Monday, December 3, 2007

Major Bank Crisis?

The Global European Anticipation Bulletin No.19 of which an abstract is available, outlines some possible scenarios in the world of banking stemming from the unfolding subprime crisis and its siblings the credit crisis etc. "[A]t least one large US financial institution (bank, insurance, investment fund) will file for bankruptcy before February 2008, sparking off bankruptcies among a series of other financial institutions and banks in Europe (in the UK especially), in Asia and in various emerging countries."

GEAB N°19 - Contents
( Published on November 16,

International banks get dragged into financial crisis’ 'black
hole': Four triggering factors of a major financial bankruptcy

LEAP/E2020 now estimates that at least one large US financial
institution (bank, insurance, investment fund) will file for bankruptcy before
February 2008, sparking off bankruptcies among a series of other financial
institutions and banks in Europe (in the UK especially), in Asia and in various
emerging countries... (page 2)

Factor No.1 - Drastic drop in revenues
for banks operating in the US

The CDOs altogether are now dragged into a
general confidence crisis, and they represent a large part of bank assets since,
in the past few years, large banks from lenders became investors and
speculators, like hedge funds… (page 4)

Factor No.2 - Slumping value of
assets owned by these banks resulting from new US banking regulation (FASB
regulation 157)

On November 15, 2007, a regulatory factor, the FASB 157
standard (designed to enhance transparency of financial statements of financial
institutions operating in the US) speeds up the pace of financial organisations'
collapses (American and others)… (page 7)

Factor No.3 – Increasing
weakness of bond insurers

Bond insurers are financial markets' «
supports ». Completely unknown to the public today, their names could soon
become as common as the word 'subprime' has… (page 9)

Factor No.4 –
Economic recession in the US

As a complement to our anticipations of the
impact of the US economic recession for banks operating in the US, we find it
useful to analyse here how much US official statistics have become totally
surrealistic… (page 12)
Obviously there are plenty of signs of activity at the Fed and in Big-Corporate America to stave off this possibility and to minimize it. Thus the protracted series of adjustments to the books of various players and the paced revelations of write-downs stemming from SIV and conduit activities. The question that remains is whether the interventions available to governments are robust enough to succeed in a system that appears to have become a mystery to its designers like a modern Frankenstein. The international financial engineers are saying in effect that the way in which the new global reality is structured provides a field of buffers to dissipate the effects of any particular shock. However, it's as well to remember that this is what was claimed for large-scale hedging an eye-wink ago. Place your bets.

Saturday, November 17, 2007

Rocky Road Ahead for US Taxpayer

An object lesson for the US taxpayer is being played out in the subprime crisis fallout in the UK. The naive among us can still be found, on blogs and elsewhere, insisting that the measures being put in place by Governments and Central Banks will not cost the ordinary citizen. Developments in Britain are now showing the utter fallacy of this position.

It appears that Northern Rock, the British bank which suffered a run earlier this year in fallout from the funny money routine may saddle the UK government with "a bill in excess of £25bn" and calls are being made for the bank to be taken into public ownership. Since the latter action is unthinkable in the US, the alternative is easy enough to figure out.

"But now plans to sell the bank are running into a wall of opposition from politicians who are outraged that a sale could involve an open-ended commitment to provide government support to a buyer. 'Why should taxpayers' money be used to help Richard Branson, or whoever eventually acquires Northern Rock?' asked Vince Cable, shadow chancellor for the Liberal Democrats [a UK political Party]."

An insight into prospects for the easing up of credit pipelines worldwide can be gleaned from the comments of a City [of London] analyst: "No one will touch Northern Rock unless the Treasury continues to stand behind it; on its own, the Rock is not viable." Substitute the names of certain major US institutions and there you have it.

The full article is available at the Guardian website.

Sunday, November 11, 2007

Global Systemic Crisis - GEAB Update

The Global European Anticipation Bulletin No.18, Seven sequences of the impact phase of the global systemic crisis (2007-2009), is now available. This publication offers possibly the finest analysis of the big picture of the economic crisis to be found. Although a subscription item, there's an intriguing extract available without charge.

Here is the full scope of the current issue:

This public announcement provides the full description of the first sequence in addition to the complete list of sequences.
  • Sequence 1 - US debts infect the financial planet: A century after the « Russian loans”, meet the “American debts”!
  • Sequence 2 - Stock market collapse, in Asia and the US mainly: between - 60% and -30% in two years according to the regions
  • Sequence 3 - Bursting of global housing bubbles: UK, Spain, France and emerging countries
  • Sequence 4 - Monetary storm: Volatility at the highest / USD at the lowest
  • Sequence 5 - Global economy in stagflation: Recessflation in the US, soft growth in Europe, recession
  • Sequence 6 - « Very Great Depression » in the US, social unrest and the militaries' growing influence on public affairs
  • Sequence 7 - Major acceleration in world's strategic rebuilding, attacks on Iran, Israel on the brink, Mid-eastern chaos, energy crisis
The free extract is titled: Sequence 1 – US debts infect the financial planet: A century after the 'Russian loans', meet the 'American debts' (2nd quarter 2007 – 3rd quarter 2008).

As noted in a previous post, the position of GEAB is that the US is headed for a 'Very Great Depression' as an outmoded international economic order meets condition it was never designed for. Since the prognoses have shown an unusual accuracy to date it is well worth putting this site in your Bookmarks.

Friday, September 28, 2007

The End of the Beginning

"Defaulting middle-class U.S. homeowners are blamed, but they are merely a pawn in the game. Those loans were invented so that hedge funds would have high-yield debt to buy." Satyajit Das in an interview with Jon D. Markman, The Credit Crisis Could Be Just Beginning

In what follows I revisit the theme I touched on recently, namely the way in which all the focus of the current credit crisis is being laid at the door of the subprime bubble and by implication on those Americans who entered into one or other of the less than prime mortgages. Let's not forget the hoopla around the spread of home ownership in recent years and the signal it gave that anyone who struggled to get a foot on the home ownership ladder was being a model American. Now there is a definite atmosphere being created that those unfortunate enough to have been on the lowest rung of the ladder are the ones whose 'irresponsibility' has been the cause of tipping the ladder. Let there be no doubt about it that this is a smokescreen, and one made all the easier by the shroud of hocus pocus that has been built around the technical aspects of the finance world.

