Bear Sterns seems to be having some problems with their subprime portfolio fund. Since the March subprime firework show, we had many Wall Street pundits telling us that subprime was contained in a silo and would not impact other lenders who managed funds prudently and hedged for risk. Well guess what? They didn’t. The news coming out this week is that two Bear Sterns funds are close to being shut down after Merrill Lynch decided to seize about $850 million in assets and began selling assets off almost immediately (aka highly motivated seller). Merrill is smart in trying to liquidate whatever it can before the market hits full speed implosion. The major signal here and what sent Wall Street tumbling is that solid funds are not immune to the risky loan implosion, a chant many in the industry were preaching after notables such as New Century Financial bit the dust. Refinancing and mortgage equity withdrawals are dropping at high rates. These mortgage goliaths claimed that they had systematically filtered out risk from their portfolios and all would be well since housing, rent, and credit never went away. But when you have $1 trillion in loans resetting and a housing market in the shamble, there is no way you can engineer your way out of this one. Thank Alan Greenspan for recommending adjustable rate mortgages to the American public.
Dumb, Dumber, and Hedge Funds
There was a study conducted showing that those with high IQs usually made the dumbest mistakes in finance. They usually had high incomes due to their educational background, but somehow made idiotic moves in financial markets. Why? Sometimes they mistakenly believe they are immune to economic cycles or the risk of chance. Think Long Term Capital Management (LTCM) and Amaranth. Both highly managed funds with unbelievably intelligent financial engineers running the show. Where are they now? It reminds me of the story of the would be mail bomber who sent out a package with not enough postage; as the package was returned to sender he decided to open it up. Hilarity ensued. These mortgage backed securities funds have been holding up rather strong up until this point. We’ve been seeing boiler room mortgage fund operations running with a bunch of frat guys dropping like flies which is expected. But seeing a major player such as Bear Sterns draws the ire of Wall Street raises some eyebrows and makes us think twice about pulling out that American Express card for vacations. This implosion will impact everyone.
Private Mortgage Insurance
Private Mortgage Insurance (PMI) is insurance paid by the buyer to protect the mortgage holder on loans over 80% loan-to-value. As a buyer this is ridiculous since you can careless if a mortgage company goes down in flames. They should manage their risk accordingly and not push this charge onto the consumer. PMI issues a yearly risk assessment of the market based on a 50 to 1000 point scale. The higher the score, the more likely said market is to fall. Let us take a look at numbers for last year:
San Diego-Carlsbad-San Marcos, Calif., 599
Nassau-Suffolk, N.Y., 589
Boston-Quincy, Mass., 588
Santa Ana-Anaheim-Irvine, Calif., 588
Sacramento-Arden-Arcade-Roseville, Calif., 585
Riverside-San Bernardino-Ontario, Calif., 583
Oakland-Fremont-Hayward, Calif., 582
Los Angeles-Long Beach-Glendale, Calif., 575
Providence-New Bedford-Fall River, RI-Mass., 568
San Francisco-San Mateo-Redwood City, Calif., 560
San Jose-Sunnyvale-Santa Clara, Calif., 559
Cambridge-Newton-Framingham, Mass., 537
Edison, N.J., 536
New York-White Plains-Wayne, N.Y.-N.J., 498
Las Vegas-Paradise, Nev., 481
Newark-Union, N.J.-Penn., 459
Fort Lauderdale-Pompano Beach-Deerfield Beach, Fla., 441
Washington-Arlington-Alexandria, D.C.-Va.-Md.-W.Va., 431
Miami-Miami Beach-Kendall, Fla., 359
To simplify the data, according to the above data San Diego has a 59.9% chance of falling in 2007. The data has been out since early 2006. My question to these financial juggernauts at Wall Street is, if you have multiple metro areas in California blinking red with 50% or higher risk assessments, why in the world did they continue to fund risky mortgages? Doesn’t matter at this point. We are seeing what is happening. Fund holders are getting smoked while assets are being distributed out. Guess what this will do to the overall market? More inventory and more motivated sellers. What does this do to prices? Knocks them down. No financial engineering degree needed to see this stupidity unfold.
