaller reductions in interest and principal, thus making them more attractive to lenders and less helpful to distressed home owners.
Another problem, said Mr Zandi, were second-lien holders. Many first mortgage lenders will only write down the loan principal if the balance on the second mortgage is also reduced. But borrowers continue to make payments on second mortgages, which tend to be smaller and therefore more affordable, even when they fall behind on the first. As a result, second-lien holders have been unwilling to take part in modifications, creating a "big impediment", Mr Zandi said.
The Treasury Department recently increased cash payments to mortgage servicers and lenders to encourage them to complete more modifications. But analysts said the government has so far done little to address the problems presented by second liens.
Commercial property loans pose new threat
by Gillian Tett - Financial Times
What will happen to the financial system if US interest rates keep rising? That is a question many investors are pondering, given the recent sharp upward swing in US Treasury yields. There is plenty to fret about: higher rates could hurt US homeowners, for example, as well as delivering more pain for struggling municipalities.
However, there is another sector that investors should watch: commercial real estate. During the past three years, the CRE sector has not generally grabbed much attention, because events there have not been as dramatic as in subprime (in 2007-08) or sovereign debt markets (in 2010).
But the recent turbulence in Ireland, where the banks were devastated by CRE exposure, is a potent reminder of the potential for property loans to turn sour. And it is just possible that echoes of this problem might be seen elsewhere in 2011. For one dirty secret in the financial world is that the lack of drama in the CRE sector has partly arisen because banks on both sides of the Atlantic have been "evergreening" loans – or in essence extending the maturities – and practising forbearance to avoid recognising losses.
Banks and borrowers have been able to conduct such evergreening because interest rates have been at rock bottom. But if rates rise, this evergreening will be harder to maintain. What makes this doubly pernicious is that any rise in rates might hit just as the sector is heading for a wave of refinancing.
To understand this, look at some numbers compiled by the Institute of International Finance, the Washington-based banking lobby group. The IIF calculates that in March 2008, there was about $25bn worth of pre-crisis investment grade commercial real estate in distress. By March this year, however, that number had exploded to $375bn (and has probably swelled since).
Thus far, the banks have "dealt with potential delinquency problems in part by extending loans until 2011-13", the IIF notes. Or, in layman’s terms, they have swept it under the carpet. But while this avoided defaults, the IIF reckons that about $1,400bn of CRE loans must be refinanced before 2014. Alarmingly, "nearly half of these are at present ‘underwater’, ie have mortgages in excess of the current value of the property", it adds.
If you are an optimist (say, a real estate broker) you might argue that property prices will soon rebound, enabling borrowers and banks to get out of this hole. Some bankers also think that the primary commercial mortgage-backed securities market will spring into life in 2011, after the recent freeze, to support this refinancing. After all, they point out, secondary CMBS prices rose in 2010, and actual real estate prices also rebounded in the UK and US.
But in practical terms, there is still little tangible sign that the primary CMBS sector is thawing. And while average UK and US prices have rebounded, they remain well below the peak – and outside prime locations in London and Manhattan are often falling. Thus, it seems hard to believe that all that $1,400bn refinancing will occur smoothly; barring a miracle – and indefinite rock-bottom rates – defaults will rise.
If so, that will hurt many small and medium-sized US banks. Moody’s, for example, estimates that US banks have barely recognised half their CRE losses, far less than for residential mortgages. Defaults could also damage European financial institutions. Last month the Bank of England’s financial stability report observed that a third of all UK banks’ global corporate loans were to CRE – and many of those loans have also been "evergreened". (Apparently, "30 per cent of UK companies made insufficient profits to cover their interest payments in 2009", the FSR observes.)
DTZ Research estimates that there is a potential gap of $54bn between the value of UK CRE loans maturing and the amount of new debt that could be raised over the next three years. "Ireland and Spain also have large estimated CRE funding gaps," the Bank adds. That could hit plenty of other European banks too.
Now, I am not suggesting that these woes could deliver anything like the shock that occurred from subprime, or that might yet emanate from sovereign debt; a "mere" $54bn funding gap – or a $375bn pile of distressed loans – is still manageable for the system as whole.
But if nothing else, these numbers could hurt some banks. And it illustrates an important point: that while a sense of peace might have returned to parts of the financial system in the past two years, this has been achieved only by virtue of government aid – and rock-bottom interest rates. If US interest rates keep "normalising" in 2011 (as US policymakers like to say) plenty of surprises might yet emerge from under the carpet. Including duff property loans in places other than Ireland.
Indiana May Allow Chapter 9
by Caitlin Devitt - Bond Buyer
Bill Would Let Stressed Cities File
Indiana cities would be allowed to file for Chapter 9 bankruptcy protection under a bill touted by Republican Gov. Mitch Daniels. Daniels this week called the measure — Senate Bill 150 — a "useful mechanism" for helping fiscally stressed cities that would help provide clarity on the topic of municipal bankruptcy.
Already, at least one municipality — the long-struggling town of Gary — is eyeing the measure. The sponsoring senator said he will meet Thursday with Gary's mayor to discuss the bankruptcy bill. Indiana law does not currently allow municipalities to file for federal bankruptcy protection. Cash-strapped governments are instead directed to the state's Distressed Unit Appeals Board, which is authorized to provide various forms of tax relief.
The board's ability to provide that tax relief, however, will end after 2011, as voters in November passed a ballot resolution making property tax caps part of the state constitution. Distressed local governments will soon have few places to turn for help, said Sen. Ed Charbonneau, a Republican from Valparaiso who sponsored the bill. "We didn't have anything in place," Charbonneau said. "I saw the potential for a problem down the road and felt it was important that we be prepared. It's legislation that everyone hopes we never have to use. "It's recognition of what's going on all over the country, and not anything unique to Indiana," he added.
Indiana is one of 26 states that do not have on their books the specific state authorization required for a municipality to file for bankruptcy under federal code. Chapter 9 bankruptcies remain relatively rare. In Michigan, the town of Hamtramck is seeking permission to file — state law currently prohibits it — with officials saying it is the only way the town can escape costly labor contracts.
Nationally, the struggles of local governments are gaining the spotlight, with more local officials mulling Chapter 9, which is the only unilateral way to void labor contracts. "There's an intensifying of conflicting pressures of municipalities not wanting to file, but being under more and more pressure to get relief from retiree pension and health care obligations," said Martin Bienenstock, a partner at Dewey & LeBouef LLP. "Chapter 9 may be the only way for these municipalities to get relief."
Indiana's bankruptcy bill would give the appeals board the authority to declare a municipality distressed if it meets one of eight criteria, one of which is a missed bond payment. The designation would pave the way for a state financial takeover, the appointment of an emergency fiscal manager, and, finally, permission to file for bankruptcy protection.
The Indiana cities considered most likely candidates for possible bankruptcy are Gary, the town of Lake Station, and a small southern town called Georgetown that last summer passed an ordinance giving itself the authority to seek bankruptcy under the Home Rule Act.
Under the bill, the state would take over if a city council and the chief executive of the local unit asked for help or if a coalition of creditors owed more than 30% of the unit's annual revenue asked the state to step in. Charbonneau introduced the measure Dec. 23. It will be referred to a Senate committee when lawmakers reconvene Jan. 5, and hearings will later be scheduled.
Gerald Celente - Trends Research Institute: Top Trends Of 2011
by Gerald Celente - Trends Research Institute
After the tumultuous years of the Great Recession, a battered people may wish that 2011 will bring a return to kinder, gentler times. But that is not what we are predicting:
- Wake-Up Call The people of all nations, having become convinced of the inability of leaders and know-it-all "arbiters of everything" to fulfill their promises, will do more than just question authority, they will defy it. The seeds of revolution will be sown….
- Crack-Up 2011 In 2011, with the bailout funds and arsenal of other schemes to prop up the economy depleted, teetering economies will collapse, currency wars will ensue, trade barriers will be erected, economic unions will splinter, and the onset of the "Greatest Depression" (a trend we forecasted before the massive bailouts existed) will be recognized by everyone….
- Screw the People As times get even tougher and people get even poorer, the "authorities" will intensify their efforts to extract the funds needed to meet fiscal obligations. While there will be variations on the theme, the governments’ song will be the same: cut what you give, raise what you take….
- Crime Waves No job + no money + compounding debt = high stress, strained relations, short fuses. In 2011, with the fuse lit, it will be prime time for Crime Time. As Gerald Celente says, "When people lose everything and they have nothing left to lose, they lose it." And "lose it" they will….
- Crackdown on Liberty As crime rates rise, so will the voices demanding a crackdown. A national crusade to "Get Tough on Crime" will be waged against the citizenry. And just as in the "War on Terror," where "suspected terrorists" are killed before proven guilty or jailed without trial, in the "War on Crime" everyone is a suspect until proven innocent….
- Alternative Energy In laboratories and workshops unnoticed by mainstream analysts, scientific visionaries and entrepreneurs are forging a new physics incorporating principles once thought impossible, working to create devices that liberate more energy than they consume. What are they, and how long will it be before they can be brought to market?
- Journalism 2.0 2011 will mark the year that new methods of news and information distribution will render the 20th century model obsolete. With its unparalleled reach across borders and language barriers, "Journalism 2.0" has the potential to influence and educate citizens in a way that governments and corporate media moguls would never permit….
- Cyberwars In 2010, every major government acknowledged that Cyberwar was a clear and present danger and, in fact, had already begun. The demonstrable effects of Cyberwar and its companion, Cybercrime, are already significant – and will come of age in 2011. Equally disruptive will be the harsh measures taken by global governments to control free access to the web, identify its users, and literally shut down computers that it considers a threat to national security….
- Youth of the World Unite University degrees in hand yet out of work, in debt and with no prospects on the horizon, feeling betrayed and angry, young adults and 20-somethings are mad as hell, and they’re not going to take it anymore. Not mature enough to control their impulses, the confrontations they engage in will escalate disproportionately….
- End of The World! The closer we get to 2012, the louder the calls will be that "The End is near!" Among Armageddonites the actual end of the world, and annihilation of the Earth in 2012, is a matter of certainty. Even the rational and informed may sometimes feel the world is in a perilous state. Both streams of thought are leading many to reevaluate their chances for personal survival, be it in heaven or on earth….
- The Mystery Trend … will be revealed upon publication of the Trends Journal in mid-January.
Living Standards Must Fall By 15% To Save The Euro
by Daily Express
The euro has only a 20 per cent chance of survival, a leading think-tank warns today.
It is possible that the eurozone may not even survive next year according to the Centre for Economic and Business Research. Chief executive Douglas McWilliams said the euro has an 80 per cent chance of failing in its present form in the next 10 years. He said living standards would have to fall by about 15 per cent in the weaker economies and Government spending slashed if the single currency was to survive.
Mr McWilliams added: “There is no modern history of falling living standards in peacetime on the scale necessary to keep the euro in its current form. “Indeed the scale of the cuts necessary was only just achieved in wartime. That is why I think there is at best a one-in-five chance the euro will survive as it is.”
The CEBR warned that the financial problems which have crippled Greece and Ireland will spread to other European countries mired in debt. In a report released today, they say there could be another eurozone crisis in the spring – “if not before” – with Spain and Italy in the firing line. Mr McWilliams argued that in order for the currency to survive as it is German growth needed to be sustained at more than three per cent for the next four years.
He added that living standards in Ireland, Greece, Spain, Portugal and Italy needed to be drastically cut and Government spending in those weaker countries would have to be reduced by 10 per cent of GDP. He said there was an outside chance the euro could break up within the year, although this is unlikely because of the political will in France and Germany. However he warned that even if the euro survived 2011 it will be the year the currency “weakens substantially” against the dollar.
The report adds weight to the Daily Express crusade for Britain to pull out of the EU altogether. A deepening of the eurozone debt crisis would hit the UK hard because it exports heavily to the Continent. And taxpayers could be asked to contribute even more cash to struggling countries than the £7billion already pledged towards the bail-out of Ireland. The report also offered a sombre outlook for Britain, warning that a double-dip recession is “well within the bounds of possibility for the UK” as austerity measures take their toll in 2011.
The stark report comes a day after credit ratings agency Moody’s branded the eurozone the “weakest link” in the global economy. It said the most vulnerable countries using the euro will be forced to default on debts, despite austere spending cuts. Moody’s experts said: “Europe remains the weak link, not just because of its sovereign debt crisis but also because even its fiscally stronger states – France, Germany and the UK – are tightening fiscal policy.
“With growth still low this could push the region’s more vulnerable economies into recession.” Yesterday, the Institute for Public Policy Research also warned that problems within the eurozone would lead to a flood of EU migrants coming into Britain.
Estonia Readies for Entry in Euro Zone: Welcome to the Titanic!
by Jack Ewing - New York Times
On Saturday, Estonia completes its trip from Soviet republic to full-fledged member of the euro zone.In the first minutes of the new year, Prime Minister Andrus Ansip will slide a bank card into an automated teller machine installed for the occasion in front of the opera house here in the capital. He will withdraw some euro bills, and Estonia will officially become the 17th member of the zone.
To outsiders, it may seem curious that this Baltic nation of 1.3 million is tying itself to the euro just as the common currency is struggling. But in fact, Estonia has been a de facto member for some time, pegging its kroon to the German mark and then the euro after giving up the Russian ruble in 1992. "Whatever happens, our currency is tied to the euro," said Riho Unt, chief executive in Estonia of Skandinaviska Enskilda Banken, or S.E.B., a Swedish bank that is one of the Scandinavian institutions that dominates banking in the country. "Being inside is better than being outside."
Economic arguments aside, in Estonia, the euro is still a symbol — tarnished, perhaps — of hope and prosperity. "It symbolizes that Estonia has emerged as a full member of the European family," said Joakim Helenius, chief executive of Trigon Capital, an asset management company. "For people here, that is a very big thing."
While not naïve about the problems in the euro zone, Estonian leaders remain fierce advocates of the common currency, a reminder that for every bond investor dumping Greek or Irish debt holdings, there is a European bureaucrat equally determined to defend the euro to the last. "Talking about splitting the euro is not the way out," Jürgen Ligi, the Estonian finance minister, said during an interview. "There would be huge immediate losses for both sides." "There is no alternative" to the euro, Mr. Ligi said. "This is the only boat in the sea."
Even if it were possible for Estonia to back out of euro membership at the last minute, the consequences could be disastrous. The kroon might plunge, most likely making Estonians unable to repay mortgages and other bank loans, which are almost always denominated in euros already. The surge in defaults could bring the economy to a standstill.
The Estonian government has already gone to extreme lengths to defend the currency peg. In 2009, after economic output plunged nearly 15 percent, it cut its budget by the equivalent of 9 percent of gross domestic product rather than devalue and put euro membership at risk. The austerity measures did not provoke civil unrest in the country, unlike in neighboring Latvia. Most Estonians seemed to accept that sacrifices were necessary, and the economy is growing briskly again. Many Estonians regard themselves as a stoic people who endured much worse during centuries of foreign domination.
"It wasn’t an easy process," said Henri Kaarma, an employee of a bank in Tallinn that laid off some of his colleagues during the downturn. "But it is done now, and we reached our goal. I am proud," said Mr. Kaarma, a muscular 36-year-old whose idea of relaxation is to swim in icy lakes and rivers during the winter.