Everyday life has a pretty good idea of how cause works and despite all the verbal alchemy things are no different in the case of the credit crisis. If anyone approached an auto collision by focusing on how the innocent party had invited the offending vehicle to bring it on we would rightly consider it silly. Similarly, the growth of the subprime mortgage market wasn't a result of some smart idea dreamed up by the homebuying public. It resulted from a premeditated strategy to extend the market for mortgage credit. It wasn't the ordinary homebuyer who invented this mind boggling range of products. On the contrary the various players in the market vied to outdo each other in the next esoteric product they could come up with. All of this went on with the blessings, some would say encouragement, of the FED. Listen for example to Alan Greenspan speaking at the Community Affairs Research Conference in April 2005:

“Innovation has brought about a multitude of new products, such as subprime loans and niche credit programs for immigrants. Such developments are representative of the market responses that have driven the financial services industry throughout the history of our country. With these advance in technology, lenders have taken advantage of credit-scoring models and other techniques for efficiently extending credit to a broader spectrum of consumers.”
The question then arises of the driver for these marketing innovations. We hear lots about the world having been swimming in liquidity. Note however that not many speak of this as being awash in cash. The truth is that the creation of 'liquidity' stemmed from the development of a range of financial products by the investment community, products massively built on leverage and the off-loading of risk through instruments that to all intents are one or another variety of insurance policy. The problem is that whereas insurers have a long experience of the statistical possibility of the risks they cover actually occurring and know full well that 'runaway' risks are absolutely rare - even mass auto pile-ups or 'out of control' forest fires have a limit as to how far they will go - no such predictability comes with the markets. No one ever heard of 'unwinding' in the case of the ordinary business carried by insurers.

Everyone in the financial markets however had better have heard of the great crashes that have been a recurrent feature in the history of that world. If not they have no business being in business. In practice of course what happens is that every generation cooks up one or another 'theory' that they've got things under control and it won't happen again, "the business cycle has been mastered" and so on, only to be proven wrong each time. These theories are invariably nothing but rationalization of the foolhardy risk taking, what has become known as 'exuberance'.

When in mid-August Goldman Sachs announced that a “25 standard deviation event” had caused the value of its quantitative fund to drop 30%, the implication was that the subprime mortgage crisis had caused the market to behave in some wholly unexpected pathological manner, normally to be anticipated only two or three times in the history of the universe. In reality such “25 standard deviation events” happen two or three times a decade and are perfectly normal. The abnormality, in which the market lost its mind, was in Goldman basing its reputation and its investors’ wealth on such obviously inadequate mathematical techniques. When markets lose their mind, Martin Hutchinson

Given this it is truly outrageous that those who will suffer most in real practical terms from the operations of the credit freewheelers are now being set up as the first link in the chain of cause of the crisis. The truth is that this line is being pushed more as a move to justify the rescue of the speculators by public funds than as a real explanation. It is hoped that gushing of crocodile tears for suffering homeowners will garnish enough sympathy so that the financial world can be pulled from the fire of its own creation, while at the same time it keeps the spotlight pointed elsewhere. And make no mistake about it, it is the financial industry that will benefit from any of the measures contemplated so far. Who after all will benefit from the publicly funded rescue of the debts owed to the mortgage lenders, (even if it's only through the 'liquidity enhancing' measures of the FED or through tax breaks)?

The other aspect of this turn of events is that it acts as an impediment to the understanding of the real causes. Could it be that this is yet another convenient result for those who have gained most from the whole affair? After all, failure to unravel the system of real interconnections that have ended as this 'unwinding' leaves the door open for an equally profitable repeat in some future period.

Saturday, August 25, 2007

Blame the Victim Rules the Subprime Debacle

Anyone get the impression as I do that the scene is being set for placing the blame for the economic crisis on those hapless people who were so inconsiderate as to put everyone at risk by actually taking advantage of what they saw as the opportunity to get their piece of the pie? Yes folks, the reason the wheels of high finance are now gumming up is you or your neighbours utter selfishness in wanting a decent roof over the heads of your families. How thoughtless and unpatriotic of you to throw caution to the wind.

Max Wolff notes the mindlessness that has become a feature of commentary on the financial crisis where mouthing "subprime" a sufficient number of times seems to absolve anyone from actual analysis. The following from Credit Backwash August 21, 2007

"Every day we watch people blame sub-prime. Sub-prime is neither contained nor, is it the essence of present trouble. Discussing sub-prime as the cause of asset re-pricing has become ubiquitous. I would liken this line of explanation to the way that American urban violence is often discussed as "gang related" or "drug related". In short, it is a lazy catch all employed to avoid scratching below the surface. ..."

The truth is it seems that it's not only in the housing mortgage sector that 'liar loans' have been the fashion.

"A huge credit bubble exists and extends far beyond sub prime mortgage distress. The global bubble is enormous and has many sub-component bubblettes. The internationalization, integration and expansion of finance extended and distributed the effects of overly cheap and easy credit. Innovation of new products, thin opaque markets in credit vehicles and voracious appetite for leveraged yield have transformed balance sheets and portfolios. This mountain of gas soaked rags was ignited by the credit concerns in sub prime. Now the credit bubble is burning. Years of euphoria, easy money and asset inflations built to dizzying heights. Massive, cheap and easy debt was taken on to buy houses, currencies, bonds, equities, mortgages, leveraged loans, credit default swaps, real goods and services. Credit burdens were taken lightly, rolled over, bundled and sold. As long as lenders, buyers, ratings agencies and faith held, bubbles formed and swelled. The size, volatility and interconnectedness of international asset inflation was unprecedented. The downturn has been similarly correlated. Sub-prime credits and the collateralized mortgage obligations comprised of them deflated- the match was struck. The fire is never really caused simply or exclusively by the match that lights it.