Peak-a-Boo I See you Hedge Funds
The problem in this industry is transparency and public apathy. Everyone does whatever they want. Government oversight is a joke. The major political action committees get cash from the National Association of Realtors. So where is their allegiance? But many people were screaming a siren call long ago. Folks like Bill Gross and Robert Shiller. Yet the pundits used their media outlets to marginalize these folks as tinfoil hat wearing bubblelistas. Why ruin the party with these neg-heads? Well now everyone is waking up with a major hangover wondering what happened. When you drive on the freeway, do you ever see those folks that pick their nose behind tinted windows? For some reason, they think the tint is strong enough to hide their facial nugget digging so they go at it with a vengeance. But guess what? The sun shines and illuminates your shadow idiot! We can see your entire exercise in one finger gymnastics.
Think this mortgage mess isn’t prevalent? “A recent sample of 100 stated income loans which were compared to IRS records (which is allowed through IRS forms 4506, but hardly done) found that 90% of the income was exaggerated by 5% or more. MORE DISTURBINGLY, ALMOST 60% OF THE STATED AMOUNTS WERE EXAGGERATED BY MORE THAN 50%." These results suggest that the stated income loans deserves the nickname used by many in the industry, the “liar’s loan.” Good times. Think housing isn’t a big deal? As of 2006, residential housing now makes up 16 percent, or $1.9 trillion, of the gross domestic product and is the economy's largest single sector, slightly bigger than the industries and services that supply health care. Housing is the economy.
So is the case with the mortgage backed securities market and collateralized debt obligations (CDOs). They figure the public is too busy and dumb picking their nose to understand what is going on in Wall Street. What they did is repackage financially irresponsible loans with prime loans and sold them off on the securities market. Like taking a whiz in the sea; no one will notice right? Well what if it wasn’t the sea and your county pool? And everyone simultaneously decided to let go of their liquid wealth? Would you want to swim in that pool? Well we have a dirty mortgage market with horrible debt floating all over the place. Care to take a dive into the housing industry?
Dumb, Dumber, and Hedge Funds
There was a study conducted showing that those with high IQs usually made the dumbest mistakes in finance. They usually had high incomes due to their educational background, but somehow made idiotic moves in financial markets. Why? Sometimes they mistakenly believe they are immune to economic cycles or the risk of chance. Think Long Term Capital Management (LTCM) and Amaranth. Both highly managed funds with unbelievably intelligent financial engineers running the show. Where are they now? It reminds me of the story of the would be mail bomber who sent out a package with not enough postage; as the package was returned to sender he decided to open it up. Hilarity ensued. These mortgage backed securities funds have been holding up rather strong up until this point. We’ve been seeing boiler room mortgage fund operations running with a bunch of frat guys dropping like flies which is expected. But seeing a major player such as Bear Sterns draws the ire of Wall Street raises some eyebrows and makes us think twice about pulling out that American Express card for vacations. This implosion will impact everyone.
Private Mortgage Insurance
Private Mortgage Insurance (PMI) is insurance paid by the buyer to protect the mortgage holder on loans over 80% loan-to-value. As a buyer this is ridiculous since you can careless if a mortgage company goes down in flames. They should manage their risk accordingly and not push this charge onto the consumer. PMI issues a yearly risk assessment of the market based on a 50 to 1000 point scale. The higher the score, the more likely said market is to fall. Let us take a look at numbers for last year:
San Diego-Carlsbad-San Marcos, Calif., 599
Nassau-Suffolk, N.Y., 589
Boston-Quincy, Mass., 588
Santa Ana-Anaheim-Irvine, Calif., 588
Sacramento-Arden-Arcade-Roseville, Calif., 585
Riverside-San Bernardino-Ontario, Calif., 583
Oakland-Fremont-Hayward, Calif., 582
Los Angeles-Long Beach-Glendale, Calif., 575
Providence-New Bedford-Fall River, RI-Mass., 568
San Francisco-San Mateo-Redwood City, Calif., 560
San Jose-Sunnyvale-Santa Clara, Calif., 559
Cambridge-Newton-Framingham, Mass., 537
Edison, N.J., 536
New York-White Plains-Wayne, N.Y.-N.J., 498
Las Vegas-Paradise, Nev., 481
Newark-Union, N.J.-Penn., 459
Fort Lauderdale-Pompano Beach-Deerfield Beach, Fla., 441
Washington-Arlington-Alexandria, D.C.-Va.-Md.-W.Va., 431
Miami-Miami Beach-Kendall, Fla., 359
To simplify the data, according to the above data San Diego has a 59.9% chance of falling in 2007. The data has been out since early 2006. My question to these financial juggernauts at Wall Street is, if you have multiple metro areas in California blinking red with 50% or higher risk assessments, why in the world did they continue to fund risky mortgages? Doesn’t matter at this point. We are seeing what is happening. Fund holders are getting smoked while assets are being distributed out. Guess what this will do to the overall market? More inventory and more motivated sellers. What does this do to prices? Knocks them down. No financial engineering degree needed to see this stupidity unfold.