Among Estonian citizens, support for the euro is far from unanimous. Polls show roughly half in favor of the euro, with the rest either apathetic or opposed. There is widespread suspicion that shops and restaurants, which have promised not to raise prices in the months after euro membership, have been doing so ahead of time. The Estonian central bank blames recent price increases on the higher cost of imported commodities.
With an average monthly wage of 785 euros, or about $1,030, Estonia will be the poorest member of the euro area. Though central Tallinn is filled with Audis and Mercedes parting the winter slush, unemployment remains above 10 percent and about a fifth of the population lives in poverty. Among the less fortunate, there seems to be little hope that euro membership will bring improvement.
"The last years are very difficult," said Rufina Martinovskaya, a single mother selling knit sweaters and mittens at an outdoor market on the edge of Tallinn’s 13th-century Old Town. Ms. Martinovskaya, swathed against the cold in a thick scarf and long fleece jacket, said she lost her job as an architect four years ago, when Tallinn’s real estate boom stalled. "There is no building. It stopped," she said. "I’m an architect, and now I work here," she said, surveying the rows of wooden stands visited by a handful of tourists. Ms. Martinovskaya said she made just enough for her and her 11-year-old daughter to eat, with nothing left for even simple pleasures.
A few political leaders have tried to tap such sentiments. Edgar Savisaar, mayor of Tallinn and leader of the main opposition party, told the German newspaper Die Zeit, in an interview published on Tuesday, that Estonia was not ready for the euro and that the sacrifices to join were too great. But even Mr. Savisaar acknowledged that such sentiments had not coalesced into a serious anti-euro movement. Despite the severe austerity program, the government led by Mr. Ansip remains popular.
This is a country that continued functioning recently after snowfall that was heavy even by Nordic standards, and many times the amount that crippled transportation in Britain, France and Germany. After plows swept Tallinn this week, high walls of cleared snow made some streets look like white canyons. Estonian leaders approach the euro with the same spirit of perseverance.
"We have never taken the euro as a short-term project," said Marten Ross, deputy governor of the Estonian central bank. He and other leaders portray the country as the anti-Greece, with a history of discipline and willingness to suffer for the euro cause. Last year, Estonia had the lowest level of total debt of any European Union country, just 7 percent of gross domestic product. The government’s budget deficit will be well under 3 percent of G.D.P. this year, when almost every other country in the euro area is in flagrant violation of limits set by treaty.
The European Central Bank will not need to intervene to prevent a sell-off of Estonian government bonds. There are none, though the government is considering a debt issue to finance expansion of the energy sector. What little the government has borrowed has come directly from banks. Estonia is also one of the most business-friendly countries in the world. It is ranked 17th by the World Bank for ease of doing business, ahead of countries like Japan, Germany and Switzerland. Estonia has no tax on reinvested corporate earnings, and in contrast to most other European countries, there are few restrictions on hiring and firing employees.
"The business environment in Estonia has always been good," said Bo Henriksson, manager of the Baltic region for ABB, a company based in Zurich that makes power distribution equipment and other products in Estonia. Hopes are high that euro membership will encourage more investment from nearby Finland. Its capital, Helsinki, is just two hours away by fast ferry, but smaller Scandinavian companies might have feared exchange rate risk if Estonia was ever unable to defend the kroon.
"That has been an issue for foreign investors," said Priit Perens, managing director in Estonia for Swedbank, a Swedish institution. For many Estonians, such benefits make it worth enduring a sovereign debt crisis or two. "There is no reason to be afraid," said Peep Aaviksoo, a consultant and former chief executive of EMT, an Estonian mobile phone company. "If you look at the not-so-happy history of Estonia, we have had worse experiences. "Now we are back in Europe."
Canadians Spend Like Crazy Americans
by Theophilos Argitis and Greg Quinn - Business Week
Spendthrift Canada? Many Americans would find that hard to believe. Throughout the subprime crisis that rocked the U.S., Canada's economy and banking industry remained rock solid.
Yet in mid-December, the Canadian government released statistics showing that the indebtedness of Canadians surpassed U.S. levels for the first time in 12 years. Household debt as a portion of disposable income was 148 percent in the third quarter, according to government agency Statistics Canada, exceeding the U.S. level of 147 percent.
Canadians, it turns out, have been acquiring big mortgages, too, as the country's recent prosperity drove demand for bigger and better housing. Low interest rates have encouraged Canadian consumers to take on debt, while banks, largely untouched by the financial crisis, have continued to lend. The average size of a mortgage in Canada has gone from C$120,000 in 2004 to $170,000 as of last spring, according to CIBC World Markets, a Canadian investment house.
The rise in household debt puts the government and central bank in a corner. The ordinary response is to cool borrowing off by raising interest rates. Bank of Canada Governor Mark J. Carney has boosted the benchmark rate three times since June to 1 percent.
The problem is that further rate hikes increase the cost of servicing mortgages, which stretch debt-laden households. Higher rates would also attract foreign investors looking for higher-yielding bonds. That would strengthen the loonie further: It's basically at parity with the greenback, which has weakened against most currencies in the last year as the Federal Reserve pursued a loose monetary policy.
A stronger Canadian dollar would make exports pricier—especially to the U.S., Canada's biggest trading partner—and put growth at risk. "The Bank of Canada is in a bit of a box, given where the Fed is and where the Canadian dollar is," says Douglas Porter, deputy chief economist with BMO Capital Markets in Toronto.
Finance Minister James M. Flaherty is trying to cool the market off, too. The government has tightened rules on refinancing and down payments, and made it harder to qualify for government-insured mortgages. "Everybody knows, I think, interest rates will have to go up over time," Flaherty says. "So people have to make sure they can afford their mortgage payments when interest rates rise."
The central bank will have to weigh all these issues before its next interest rate announcement on Jan. 18. While in December it kept rates steady, the pressure to raise them and slow down consumer borrowing is increasing. "The level of vulnerabilities of households remains high," Bank of Canada's Carney said at a press conference on Dec. 13. "Without a significant change in behavior, the proportion of households susceptible to serious financial stress will continue to grow."
For many, it'll be a very unhappy financial new year
by Jeremy Warner - Telegraph
In one respect, Brendan Barber, the TUC general secretary, had it about right in his new year message; for many people, 2011 is going to feel "horrible". Around 60,000 public sector workers will lose their jobs, and across the economy as a whole, living standards are likely to fall. Growth will be sluggish, if not negative in some areas. Inflation will remain high, so real wages will fall. Meanwhile, the Government will struggle to get on top of the deficit. But that's where Mr Barber's grasp on reality ends. Both he and the Labour leader, Ed Miliband, seem to believe that with different policies, the coming adjustment can somehow be avoided. In so arguing, the Left has descended into fantasy.
It's easy enough to see why they might delude themselves. Despite the worst banking crisis in 100 years, and the deepest economic contraction since the Great Depression, to many people, it hasn't felt much like a recession. Unemployment has remained relatively low by the standards of past contractions, and thanks to rock-bottom interest rates, many households have enjoyed a significant boost to their disposable income.
The collapse in business demand has been countered by higher government spending and robust domestic consumption. House prices have undergone only a mild correction, and thanks to public support the City is once more skipping along as if in the midst of a full-scale boom. Why can't we just continue in the same vein? That's what they're doing in the US, where more fiscal stimulus is being piled on top of yet more quantitative easing. Is it not madness to follow the European periphery into self-imposed austerity?
This is a seductive message – but it's also cloud cuckoo land. To think that Britain can be saved from the consequences of years of credit-fuelled excess by continuing to apply more of the same defies logical analysis.
Ministers, meanwhile, suffer from a different form of delusion: a conceited belief in their own powers of economic alchemy. Their message is that things are now unambiguously on the mend, that the mere act of announcing a credible deficit reduction plan has somehow put the worst behind us. Already the sunlit uplands seem to beckon. If only it were true.
I'd never urge ministers to fill the airwaves with pessimism. To stand any chance of getting out of this mess, we need decent private sector growth, and perpetually sounding the air-raid siren hardly helps. Yet there is a sense in which policymakers are not telling it as it is – for in fact, the debt workout has barely begun.
To understand why, take a look at where we were meant to be by now, three and a half years into the crisis. By common agreement, the UK economy became dangerously unbalanced during the long years of boom. We weren't exporting enough, and importing far too much. The illusion of rising living standards was kept alive by soaraway credit expansion, rapid growth in public spending and constantly rising house prices. Like all illusions, it couldn't last.
Nobody welcomes a crisis, but it did at least provide an opportunity to get the economy on to a more sustainable footing. Rebalancing it away from debt-funded government and consumer spending and towards private investment, savings and net trade became the over-riding goal of macro-economic policy.
But how much progress has been made? Hardly any. In fact, the policy response to the downturn has only succeeded in making matters worse. Household debt remains at near-record levels – indeed, in nominal terms, it hasn't fallen at all. It wouldn't require much – say a P45, and/or a rise in mortgage rates – to tip many households into outright destitution.
After a brief upward blip, the savings rate has returned to one of the lowest in the developed world. And despite all the brave talk of deficit reduction, central government spending – and therefore borrowing – reached an all-time record last month. Meanwhile, growth in imports is still outpacing the recovery in exports. Our trade and current account balances remain deep in deficit.
A big uplift in business investment does, admittedly, provide cause for encouragement, but in other respects, the hoped-for rebalancing is still in the starting gates. We live in a policy-induced stupor, shielded from the consequences of past follies by fiscal and monetary stimulus.
That's why it hasn't so far felt like a recession. Yet nothing can be put off for ever – and for many, next year will be when the pain starts to bite. Austerity has been on a long fuse, but begins on January 4 with the rise in VAT. The inflationary consequences of devaluation will, through higher interest rates and falling real wages, further damage our already declining living standards.
I'm not trying to argue that supporting the economy via negative real interest rates and government spending was the wrong response to the banking crisis. But nobody should be under any illusions about how these levers work: they could only ever succeed in smoothing and slowing the pace of adjustment. They could never, as Messrs Barber and Miliband seem to believe, eradicate it. Next year comes the moment of truth.
UK families £3,000 worse off in 2011
by Rosie Murray-West and James Kirkup - Telegraph
Middle-class families will be more than £3,000 a year worse off this year, with the rising cost of living pushing many to the brink of bankruptcy, research by The Daily Telegraph has found.
A combination of higher prices, lower benefits and pay freezes will leave many struggling to cope in a tough economic climate, experts have warned. Telegraph figures show that a family of four, living in Ashford, Kent, with a single earner on £50,000 will be £3,252 worse off this year than they were in 2010. Major costs include a £488 rise in rail fares, an increase in energy bills of £161 over the year, and food bills rising by £230. Predicted rises in interest rates add a further £562 to the family's average £150,000 variable rate mortgage.
Keith Stevens, insolvency practitioner at Wilkins Kennedy, said: "The worst is yet to come. We are still approaching the peak in personal insolvencies. People have been putting off reducing their debts just to get through the last year. "As soon as interest rates go up, more people will struggle and personal insolvencies will rise."
The figures are based on predictions from leading economists and industry bodies, who are forecasting record rises in many areas in the next 12 months. VAT rises to 20 per cent on Jan 4, while poor harvests worldwide are pushing up the prices of clothes and food. A family of four will lose out on £109 a year because child benefit is not being increased in line with inflation, as well as £545 because they will no longer be eligible for tax credit help from the Government.
On top of this, they will be hit by the change in National Insurance, which the accountancy firm BDO calculated would cost £114 a year. Further changes to tax bands will cost them a further £100 a year. The price of a season ticket from Ashford to London will rise by £488 this year, and families will also be affected by changes to National Insurance and benefits that will leave them worse off.
“There is no doubt that the start of 2011 will see a real impact on everyone’s finances, especially with the price of petrol due to rise and VAT increasing,” said Kevin Mountford, from Moneysupermarket, the price comparison website. “These increases are on top of soaring energy bills, car insurance prices and potential interest rate rises, so the next 12 months could see the nation’s wallets getting squeezed further.”
Energy prices are already high, but Ofgem is forecasting that wholesale gas and electricity prices will rise by 13 per cent this year, adding £161 to the family’s average bill. Petrol costs will also be affected by this price increase as well as the rise in VAT, with the AA predicting that a family with two cars will spend more than £100 extra a year on petrol. The VAT increase will cost everyone in Britain an extra £181, according to a survey by Kelkoo, a price comparison service, while food costs are increasing at a rate of 4.4 per cent, putting an extra £230 burden on a family of four.
Half of British businesses are expected to freeze pay this year, meaning that there will be little respite for families suffering from the extra living costs. Pensioners will also lose out this year, although there may be some relief from rising interest rates pushing up their income from savings. They are expected to pay an extra £130 a year on food, as well as increased amounts on heating, petrol and clothes — all of which take up a higher-than-average proportion of their income.
A recent survey from Age UK, the charity, showed that those over 55 are already suffering from the effects of inflation far more than the population in general, and are on average £600 a year worse off than they were in 2008. This is partly because most pensioners have not benefited from the fall in interest rates on mortgage payments, as they have paid off their home loans.
Gordon Morris, of Age UK, said: “The impact of inflation on over-55s has been substantially underestimated and it worsens as you age, with over-75s experiencing cost rises on average four per cent above official measures.” Since the beginning of 2008, those aged over 55 have experienced price rises at almost two per cent above that suggested by headline Retail Price Index figures. This rises to four per cent above headline RPI for those over 75. The gap between real and headline inflation over that period has cost the average 60-year-old £620 a year, rising to more than £700 for someone aged 65 to 69.
RSM Tenon, who are specialist bankruptcy advisers, predicted that personal insolvencies will reach a record level of 140,000 in 2011. Mark Sands, of RSM Tenon, said: “The economic downturn has left people in a bad financial state and we expect this to continue through 2011 and into 2012. There really is no let up at the moment and many people will be struggling to see the light at the end of the tunnel when the upturn does arrive.”
China slows as tightening start to bite
by Ambrose Evans-Pritchard -Telegraph
China's industrial growth has begun to slow as a string of measures to choke excess credit and control inflation feed through the economy, threatening to curb the country's voracious appetite for commodities.
HSBC's manufacturing index fell from 55.3 to 54.4 in December, the first drop in five months. The slowdown suggests that the authorities are at last gaining traction in their ever-more zealous efforts to stop over-heating, though many analysts say the credit bubble has already gone too far to avoid trouble next year. The spectre of Chinese monetary tightening has now become the most neuralgic issue in the world economy. There are fears that Beijing may knock away the central prop of global recovery if it misjudges the delicate task.
Capital Economics said Chinese growth has been even stronger than suggested by official data, reaching 10pc in the fourth quarter based on freight levels, electricity use, and building footage. This blistering pace is no longer viewed as benign since it implies that China will have to brake harder.
The central bank has nudged up reserve requirements for banks five times and raised a range of interest rates, including a surprise move over Christmas to lift the one-year lending rate to 5.81pc. Beijing bared its fangs again on Thursday, pushing the money market rate to a three-year high of 6.25pc. Tightening fears has triggered a 12pc fall in the Shanghai stock market since early November.