All these innovative new mortgages were written because there was great money to be made in bundling them into mortgage backed securities (MBS) and collateralized mortgage obligations (CMO). Lenders cashed in on a "originated to distribute" bonanza. All types of finance companies wrote mortgages- and many other types of credit contracts - only to sell them off. A popular final destination was in collateralized obligations. This industry swelled as trillions of dollars in mortgages were written over the past few years. Every obstacle to further lending was innovated around to allow profits to continue to flow. The risks of all this lending were less pressing as mortgages loans were made to be sold- not held. All the available credit bid up house prices and led to the false conclusion that houses were always safe, appreciating assets. Questionable loans and sub-prime mortgages were sold and reconfigured into AAA rated product. Risk vanished from consideration and discussion. Transformed mortgages became credit vehicles and were sold all over the world. Part of the mad dash now involves finding these hidden gems hiding on books and ascertaining their real value."

Meanwhile over at the Pundit's Blog Brent Budowsky tells it to America straight: Gilded Age Crime: Poor Go Homeless, Wealthy Get Bailouts

"Is it right that the new racket on Wall Street is that banks make bad loans, sell them to hedge funds and private equity firms, many of whom are virtually unregulated and untaxed, who then complain about their pain after they foreclose on average Americans for falling a little behind their payments?

It is good that today the Fed cut the prime by 50 points, but it is bad, and terribly wrong and unjust, that in the last week the Fed has essentially used Americans' money to bail out the wealthy who made the profits, while doing zero for the foreclosed and homeless.

When the banks, hedge funds and private equity firms make bad deals, they keep the personal profits, while the corporate profits are protected by bailouts. Meanwhile, when the average Americans in the middle class, or the poor, fall a little behind, they get the boot, they lose their jobs, they are thrown into the street without homes and often without food."

And don't ya just love the reasoning on RESPONSIBILITY that goes with the line of argument that runs, subprime borrowers who made bad decisions based on insufficient knowledge of what they were getting into should BE HELD RESPONSIBLE for those decisions even if this means losing their homes. Who cares if they're on the streets since that won't affect the economy. All they do is produce products services. But investors who made bad decisions based on insufficient knowledge of the real values of their investments should .... NOT BE HELD RESPONSIBLE for their decisions and should be bailed out by the taxpayer. They must at all costs be protected from losses. Their coupon clipping and 'premia' are essential to the economy.

I think this is known as one law for the rich and another for the poor.

Friday, May 18, 2007

Paulson Gives Bottoms Up On Subprime Crisis

Since Secretary Paulson's remarks on the housing bubble in the Newshour segment for Thursday May 17, Treasury Secretary Discusses Wolfowitz, Chinese Economy , may have been drowned out by more salacious developments in the world of high level banking I give them here:

JIM LEHRER: One final question, and a third subject. How worried are you about the slump, so-called slump in the housing market in the United States right now? And what kind of damage, if any, is it doing to the economy?

HENRY PAULSON: Well, let me say this. As you've pointed out, we've had a major housing correction in the U.S. The U.S. economy had been growing at a rate that was unsustainable and, in housing, it had clearly been growing at a rate for a number of years.

That correction was inevitable; that correction has now been significant. We think it is near the bottom. It will take a while to work its way through the system. Fortunately for us, we have a very diverse, healthy economy. There are other things that are positive that are offsetting that.

We've had business investments start to pick up. They've got a very strong labor market, unemployment at quite a low level. We have good growth outside of the country. We've been talking about exports to China, but exports everywhere are picking up. The consumer remains healthy.

So my very strong view is that we are near the bottom and that this will be contained as -- the housing will be contained, and we're fortunate that we have a diverse, healthy economy.

The correction to which Sec. Paulson is referring is that beginning in 2006 when homebuyers courting default suddenly found themselves with no additional home equity to see them through. They also faced the additional obstacle to selling presented by a glut of inventory on the market. Refinancing options quickly evaporated as borrowers were unable to get appraisals matching the original purchase price of the home. But where is the evidence that would lead him to conclude that this is the extent of the correction that in his own words "was inevitable?"

The language Sec. Paulson uses is in itself instructive. All in the same breath he is able to say "we've had a major housing correction", "We think it is near the bottom. It will take a while to work its way through the system." and "we are near the bottom." The mixture of past present and future tenses doesn't exactly inspire confidence.

Another opinion can be found in the Credit Suisse Mar 12 2007 Mortgage and Housing Report which points out that "escalated delinquency rates on 2006 vintage loans are not being driven by the payment shock issue which is at the forefront of legislative and regulator debate, as rate reset has not yet occurred on these loans. As shown in Exhibit 42, [below but for a clearer image see the report] roughly $300 billion of securitized subprime mortgages (36% of outstanding subprime MBS) are set to reset in 2007 alone, with even more occurring in the non-securitized space. This, in our opinion, is the next shoe to fall and will likely contribute to additional delinquencies, foreclosures, inventory and additional pricing pressure." Perhaps this explains the hesitancy implicit in the Secretary's language.

As for the factors that are claimed to be "positive" and "offsetting," i.e., the "diverse, healthy economy", with "business investments start[ing] to pick up", "a very strong labor market", "unemployment at quite a low level", "good growth outside of the country", "exports everywhere are picking up", and the "consumer remain[ing] healthy", each in turn is in strongly disputed territory. At least with regard to the China trade Sec. Paulson admits that the administration have only "been talking about exports." So much less than a positive is this factor that talk of a developing trade war is more on the lips of commentators.