Peak-a-Boo I See you Hedge Funds
The problem in this industry is transparency and public apathy. Everyone does whatever they want. Government oversight is a joke. The major political action committees get cash from the National Association of Realtors. So where is their allegiance? But many people were screaming a siren call long ago. Folks like Bill Gross and Robert Shiller. Yet the pundits used their media outlets to marginalize these folks as tinfoil hat wearing bubblelistas. Why ruin the party with these neg-heads? Well now everyone is waking up with a major hangover wondering what happened. When you drive on the freeway, do you ever see those folks that pick their nose behind tinted windows? For some reason, they think the tint is strong enough to hide their facial nugget digging so they go at it with a vengeance. But guess what? The sun shines and illuminates your shadow idiot! We can see your entire exercise in one finger gymnastics.
Think this mortgage mess isn’t prevalent? “A recent sample of 100 stated income loans which were compared to IRS records (which is allowed through IRS forms 4506, but hardly done) found that 90% of the income was exaggerated by 5% or more. MORE DISTURBINGLY, ALMOST 60% OF THE STATED AMOUNTS WERE EXAGGERATED BY MORE THAN 50%." These results suggest that the stated income loans deserves the nickname used by many in the industry, the “liar’s loan.” Good times. Think housing isn’t a big deal? As of 2006, residential housing now makes up 16 percent, or $1.9 trillion, of the gross domestic product and is the economy's largest single sector, slightly bigger than the industries and services that supply health care. Housing is the economy.
So is the case with the mortgage backed securities market and collateralized debt obligations (CDOs). They figure the public is too busy and dumb picking their nose to understand what is going on in Wall Street. What they did is repackage financially irresponsible loans with prime loans and sold them off on the securities market. Like taking a whiz in the sea; no one will notice right? Well what if it wasn’t the sea and your county pool? And everyone simultaneously decided to let go of their liquid wealth? Would you want to swim in that pool? Well we have a dirty mortgage market with horrible debt floating all over the place. Care to take a dive into the housing industry?
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22 Comments:
Dr. HB,
I left my question the other day.
I copied it here to ask it again.
Sorry if I am bothering you...
But I hope you reply to my question. It is a kind of dumb question, though.
----------------------------------
I think you are right when you said "If you buy now I hate to say it but you'll lose a lot of equity in the next two years." that is in the comment posted under the article on Friday, April 06, 2007.
But I have a dumb question. What if inflation surges? How much will inflation affect it? High inflation can help reduce your mortgage debt if it is 30yr fixed. Doesn’t it?
Anon 9:47,
Inflation "growth" is still relative since it impacts all. If you ever studied economics, you might remember that inflation can be categorized into three tiers or tranches. T1 are those first who "win" from inflation. T2 just breaks-even or losses from a little. T3 tiers which are consumers have drastically less purchase power.
Inflation will only make the situation worse since it will cause everything but your salary to increase in price, including housing cost.
Howdy... Love the blog, but I do have one issue: the subtitle. In order to more accurately mimic the subtitle of Dr. Strangelove, your subtitle should be: "How I Learned to Forget the Housing Bubble and Love Southern California", since Dr. S is "How I learned to stop worrying and love the bomb".... Just one man's opinion, though.
anon 9:47,
Gear up for stagflation. That is, sluggish economic growth coupled with a high rate of inflation and unemployment. Meaning, less money to buy homes and tighter credit. What we are seeing with this hit to Bear Sterns is Wall Street is fearing a market becoming more cautious about credit. The entire game is dependent on credit so stifling off easy money will surely bring the game to a close.