Professor Michael Pettis from Beijing University said the Communist Party will struggle to engineer a soft-landing after letting rip with credit over the last two years. "Debt levels are worryingly high and starting to act as a serious constraint on rebalancing. It is becoming increasingly difficult for the People's Bank of China to raise interest rates without causing a great deal of financial distress in government related entities," he said. Mr Pettis said China must slow from the blistering growth rates of 8pc to 9pc over recent years as it reaches the limits of its investment-led export model. "It will be very bad for commodity exporters," he said.
A study by Fitch Ratings concluded that global commodity prices would fall by 20pc if China's growth slows to 5pc next year. China is now the global price setter for oil, coal, and base metals. It was has snapped up 30pc of global copper supply this year. Professor Victor Shih at Northwestern University said banks have lent $1.6 trillion (£1.04 trillion) to local state entities, often for projects that are not commercially viable. He estimates that China's public debt will reach 100pc of GDP next year if counted properly.
China's credit grew 32pc in 2009 and 19pc in 2010, far above the safe speed limit. The authorities have belatedly begun to crack down on property speculation with mortgage rationing. The International Monetary Fund said home prices in the eastern cities had become "increasingly disconnected from fundementals", although there is no nationwide bubble. Prices are 22 times disposable income in Beijing.
Credit curbs may help to lower property prices to affordable levels for China's working poor, but only at the risk of exposing the bad debts of the banks. It is a blunt way to curb inflation, largely due to an 11.7pc rise in food prices over the last year. A stronger yuan is the obvious tool to cope with global 'agflation' and head off food protests. Hedge funds are betting that Beijing will be forced to do exactly that, opting for currency revaluation as the lesser evil.
Inflation in China will cause the collapse of the regime
by Wei Jingsheng - Asia News
China's economy often has excessive inflation. But each inflation is not exactly the same. The inflation during the Mao Zedong era was due to the shortage of goods caused by the planned economy. Academics call it a shortage economy. After the economic reform of the 1980's, inflation is still emerging consistently. At present the recently rising currency inflation has such intensity that it has made many people puzzled: "Since China has been reformed to a market economy, why is it still short of commodities, and has this inflation?"
Some friends with knowledge of economics would say: "the capitalist countries engaging in a Keynesian economy will also have a little inflation from time to time." So let us take a look at this Keynesian inflation of the Western countries, to see how it is different from the currency inflation in China now. Then we will analyze how to adjust and control the current inflation, and also explain why only democratic politics could avoid a hyperinflation.
Without exception, all inflation is due to there being more currency in the market than the value of commodities. The market will automatically balance the relationship between the two, that is to make the aggregate value of money to be the same as that of the total commodities. So that means the prices of commodities will rise. The theory average folks can understand easily is that: "when there is more money and less goods, the goods get more expensive."
Some friends will ask: "Is not China a world factory now, how could it be short of goods? This is not logical." Indeed, it is not logical. The economic policy of the Chinese Communist Party is to let a few people make a lot of money, so they can get rich. The Chinese world factory is a factory to make those few people rich, instead of making average people able to enjoy the commodities of this world factory. So regardless of how big this factory is, China's market is still very small, which means it is still short of commodities. According to the scale of its market size, China is still a very poor country, not even an average poor country.
So what does all the GDP in China mean? Doesn't a rising GDP mean prosperity? Yes, indeed there is prosperity there, but only for the minority. A few people have even become super rich. The problem is that the average folks who are the very majority of the population in China are not rich. They have very limited purchasing power, along with a very small Chinese market. So what does that impressive GDP figure mean? It means that the small minority possesses the majority value of the production. If these people used their money for consumption in the domestic market in China, at least the market would be balanced.
Despite of the average people remaining poor, at least there would be no inflation. If it were the lower and middle classes earning this money, they would certainly spent it on the domestic market, increasing consumer spending in their daily lives. After improving their livelihood with this money, there would not be too much left unused.
But it is different with the super rich. It is impossible for them and their families to spend the huge wealth in their hands. So they must find an outlet for the money. This is where the differences between China and the West start to appear.
In a normal society, the extra money would be used to invest, or be deposited into banks for the others to invest. This kind of saving and investment is the force for economic development. When there is excessive saving and investment yet a shortage in the market, an economic crisis may also occur. This situation was one of the reasons for the U.S. Great Depression in the 1930's when there was excessive production ability yet a lack of enough market to sell.
The continuous bankruptcy of the banks resulted in a continuous shrinking of the market thus became a vicious cycle. Keynesianism is indeed an effective way to stop this vicious cycle. But the consequence is inflation. How to both promote economy into a positive cycle, meanwhile restrict inflation within reasonable limits? It must be adjusted by a government which is responsible to its country and its society.
But the situation in China is different. People all say that China is the world factory, but its production capacity is not targeted to China's own market. Instead, it is targeted to the high priced markets in the West. Its exists for the others. Measuring it by China's own market, it simply has too much surplus. This production surplus is in existence for the minority people to gain even more wealth. It uses the cheap labor in China and high priced markets in the West to make excess profit. This is the production purpose of the bureaucratic capital in China.
Half of these excess profits are in the Western market as profit for the big businesses of the West, while the other half is distributed within the Chinese ruling class in the form of Chinese currency, RenMinBi. Neither the businessmen nor corrupt officials in China feel that their money is secure, nor think this society is reliable. They exchange their RenMinBi into foreign currency, which makes China's foreign reserves to be the highest in the world while the RMB flows back to the market.
Or they use the money to buy things like real estate as a way to preserve their money, which also results in the RMB flowing back to the market. So, as the real purchasing power represented by the money goes abroad, the money exchanged is still in China. This is the potential and gradually accumulating reason for the inflation.
The gradual accumulation of inflation was not immediately and directly demonstrated. Because of the presence of financial factors etc. as buffers, its outbreak needed a trigger similar to that needed to ignite of the gunpowder in a bullet. The trigger was pulled when the biggest pillar of China's economy got in trouble. This pillar is the cheap exports, which caused the economic recession and unemployment in the West. The Western democracy has to give priority to its constituents, and thus has to stop this type of economic model which makes minority people in the East and West rich, while for the most ordinary people bear the negative consequences.
In this case, the measure a government of a democratic country should take is to use the foreign currency in its hand to absorb the excessive RMB, as well as to relax the restriction of foreign goods into the Chinese market. The only proper course to solve the inflation problem is to reduce the circulation of RMB and increase commodity circulation. However, the Chinese government did just the opposite. It does not allow a free exchange of foreign currency, nor relax restrictions on foreign goods entering China. Even so, most of the products produced by the foreign trade enterprises in China either have no market, or the market is already over saturated.
This saturation is the root cause of hyperinflation in China now. China's economic policy is not to develop China's own economy, but to make some people rich. Its aim is to maintain cheap labor. So the Chinese Communist regime will not allow the Chinese currency RMB to appreciate, nor let the free flow of markets in between China and the foreign countries. Maintaining the enormous gap between the Chinese and the foreign markets is the fundamental policy for the Chinese Communist regime to get rich in unity with the capitalists in the world. Only an authoritarian regime could have done so.
Therefore, the existence of this authoritarian regime is the root cause of the deformed Chinese economy. As long as China is undemocratic, this situation will continue until the collapse of Chinese Communist regime.
Yuan Advances Beyond 6.6 Per Dollar for First Time Since 1993
by Patricia Lui - Bloomberg
The yuan strengthened beyond 6.6 per dollar for the first time in 17 years, bringing gains for 2010 to 3.6 percent, on speculation China will allow the currency to advance in an effort to tame inflation.
The benchmark money-market rate reached a three-year high after the central bank drained cash from the banking system to cool economic growth. The renminbi climbed 0.57 percent in the past five days, a fifth weekly gain, and reached the strongest level since China unified official and market exchange rates at the end of 1993. The yuan will continue to appreciate, advancing 6 percent next year, said David Cohen, an economist at Action Economics Ltd. in Singapore.
Policy makers "recognize the usefulness of a stronger currency in curbing inflation," said Cohen. "The yuan, like other Asian currencies, has very strong fundamentals and the country has a very large current-account surplus." The yuan climbed 0.17 percent to 6.5897 per dollar as of 4:30 p.m. in Shanghai, earlier touching a high of 6.5896, according to the China Foreign Exchange Trade System. Twelve- month non-deliverable forwards were little changed at 6.4608, reflecting bets the currency will gain 2 percent in a year.
The People’s Bank of China set the reference rate higher for the ninth day, at 6.6227 per dollar today compared with 6.6229 yesterday. The yuan is allowed to trade by up to 0.5 percent either side of the so-called central parity rate. The U.S. Dollar Index, a gauge of the greenback’s strength, retreated for the seventh day.
Hu’s Visit
The main appreciation of the yuan will likely happen in the first quarter, with Hu Jintao’s state visit to Washington next month, said Craig Chan, an Asia foreign-exchange strategist at Nomura Singapore Ltd. on Dec. 16. The House of Representatives passed legislation in September letting U.S. companies petition for duties on Chinese imports to compensate for the effect of a weak yuan.
The renminbi will be the top performer among the so-called BRIC nations’ currencies in the coming year, according to analyst surveys by Bloomberg. China’s currency will strengthen 4.9 percent to 6.28 by the end of 2011, according to the median estimate of 19 analysts in a Bloomberg survey. That’s over double the 2 percent gain projected by 12-month non-deliverable forwards.
Analysts predict Brazil’s real will weaken 2.4 percent, Russia’s ruble will appreciate 0.6 percent and India’s rupee will rise 3.7 percent. Offshore yuan forwards rose 0.34 percent to 6.5800 per dollar in Hong Kong. Twelve-month deliverable forwards in the city were at 6.5760 today, compared with 6.5725 yesterday.
Zhou Pledge
China’s consumer prices climbed 5.1 percent from a year earlier in November, the biggest gain in 28 months, the statistics bureau said on Dec. 11. The yuan is a denomination of China’s currency, the renminbi. Central bank Governor Zhou Xiaochuan pledged in his New Year message to tackle inflation, saying the nation had consolidated its recovery in 2010. Zhou reaffirmed a shift to a "prudent" monetary policy in 2011 from the "moderately loose" stance that countered the financial crisis.
The seven-day repurchase rate, which measures lending costs between banks, advanced seven basis points to 6.34 percent, the highest level since October 2007, according to a daily fixing published at 11 a.m. by the National Interbank Funding Center. The yield on the 3.67 percent government bond due October 2020 was unchanged at 3.88 percent, according to data compiled by Bloomberg. One-year interest-rate swaps, or the fixed cost needed to receive the floating seven-day repurchase rate, slipped four basis points to 3.17 percent.
Lenders are holding onto funds after policy makers raised banks’ reserve requirements for the third time in five weeks to curb inflation. The central bank on Dec. 25 also lifted the benchmark lending and deposit rates by 25 basis points, the second increase this quarter. Policy makers are likely to boost lending and deposit rates by about 2 percentage points more next year, said Tao Dong, chief economist for Asia excluding Japan at Credit Suisse Group AG. in Hong Kong Dec. 22.
In Money-Changers We Trust
by Robert Scheer - Truthdig.com
Two years into the Obama presidency and the economic data is still looking grim. Don't be fooled by the gyrations of the stock market, where optimism is mostly a reflection of the ability of financial corporations -- thanks to massive government largesse -- to survive the mess they created. The basics are dismal: unemployment is unacceptably high, the December consumer confidence index is down, and housing prices have fallen for four months in a row. The number of Americans living in poverty has never been higher, and a majority in a Washington Post poll said they were worried about making their next mortgage or rent payment.
In a parallel universe lives Peter Orszag, President Barack Obama's former budget director and key adviser, who even faster than his mentor, Robert Rubin, has passed through that revolving platinum door linking the White House with Wall Street. The goal is to use your government position to advance the interests of your future employer, and Orszag and Rubin's actions in the government and then at Citigroup provide stunning examples of the synergy between big government and high finance.
As Bill Clinton's treasury secretary, Rubin presided over the dismantling of Glass-Steagall, the New Deal legislation that would have prohibited the creation of the too-big-to-fail Citigroup. He was rewarded with a $15-million-a-year job at Citigroup, where he became a leader in the bank's aggressive move into high-risk ventures. An SEC report in September claimed that Rubin as Citigroup chairman was aware that the bank failed to disclose $40 billion it held in subprime mortgages before the collapse.
During those years at Citigroup, Rubin financed the Brookings Institution's Hamilton Project, an economic policy program, and named Orszag, a Clinton economic adviser, as its director. The Hamilton Project continued to celebrate Rubin's deregulation philosophy up to the point of utter embarrassment. Clearly, Orszag is not easily embarrassed, for upon taking his new job recently he boasted "I am pleased to be joining Citi, with its unmatched global platform and dedication to providing clients with service and advice."
The most damning comment on this corrupt syndrome was offered by former Citigroup co-chief executive John Reed, who had worked with Rubin to get Glass-Steagall reversed and now is a sharp critic of the result. "We continue to listen to the same people whose errors in judgment were central to the problem," Reed told Bloomberg News. "I'm astounded because we basically dropped the world's biggest economy because of an error in bank management." Reed estimated that the financial deregulation proposals contained in the Dodd-Frank bill and other reforms of the Obama administration represent only 25 percent of the change needed.
The failure to provide serious regulation of the financial industry to avoid future downturns is documented in devastating detail in that Dec. 28 Bloomberg report, written by Christine Harper:"The U.S. government, promising to make the system safer, buckled under many of the financial industry's protests. Lawmakers spurned changes that would wall off deposit-taking banks from riskier trading. They declined to limit the size of lenders or ban any form of derivatives."
The reason for that failure is obvious from the president's choice of advisers featuring Rubin acolytes from the Clinton years. Harper writes: "While Obama vowed to change the system, he filled his economic team with people who helped create it," referring to, among others, Timothy F. Geithner, who had gone from the Clinton Treasury Department to head the New York Fed, where he presided over the salvaging of Citigroup and AIG.
As Obama's treasury secretary he was quick to appoint a Goldman Sachs lobbyist as his chief of staff. Geithner's subservience to Wall Street was reinforced by White House top economic adviser Lawrence Summers, Rubin's deputy and then replacement in the Clinton administration who pushed through the repeal of Glass Steagall and fought against the regulation of derivatives.
And with the decisive assistance from both a Republican and Democratic president, all has worked out just as planned for the banks. Harper reports: "The last two years have been the best ever for combined investment-banking and trading revenue at Bank of America Corp., JPMorgan Chase & Co., Citigroup, Goldman Sachs Group Inc., and Morgan Stanley, according to data compiled by Bloomberg."
It's all wonderfully bipartisan. Recently it was announced that Carlos Gutierrez, commerce secretary under George W. Bush, had been named to a high position at Citigroup. For President Obama, there's no cause for worry about the loss of indispensable talent from his administration. Orszag's replacement as head of the Office of Management and Budget, Jacob J. Lew, was both a member of Rubin's Hamilton Project and a former Citigroup executive -- thus insuring that government of the banks, by the banks, for the banks shall not perish from the earth.
Marc Faber Says Long-Term U.S. Treasuries Are `Suicidal' Investment
by Rita Nazareth - Bloomberg
Marc Faber, who advised investors to buy U.S. stocks in March 2009 as the Standard & Poor’s 500 Index began a rally of as much as 86 percent, said U.S. Treasuries are a "suicidal" investment.