And for a glimpse of the kind of 'creative accounting' that is once again claiming impending losses as income visit the contribution by Aaron Krowne at iTulip Forums, Say Hello To Lendron . After noting that the breaking housing bubble has "already spread from subprime to other sorts of marginal lending, and mortgage lending in general, including 'Alt-A', prime second liens–which back home equity extractions–and any sort of high-LTV loan," this article draws attention to Pay Option ARMs, (adjustable-rate mortgages). These are the ones with the option of paying less than the normal monthly payment, the difference being added to the principal. Thus the label negative-amortization applied to these. And these offer the prospect of an even more explosive situation than the subprime meltdown.

What is startling is the way lenders or portfolio-holders of these treat negative amortization in their accounting, taking the negative amortization amount and adding it to earnings. There is a growing trend in which mortgage lenders and bankers with extensive involvement in this class of mortgage treat this as "capitalization of income from negative amortization" and show it as part of net income, as much as 72% in one particular case. We should all hope fervently that these are not the business investments that Sec. Paulson assures us are starting to pick up.

Monday, May 14, 2007

Betting the Bank, and then some.....

Who hasn't heard stories of inveterate betting men fully alert to the essential truth that everything in life is a wager. It's chilling to think that the progress of the subprime bubble may well depend on the progress of two flies on a window pane, but let's not forget the idea attributed to chaos theory of the connection between the flapping of butterfly wings and the tornado that topples an economy. (A fascinating area in which to see the dissipation of risk based on essentially the same notion is the apparently mundane world of Insurance and Re-Insurance where the losses from disasters are spread in a worldwide market. Mundane until it's recalled that the men in the London coffee-houses were themselves no stiffs when it came to a bet).

The wild frenzy of gambling that now grips the world is not only attested to by the 54 million casino visits made by Americans in 2004 to lose more than $78 billion on the turn of a card or the spinning the slots, in effect sophisticated mechanical flies. James Mackintosh in The unbearable obscurity of exotic hedge funds gives a truly hair-raising listing of the current trend in hedge fund products. These make the sorties into housing speculation of the American homeowner positively parochial. You start to get the flavor of the 'New Economy' on learning from Mackintosh, "As hedge funds move into the mainstream, managers are testing demand for ever-more exotic investments - and finding backers willing to stump up millions of dollars for funds putting cash into everything from football players, wine and art to aircraft leasing and carbon credits."

A telling clue to the unease of large investors in the plain old vanilla securities market can be had from the tendency of big institutions to ensure that their fortunes "will not move in line with shares, bonds and other traditional investments." Following on this in the recent period money has flowed to a range of 'exotic' funds. These include football funds that buy the rights to talented young players in the hope of profiting from transfer fees should these achieve star status; instead of boring old charts investors must assess the risks of injury, drug abuse etc. (American Idol Fund anyone?). Others include fund specialising in sugar, film financing, art and wine.

Ominously, given the level of consumer debt, there are also funds investing in defaulted credit card debts and partnering with collection agencies in recovering the debt. This in an era when some credit card debt carries interest approaching 30% and when the UK for example is beset with problems stemming from the practices of doorstep consumer loan companies. There was a time when this kind of debt was purely a 'family' affair. Perhaps these developments lend a new meaning to the expression 'gangster-capitalism.'

Enter the multiplier, never far behind. Not to be outdone, Orthogonal Partners is launching a fund dedicated to - investing in exotic hedge funds. "There is a wall of money chasing every opportunity in the alternative scene so you really want to be targeting new niches where you still have a scarcity of capital and inefficiencies that can be exploited," says Dan Gore, Orthogonal's co-founder.

A staid voice intrudes; 'Tracy Pearson, head of alternatives at London fund of hedge funds Forsyth Partners, says it is questionable how many of the exotic funds are really hedged. "If it is offshore and they can charge 2 [per cent a year] and 20 [per cent of profits] it is a hedge fund," she says. "We get all sorts of stuff, usually sent from a Yahoo e-mail account."'

Any day now I expect offers from Nigeria to arrive in my inbox; they may even be packaged with the scams offering to make me an instant multi-millionaire in exchange for help with repatriating the fortunes of some hapless tyrant. Hey, I just thought of a great hedge fund idea.

Sunday, May 13, 2007

'Too Much Like 1929'

Bernard Ber, an investment representative with CIBC in Toronto, has published an article that for its superior analysis deserves attention. (This originally appeared in Guest Commentary at but at time of writing has gone missing; this may or may not have conspiratorial implications depending on your temperament; I give an alternative link below). The opinion expressed, needless to say, is hardly the official position of the Bank and one wonders to what extent it is a view shared within the corridors. This writer obviously knows all those numbers and concepts on the currency exchanges that give us all such headaches (well, me anyway).

Of great interest is the thesis that the relationship between China and the USA today is a replica of that between USA and Britain on the eve of the Great Depression.

"The two major players in the world
financial system at that time were the United States and Great Britain. The
United States was the emerging industrial power, whereas Great Britain was the
mature and stagnating industrial power. ...

Now fast forward to today, and what
you see is China as the emerging industrial power and the United States as the
mature and stagnating industrial power."

Tuesday, May 8, 2007

Margin of Errors

Having argued in a recent post that the position of homeowners faced with foreclosure on being unable to meet rising mortgage payments coupled with stagnation or housing price decline, ( see Speculation and The Housing Bubble - "The position is no different in essence to that of someone stricken with margin madness in a stock market bubble."), I was gratified to read this take presented in detail in a comment by jm on a thread at Economist's View . The whole comment is reproduced here:

The real problem in the housing market is
that people are being allowed to speculate with nearly infinite leverage.

In what other market are people as
unsophisticated as the average home buyer allowed to make multi-hundred-thousand
asset purchases with so little cash up front, and without being adjudged capable
of understanding the implications of a margin call -- and more to the point, of
having the financial resources to withstand one?

As interest rates fell through the
last decade, homes began trading like bonds, except that no one would ever let
anyone, let alone the average home buyer, buy bonds with margin loans like the
mortgages being made today.