"But I have a dumb question. What if inflation surges? How much will inflation affect it? High inflation can help reduce your mortgage debt if it is 30yr fixed. Doesn’t it?"
Not a dumb question at all. I wrote about this in a previous article that rates do not matter if nominal prices are disconnected with market fundamentals. The mentality of basing all decisions on cheap credit is faulty. Eventually you have so much debt being paid off at a tortoise pace, that debts being called in collapse the market. What do you think Merrill did today?
So say your debt is $400,000 on a home that is now worth $300,000 - are you better off simply because you are paying $400,000 at 6%? I rather pay $300,000 in debt at 8% since the underlying cumulative debt is less.
In addition, you are left stuck in your home. Say you are underwater $50,000 and the market is soft. Since credit is now tighter, you have less buyers willing to pay your price. They are stuck paying higher premiums because of monetary restrictions. Stagflation is a nasty beast. I doubt the Fed will allow the dollar to collapse completely. My guess is they will be forced to raise rates. Look at the jaded CPI last month, .7 jump. Largest jump in almost 2 years. The core is low but who cares, this factors out energy and food (basics of life). At .7, we are going at an anuual rate of 8.4 - this hammers fixed items such as COLA and Social Security. More money the government will have to pay out. In addition, folks will chase these premiums in treasury bills thus removing money out of circulation.
Either way, you need to protect yourself against monetary inflation and asset deflation.
I've been selling real estate the past 7 years and have been quite successful, that is until last June. I primarily marketed a northern suburb of Minneapolis which has experienced tremendous growth in the past 10 years.
Frankly, it's over. The housing market has officially crashed. Here are some recent sold statistics for the area I market:
March thru June 15
(2004) Sold 172 units
(2005) Sold 216 units
(2006) Sold 168 units
(2007) Sold 53 units (350 active listings)
During this same timeframe only 17 new construction listings have been sold. Of these, 6 of them were bank owned. Currently, there are approx. 130 active new construction listings.
Ok, so the housing bubble has popped; what does that mean for the average person? First, we are losing the largest manufacturing industry in the U.S. You will begin to see unemployment tick up, but many of these jobs were under the table. Meaning, the skilled workers were being paid cash. These individuals will not be able to file for unemployment. The loss of these jobs will bubble up over the next 1-2 years and will surface on the bottom lines of retailers like Home Depot and Lowes.
Second, as prices fall, home equity loans will be a thing of the past. Falling home prices are the single leading factor in the bubble burst. Prices started falling well before foreclosures were an issue. My estimation is prices began to fall in early 2005. Homes prices have now retreated to 2003-04 levels. Meaning a home that sold in 2005 for $250,000 is now selling for $220,000 (as long as it’s in perfect condition). Homeowners’ getting over their heads financially is nothing new; however; the difference now is they can’t just sell their house, because they owe more than it’s worth. I turned away 20+ listings this year due to homeowners being upside down on their mortgages. As a result, they are walking away and letting the banks foreclose on them. As more and more foreclosures (up 90% from last year) hit the market home prices will continue to be pressured downward. Before it’s over (if things don’t spin totally out of control) we will see price levels equal to the year 2000…Approximately, a 20% decrease in prices.
Now, you may say, “great, I can’t sell my house for what I owe on it. I will just stay and wait for the market to turn. I have a good job and can get use to the idea of staying in my home a little longer. This problem doesn’t really affect me.” Wrong, as more and more homeowners are unable to tap into their homes equity they will no longer be buying cars, 4 wheelers, big screen t.v.’s, computers, lawn tractors, updating kitchens, roofs or siding etc. Millions and millions of homeowners will be putting off discretionary spending out of necessity. This will result in a tremendous fallout in the retail sector of our economy, which in turn, will have a direct effect on the transportation and manufacturing industries. Many jobs will be lost and many more homes foreclosed.
Finally, as the housing market crashes, so does the tax roll of state, county and local governments. These institutions have built their budgets on the back of the housing surge during the past ten years. It will not be unheard of to see local governments going bankrupt, schools shutting down, police departments with skeleton crews and social programs slashed. You will quite literally see ghost towns, large developments with empty Mcmansions, because it made more sense to walk away than pay the exorbitant property tax.