Government bonds are likely to decline, said Faber, who publishes the Gloom, Boom and Doom report. After bottoming in December 2008, the 10-year Treasury yield rose as high as 3.9859 percent in April on government measures to stimulate the economy. Concern about a second recession in three years sent yields lower through October.
"This is a suicidal investment," Faber said in a telephone interview from St. Moritz, Switzerland. "Over time, interest rates on U.S. Treasuries will go up. Investors will gradually understand that the Federal Reserve wants to have negative real interest rates. The worst investment is in U.S. long-term bonds."
On Nov. 3, the Fed said it would buy an additional $600 billion of Treasuries through June, expanding record stimulus and risking its credibility in a bid to reduce unemployment and avert deflation. U.S. bond funds had withdrawals of $8.62 billion in the week ended Dec. 15, the most in more than two years, according to Washington-based Investment Company Institute.
Rising Yields
Treasury 10-year note yields will rise to 5 percent from yesterday’s level of 3.349 percent, Faber said, without specifying a time frame. As bonds fall over the next decade, he said investors should buy precious metals, real estate or equities. U.S. debt has returned 5.7 percent in 2010, more than erasing last year’s 3.7 percent loss, according to a Bank of America Merrill Lynch index.
Treasuries fell today as reports showed initial jobless claims dropped more than forecast, U.S. businesses expanded at the fastest pace in two decades and pending home resales beat expectations. The yield on the benchmark 10-year note advanced 0.02 percentage point to 3.37 percent at 4:28 p.m. in New York, according to BGCantor Market Data. Bonds may rally in the next two or three weeks, Faber said.
Faber correctly predicted in May 2005 that stocks would make little headway that year. The S&P 500 gained 3 percent. He was less prescient in March 2007, when he said the S&P 500 was more likely to fall than rise because the threats of faster inflation and slower growth persisted. The S&P 500 then climbed 10 percent to its record of 1,565.15 seven months later, and ended the year up 3.5 percent.
Faber said equities may continue to advance as the dollar weakens as a result of loose monetary policy. "If you print money, the currency goes down and the S&P 500 goes up," he said. "By the end of 2011, people will look at 2012 and think 2012 could be a very bad year because the policies applied are not sustainable and create a lot of instability. Investors may look at 2012 and 2013 with horror."
Baby boomers fear outliving Medicare
by Ricardo Alonso-Zaldivar and Jennifer Agiesta - AP
The first baby boomers will be old enough to qualify for Medicare Jan. 1, and many fear the program's obituary will be written before their own. A new Associated Press-GfK poll finds that baby boomers believe by a ratio of 2-to-1 they won't be able to rely on the giant health insurance plan throughout their retirement.
The boomers took a running dive into adolescence and went on to redefine work and family, but getting old is making them nervous. Now, forty-three percent say they don't expect to be able to depend on Medicare forever, while only 20 percent think their Medicare is secure. The rest have mixed feelings. Yet the survey also shows a surprising willingness among adults of all ages to sacrifice to preserve Medicare benefits that most Americans say they deserve after years of paying taxes into the system at work.
Take the contentious issue of Medicare's eligibility age, fixed at 65, while the qualifying age for Social Security is rising gradually to 67. Initially, 63 percent of boomers in the poll dismissed the idea of raising the eligibility age to keep Medicare afloat financially. But when the survey forced them to choose between raising the age or cutting benefits, 59 percent said raise the age and keep the benefits. "I don't mind the fact that people may have to work a little longer," said Lynn Barlow, 60, a real estate agent who lives outside Atlanta. Especially if there's time to plan, laboring a few extra years allows people to save more for retirement.
Bring up benefit cuts and Barlow isn't nearly as accommodating. "I started working when I was 16 and I expect a benefit after putting into it for so many years," she said. As Medicare reaches a historic threshold, the poll also found differences by age, gender and income among baby boomers. For example, baby boom women, who can expect to live longer than both their mothers and their husbands, are much more pessimistic than men about the program's future.
Medicare is a middle-class bulwark against the ravages of illness in old age. It covers 46 million elderly and disabled people at an annual cost of about $500 billion. But the high price of American-style medicine, stressing intensive treatment and the latest innovations, is already straining program finances. Add the number of baby boomers, more than 70 million born between 1946 and 1964, and Medicare's fiscal foundation starts to shake.
Here's the math: when the last of the boomers reaches age 65 in about two decades, Medicare will be covering more than 80 million people. At the same time, the ratio of workers paying taxes to support the program will have plunged from 3.5 for each person receiving benefits currently, to 2.3. "The 800-pound gorilla is eating like mad and growing to 1,200 pounds," said economist Eugene Steuerle of the Urban Institute, warning about the imbalance. "The switch from worker to retiree status has implications for everything."
The government can't balance its books without dealing with health care costs, and Medicare is in the middle. Some leading Republicans and a few Democrats have called for phasing out the program and instead giving each retiree a fixed payment — or voucher _to help them buy private medical insurance of their choice. The poll found doubts about the idea, and a generational debate.
Overall, a narrow majority (51 percent) of Americans opposed the voucher plan. But those born after 1980 favored it by 47 percent to 41 percent, while seniors opposed it 4-to-1. A majority of boomers were also opposed, with 43 percent strongly objecting.
However, younger boomers like RoxAnne Christley of Roanoke, Va., were more likely to be favorable. "I think that's a possibility if it brings choices and competition," said Christley, 47. "We don't need to stimulate the government; we need to stimulate the economy. A lot of people have different choices when it comes to medical coverage, and I see nothing wrong with that at all." Christley is self-employed, counseling new mothers on breast feeding.
Changes that don't involve a full-scale re-engineering of Medicare tended to draw more support in the poll, especially when the survey forced people to choose between giving up benefits or making some other kind of sacrifice. For example, 61 percent of Americans overall favored raising Medicare taxes to avoid a cut in benefits. The current payroll tax is 2.9 percent on wages, evenly divided between workers and their employers. The new health care law added a surcharge of 0.9 percent on earnings over $200,000 for individuals and $250,000 for couples filing jointly.
When forced to choose, even a majority of Republicans said they would rather pay higher taxes (53 percent) than cut benefits (38 percent). Among adults in their 20s, who'd face a whole career paying higher taxes, 61 percent said they would be willing to pay more to preserve benefits. Only 29 percent of boomers said keep taxes the same but cut benefits. "If people are forced to the wall and something has to be done about the financial shape of the program, they would rather take their medicine by raising taxes and moving the eligibility age than having the benefits cut when they retire," said polling analyst Robert Blendon of the Harvard School of Public Health.
A narrower majority of Americans — 54 percent — also favored requiring people on Medicare to pay higher copayments and deductibles so that payments to doctors don't have to be cut.
Support was surprisingly strong among seniors, 62 percent of whom said they'd be willing to pay more so that doctors' fees don't have to be cut and more doctors keep accepting Medicare payments. "In its present form, Medicare will be insolvent before my grandkids get there," said Fred Wemer, 73, a retired dentist from Seattle. He says Medicare's biggest problem is that it rewards inefficiency by not paying doctors enough to keep people healthy and then paying for just about everything — even botched procedures — when patients get into trouble.
"We've got a discrepancy in how doctors are paid," said Wemer. "Primary care doctors, the ones who listen to you, they're underpaid. But specialists get paid way over what they're worth." The AP-GfK Poll was conducted Nov. 18-22, 2010, by GfK Roper Public Affairs and Corporate Communications. It involved landline and cell phone interviews with 1,000 adults nationwide, and has a margin of sampling error of plus or minus 4.3 percentage points.
Veterans of recent wars confront grim employment landscape
by Michael A. Fletcher - Washington Post
During the seven months that he was stationed in Iraq, Joe Janssen served as an assaultman, a job that involved manning the turret gun in a Humvee and using shoulder-fired rockets and other explosives to support his fellow Marines. Those skills were invaluable in war. But they are of little use now that he is back home in Hauppauge, N.Y., a Long Island hamlet. He has applied for job after job since leaving active duty well over a year ago, but his efforts have proved futile.
The Marine reservist used his veterans benefits to finish his bachelor's degree in criminal justice. Now he is scouring for a job in law enforcement while he waits for his name to rise to the top of the New York state police hiring list - which is unlikely to be anytime soon, given the state's severe budget problems. "I have a passion to be a cop," said Janssen, 23, a fitness buff who dabbles in mixed martial arts. "But no one is hiring."
Janssen's experience is common among the 2 million veterans of the long-running wars in Iraq and Afghanistan. As they return home to the worst labor market in generations, the veterans who are publicly venerated for their patriotism and service are also having a harder time than most finding work, federal data show. While their nonmilitary contemporaries were launching careers during the nearly 10 years the nation has been at war, troops were repeatedly deployed to desolate war zones. And on their return to civilian life, these veterans are forced to find their way in a bleak economy where the skills they learned at war have little value.
Some experts say the grim employment landscape confronting veterans challenges the veracity of one of the central recruiting promises of the nation's all-volunteer force: that serving in the military will make them more marketable in civilian life. "That [promise] works great in peacetime," said Lawrence J. Korb, an assistant secretary of defense for manpower under President Ronald Reagan who is now a senior fellow at the Center for American Progress. "But that does not work too well in war. . . . If you are in there four years and deployed twice, what kind of skills have you learned other than counterinsurgency?"
The unemployment rate for Iraq and Afghanistan war veterans was 10 percent in November, compared with 9.1 percent for non-veterans, according to the federal Bureau of Labor Statistics. Unemployment rates for combat veterans of the wars in Iraq and Afghanistan have been higher than the overall rate since at least 2005, according to the bureau.
Top military officials stand by their promise, even as they express concern about the unemployment rate of veterans. They emphasize that veterans are driven by patriotism and have access to an array of programs to help them find work, including preferences for government jobs, guaranteed interviews with large employers, and tuition reimbursement and stipends for college. "I continue to be very worried about the unemployment rate among our vets. They and their families have sacrificed an awful lot, and all they want in return is a chance to get back to their lives and to their dreams," said Adm. Mike Mullen, chairman of the Joint Chiefs of Staff.
The experiences of four Iraq veterans, all attached to the same Marine reserve unit in New York, are emblematic: One is gainfully employed; he said he thinks he was hired because he is a veteran. Another has managed to get part-time work after a long and difficult search. A third is in school, with the help of government veterans benefits. And Janssen continues to look for work, a process that has nourished a desire to return to active duty. "I'm hoping to get deployed," Janssen said. "Besides wanting to go to Afghanistan, I could use the money."
Calvin Artis, 22, joined the Marine Corps in March 2006, when he was 17. He said he was driven by a desire to serve his country and expand his career options. "It was either that or get a job at McDonald's or Home Depot, or go back to live with my mom," said Artis, who before enlisting earned his general equivalency diploma in the National Guards' Youth Challenge Program, which works with high- risk youths in a quasi-military structure. But Artis says his civilian job options are little improved.
Three years ago, he was patrolling the streets of Fallujah, Iraq, from behind a machine gun mounted atop a Humvee. Later, he was stationed aboard a ship that cruised the Arabian and Mediterranean seas as part of a "911" force that could be quickly deployed to back up troops on the ground. Now, Artis is bunking with his brother's family in southern New Jersey as he tries to sort out his future. He has twice taken the New York City police exam, but he remains far down the hiring list.
Meanwhile, he has applied for dozens of other jobs, at Toys 'R' Us, Radio Shack, Wal-Mart, McDonald's and several security firms - all carefully cataloged on a spreadsheet he keeps on his laptop - but few employers responded with as much as a phone call. "Everybody says, 'We support the troops,' " Artis said. "But a lot of people turn away when it is time to return the favor."
In late September, he landed a part-time job at the deli counter of Quick Chek, a sunny convenience store attached to a gas station in Manchester, N.J. The job pays $7.50 an hour, and Artis got it only after pestering the manager with phone calls "for the better part of a week." Artis said he is considering going to school and plans to return to active duty if the economy does not improve. "Knowing what I know now, I would have stayed in," he said. "At least there are job security and benefits when you are in."
Analysts offer several reasons why newly returned combat troops often struggle to find work. For one, the types of skills that troops hone during war - teamwork, mission focus, the ability to operate under extreme pressure - are often misunderstood or undervalued by employers. In addition, more than one in five recent combat veterans claim service-related disabilities, including post-traumatic stress disorder. That has left veterans burdened with a complicated legacy: Although the public admires their service, it also sees combat veterans as especially prone to mental illness, substance abuse and violence.
Some analysts say that stigma is one reason that veterans often earn less than comparable workers - a gap that lingers long after they leave active duty. If people perceive many combat veterans to be troubled, they also express a willingness to work with or befriend them, said Meredith A. Kelykamp, a University of Maryland sociologist, who has done extensive research on public attitudes toward veterans.
"A lot of people when they look at Afghanistan and Iraq vets, the first thing they think is post-traumatic stress," said Janssen, adding that he suffers no fallout from his time in Iraq. "Is he normal? Can he sleep at night? Is he reliable? I think that's what employers think." Artis ruefully recalled that during one job interview, the hiring manager turned to a colleague and, pointing at Artis, said: "Guess what he used to do? He used to shoot people." "I just thought to myself, 'Really?' " Artis said, shaking his head.
In recent years, the federal government has bolstered aid for veterans seeking to further their education. The post-Sept. 11, 2001, GI Bill provides combat veterans more assistance with college tuition, as well as stipends for books and living expenses. Meanwhile, the Defense, Veterans Affairs and Labor departments offer skills training, assessment and other services to help veterans get jobs. Last year, President Obama signed an executive order establishing offices in federal agencies responsible for identifying job opportunities for veterans.
Some analysts say the educational and other benefits available to veterans - including immediate unemployment insurance - are also likely contributors to their high joblessness rates. "It could be they are going to college. And it could be that they are accessing certain benefits that are available to them," said Beth Asch, a senior economist at the Rand Corp. "They could be more likely to go to college now because they have educational benefits that other people don't."
To be sure, some veterans are able to land good jobs on returning home. John Louis, 24, who served at Iraq's Camp Korean Village with Janssen, works as an electrician's apprentice, helping to wire new offices in a high-rise on Manhattan's East Side. He makes about $20 an hour, and there is plenty of overtime. "I have a feeling that the only reason I got this job is because I had the Marine Corps on my rsum," he said.
David Fuertes, 23, also feels like he is on track. A TOW missile gunner in Iraq, he drives a tricked-out red sports car and attends St. John's University. He also is a member of the New York City Police Department Cadets Corps, which is an apprenticeship program. Once Fuertes completes his degree, he plans to join the police force and, eventually, the Drug Enforcement Administration.
"My Marine experience, I wouldn't trade it for anything," Fuertes said. "The economy sucks. My friends who have no high school diploma or GED, they're stuck doing odd jobs or nothing. I look at my friends, not to brag, but I am the most successful. Now, some of them are asking me about joining."
Creating an onshore nation is the only way to restore financial sovereignty
by William Brittain-Catlin - Guardian
Protests by UK Uncut against Top Shop and Vodafone demonstrate justified anger against these and other clients of tax havens whose lawful tax avoidance makes a mockery of those stranded onshore in a rapidly disintegrating and impoverished social and public sphere.
The protests bring the issue of tax justice to the frontline of domestic politics and that is to be welcomed. But exposing the practices of corporations and finance and their dealings offshore will not in itself bring about change, for we are dealing with a much larger economic system – offshore capitalism – in which national governments can do little to challenge corporate and financial power secured offshore.