For decades the home ownership rate
in the US held within a very narrow band around 64%, but over the last ten years
has risen to 69%. That's 0.5 percentage points a year against the number of
households, meaning that the pace of new home buying has been at least 400,000
units a year above the rate of household formation, and that there are now 4
million more home-owning households than we'd have at the historical average
level. Is anyone out there going to claim that this is because the economy is
booming for people in the economic situations of those households?

I predict that, since wages
have risen very little since the late 90s, and home prices were already elevated
then due to the rising ownereship rate, prices are going to fall back to
late-90s levels or below. A lot of people are going to get very cruel lessons on
the risks of highly leveraged speculation in illiquid assets.

The awful evil of this is that it
could have been prevented just by enforcing in the mortgage lending markets the
same kind of standards that are applied to margin buying in the bond market. It
wouldn't have taken any explicit targeting of asset prices or judgments about
what did or did not constitute a bubble.

Posted at Economist's View by: jm Mar 31, 2006 8:24:05 PM

I am left wondering what is the mystery behind the inaction in the face of what could have been prevented so easily. One answer put forward so far is that fueling the housing bubble was a sure fire way of maintaining momentum in the economy in the face of looming recession and in the aftermath of the bubble. Another sees the Fed's cheap money policy as being more a result of being caught between a rock and a hard place than a policy of choice.

Meanwhile we are confronted with what to some are mixed signals everywhere. Reports of the Housing Bubble being a global phenomenon multiply. Yet the securities market appears to roar on oblivious. The common wisdom on bubbles, which I share for now, is that things can't go on forever. Yet there does seem to be a certain resiliency in the Global Economy. Could it be that there is something different about the new conditions of globalization that we are not seeing?

Wednesday, May 2, 2007

A New 'New Deal'?

If the unfolding contagion of the subprime crisis really has the potential to precipitate, (in the awkward translation of the Global European Anticipation Bulletin' No.14 report - see below.) 'America's Very Great Depression', then sooner or later the question of a "New 'New Deal'" must enter the discussion. And in the belief of many it is not only America's fate that is in the balance. If as many claim the money financing this housing bubble comes from global sources, the end of the US housing bubble could have disastrous consequences globally. If indeed 50% of “securitized” mortgage debt is held by overseas investors, the subprime meltdown could shake the entire global financial system.

While it is true that assessments of the extent to which the New Deal rescued America from the ravages of the Great Depression vary widely, in any case, on this occasion perhaps we can for once commit ourselves to learning something from history. And this at a time when there is an unmistakable undercurrent of hopelessness abroad in the land. It is salutary to recall that the most pessimistic reflections on the New Deal conclude that it was all for nothing and that the real 'saviour' lay in the dreadful carnage of the World War.

A few areas therefore that strike me as candidates for deliberation. The first question that comes to mind is whether America today is in a position to undertake a new New Deal. Much has been written about America's changed position in the world economy. Whether this change is reflected in international wealth production rankings, the structure of international trade, or national and international debt liabilities, the picture is very different from that faced by FDR. Among European economists some hold the view that Europe could 'de-couple' from the impact of a New American Great Depression. Such opinions would have been unheard of in earlier periods.

A second question concerns the power of the nation state to intervene in an era of privatization and the global free market. It is said that 'the market' is the best mechanism for the solution of all economic problems and that matters should be allowed to run their course. However, whatever merit there is in this idea must surely meet its limit if the consequences are large scale social disruption and the attendant disorders that threaten the very social order that such a market mechanism is claimed to uphold.

There are signs that the implications of an economic disaster are being taken seriously in the centers of power. Witness Senator Charles Schumer's recent remark that, “The subprime mortgage meltdown has economic consequences that will ripple through our communities unless we act.” Federal regulators have called on lenders to work with those borrowers unable to meet their high-risk mortgage payments to help them keep their homes.

And those who perhaps have the most at stake in the spectacle of millions of homeowners defaulting on their loans are showing signs of action. Several major lenders have already unveiled plans for a housing market rescue. Citigroup and Bank of America have together created the Neighborhood Assistance Corporation of America. This will provide $1 billion in subprime loans assistance to allow homeowners to refinance their mortgages and avoid foreclosure. The 30 year loans envisaged will carry a fixed interest rate one point below prime with no fees and with the banks paying closing costs. Washington Mutual has announced a $2 billion program to forestall the worst of the foreclosures impact and Freddie Mac has committed $20 billion with the same goal in mind, adding that the term would be extended to a maximum of 40 years from the existing 30 year limit.

Perhaps what we see in these moves is the beginning of a 'privatized' New Deal? Perhaps this also signals that we are reaching the end of the period of widening income differentials? Whatever the case where is the logic in waiting for a disaster to happen before the necessary response is called forth? Surely the time for a New 'New Deal' is now and not when the damage is done. Sure, the people at Citigroup, BoA and WaMu are acting in their own best interests. But, I have to believe that people of honour and integrity are in the majority on this shrinking planet, the opposing view being too terrifying to entertain. And if that's Utopian perhaps the time has come for this word to be rehabilitated.

Saturday, April 28, 2007

Forum Pick of The Month

Since launching this blog I need hardly tell you my surfing patterns have had to adapt to the job of finding the information needed to digest the subprime crisis and all things 'bubblenomic.' It's certainly become a dizzying learning experience (whether a successful one will be up to the judgement of others). It seems a worthwhile endeavour in any case to share the sources I am coming across and with that end I will try to present one source that I've found particularly rich each month.

This month I am calling your attention to the iTulip Forums which appear on the website of the company of the same name founded by Eric Janszen, co-author with David Wiedemer, Robert Wiedemer and Cindy Spitzer, of America's Bubble Economy: Profit When It Pops. Although there is a premium area of this forum, there is plenty to be had from the free area, including regular commentary by Jansen, and additionally by the respected Investment Analyst & Portfolio Strategist, John Serrapere; Sean O'Toole of Granite Realty; Eric Hodges of Stahlschmidt Financial Group and many other writers with something valuable to say.