Sounds depressing doesn’t it. Well, history shows that it will be depressing. This is exactly what happened before the stock market crash that lead to the Great Depression
I've been selling real estate the past 7 years and have been quite successful, that is until last June. I primarily marketed a northern suburb of Minneapolis which has experienced tremendous growth in the past 10 years.
Frankly, it's over. The housing market has officially crashed. Here are some recent sold statistics for the area I market:
March thru June 15
(2004) Sold 172 units
(2005) Sold 216 units
(2006) Sold 168 units
(2007) Sold 53 units (350 active listings)
During this same timeframe only 17 new construction listings have been sold. Of these, 6 of them were bank owned. Currently, there are approx. 130 active new construction listings.
Ok, so the housing bubble has popped; what does that mean for the average person? First, we are losing the largest manufacturing industry in the U.S. You will begin to see unemployment tick up, but many of these jobs were under the table. Meaning, the skilled workers were being paid cash. These individuals will not be able to file for unemployment. The loss of these jobs will bubble up over the next 1-2 years and will surface on the bottom lines of retailers like Home Depot and Lowes.
Second, as prices fall, home equity loans will be a thing of the past. Falling home prices are the single leading factor in the bubble burst. Prices started falling well before foreclosures were an issue. My estimation is prices began to fall in early 2005. Homes prices have now retreated to 2003-04 levels. Meaning a home that sold in 2005 for $250,000 is now selling for $220,000 (as long as it’s in perfect condition). Homeowners’ getting over their heads financially is nothing new; however; the difference now is they can’t just sell their house, because they owe more than it’s worth. I turned away 20+ listings this year due to homeowners being upside down on their mortgages. As a result, they are walking away and letting the banks foreclose on them. As more and more foreclosures (up 90% from last year) hit the market home prices will continue to be pressured downward. Before it’s over (if things don’t spin totally out of control) we will see price levels equal to the year 2000…Approximately, a 20% decrease in prices.
Now, you may say, “great, I can’t sell my house for what I owe on it. I will just stay and wait for the market to turn. I have a good job and can get use to the idea of staying in my home a little longer. This problem doesn’t really affect me.” Wrong, as more and more homeowners are unable to tap into their homes equity they will no longer be buying cars, 4 wheelers, big screen t.v.’s, computers, lawn tractors, updating kitchens, roofs or siding etc. Millions and millions of homeowners will be putting off discretionary spending out of necessity. This will result in a tremendous fallout in the retail sector of our economy, which in turn, will have a direct effect on the transportation and manufacturing industries. Many jobs will be lost and many more homes foreclosed.
Finally, as the housing market crashes, so does the tax roll of state, county and local governments. These institutions have built their budgets on the back of the housing surge during the past ten years. It will not be unheard of to see local governments going bankrupt, schools shutting down, police departments with skeleton crews and social programs slashed. You will quite literally see ghost towns, large developments with empty Mcmansions, because it made more sense to walk away than pay the exorbitant property tax.
Sounds depressing doesn’t it. Well, history shows that it will be depressing. This is exactly what happened before the stock market crash that lead to the Great Depression
Scooby... I think that you're being totally honest in your post. However, what you said is not entirely true in Southern California, where the bubble is the worst in the country. Home prices around here are not at the 2003 level... rather, we're at around 2005. In a couple of years, I think we will see 2001,2002 prices, until then, sellers are still asking for the stars.
Dr. HB...
LOL @ the "gold digging behind tinted windows" analogy....
Absolutely right. Sellers in So. Cal and the Inland Empire in particular have the mass delusion that we potential buyers can "take it or leave it." Can you believe we are still seeing moron agents listing houses "810-840K". Huh? I've never seen a hamburger sold as a range. Hmm, I guess I'll take it for 840 instead of 810 because I'm so stupid.
The local paper's real estate section said that there "is some resistence" to dropping prices. No kidding. They haven't really started to seriously come down. They aren't even close to 2003 yet, but if we keep going the way we are, they will eventually come way down.
They say California will always have demand with influx of people, but the problem is that all these people cannot afford the houses.
The market is still irrational.. stay out of it for as long as you can!