On a conservative estimate, a third of the world's wealth is held offshore, with 80% of international banking transactions taking place there. More than half the capital in the world's stock exchanges is "parked" offshore at some point. The offshore aspect of the global economy is far from marginal; to a large extent it has captured any significant onshore economic activity that remains.
This is the reality that national governments face; it is not hard to see how impossible a task it is for government to function in these circumstances, and it explains why governments have little option but to bend to the demands of corporate and financial power. Unless they do, corporations and banks just move to the next square on the chequer board of their offshore game, and the national fisc suffers.
To deliver ourselves from the hold of offshore capitalism, the practices of tax evasion and avoidance, the dreadful risks to economies from the vagaries of offshore finance and shadow banking, it is not a case of simply "outlawing" or "banning" offshore finance centres and tax havens, as if these places could conveniently vanish into thin air at the click of national governments' fingers. The political option to do this was probably lost some 40 or 50 years ago. To see it as viable today is simply out of step with the economic times we live in.
What we have to do is renounce and turn away from the offshore world and make the decisive and final break with all those whose tentacles reach and touch the subterranean network of tax havens and offshore finance. As individuals, corporations and finance have detached themselves from their home countries and gone offshore and global, progressive nations must now play the trump card of their own sovereignty and disengage themselves from the offshore world that drives on global capitalism so perilously.
Governments of progressive nations should leave offshore tax havens and their clients to their own devices, and instead boldly declare that they will refuse to have on their soil any corporation, individual, financial entity or transaction that has an offshore connection through which profits (as well as toxic, hidden losses) are funnelled away to third party jurisdictions.
Onshore you're in, offshore you're out, simple as that. And let us subject every company and individual to the onshore test: a rigorous due diligence investigation to make sure that there is absolutely no offshore tax haven link to any company or person that wishes to use the onshore nation as place to do business in. Those that pass the onshore test will then be welcomed to join in and establish the new order.
So, Boots, renounce your new offshore base in Zug and return home to Nottingham. Likewise Cadbury's, another newly arrived Swiss resident – we want you back here again, so please have your new owner Kraft relinquish their offshore links. Ladbrokes and William Hill – come off your offshore perch in Gibraltar and properly return to our high streets. Vodafone, Barclays – and all the other "British" multinational corporations and banks out there – relinquish your offshore networks and make your home in the UK and in any other nation across the world that embraces the new onshore model of economics.
But the quid pro quo for establishing the onshore nation brings with it realistic, hard choices that some may find unpalatable. If we want those companies and individuals that have only ever known the offshore world to commit and engage to the onshore nation, we will have to revolutionise onshore tax systems and make them competitive with what firms have managed for themselves by stealth, secrecy and guile in the offshore world.
There will be no hiding place for profits and asset ownership in the onshore economy but neither will there be a return to the high-tax model of the state, a model continuously degraded and made impossible by constant trade-offs with businesses to keep them from fleeing offshore and which, in its ultimate tolerance of offshore practices, led to the rise of shadow banking, the financial crisis and the near bankruptcy we are now mired in.
The journey that nations must make onshore is only just beginning. The imperative to do so is only just impinging on public consciousness. The ethical case for coming onshore – as with other global issues like climate change and human rights – needs to be built on facts and made time and time again through campaigns, action and education. That is why the protests by UK Uncut are a significant step in the right direction; only a year ago the issue of tax avoidance and the dry, technical facts around it, hardly seemed the stuff of something to rally around. Now that is changing and the journey has begun.
In the onshore nation, democratic governments and their citizens will finally be able to assert fair and proper authority over corporations and finance that have for half a century or more detached themselves from the solid ground from where their business derives, causing all manner of systemic problems in the global economy. The onshore nation is not anti-corporate, anti-globalisation or indeed necessarily even anti-tax haven; it just realises that if politics is to have the power of change, a nation must be able to determine its own path in the world.
94 comments:
What is the action to take if one already has a large home loan and cannot sell the house?
We should be alright in our home. The mortgage isn't terribly high, and there will be the option of our soon to be adult children living with us while they work. Even if they get married, there is still an option for them to live with us. Multiple households under one roof may be our answer.
Others may do the same as well.
Ilargi,
I live in the Portland, OR Metro area and have a house that was last valued by an RE Agent at around $210,000 in August. I owe $57,000 on the house with seven years remaining on a loan. I am thinking of retiring/moving and selling the house in three or four years and am in a real pickle in trying to decide to sell now or wait. Given your current predictions, any suggestions, I'm at a bit of a loss or perhaps I will be soon, heh!
"Many people claim Stoneleigh and I must be crazy, and doomers and all that, for predicting an 80%+ drop in real estate values."
Not at all. We live in Montgomery County, Maryland -- suburban Washington, DC -- we just received our tax assessment from the state of Maryland -- it went from $574,000 to $404,000 -- a 29% drop. If this can happen in the one area of the country that still has jobs because of federal government spending, imagine what's happening elsewhere.
P.S. I attended Stoneleigh's talk at a private house in Rockville, MD in early 2010 -- enjoyed it very much.
@Ilargi,speaking of Detroit see these Guardian photos of civilization in decline.
http://www.guardian.co.uk/
artanddesign/gallery/2011/jan/02/photography-detroit#/
There's this little problem with changing the laws to make MERS a legitimate party to the foreclosures: it involves revoking four or five centuries of ownership law, going to the very heart of ownership.
Will it be a return to the days of royalty, where the King owns everything and manages it with arbitrary decrees?
Celente is hilarious!
" Alternative Energy In laboratories and workshops unnoticed by mainstream analysts, scientific visionaries and entrepreneurs are forging a new physics incorporating principles once thought impossible, working to create devices that liberate more energy than they consume."
Yeah, people have been 'working' on perpetual motion machines for centuries all right, just as long as gullible 'investors' appear to pay for them.
Speaking of perpetual motion machines, were houses 'Geffin goods'? These are items that are more in demand as the price rises, defying the laws of supply and demand. How about precious metals, now?
Is crude oil a Geffin good? At what price level do these become ordinary good? Seems that a lot of what is taking place in the greater world orbits around opportunity costs and time factors. The outcome is a crisis of valuation: what is anything worth?
This is a great interview of Gary Gorton over @ the Minneapolis Fed website:
http://www.minneapolisfed.org/pubs/region/10-12/gorton.pdf
Gorton, who dat? Another analyst to pay attention to like Steve Keen or Chris Whalen or Nicole Foss. He discusses (collateral) values. Gorton has the best analysis of shadow banking I've seen anywhere.
It's broken, by the way ...
Meanwhile, more analysis emerges daily. Outside of Celente's mindless babble no words about the energy/infrastructure imbalances that 'back' our currencies/debt loads and stands as collateral for everything. Our consumption infrastructure: our housing, shopping, transport and support including agriculture is too expensive to use with higher priced fuels. No profits = no economy. Inputs are too pricey to allow profits.
This is our crisis in seven words.
We cling to the fuels and jettison everything else: jobs, benefits, senior care, police and other civic services, rational government, and much of our national character. This process is taking place in other countries as well ...
What is 'preserved' is the cartoon version of modernity with 'just in time' convenience at a cost that strip mines everything else.
It would be nice to see this aspect of our 'policy' appear in the public discussion along side banker care and debt remediation. In fact, economic circumstances will deteriorate until stringent energy conservation becomes the center of the public policy.
It's that or conservation will be imposed by events which is what is taking place right now.
My first comment here at TAE - saw Stoneleigh's presentation last spring in the Hudson Valley of New York (after having followed her posts on TOD). Happy New Year and thanks for all the information you provide I&S.
Steve from VA - I think what you wrote is a great summary of our "predicament" - the energy situation in the coming years is going to absolutely hammer this country - and so far it's not even close to being on 1 in 1000 people's radar...
@ DIYer
I won't go so far as to predict the rise of a Monarch, though of course we could borrow one from the UK. I have been saying lately that neofeudalism is very likely to be the long-term arrangement. I foresee warlords carving out the largest territories they can control and declare everything in it to be theirs. Then they can start thinking of themselves as aristocrats.
Here's food for thought. In a post industrial society, i.e. service society. Incomes will be in the 10-14 dollar range. So, who can buy a house on that income? NO ONE. Prices will have to come down, real estate prices and incomes have to be on parity or no sales. Yes, some of the larger cities will have more expensive homes, but their income will support that, but once those individuals retire and new hires come on at lower salaries, house prices can only go lower.
The Collapse is a dead certainty.
However, I foresee instead of a cathartic, catabolic, massive Bang . . . a long, agonizing, drawn-out Whimper.
This is going to be an extended, degrading, ghastly slide over the next 10 - 20 years.
The elites will continue to devise ever-more-clever-and-insidious ways to drag this denouement out for as long as humanly possible. The elites control the largest military institution in the history of the world, and will use it ruthlessly to extract all resources from wherever it can planet-wide.
The military will be assured of continual priority access to energy, food, water, medical, shelter, weaponry, and ammunition.
The nation's healthcare system, educational system, public services, Social Security, and all forms of social safety net, will be coldly sacrificed to continued funding for the military.
And certainly expect other world power centers to do exactly the same, carving up regions of fiefdom and extracting tribute. Only when the resource base has been essentially bled dry, and the military can no longer be sustained, will the collapse accelerate.
When the military establishment finally begins to disintegrate, and shrinks to a Praetorian Guard surrounding major power centers, then the dissolution will be finally complete.
It is up to all of us, right now, to do the maximum we can to get our financial houses in order, so as to prepare for the massive slow-rolling mudslide ahead.
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Ilargi - I read and ingested a portion of all these fine posts on housing, etc. Good stuff! Of course the foreclosed and unoccupied homes around me, and the un- and under- employed people I see are all the experiential reality I need to be convinced we are heading off a cliff of sorts.
My only conclusion is that Celente (whose rants, like Max K's, I enjoy, as they are often rather humorously correct) has some relevant knowledge of Wall Street but little knowledge of physics or geology. Nor do I, but I am convinced that even with the "new physics" one cannot get more EO than EI, certainly without going sub-atomic and last I heard cold fusion was pretty much a bust.
As for towns around here going bankrupt (Indiana) I have little doubt the new law will be put to use many times before, say, the next Olympics!
Great post as usual.
In regards to Peter Schiff's 20% estimate, It may well be he thinks its more but like many, he may have made a more politically palatable number. As a turnaround consultant I have found some staff or directors just won't believe 40-60% - at 30% people just go in to denial.
@Ventriloquist
Couldn't have said it better, myself. A very good summary of things to come. Thank you.
"...I have found some staff or directors just won't believe 40-60% - at 30% people just go in to denial."
No kidding. They'll even deny the 30% prices have already fallen. Just look at NAR numbers.
As for Schiff, he talks about a 10% dip below the -100-year - trendline, for a 28.3% loos from today, so he does get somewhere. That's 29.6% -the current loss from the peak- plus 28.3%, for 58%. Or around 50% if you want to stay mathematically correct, you need 28.3% of 70.4% after all.
What Schiff doesn't address adequately, in my view, are the ramifications for the financial industry and system, the economy at large, and the political system. And that's a bit of a shame.
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From last thread:
" memphis said...
Ilargi,
The new post isn't loading when I enter the domain name; it only is loading when I click the link at the bottom of the comments page.
If people aren't seeing the link there, they (I assume) aren't able to see the new post up."
If anyone else has this issue, please let me know.
.
Fans of Edward Abbey will remember that in his post-apocalyptic novel "Good News", one of the first targets was the offices holding the records of who-owns-what... looks like MERS has consolidated 60% of the mortgages in one convenient location! They seem to have already muddied the whole issue.
It seems that as the laws around MERS go (can you imagine the lobbying pressure in the backrooms of Washington?), so goes this nation. "Rule of Law"? Similarly, will laws be written after the fact to prosecute Assange? Wow, what a slippery slope! (slippery slope if we continue to pretend to be a democracy, not for a monarchy or other such structure...).
Tremendous work I & S, check is in the mail.
"Nature has a way of controlling high populations..."
Dr. Reese Halter on national TV
(no, he was not talking about birds...)
http://www.msnbc.msn.com/id/40874105/ns/us_news-environment/
Regards,
Paul
Steve From Virginia:
While I haven't read Celente's posts, in terms of devices "that liberate more energy than they consume", note that they already exist: it's called a heat pump. To produce the same amount of heat as an electric baseboard heater, a heat pump will only use a small fraction of the electricity.
http://en.wikipedia.org/wiki/Heat_pump
Ilargi:
Instead of owning a home the traditional alternative is renting. So if owning would cost less than renting it would be appropriate to buy a house. I don't believe there is any data to suggest owning is currently several times as expensive as renting--which would justify this 80% price decline.
Note most people would pay a premium for owning over renting because of reasons such as 1. psychological reasons (the home is your castle) 2. They can modify the home any way they want. 3. They can make energy efficiency investments to cut energy usage over a rental... Even if the financial system collapses so what--the federal government is providing the financing anyway.
Usman:
What are your current monthly payments (including taxes, etc) compared to renting? If you wouldn't save a substantial money by renting, just stay in your house.
Robert:
"I am thinking of retiring/moving and selling the house in three or four years"
The big question is how strong are your plans. Have you definitely decided to move? Do you know where you want to move to? Can you get a lot cheaper housing there? Let's say you're sure can clear $125,000 after paying off the mortgage and can get a house now for $75,000 now in the area you want. So if you sell your house now and buy the new house now you would own your new home free and clear and would have an extra $50,000 to cover extra expenses. If so it doesn't really matter what happens to house prices--you're in good shape.
But if you have plans to buy an expensive house later after you retire selling your house now could really mess you up if housing prices explode instead of decline.
@pasttense
RE: heat pumps
No, they don't liberate more energy. You just put some energy into them in order to move some heat backwards. The entropy of the system still grows. You cannot escape The Laws, sorry.
Regards,
Paul
I may have missed something but I did not see the mechanism used for calculating the %80 drop in home values.
In the Detroit area, home values have already been newly assessed by the local municipalities. Follow this link and click on property history to see that the city of Warren, Michigan (USA) has dropped the assessment from $72,930 to $60,710 for this somewhat average property:
http://www.realtor.com/realestateandhomes-detail/30053-Warner-Avenue_Warren_MI_48092_M42246-68932
I see this dropping another $6,000 or so, perhaps $10,000 in the next 2-3 years. I base that on the following factors. The house was built in 1965 for (I’m guessing $22,000) What cost $22000 in 1965 would cost $148034.13 in 2009. If the original cost new was $18,000 (it really could not be much lower) then what cost $22000 in 1965 would cost $148034.13 in 2009-this is according to my handy-dandy inflation calculator-http://www.westegg.com/inflation/-which could be off but that’s all I have to go on.
So to bottom line it-and by the way the tax assessor uses %50 of market value for taxing-another 20-30% drop would put this house well under the original value-assuming of course that it really is in top ship shape and all systems are up to snuff. But 80%? ! of the current value ? I’m not sure-that would make the house worth $24,000 in the not too distant future-a mere $2000 over my original guesstimate of the original value. I just find that hard to see unless a HUGE panic and slippage formulation is factored in. Which is not out of the question but that implies the panic button will be trounced regularly and very soon. Not saying it would not happen, just not too sure . . . . .