As of this writing the Forums have had 6,911,843 visitors since Jan 1999.

(I have no connection with iTulip other than as a public user, but I have added an Amazon link to the book mentioned above).

Tuesday, April 24, 2007

Speculation and The Housing Bubble

Most of us have, or at least think we have, a pretty good idea of what speculation means when applied to the stock market. Financial advisers will give us various rules the first among which is to speculate only with money the loss of which won't be a catastrophe for your portfolio and assets in general. But what form does speculation take in the housing market?

At first glance we think we know the answer to this too. It's obvious in the statistics after all. Just look at the sales in the non-owner-occupied category and there you have it. Formally, in other words, we think of speculative buying in the housing market as involving those units bought by investors, either with an eye to the fastest possible capital gain in a rising market, or for the rental market with the same ultimate intention of realizing a capital gain through resale.

It is not usually the case that a property bought for owner occupation is considered a speculative purchase. However, in the period of a bubble such as the present subprime bubble, (actually, as we are daily learning, it's a general housing bubble), it can be said that in fact a proportion of owner occupier buys have a greater or lesser speculative component. This will have a tendency to be amplified in the course of the bubble. The main indicator of whether this speculative component is present will be to whatever extent the buying decision is being made on the basis of the profits to be had from a rapidly rising market. Anyone with a home that serves current needs perfectly well and even has a substantial percentage of equity built up who then sells with a view to cashing out this equity and leveraging it into a more expensive home is speculating. Worse still, they are speculating against the advice of the staid investment advisor mentioned earlier. For who can afford to lose a home should the speculation not pan out without it being a catastrophe? The position is no different in essence to that of someone stricken with margin madness in a stock market bubble. And the consequences when the bubble bursts are likely to be the same: the margin call that cannot be met from evaporating gains or the mortgage adjustment that cannot be met from increased equity.

Unfortunately, a whole fairytale about the home being the "biggest investment you will make in life" has taken hold almost universally in the last few decades. This idiotic idea may be wonderful copy for the Realty world but it is disastrous for the homeowner. And it is especially disastrous for those homeowners who could have traded down and thereby could now have cash in hand ready to take advantage of the coming bargains at the bottom of the cycle.

Read twice: Don't speculate with an asset the loss of which would be a catastrophe.

Monday, April 23, 2007

Denial Wavering Across The Pond

It is remarkable how quickly the euphoria hitherto evident in the UK housing market is showing signs of a definite mood swing. On Apr 9th, Larry Elliott, economics editor at The Guardian was reassuring readers whilst hedging his bets under the banner Britain is not the US, so don't panic - yet, by Apr 21 the 'pink un', the UK's venerable Financial Times, an organ not known for frivolity, finally announced in the measured tones we have come to expect of it, Subprime market in UK 'has parallels with US.'

Before the bombshell of revised UK inflation expectations and the consequent fall in the dollar against the pound, Elliot was assuring his anxious readers with the Halifax, Britain's biggest lender, announcement that house price inflation had broken through the double-digit barrier for the first time in a year in March, (rising to above 11%) and that the Bank of England decided that a raise in interest rates from their current level of 5.25% was not in the cards; "get on the ladder now before that dream home becomes even less affordable," he urged.

Turns out though that the Brits have been having their own subprime party, just that true to form they haven't called it by name, ever wary of the Yankee's tendency to embarrass with straight talk. But whadda ya know; turns out that UK lenders have attracted first-time buyers with low introductory offers, there has been an increase in 'self-certification' (read liar-loans) for those with 'irregular income' (read $100,000 pa 'lawn care specialists'), and in return for a higher interest rate the usual checks aren't done on the borrower's ability to pay. Also lenders mortgages can be had at five times income and the ratio of house prices to income is higher there than in the US. Sound familiar?

I was particularly amused by Elliot's invocation of US "unscrupulous lending practices," not to be found of course among the saintly denizens of Threadneedle Street. Then there's the hoary old myth of land availability in which the US has limitless open space coupled with lax planning laws so when prices increase supply can easily be adjusted, while the UK is a small island where land availability is additionally limited by usage regulations. All this together with a favourable property tax system leads to an inefficient housing market where high demand leads to inflation rather than an increase in supply. The conclusion Elliot draws: UK house prices have an in-built tendency to rise and low quality UK loans are less likely to lead to negative equity than they would in the US. Amazingly, his argument for the strength of the UK economy appeals to the health of consumer spending, financed through, you guessed it, mortgage equity withdrawal! And so it goes.

Enter Jane Croft at the Financial Times less than (an eventful) two weeks later; ""Banks may be "taking on substantial risks" by ramping up mortgage lending to customers with patchy credit histories, the City regulator warned yesterday." It seems arrears in the UK subprime sector are 20 times those on primes. And shockingly enough, rising house prices are leading some high-debt borrowers to take on additional debt by borrowing against the resulting increase in 'equity.' Clive Briault of the UK regulatory Financial Services Authority: "For example, lenders are in some cases taking on substantial risks through a combination of high loan-to- value ratios and high income ratios, in part because borrowers are using additional borrowing against property as a means not only of debt consolidation but also of increasing their debt at regular intervals by taking as much advantage as possible of rising house prices."

On Apr 20 unmistakeable signs of a sea-change emerged with a host of lenders cancelling fixed rate deals already in the pipeline: Lenders pull fixed-rate mortgages. Is a housing market crash coming?

If it quacks like a duck.

Friday, April 20, 2007


This paper appearing on Financial Sense University deserves serious attention. For one thing it doesn't for a moment indulge in any of the prevalent nonsensical theories of money as 'fiction', 'signs', 'symbolic' etc. In doing so it reasserts the distinction between price and value and correctly identifies gold as the money commodity. One had thought such clarity had died with Classical Political Economy.

