GEAB No. 20 Breaking phase ahead for the global financial system in 2008

Posted by D.D.Grant at 3:07 AM

GEAB No. 20 is now issued. This is one of the few publications that has achieved a remarkable predictive record on the subprime crisis and the global credit crisis. Although it is a subscription item (I have no financial connection or other connection) there is an informative abstract provided on the site. The following is excerpted from this abstract:

"The rapid aggravation of the global systemic crisis as its phase of impact unfolds (1) has brought our researchers to estimate that the contemporary global financial system will reach a breaking phase in the course of 2008.

Crisis follow-up indicators now show that we should no longer only fear the failure of some large financial institution (and of many small ones) in the US first and the in the rest of the world (cf. GEAB N°19), but that the global financial system itself is structurally hit.

The network of global central banks' repeated incapacity to control the « credit crunch » when the two historical pillars of the contemporary global financial system (a US economy in recession and a US dollar in decay), reflects the growing surge of centrifugal forces within this very system.

Indeed it is no more a matter of competence or of magnitude of the corrective actions implemented by central bankers. These times are over since summer 2007 and, according to LEAP/E2020, we are now witnessing an increasing divergence in
economic interests among the different components of the global financial
system.

The expected failure of the Fed's most recent attempt to coordinate a joint action of the main central banks in order to feed the banks in US dollars (2), is particularly revealing. This action meant to restore confidence in the financial system by two means:

- reinstating the now moribund inter-banking market, by proving the existence of a « joint force de frappe (strike force) » of global central banks.

- enabling large financial institutions in distress to anonymously restock in US dollars, in exchange of their assets being accepted as discount window collateral (i.e.worth their value some months ago, when they were still worth something)(3).

Of course the first goal is predominant, as reinstating of interbanking market is the only means to bailout banks in distress in a sustainable manner. However, it is already clear that the target has failed to be reached (4). The LIBOR (London Interbank Offered Rate), a key indicator of the health of the interbank market, has not moved an inch from its highest levels ever reached (5). “Psychologically” speaking, the global stocks decline recorded after the action of the central banks was announced, proves this if any message went through, it is that the situation for large US banks is even worse than announced in the past months (6).

According to LEAP/E2020 research team, it is already a fact that after it lost control over interest rates (cf. GEAB N°16), the US Federal Reserve has now lost two more of the attributes that characterized the post-1945 global financial system: its credibility as a proactive player capable of influencing heavy market trends(8), and its capacity to organize and drive global central banks altogether along its own rhythm and goals. In doing so, it has just lost the ability to steer by itself the entire global financial system, an ability it has gained after 1945.

Even though today, financial markets are mostly receptive to the loss of the first attribute (9), our researchers estimate that it is the loss of the second attribute (and the impact on the system's leadership) which will result in the global financial system's break sometime in the course of next year, probably by summer, when the effects of the ongoing US recession will start being fully felt and when Asians and Europeans will decisively be compelled to impose their own priorities to the “Fed-pilot”.

In this 20th issue of the GlobalEurope Anticipation Bulletin (December 2007 issue), our team describes in detail the characteristics of the growing divergences between the four main central banks (US Federal Reserve, European Central Bank, Bank of England, Swiss national Bank)."

Major Bank Crisis?

Posted by D.D.Grant at 1:27 AM

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,
2007)

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.

Rocky Road Ahead for US Taxpayer

Posted by D.D.Grant at 10:53 PM

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.

The End of the Beginning

Posted by D.D.Grant at 10:46 PM

"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.

Blame the Victim Rules the Subprime Debacle

Posted by D.D.Grant at 2:04 AM

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.

A New 'New Deal'?

Posted by D.D.Grant at 1:28 AM

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.

Forum Pick of The Month

Posted by D.D.Grant at 12:20 AM

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).

Speculation and The Housing Bubble

Posted by D.D.Grant at 11:32 PM

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.

Denial Wavering Across The Pond

Posted by D.D.Grant at 1:28 AM

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.

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

Posted by D.D.Grant at 1:03 AM

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.

Credit Suisse Mar 12 2007 Mortgage and Housing

Posted by D.D.Grant at 2:55 AM

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.

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

Posted by D.D.Grant at 12:37 AM

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.