Ilargi-
Excellent intro! I posted it over at the Yahoo group EnergyRoundTable and received the following comment:
"Ilargi left out agriculture. Is that because ag doesn't conveniently fit into his picture?
Ag may become the last big game in town. The USA can be useful to other countries and could be used by some individuals to make more profits. I'm refering to the ag portion of the USA which seems to be separate from the rest of the economy."
I was hoping you could address this in some way. I have searched back through most of the site and found several mentions of agriculture, but was wondering if I may have missed a more focused discussion about the future of ag by either you or Nicole.
My feeling is that environmental and energy realities will bring big ag to its knees in the years ahead. Apparently, the ag sector has been largely unaffected by the financial collapse we are witnessing. According to articles posted by the person I quote above, credit is flowing freely and farm land is holding and gaining in value.
What are your views on the immediate and long term future of agriculture?
Thanks-
Brian
Brian,
Stoneleigh sent me that comment from the EnergyRoundTable.
My reaction was:
"Eh, well, what can I say?
I left out prostitution as well.
Talk about the last big game in town."
Sorry, but nothing in the intro has anything to do with agriculture. Or with energy, or peak oil, for that matter. It's simply a description of a collapsing Ponzi scheme. Pure finance, nothing else involved.
Agriculture as it "functions" today has no more future than the rest of our societies. When credit goes, everyone who needs credit to produce whatever it is they produce goes head first underwater. We'll have to grow our own and/or trade what we can do that anyone would want for food.
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I'm spending half my income on rent right now, paying quite a premium, as everything in housing is otherwise relative to gravity, immediate alternatives were undesireable, unaccessible or unfinancible.
Also, unreasonable and desperate measures of taxation could become additionally prohibitive for homeownership, especially when increasingly administered without warning.
The MERS situation is the worst assault on property rights since the russian revolution, considering the amount of property involved, it could be the worst misallocation of capital ownership ever.
Three years ago Max Keiser shot this video about the death of the dollar. Featuring prominently, the views of Paul Craig Roberts. People & Power - Death of the dollar 2 - 19 Dec 07 - Part 1. Be sure to watch Part 2 for the conclusion.
Roberts explains quite clearly why pasttense, who is certainly to be disregarded on questions of physics, is wrong to suggest that house prices could possibly explode to the upside. Americans paid Chinese wages and paying european or higher prices for fuel will not be bidding up the price of houses.
We are now three years down the road and the process has only accelerated. I don't know if the dollar will die as the currency of Usanistan, but its world reserve status is already shaky. If we lose that, poverty in Usanistan absolutely explodes.
Brian,
The future of Ag bears absolutely no resemblance to what it looks like today. It is true that farmland prices have recently taken off. It sure looks like a bubble to me. People with plenty of cash or good access to lots of credit are paying inflating prices because they don't think there is anything better to invest in. Farmland is turning into one of SFV's Giffen Goods.
Of course, someone benefits, but it is not the buyer. The land will still produce the same yield of whatever it produces. For some the yields will decline as the new owner discovers his budget won't allow for adequate soil amendment, pest and herbicide treatments. The future for those items is progressively bleak as the dollar weakens and oil production declines.
My cloudy crystal ball prediction for future farming, exactly how soon is impossible to say, is horses, mules, hoes, extremely hard work and poverty. Oh, and probably a pledge of fealty to a warlord cum aristocrat. Yields will be dramatically reduced for most crops and beef will go back to being grass fed.
Since Ilargi brought up prostitution, I will opine that it will almost certainly experience growth as an industry, though prices will decline. Like it or not, sex is a trade good.
A Paul Craig Roberts essay from three years ago that expresses his concerns even more explicitly and addresses the housing issue even as it's collapse was just starting to show.
Impending Destruction of the US Economy
by Paul Craig Roberts
I definitely agree with I.M. on ag which is in the beginning of what will be a very painful transition.
How painful? Could be starvation in the US. Get used to it.
Why? Ag is too concentrated, too fuel dependent both for production as well as distribution, most farmers don't grow food, much of what farmers produce is in fact inedible (cotton? rapeseed? corn for ethanol?), farms are too far from markets, farmers (in the US) tend to be in retirement age, are too finance dependent, cannot change crops readily, cannot change techniques at all, too irrigation/aquifer dependent, too dependent upon producing cash crops by industrial means, are too chemical dependent, are too dependent upon GMO products that are 'single- sourced': farm soil is deteriorated, poorly managed, alternative techniques are poorly understood ... farms and farm production are 'wing and prayer' category of operation in this post- peak world.
Getting more farmers is discouraged by high land and equipment costs, by difficulty in obtaining credit, by the 'landbanking' of farmland for real estate speculation, by the shortage of mentors who know anything about farming other than industrial methods.
The foreclosure cycle is just getting started. Once underway buying a house for a dollar will be commonplace. Who will have a spare dollar?
@ I.M. Nobody
Excellent response.
In the past history of humankind, farming has been the provenance of mostly serfs and peasants.
Given the Independent-Self-Made-Man meme of the American Experiment, farming was raised beyond its feudal heritage and given a role as a way to make a living without fealty to a Lord.
However, the current Corporate Farm is an abhorrent aberration of the first water, a manifest, unsustainable abomination of what the human relationship to the land was for the past 12,000 years.
Corporate farming is an oxymoron.
We WILL return to farming, in a manner similar to what generations of humans endeavored and survived.
NOT, via the caricature of farming that exists today.
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Orlov seeks a profitable niche in astromarketology in his latest post. He notes that since gravitational actionality has no distance boundary, distant galaxies could exert equally potent massful influence as/on the lord jupiter and friends.
Savinar seems to have a handle on those matters, maybe he has use for an appropriate transcendental oneliner to pose as meta-rational transfer mechanism.
Re housing prices: If credit is not available, most people won't be able to buy houses at all. They will have to plunk down hard cash instead of figuring out how much they can afford to pay off each month. Only the very rich can do that. Most houses won't be bought by the very rich.
It's very hard to advise anyone about what to do without knowing a lot about their personal situation. Personally, if I were underwater on my mortgage and could not sell I would stop paying. At least I think that is what I would do. I know that I would be very upset and I am so sorry when I hear of people in that predicament. Many of my friends who were totally solid a couple of years ago are now in trouble with their jobs and houses. It is just awful.
As for offshore corporations: Why don't we begin to discuss revoking the charters of these corporations? Why are these "persons" allowed to be immortal? If you care, then it is time to stop buying their products. No more Kraft and Monsanto and Bayer Crop Science and the like. Don't put your money in banks and insurance companies that are obviously engaging in criminal behavior and causing you, your friends and neighbors to loose jobs and homes.
I have one more link that is perhaps the most frightening of all. The fact that it makes my crystal ball look positively oracular does not please me at all. I would also say that it is directly responsive to things like LynnHarding's call to discorporate corporations. Those very entities have nearly completed the conquest that Naomi Wolf describes in this video.
Naomi Wolf - The End of America
I would add to what Ms. Wolf presents that our Fascist state will start out where Hitler, Mussolini, et al, only hoped to get someday. This afternoon, it was boldly broadcast during an NFL football game that it was being shown to american soldiers in 175 countries and ships at sea. Those 175 countries will wake up one day and discover that those soldiers have a new mission. I assume any attempt to dislodge them will bring horrifying consequences.
There is audio tape of Henry Kissinger, HENRY KISSINGER for doG's sake, talking Nixon out of using nukes on North Vietnam or blowing dikes that would drown an estimated 200,000 people. Nixon was an evil bastard, but he couldn't hold a candle to the cabal that wants to run the country now.
re: agriculture
As Ilargi and Stoneleigh so frequently say, the economy isn't the only problem, just the first problem.
So, before farmers run out of oil to run their tractors, they will run out of credit to buy next season's seed.
I have read a few article to that effect, though only Mama Google know where.
+80% drop in housing?
LOL
What would prevent housing from falling further?
How about: Cheap houses.
When prices drop, people buy.
You're arguing the same way people argued when oil was $150/barrel. How could oil ever go down again? They asked. Oil at $2000/barrel. they predicted.
Nonsense. When oil gets that high, people buy less of it. When it falls to $30/barrel, people buy more of it -- same with houses. Duh? Econ 101?
While the Peter Schiff article is generally good, unless I am misunderstanding something, he makes an invalid interpretation of the Case-Shiller index, leading his prognosis to be overly optimistic. He states:
In January 1998 the 10-City Index was at 82.7. If home prices had followed the 3.35% annual 100 year trend line, then the index would have arrived at 126.7 in October 2010. This week, Case-Shiller announced that figure to be 159.0. This would suggest that the index would need to decline an additional 20.3% from current levels just to get back to the trend line.
However, the Case-Shiller index accounts for inflation. Since 1890, the average index has been about 110 (it starts at 100 in about 1890). In Jan 1998, it was below average following the previous, much-smaller housing bust.
The 3.35% average annual house price increase from 1900 to 2000 includes price inflation. The real house price increase has been on average 0% (that's a key point of the index). Otherwise, if Case-Shiller was 100 in 1900, an annual increase of 3.35% would mean the index should have been almost 2700 by year 2000.
The message of Case-Shiller is that we can expect a reversion to the mean (probably with an undershoot as happened in 1998).
At a minimum, a reversion to the mean (ignoring price inflation) would be a return to 110. So far, the index has dropped from about 225 to 159 (about 30%). From here, we can expect it to drop at least back to 110 (over 30% from current prices, and over 50% from the peak).
And since 110 is just the long-term average, one can expect busts below to balance booms above.
Since the peak reached more than double the long-term average (225/110 = 2.05), why wouldn't we get a trough that is less than half the long-term average (110/2.05 = 53)? A Case-Shiller index of 53 would be a total drop over over 76%.
Ruben has indirectly highlighted what will be the really big Ag problem. Credit to buy seeds can, at least for some period of time, be finessed. The seed companies can defer payment until after the crop comes in.
The big seed problem isn't credit to buy it. It is that new seed must be purchased every planting season. Those peasant and serf farmers of yore saved seed from their previous harvest. With nearly all grain now containing patented traits, that is a crime. The first spring that seed is, for whatever reason, unobtainable will signal the end of the game.
The credit issue is still a problem of course. If you're not a farmer, I suspect you wouldn't believe what a bag of seed costs these days. The transition to post-industrial agriculture is going to be very very rough. And I'm just assuming that it will succeed at all. Maybe it won't.
Continued from above... (I should have finished the article before posting).
Schiff says ...I feel that a 10% dip below the 100-year trend line is a reasonable expectation within the next five years... That would put the index at 114.02, or prices 28.3% below where we are now.
Based on my analysis above, the Case-Shiller trend line is 110 on average. A 10% dip below the this trend line would put the index back to about 99, which is a 37.7% drop from where we are now (not 28.3%), and a net drop of about 56% from the peak.
After the sale of the home, where does one park the money until rural "values" are affordable? We're in Texas where the bust is happening on a delayed basis and in slow motion. There are some great small towns with good soil but the home prices don't appear to have dipped to reasonable levels yet.
Life After the Oil Crash said...
+80% drop in housing?
LOL
What would prevent housing from falling further?
How about: Cheap houses.
When prices drop, people buy.
Unless they start thinking it's going to be even cheaper next week. Maybe a psychology 101 class to go with that econ 101.
@ LynnHarding
"Most houses won't be bought by the very rich."
In my neck of the woods, only the rich are buying houses. The 80-90% drop described by I&S has already materialized here -- at foreclosure auction, or in bundles of properties the bank offloads to cash buyers after those homes fail auction and REO. They turn them all over to a local property manager, and those properties become rentals.
Meanwhile, on the local MLS, asking prices are still levitating ridiculously close to peak.
Just because the property values take a nosedive doesn't necessarily mean that the meek shall inherit the houses or that the action will be visible in the usual metrics. But this process is already well-underway, at least where I'm at. The rich are happy to be absentee slumlords.
Anyhow, it's not my intent to be contentious. But it surprised me when I looked closer into my local real estate market last year that the severe market crash is already happening behind the curtain, and the vultures are already picking the bones.
@Robert (other)
They don't dole out personal advice here, but if you read this site for a few months, you'd probably come to the conclusion: Sell right now, rent a few years, see what happens. The general advice is not to hold debt of any kind.
How exciting! When one can buy a house for a dollar I can buy one! And pick up a few for family and friends. Thanks to I & S I have a cash dollar or two:)
What I don't have is the means to carry the house as in municipal taxes that I expect to increase to service the debt incurred to " grow " the town.
I am wondering how much RE taxes will increase even should the tax dept lower the assessed value?
Another issue is who wants to own a house in a town without services, a bankrupt town?
It would seem prudent to inform oneself of the municipal debt obligations one is taking on with a home purchase.
I am wondering how many people lose their home through unpaid taxes versus a mortgage payment that can't be met?
Business Insider picked up this post:
The Story Of 2011 Will Be The Second US Housing Crash.
And someone in the comments section there hates my guts, even though he thinks I'm someone I'm not. For some people, life is a constant struggle. With themselves.
.
scandia said "I am wondering how many people lose their home through unpaid taxes versus a mortgage payment that can't be met?"
Another thought...How many people such as myself who have no mortgage, but might lose the house because we can't find the cash to pay the taxes?
Robert in Portland,
I'll give you a 95% chance that your home will lose considerable value in the next 3-4 years. It could even well fall to the amount you still owe on it. Selling and renting something else is what I would do, but then, I'm not you, and I don't know what sentimental values are in place either for you or loved ones. From a pure financial point of view, I would advice 99% of people to sell and rent.
.
I find it interesting how people can be in such denial about housing and where price might be headed. If you told folks in Saskatoon ten years ago that their houses would treble (or more) in price they would think you were a lunatic. Now that they have, everyone seems to sleep well after 'rationalizing' this complete (and ultimately dangerous) overshoot in price.
From my study of Canadian history a 90% drop is not unprecedented. I know someone whose father bought houses in Windsor for $500 each in the Depression. These same houses were selling for $5000 in the twenties when the auto plants (and bootlegging) were booming. It can happen - heck even the late John Templeton could see it coming years before it was on anyone's radar - but then again he had lived through it as a young man.
scandia,
I think you have hit on very good points about the potential pitfalls of house buying beyond ability to pay the purchase price. Houses are lost to the taxing authority all the time. The numbers are bound to increase as we slide deeper into chaos.
@ board
Kunstler must have worked his fingers off this weekend. This week's Clusterfuck Nation is far and away the longest I've ever seen him post. He also thinks a coup d'etat is a strong possibility.
@Ilargi - "...And someone in the comments section there hates my guts"
No, the jerk (Jojo) doesn't even know you, and as I best determined he is only looking for a way to "thrive" at the expense of others who are in dire straits.
You offered sound advice and a rational argument which he didn't like so he went into his "kill the messenger" mode.
All you can do is lead a horse to water. If it's a demented horse, he won't drink!
@Bluebird "How many people such as myself who have no mortgage, but might lose the house because we can't find the cash to pay the taxes?"
Or, the maintenance bills, etc.. These are the considerations I find myself contemplating down the road. How this will all play out is going to be as interesting as it is troublesome. Right now I am hoping to switch more of my modest savings from the credit union (dollars) to silver when and if it dips, as I think it will. In the meantime Stoneleigh's lifeboat advice and some from recent JMG blog posts makes sense to me.