The demonstration is accomplished by a series of elegant charting exercises which begins by considering the Dow 1997-2007 which of course is denominated in Dollars. However, "Since January 2002 the dollar has plummeted 31.25%, versus other currencies. This has caused money (gold) to rise measured in currency (dollars) as more and more investors move out of their currency and into real money."

A series of charts is then presented which show the Dow in Gold, Silver and a selection of different currencies. But it is those charts that show the Dow in terms of the values of several commodities, viz. the Commodities Index, Copper, Crude Oil, Industrial Metals and Food that are my favorites.

Part II of the paper critiques the official measurement of CPI where we find another uncommon appreciation of the nature of money; "The true definition of inflation is an expansion of the currency supply (incorrectly referred to as the money supply… currency and money are very different things…)" In carrying out this part of the analysis reference is made to the Fed's action in ceasing the publication of M3 and the significance of this move in masking real inflation. Considered together with the contemporary suspension of the publication of repurchase agreements (RPs) the conclusion drawn is that, "... now the Fed has hidden one of the methods used to inflate (Repurchase Agreements), and they have hidden the measurement that would reveal this inflation, (M3)." Real inflation over the period considered is calculated in the order of ~ 60%.

Constructing the missing M3 figures from other data claims to show that, "there is now 70% more currency in the currency supply today than when the Dow peaked in 2000. This means that today the Dow would have to be above 20,000 to be in positive territory."

Do yourself a favor; read the full article.

Tuesday, April 17, 2007

GEAB N° 14 A Chronicle of America's Very Great Depression

The (free) abstract of GEAB 14 is now available online. This issue claims that the "2007 Very Great Depression has indeed begun."

Two aspects are identified:

1. A historical reversal of global financial balances:

The report chronicles the decreasing role of the US in the field of international trade and wealth production signalling an end to a century-long tendency which began during WW1. This is supported by statistics showing the current dominant place of the EU in the external trade of oil-producing countries. In addition China has now surpassed the US as premier source of EU imports. It also notes that in March 2007, the value of European financial markets surpassed those of the US. This represents "a 'seismic tremor' for the global financial markets as it shows a displacement in the centre of gravity of the global financial sphere out of the US and towards the Old Continent."

The following US trends are identified:
  1. relentless and durable decline of the US currency
  2. decreasing share of the US in international trade and the production of global wealth
  3. geographic remoteness of the US compared to the 'Old Continent's' Eurasian economic centres
  4. impoverishment of the US consumer
  5. collapsing competitiveness related to collapsing quality of education

2. An implosion of the US society:

US income disparity is now comparable to what it was on the eve of the Great Depression. The ratio of incomes between the richest 0.01% and the poorest 90% hovered in the 170-180 range throughout the period 1950 to 1980. It soared to 880 in 2005, this being about the same level (891) as in 1928. It is thought that this disparity will produce severe social and political tensions, a hint of which are already present in the number of foreclosure evictions. The report maintains that the economic recession will grow deeper and that US society is being split into two groups, one poor and the other very rich, with the middle class in increasing danger of falling into the poor group.

Unlike the situation during the Great Depression when the US was in the ascent as an economic power, the current depression will take place in a period when US economic power is eroding. It is claimed that in April 2007, the tipping point of the global systemic crisis is already occuring and that trends will speed up and their impact intensify and become obvious to everyone.

The full report (subscription) describes four other trends that will dominate the coming quarter:

  1. The continuing contagion of other types of home loans and other sectors of the economy by the subprime crisis.
  2. The return of stagflation with US growth falling below 1% by this summer. A further sharp increase in the US deficit by mid-2007.
  3. An intensification of the geopolitical oil crisis in May 2007 with Iran and Venezuela on the frontline and Oil on the rise (USD$100) and the US Dollar suffering a further dramatic fall by summer 2007.

Monday, April 16, 2007

Credit Suisse Mar 12 2007 Mortgage and Housing

The Credit Suisse research report, Mortgage Liquidity du Jour: Underestimated No More, is a must-read for anyone who wants a thorough look at the US Housing Market. The report considers the deteriorating conditions in the mortgage market and their effects on the homebuilding industry and the resale-homes market, indicating that problems are not restricted to the subprime area or entry-level housing only.

The report considers recent trends in the prime, Alt-A and subprime markets and summarizes current guideline and regulatory changes and their effect in contracting the mortgage market further. The conclusion drawn is that tightening liquidity puts current builder inventory backlogs in further jeopardy.

Looking at the performance of current mortgages and the impact on new home sales it estimates that there are approximately 565,000 homes in the foreclosure process and goes on to consider possible projections of the effect on new and existing home sales, concluding that 50% of the subprime market is at risk of default.

The pdf report can be downloaded at Bill Cara's site where there is also a detailed commentary.

Saturday, April 14, 2007

Heebner: "Biggest housing-price decline since the Great Depression."

Bloomberg reports an interview with Kenneth Heebner, co-founder of Capital Growth Management, the top-performing real-estate fund. Commenting on the potential effects of the subprime crisis Heebner inferred that U.S. home prices could fall as much as 20% due to rising defaults on high-risk financing. "It will be the biggest housing-price decline since the Great Depression," he is quoted as saying.

Nor will hedge funds be immune from the effects of subprime-loan defaults. Although to a lesser extent, the same goes for mutual funds that invested in Collateralized Debt Obligations (CDOs) and other instruments secured by this type of loan. However investment banks and the brokers who are in the business of packaging and marketing these products will avoid being hurt, having passed on the bulk of the risk to investors. "They know the product is toxic; they're not going to get caught," Heebner said.

These comments by someone who has a consistently successful track record in calling the market should give pause for thought. A 20% drop in prices would undoubtedly affect many more people than the lower rungs of the subprime borrowers. Those with half-million dollar homes who have over-reached in equity backed borrowing could well find themselves walking away from homes with $100,000 of debt following them. I have witnessed just such situations in the Ontario market in the 80's. This is before the knock-on effects in the rest of the economy are even considered.