@ IM Nobody,
If nothing else, Kunstler is entertaining. As a wordsmith, he is topnotch. I fear this year he will be more right than wrong.
In terms of yearly evaluations and predictions, the United States on multiple fronts came out of 2010 looking Mr. Magoo wandering through a construction site.
Consider, 2010 was one of the most active and strong hurricane seasons ever. The US coastline along with the BP oil spill presented an enormous target for such storms. And yet the good ol' USA recieved only a glancing blow from one storm.
2011 is shaping up to be another active year for tropical weather. Think we can miss having that and other wrecking balls smack us upside our collective noggin?
MERS violates centuries of property law, and all these foreclosures are illegal? No problem - if the elites need it to be fixed, it'll be fixed - as Will Rogers said, we've got the best Congress money can buy. Centuries of precedent are insignificant under the circumstamces. After all, the Holy U.S. Constitution says that it is the role of the Congress to declare war, and yet Congress hasn't declared war at any time since I was born - and I'm old enough to credibly claim to be "retired" instead of disemployed.
I agree with mistah charlie that the rule of law has long since been replaced by the golden rule (those who have lots of gold get to make the rules). And Congress could change the laws, but the cabal may well prefer that they don't. The property fraud crisis just might offer a salable pretext for that coup d'etat I've been blathering about. Martial Law offers so many interesting possibilities. Not least of which is its incontestability.
For JMG aficionados, he is on two beers this week.
http://twobeerswithsteve.libsyn.com/
Z.
Just as Richard noted: the price of housing will be directly related to the price people can actually pay, eventually. We noted in 2007 that the housing prices would fall to roughly 90% of peak value! Why? very simple... it is directly related to income/wages. If majority of high paying jobs have been outsourced then there is NO dollars available to pay more. Use $20/hr as a base (excellent pay) vrs service pay at $7-14/hr.
At $20/hr you make $41,600/yr (at $10/hr roughly $20,000/yr). Using the standard 3 x's your annual salary = cost of home you can afford to pay. i.e. between $60,000 - $120,000... if you can get a loan. Of course other variables that will vie for the use of those dollars: taxes, medical, transportation costs, and FOOD. So I suspect the actual dollars available for housing will be less. My estimate of 90% drop from peak may well be too rosy!
We sold out 2 yrs ago. Found a long-term lease, old farmhouse with 4 acres, from some folks who own the property outright. They inherited it from family so the california tax base is unusually low. Literally a "golden find"....
The elderly owners live very far away, and have no interest in living on the land (at least, at this point... who knows what the future will bring).
We've added to our skill set: organic gardening, grass-fed livestock, cheese making, etc. One can only "buffer" as much as possible and the rest is up to "fate".
Was reading the comments on business insider, tough crowd. Some people there are strongly emotionally invested in the oppposite viewpoint.
I suppose anyone who's rather invested in the doomish perspective would seem unreasonable to them. The more self-serving savvy crowds shouldn't need as much help to protect themselves against predatory leverage schemes, or if they do, they're not susceptible to such argumentation that would cause them to perceive themselves as vulnerable.
Not to lecture, but I sincerely hope that every person who sees what's coming down the line as far as agriculture in industrialized societies puts some effort into growing their own food. There are multiple curves to home-scale agriculture, the learning curve being only the most obvious. It's also not the shortest curve either - figure you need at least 3-4 years of practice to have any really sense of what to expect from a given piece of earth. Ten years will give you the right to say you have a pretty good idea of how to provide your own food. We also need to work on improving the health of any soil we plan to use, and to understand how diets and kitchen skills change when relying on food from the backyard. Both of these take time.
Sure, plenty of bad things could happen at any point that make our efforts to feed ourselves moot. But we must try. For those of you with children or grandchildren, who is going to pass on to them the skills and the knowledge of how to feed ourselves, if not the adults of this era? Please, whether you rent, own, or squat, start this year, on any patch of soil available to you.
Stoneleigh,
From a post by you at the Business Insider
"I wouldn't hold more than a small amount of currency in a bank account. FDIC insurance wouldn't be worth the paper it's written on in a systemic banking crisis. Nominal interest rates are low anyway - not nearly enough to justify the risk."
I have been wondering why you might think that short-term treasuries are any more secure than FDIC insured accounts. Isn't the govt./fed just as likely to cover FDIC guarantees as they are to honor their bonds?
I agree that the low interest rates hardly make it worth holding money in the banks versus holding cash. Isn't that pretty much true of the short-term treasuries too?
I guess I just don't understand why treasuries are any safer than other forms of govt. obligations.
Kate,
A little lecturing on the topic of growing your own seems a very worthy thing. It was mentioned some time ago that TAE wanted to post practical advise on such topics. If you have gardening tips, I'd bet they would be welcome.
@ Hayduke
I'm inclined to agree with you. I think people should keep a small stash of cash. But there just isn't enough cash in circulation to allow wholesale withdrawals for lots of depositors. IMHO, if the banks go down, cash will lose a lot of its utility anyway. Some kind of banking system will have to be held together. Even if it takes chewing gum, baling wire and Martial Law.
Maybe the feudal lords will find a way to deal without banks, but even that may be doubtful. The evidence so far, says that banks are more resilient than governments. Even when a bank fails, its branches stay open. The banks own the gov and the gov will do serious things to keep its owners from collapsing.
The Business Insider crowd really doesn't like us. They seem to think that we obsessively delete comments and never allow any dissent. We're actually about as light a touch on the delete button as possible, although if people make persistently nasty or aggressive comments they might get nixed eventually. Usually we give people quite a bit of leeway for figuring out the tone of the place here.
The BI crowd also seems to think that timing is everything, and they don't want to take the time to appreciate a big picture fleshed-out over a long time. I guess if one's game is to wring every last ounce of profit out of a failing system then one's mindset will be different than is typical for TAE.
It seems odd to me though that the tone of BI should be so different to FSN or the Keiser Report or Mish's site. It's more similar to the few ZH comment threads I've read. Each site has its own culture I suppose, and some are more in denial than others.
The Business Insider crowd really doesn't like us...
The artice The Story Of 2011 Will Be The Second US Housing Crash is listed under "Money Game"
Need I say more?
Stoneleigh, Most of the commenters at BI are not worth reading, but a few make interesting points. You mentioned over there that "All these risks factors were visible in 2000 and have only got worse since. Canada continues to be a better bet for my family. Moving when we did allowed for learning curve time."
But at the same time, you scorn timing. But it does matter as you yourself make clear. If I had a decade to prepare, I'd do it right, slow and steady. But if I have three months, then I probably should quit everything else in my life and do crash course learning.
I know you may be loathe to do it, but I would love it if you could talk more about timing and when (and why) you see things happening the way you do. Thanks!
Nassim,
Indeed. It seems like we may be a threat to people's divine right to play the leverage game and entitlement to perfect timing information for the purpose.
@ Board
I went to BI to check out the arguments/comments with Ilargi's posts. One guy (Jojo) is a rich guy who basically feels Ilargi gives bad investment forcasts he was more amenible when Stoneleigh was more specific on holding cash and timing. One guy (Tan) is ticked off because Stoneleigh doesn't have a perfect crystal ball on timing and doesn't say she's sorry that TPTB have been able to extend and pretend. He wants her to say that we will have full-on deflation and destruction by 20XX and if not then she is wrong and will go live in a convent in a hair shirt and beat herself daily with a whip (OK I made the last part up but that's what it seems like). Then there is John F. who says his sister reads TAE and is destroying her life and her marriage because she has listened to Stoneliegh's advice for building a lifeboat, but happily she is now having second thoughts about Stoneleigh's accuracy in timing. BR then made her own reply to them both. I interpreted the response to mean that she thinks getting out of debt is generally a good Idea but doesn't like the lack of emphasis on timing. She doubts that TSWHTF with in the next two to three years because S & I have not posited evidence for the near to middle term.
My feeling is that if you need some hard dates you should read "Half Past Human" or contact your local medium. From discussions I've had with my family about various social and economic events in the past 50 or so years, timing is only obvious in hindsight.
My question is if you are so rich you need to worry about wringing the last shiny nickle out of your 401K why do you even read TAE? Hire a financial advisor.
Candace
Draft,
I understand what people are asking with regard to timing. Of course it makes a difference if the potential variation in timing is very large. My view is that it is not. When I say that timing doesn't matter I mean that it doesn't matter if the next phase of the decline happens this week, next month, or even next year. That level of variation makes little difference when it comes to practicalities.
My view remains that we should see the next phase of the decline begin relatively soon, but that markets do not crash right out of the gate. We would see momentum build to the downside, leading up to a crash. The real economy would follow with a time lag, but the exact length of the lag is not really predictable. Watching the financial markets tells you where the real economy is going (either up or down), so the markets should give some warning of real economy impacts.
I am expecting (as a best guess to be refined as circumstances warrant) the worst of the deleveraging to occur between two and five years from now. However, deflation can be devilishly difficult to call timingwise because it can take a long while to build up and then can unfold very rapidly once a kind of 'crtical mass' is reached. For instance, the banking system could seize up in a matter of hours at some point, as it almost did in September 2008. This (and the fact that extractng oneself from a vulnerable position takes time) is why we try to communicate a sense of urgency even though we don't expect TEOTWAWKI tomorrow.
I think on balance that the best general way to approach a transition (depending on your own circumstances of course) is to move steadily towards where you want to be, rather than jumping in a panic. If you're going to jump, take the time to put on your parachute and make sure it's secure first ;)
Most people end up living with one foot in each of two world for a while. For instance, you may want to keep a job you know has no future at least for long enough to use the earnings to build a different future on the side. This can be difficult, as it means all the work of both and not really all the benefits of either, but then we can't really expect major transitions to be seamless.
It helps if you have a means of speeding up preparations if necessary. Basically keeping as much flexibility as possible is a good thing. You may need to adapt to changing circumstances quite quickly at some point. The simpler you have managed to keep your life, the easier this should be. A highly complex life can be very brittle. The future belongs to adaptable generalists.
Steve from Virginia,
Celente probably has a week understanding of thermodynamics but that's ok. He traffics in the understanding of social trends. And he is probably right in predicting that mad scientists will be tinkering in their basements this year. The Archdruid had a nice post on this last month. Here is an abbreviated version the relevant bits:
Focusing on those possibilities that can be done on a shoestring, and maximizing the total number of these that get tested in the immediate future, is therefore a crucially important strategy right now. Even if most of those efforts fail, this approach will likely yield the largest number of useful options to mitigate the crisis... as Charles Fort used to say, "It is by thinking things that schoolboys know better than to think that discoveries are made.".... The Bussard fusion reactor makes a good example... It’s fairly consistently proven able to fuse small numbers of hydrogen nuclei into helium, but there’s no good reason to think it can produce anything like as much energy as it uses up... Still, there are a modest number of people – according to recent media reports, around a dozen – who have built Bussard-style devices in their basements and achieved nuclear fusion, confirmed by neutron detectors...
The odds of discovering the just in time technology fairy are low but we will likely get some neat inventions along the lines of, say, the heat pump or the Stirling engine; new technologies that are efficient and practical for some applications. This is probably what Celente is thinking about. I imagine that he is used to making predictions that seem outrageous to conventional wisdom and he thusly ignores the experts who pooh-pooh his forecasts.
Still, it's always entertaining to listen to someone fantasize about free energy from the technology gods. One of my favorite quotes sums it up nicely:
“If someone points out to you that your pet theory of the universe is in disagreement with Maxwell’s equations — then so much the worse for Maxwell's equations. If it is found to be contradicted by observation — well, these experimentalists do bungle things sometimes. But if your theory is found to be against the second law of thermodynamics I can give you no hope; there is nothing for it but to collapse in deepest humiliation.” — Arthur Eddington
Steve from Virginia,
I don't think housing is a Geffin good, also known as Veblen goods, after Thorstein Veblen who coined the phrase "conspicuous consumption." The driver behind Veblen goods is status. Buying a ridiculously expensive car, bottle of wine, gold plated pen, etc. mostly conveys to others that you can afford overpriced novelties. The appearance of being rich and powerful and having money to burn is what one is buying.
I don't think that the housing bubble was a keeping up with the Joneses driven status contest as much as it was a get in before it's too late investment opportunity. The classic ponzi scheme kind where everyone can get rich and retires early on their investments.
"Many people claim Stoneleigh and I must be crazy, and doomers and all that, for predicting an 80%+ drop in real estate values."
You are crazy doomers but that is not as bads as it sounds. Sanity is a consensus based operation; previous crazies thought that the world was round and that the Earth revolved around the Sun. In theory sanity is supposed to refer to illogical and maladaptive thought processes but in practice it usually refers to deeply unpopular ideas. Gerard Schmidt Turnaround Consultant put it nicely upthread:
"As a turnaround consultant I have found some staff or directors just won't believe 40-60% - at 30% people just go in to denial."
And a doomer is commonly thought of as a misanthropic pessimist but Merriam-Webster's dictionary defines a doomer as one who thinks the future will be crappier than the present. Way back in the day when Ilagri's and Stoneliegh's forefathers where debating the declining prospects of Easter Island or the Roman Empire the same misconception probably arose. Again there is a disconnect between the broad social notion and the precise understanding.
Language is funny stuff. As the medium for communication it has weird social dynamics where an concept has both a precise historical meaning and a vague popular meaning which is often the polar opposite. My favorite example is the word anarchist which can refer to "the government which governs least governs best" on the one hand to unruly kids in black f*cking sh*t up on the other.
It gets us into trouble when we conflate the two. I suspect that Elliot waves and Kondratiev cycles are the result of confusing one's simplistic map of the world with the actual world; it has positive gain initially because everyone is coordinated in their actions but eventually fails because it doesn't jive with reality.
WoW...Those "bidness insiders"like to play hardball.[I would invite them to read Kunslers rant this week,and tell me which of his/the rosy scenarios outlined will act as a fuse to the bomb that will blow all their investment hopes to hellangone....[!]
Three weeks till I go back on the road.[Ick].Trying to batten down all the hatches on my various projects.
A friend canceled a planned orchard,so now I have 120 4-6' Italian Prune trees.Oh well,I guess I will have a prune crop...4-6 years from now.
One of the building center stores has 2'planks of nice 6"cedar for 39c...3pc = a nice bottom board for a beehive.Stockpile.summer will be here too soon...
The possibility of throwing out 200-300 years of property rights+settled law is a distinct possibility.When they [tossed out]/[got creative with] the bankruptcy of they entire banking system,did you think the grifters would stop there?
Too many hands in the cookie jar now,too many folks are watching outright theft of lands
by fraud,and losing all.
Here is a bit of Physics that might explain where we are at now.
You know when you put a cup of water in a microwave for too long,and when you bring it out,and add a bit of cocoa or some coffee to it it nearly explodes,going into a frothy,steamy mixture that is a pain to clean up?
When you first bring the cup out,it has small ,tiny bubbles,that quiver,but don't move or react...until you add one final bit of energy to the mix,and everything goes to hell?
This water is at the nucleonic boiling point,and has actually soaked up enough energy to be in a rolling[steam-producing] boil[more,in reality],and,the stasis is kept by the water being "at rest"as well as the pressure differential in the column of water in the cup
Our society is the cup of VERY hot water prior to the adding of a bit of.....At the nucleonic boiling point.We are going to have a hellava mess here pretty quick
................................
The law breaking at the top will be a cancer that destroys this nation.The "wealthy" banks [full of fed play money]are playing games with foreclosures,which will be political dynamite when the teaparty folks gets rolling with "Investigations"
Like to see two-lips Timmy in front of Ron Pauls house committee answering loaded questions about the bailout?
How about the former treasury guy,Mister H.Paulson,who is whining about losing a cool million on the home he just sold in D.C.
Long as I can crank in the tech work,I am happy,life is good.
I expect to see a lot of theater in congress...but they will magic a "fix" of MERS? I do not know.It would be the beginning of the end of the rule of law for sure....one law for the investor type..one quite different for the citizen...[outright legalized financial rape is what it looks like to this poor-boy]
Way tired...
Bee good,or
Bee careful
snuffy
The Business Insider proves it.
Somebody around here has been hitting the delete button.
The Business Insider may prove a few things, but not that. The only comments deleted from here, and it still is exceedingly rare, are the ones that are offensive, not the ones that don't agree with us. Of course there are those who feel that they are justified in being offensive in disagreeing. And that's what you see in a thread like the one at BI. I don't want TAE to slide down that slope.
Even if some people have come to see that way of communication as the new normal.
.
I don't usually read Kunstler and he usually deletes my posts. Fair exchange. :)
Someone mentioned him here so I looked at his latest effort and can only conclude that he must have internalized a recent comment of mine:
... It is worth pointing out however that this part of the world is grotesquely overcrowded when the availability of basic resources like water and agricultural land is taken into account. I can however sympathise with those who use Israel as a stepping-stone towards going to the USA or Australia (our immediate neighbours here are Goldbergs from Israel). There even are quite a few who return to Russia - 100,000 Former Soviet Jews In Israel Return To Russia...
Here is how Kunstler phrased it:
... They're all wildly overpopulated, given their unfortunate geography, scarce water resources, and blast furnace climates. ... And then there's Israel, settlement of my people since 1945 ... I don't have a religious bone in my body and I pray for Israel's survival under the circumstances. Or maybe the dwindling sane among them can come to Nebraska now. I'm not joking. I know it's not the exact spot on the planet assigned by Yahweh, but it is reasonably buffered against Israel's modern political enemies and increasingly available from a real estate point-of-view as the descendents of the original sodbusters pack up and leave to become film-makers in LA....
I am rather flattered. :)
Hi Guys,
Thankyou once again for a most excellent blog, I can't thankyou enough on how much I've been able to learn and be able to discuss multiple issues with my wife in the complex times. It's time to hit the donation button again, thankyou!!
Question: Could you guys advise how the current tax breaks on Real Estate and Mortgage deduction come into play for future concerns?
Currently a US homeowner gets approx 30% deduction on the Property Tax and Interest Portion of the Mortgage.
For a monthly $2000 Mortgage/Tax payment, that would work out to a ~ $600 deduction, and a $1400/month payment. This would be a comparable Rental price for a 2/3 bedroom apartment for a family. At least in the NY Metro Area.
If you have to pay rent somewhere, does it make more sense to analyze the rent v mortgage/tax payment (after tax deduction)?
Or is safe to assume the tax deductions components will go bye bye?
In my own situation, if I were to sell and rent, I would have likely have to rent a house for my family of 5 at a comparable price or possibly even more than what I am paying for a monthly mortgage/tax situation.
Does it make sense to just stay put and manage that tax/mortgage v what could be a higher rental cost?
What were we just saying about MERS and neofeudalism ?
http://www.zerohedge.com/article/fraudclosure-settlement-imminent
From my personal experience:
Within the circle of my friends at a similar age of mine (around ca. 30), I have been arguing against the mortgage and in favor of renting a house.
Of course, typical argument that was raised collectively (hey, I am probably the one of few in Slovakia reading TAE - certainly the only one commenting!) was, that for mortgage you need to pay only a little bit more than for renting the house and moreover you pay *your own house*.
I never managed to articulate the argument that mortgages are increasing the prices for everybody.
There was one minor agreement with me that not everybody is entitled to have its own house (high expectations anyone?).
Moreover, question was raised that how do I know that the debt is impossible to pay-off. Really, how do I know??
Now, this leads me to the conclusion that this is not the banking crises, or financial crises, it is the "future expectation crises".
Also, my general feeling was that
"we-are-different-compared-to-sub(?)-prime-US-Ireland-Spain-China(?)-mortgagers"
That is what we are - greedy, selfish, ignorant, blind to faster-than-exponential growth, entitled-to-drive-a-car-to-final-climate-disruption-unless-electric-cars-come-to-the-rescue, etc...
so this is political crises? Yes, I agree - it always was, but now we are forced to do something about it.
DIYer - That ZH reference about spells it out pretty clearly who pulls the strings. Democracy? Nope. Republic? Nope, more like a the United Bankers of America.
Oh, but I almost forgot, it's all for our own good.
@DIYer, I was just about to reference the Zerohedge article on fraudclosure settlement. You beat me to it:)
Man oh man but this is big decision?! A big,bad outcome!
What does it mean for anyone with a house in foreclosure proceedings? Does a fine and a slap on the wrist mean BAU?
No trials,no jail time! I am quite shocked! No clear title!
Really, why buy a house, why be an owner ? The elite are just about to piss all over property rights!
I guess we'll find out if property law is tribal sacred land or not.
Will the ownership class surrender?
I think,yes.
On several occasions there has been criticism that TAE solicits donations via paypal inferring a lack of integrity for doing so. Why would one object?
I don't get why this angers some people? It seems so obvious to me that there are bills to be paid.
Today I received this troubling email from Joe Bageant. I pray that his voice is not stilled.
01/04/11
Dear friends, associates and fellow travelers,
As you may or may not know, I have been struck down by an extremely serious form of cancer. Presently I am back in the United States receiving treatment through the U.S. Veterans Administration hospital system. Due to the nature of the massive internal tumor, I am currently unable to even carry on email correspondence or Skype conversations.
Right now I am at a hospital in Morgantown West Virginia. Once a treatment program has been designed and set in motion, I will probably be transferred back to the Veterans Administration facility near Winchester Virginia. The condition is inoperable, but it is hoped that with chemotherapy plus, the use of a pain killer such as oxycontin, I will be able to resume my online work.
As soon as I am able to sit up long enough to work online and carry on a skype conversation, I will reconnect with all of you. Until then, please have patience and bare with me in this frustrating and difficult time. Business correspondents and relationships will not be interrupted during this period of recovery because I have several persons willing to work with me through dictation.
Thank all of you very much for your friendship and patience.
Joe Bageant
Re.: rent or buy
Until ownership of housing is clarified in the USA do not take a mortgage.
You are only a renter until the title of the property has been handed to you with a clear line of transfer.
Its a choice of paying rent to an individual or paying rent/mortgage to the bank.
If you have a mortgage you must undertake ALL of a slew of expenses that are over and above the mortgage payment.
If you are not in the vulture business of flipping forget about being able to make money by flipping to another sucker.
jal
@Eric Lilius...I have been checking Joe's site every day for the past couple of weeks...wondering...I love Joe, I love the screaming man.
A lot of chatter about the end of rule-of-law this morning. That leads this old dog to think that a refresher course on animal rights is in order.
The Big Dogs have the right to make, change and enforce the laws. The little dogs have the right to try and obey those laws and suffer punishments at the whim of the Big Dogs. The Big Dogs have the right to punish each other or not as they see fit (they very seldom do see fit to punish).
This was all spelled out very clearly in beloved author dog Orwell's other great book, Animal Farm. So, why all the angst over rule-of-law? It's working like it always has. The Big Dogs have been taking property from little dogs forever. Their insatiable appetite has simply pushed them to try ways of improving the efficiency of the process. It hasn't gone quite as smoothly as I'm sure they hoped, but I'm confident they will keep working at it.
The little dogs also have the right to hope that the Big Dogs will eventually turn on each other. They always have and presumably always will. Though the little dogs don't actually have the right to encourage that behavior, they would be foolish not to do so whenever an opportunity arises. Not having it as a right means, of course, that it is not without danger to oneself and other little dogs.
Sympathy and Best Wishes for Joe Bageant. A self-described mutt and one of the heroes among the great author dogs. If it should happen that his latest essay is his last, I would say it was the right one.
An update on the progressive decomposition of the Empire. Note the suggestion that NATO militaries might be inspired to modernize. A euphemism for Usanistan has lots of weapons it badly needs to sell.
How Afghanistan Became a War for NATO
My sympathies to Joe Baegent, his family and multitude of his readers.
And thanks a lot to Ilargi for this informative entry on the housing situation.
It won't take much in my an older part of Phoenix to get to the 80% drop. We're already easily at 60%.
peace, shamba
Tom Englehardt has ended the Tomgram Holiday with a terrific essay on Usanistan's most deleterious drug addiction.
The Urge to Surge
Washington’s 30-Year High
It occurred to me while reading Tom's piece that the coup I've been blathering about already happened. The people he names were the publicly visible apparatchiks. That such a gang of fools could succeed in coup d'etat stands, dismayingly, as a tribute to Joe Bageant's insightfulness about the nature of us. Both the Big Dogs and the little dogs.
Our peeps are so dum that we thought it couldn't have been a coup because they didn't make Dubya President for Life. But they didn't need to change the form of governance or the class of characters that compose its stuffing. All the shadowy characters behind it wanted was to decide its policies and priorities. They got what they wanted and the world now gets the shaft. A planetary Empire may prove to be humankind's final folly. It should have been called Pox Americana.
Sad news indeed about Joe Bageant. Illness, aging, suffering, death - no one gets out alive. He tells it as he sees it, with compassion.
I do so hope Joe B. can come through this as well as can be reasonably expected... I feel I know the man.
I have been in a "is Blair still breathing?" type rage about the foreclosure settlement issue posted by DIY'er, wish I could just let blatant injustice pass over me.
Life's gettin' too short to care.
Z.
I.M.Somebody - Thanks for Tom dispatch link. Good read.
Despite the numerous lessons of history about extensive, far flung, military adventures ending in disaster, despite the incredibly destructive debacle of Viet Nam, despite the recent example of the failed venture of the U.S.S.R. invasion of Afghanistan, these tragically stupid ego maniacs of the last few years continue to indulge themselves in these incredibly asinine and costly aggressions.
What the h&ll is it? Did they grow up on war movies and believe them?
Is Afghanistan really that crucial in terms of resources, or strategically located that two great powers flung themselves headlong into that black hole only to be sucked dry of their own resources, manpower, and what last little bit of dignity might have remained? I just cannot fathom what is the driving force at the heart the matter here.
Oh, BTW are coyotes small dogs or large? :-)
Coy Ote
Stoneleigh - Thank you for your reply. I do have one followup question, about this: "I am expecting (as a best guess to be refined as circumstances warrant) the worst of the deleveraging to occur between two and five years from now. However, deflation can be devilishly difficult to call timingwise because it can take a long while to build up and then can unfold very rapidly once a kind of 'crtical mass' is reached."
I agree it is difficult. Here's my concern - I recall you suggesting in late 2009 that you expected the worst in two to five years. I believe you are right on the fundamentals, that we will have a reckoning. What is your reasoning for when this might happen? (You have given much evidence for why, but to my knowledge not for the when.) Because it seems to me that at the end of this year we could say the same thing - two to five years - and the horizon will keep receding as we approach it.
Sympathies for Bageant.
@I.M. Nobody
While I appreciate the blunt honesty by which you address the selectivity of justice inherent in the gravitokinetic modulations of the psychosocial heuristic, the rule of law, there's a trace of premature defeatism in there.
Its not as if the perps could get away with the worser abuses without actually breaking the law, they often do so, even after formatting it to be more conductive to their abuse. While the structure of justice may have become too corrupted to restrain them, the [ideological] tools of law haven't yet become the exclusive property of the overclass.
"So, why all the angst over rule-of-law? It's working like it always has."
Not so, homeland security materials now increasingly qualify as seditious literature or as actual [borderline] treason, against the people, but perhaps more importantly against the legislative branch, and clearly indicate a slow coup in progress, by the executive branch, via mechanisms that weren't [openly] possible just 10 years ago. Much of this coup-creep remains fully illegal, and yields criminal offences of various gravity at select junctures, yet the attitude that the rule of law doesn't matter anymore, or cannot be used to protect the weak, seems to prevent the lawful action that is still possible against these affronts from being initiated or even attempted.
"Dislike them?"
"Denounce them!"
Hombre you old Coy Ote,
The Big Dogs and little dogs are not separated by size. It's the greed that counts. Coyotes are equal to all other dogs, except that some dogs are more equal than others. ;)
I've just run across another 2-part video, these from the BBC that not only tells us how we got here, it actually names the bastards that made it possible. Who would ever believe that right at the top of the list would be the insane mathematician John Forbes Nash? If Oppenheimer and his ilk had devoted themselves to the Gita's instead of physics, we might possibly have been spared our fate.
[Insert primal scream here]
The Trap - F*CK YOU BUDDY
Regarding the BBC video that I linked to above, the link to the second part shows the Part 1 video again. Part 2 and there is also a Part 3 is available on Google at these links.
The Trap - Part 1
The Trap -Part 2
The Trap - Part 3
When blogger Klein opined om national television last week that the US constitution 'has no binding power on anything', it was an unfortunate self-defeating opinion ironically covered under protected speech, as bound by said constitution. Were any sworn officer of government to make an identical public statement, this would incontrovertibly be an act of sedition, and fully prosecutable as such. When that type of reasoning still follows, unlimited powers over the law don't exist while under the law.
When former pres. Bush so freely stated that the legal foundation of all his authority was physically a 'goddamn piece of paper', he simply reaffirmed that the representative vitality of universal ideas and human values it so eloquently enumerates cannot be destroyed, only misplaced or forgotten, perhaps when vested in the wrong people. Such grave statements, as made by certain officers of government, may also be interpreted as purposefully seditious, in such a way as would necessitate impeachment, whereas such a charge is never neutralised by the immunity granted to said office and must be applied when said immunity expires.
A 60x multiplier... or a hoax?
"Nuclear fuel feat to solve uranium shortage"
Efficiency hiked by 60 times, resource 'to last for 3,000 years'
BEIJING - China has made a breakthrough in spent nuclear fuel reprocessing technology, which could greatly extend uranium's usage rate and potentially solve the problem of its supply shortage.
http://tinyurl.com/34jzbgo
My plan is this:
I am looking for a retirement home on small acreage for gardening and firewood.
I will put as little down on it as possible(VA,FHA)because I will never see the down payment again.I would rather keep it in a shoebox.Much of my disposable $ is going to beans,solar oven and rocket stove,tools,etc.What is the point of having a small mortgage payment when I will not outlive the mortgage?
My plan is this:
I am looking for a retirement home on small acreage for gardening and firewood.
I will put as little down on it as possible(VA,FHA)because I will never see the down payment again.I would rather keep it in a shoebox.Much of my disposable $ is going to beans,solar oven and rocket stove,tools,etc.What is the point of having a small mortgage payment when I will not outlive the mortgage?
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