Many people have been paying attention to the market and conversations about selling are growing in frequency. This is a difficult matter to decide. Those who leave such a decision to the end in the hope of a recovery can end up being disastrously disappointed. On the other hand, at least one commentator not known for optimism has offered the opinion that a slump in prices that he sees as inevitable in mid-year could be followed by an upsurge in the fall when buyers from Asia will be attracted by the property bargains to be had in the US. But the same writer has been issuing a 'sell now' message for at least a year.

No help will come on this question from anyone who has a vested interest in shoring up the market. This includes politicians and mainstream financial 'gurus'. And it is well to bear in mind that your Financial Planning Associate at the local bank is more often than not speaking on the basis of the minimal requirements for offering such advice that holds in most jurisdictions.

Thursday, April 12, 2007

'Glut is huge - "staggering" home inventory erases hope of a recovery in 2007'

A St. Petersburg Times report mentions a term used by Realtors. In the business it's known as "absorption" and it represents the ratio of sales to listings in the market. It is calculated by dividing the total monthly sales by the total number of homes on the market. In the Tampa Bay area in February, it was 5.4% meaning about one in every 20 homes on the market found a buyer, or 2,225 out of 40,896 single-family homes and condominiums. During the peak of the 2005 boom market the equivalent figure was running over 50 percent. At that time half the listed homes sold in a given month. Realtors have been unable to find a worse absorption rate in the historical data.

This implies home values are likely to stagnate or fall this year. While the Florida Association of Realtors reports that home prices fell 2% in the Tampa area in the past year, declines have exceeded 10 percent in many neighborhoods. The buyers market is already well in place with the figures additionally distorted by the premiums required for a successful sale which can include paying buyers closing costs as well as selling at the reduced prices.

Another figure indicating the character of the boom time market is that roughly 25% of homes bought were "non-owner-occupied", in other words, bought by 'investors'. Many of these investors used riskier loans in hope of quick sales, and many could default as properties await buyers. The situation is further worsened by the 'hidden home inventory' which includes sales by-owner, new construction and condo conversions and bank initiated home foreclosures. A sign of the desperation comes from one agency's report of an area condo converter offering a 12 percent commission, four times the normal rate. Another comments, ""The buyers are on the sidelines waiting for the blood to continue to rise."

Tuesday, April 10, 2007

Feedblitz Email Subscription Added

I've added a Feedblitz subscription service so you can now get posts and comments without visiting the page. This can be handy when accessing email 'on the go' or just when you aren't in the mood for clicking links. When I figure out how I will make it possible to leave comments through this method, assuming it's not already a feature!

Monday, April 9, 2007

Krassimir Petrov - Effects of inflation

An interesting list of the effects of inflation from this writer:

No positive social or economic effect
Increases the level of prices
Distorts relative prices
Creates risk and uncertainty
Income diffusion effect – early comers gain at the expense of late comers
Benefits inflators (inflators=recipients of the inflation tax)
Hurts fixed income groups
Hurts existing creditors
Hurts all holders of money [through] Inflation Tax
Increases the consumption-investment ratio
Lowers national savings
Reduces economic growth & standards of living
Creates illusion of increased business profits
Consumes capital
Imposes “menu costs”
Imposes “shoeleather costs”
Causes a bracket creep
Creates Malinvestments
Causes Business Cycles
Causes currency debasement = currency devaluation
Causes more expensive imports
Strengthens industrial cartelization (predominantly for inputs/resources)
Causes speculation and bubbles

The list appears on and there is a link to a videocast talk on the subject.

This weekend I pulled an old paperback copy of Galbraith's The Great Crash 1929 off the bookshelf and have been engrossed with it since. Galbraith's account of the Crash does not give credence to the common interpretation that it was the result of the onset of a recession that was already occurring but the inverse of this explanation. More later but I am struck by the way in which the work leads to the idea that the credit bubble in the Real Estate market is very like a situation where the stock market is running on no margin.

The book is certainly a gripping read and of course Galbraith was that exception in being an economist who could weave an entertaining story while still adhering to impeccable scientific standards. Haven't looked to see if it's still in print; it ought to be.

Saturday, April 7, 2007

Features added today

I've added some new features. Note especially the News Feed at bottom of page. I will do some placement redesign when I have the opportunity to get this to the top but it will involve a severe (for me) change in my template. Who said Blogger For Dummies? The topics I've set up for the feed should deliver items of interest to anyone finding this blog relevant. I've included Home Foreclosures, the Subprime Crisis, the Economy and China Trade Relations to begin with.

I've also added Google Adsense. Hopefully the ads will bear some semblance to the blog topics.

It is almost impossible to avoid having a US-centric orientation when we think of news. Worse still is the West-centric orientation which really obstructs appreciating the extent to which Global relationships and trading patterns have changed. I highly recommend paying attention to Asian commentary if only to get that sense of looking in from the outside of the box. Shortly I will put up some links to those Asian publications I have found of value.

Thursday, April 5, 2007

Home Foreclosures - What future?

Home foreclosures and the home lending crisis are very much in the public mind right now, or at least they should be. A housing crisis on its own is not a pretty thing as anyone who has lived through one knows. But the present subprime crisis is taking place in the context of other economic forces that many suggest, should home foreclosures continue unabated the consequences for not only the US economy, but for the Global economy would be dire indeed.

My intention for this blog is to act as a clearing house for the many strands of opinion and analysis on these questions. Subprime home loans are only one aspect of a complex picture. To see a macro appreciation of this there is probably no better place to begin than the Global European Anticipation Bulletin which looks at all the global trends that impact each other and which situates the US home lending crisis in the context of international economic forces.

On each post here I will be bringing you links to other items I have researched. It has been my practice daily for some time to use Google News to track what's being said not only in the MSM but among the market commentator blogs. This is extremely time consuming and you may as well have the results of mine rather than duplicate the effort yourself.