I have a couple problems with what I keep reading on the blogs. First, everybody blames Greenspan for having his head in the sand and letting things get this way. No one had their head in the sand. Everyone was getting fat and happy and no one wanted to complain. George W was kickin it and bragging about how tax cuts for the rich help the common man. I'm sure the goverment knew exactly what was coming down the pike, but there was no way the government was going to stop this money train on the tracks. Imagine the scenario if the government DID create regulation in 2002 to prevent all these bad loans. Guess what the headlines would be then: "Discrimination against minorities!" "Government thinks only rich people should own a house". And you wonder why there wasn't any regulation???
Secondly, everyone claims that we need more regulation. Well, stupidity + greed = trouble. And this makes up most of middle America. "You want us to read the details of the ARM contract? You want us to think about whether we can afford a $700K home on a $50K salary? We're too busy seeing who is going to get voted off of American Idol to do that. And have you heard the latest about Britney Spears...." You can't regulate laziness and stupidity. Right now its mortgages, in 2000 it was tech stocks. What will it be next time? Gold? I don't know. Either way, government regulation doesn't fix the problem of people falling for the "next big thing" and losing.
scooby: props for looking at the facts
Dr HB: Love the actuarial stuff from the insurance company. The one things that insurance companies always want to do is manage risk. They have been and will always be relatively better at managing risk than the investors. So, bringing in the PMI stuff strikes home with me.
Dear Anon, about the inflation effect:
Rapidly rising inflation may seem like a solution towards paying off debt but this is in the end a mirage that does not end well.
A main reason concerns credit availability: would you as a potential lender give someone a long-term fixed-rate loan if you thought you would be repaid in dollars that were worth a lot less than what you lent because of unpredictable inflation? No, and neither does the bond market. This can create a credit crunch that dries up liquidity for a lot of players: home borrowers, companies, municipalities, etc and can exacerbate a pervasive slowdown across many sectors.
In this situation governments sometimes try to create stimulus by printing more money (by selling more bonds then buying them back) but this cheapens fiat currency even more, which can drive even more inflation.
We can't burn the lenders too much!
Ok, now I'm scared.
After reading some posts it's become clear that the country is headed towards a recession, and even possibly a full blown "depression". If a depression were to hit us, how long would it last (in your prediction) AND what affect would it have on the dollar. Last I read the Canadian Dollar (which at one point One Canadian Dollar was equal to sixty-four cents U.S.) is suppose to be at par with the American Dollar with in two years.
SCARY! is the only word that describes how I'm feeling right now.
Dear Dr. HB,
What in your opinion will be the outcome for people that did sell their home and have cash in the bank?
Does it make sense to wait to buy when the crash unfolds in the next several years, or run away from US and convert $ to Euros?
Brian,
The thing to realize is that we were entering a recession following the dot-com bust in 2000. Then Al Qaeda struck us on 9/11/01, at a quite inopportune time for the U.S. economy. Make no mistake: it was economic war Al Qaeda was wagering in, as much as an idological or religious battle.
Bin Laden has repeatedly stated that he's waging an economic battle against the West, and would use our own tools of capitalism against us.
Remember what the target of 9/11 was? Oh, yeah: the World Trade Center. Think about what the buildings represent, taking it one word at a time: World. Trade. Center. The heart of the beast, per Al Qaeda.
And what did they use as a weapon? Western aircraft, once again our own tools. The thing is, the attack nearly worked at achieving it's goal. We almost spun into a recession/depression.
Remember in the days following 9/11, when everyone was afraid to go to places where people and crowds congregated, afraid to go to malls, afraid to spend money, etc?
That's NOT good: our economy almost went into a nose-dive.
I remember government officials saying how the best thing for the average citizen to do was to go spend money, stimulating the economy. It was considered unpatriotic NOT to spend money, so 'shop til you drop' at the mall was the battle cry heard across America. Shopping was almost as valid as a means of serving one's country, as serving in the U.S. military!
Americans were apparently eager to comply, as America spent like there was no tommorrow. Only problem: it's now tommorrow!
Of course, Bush and Greenspan's Fed Bank did EVERYTHING possible to jump-start the economy: they ramped up the war machine, lowered interest rates, praised sub-prime loans, allowed regulators to take long naps, etc. If there was any measure that MIGHT spur the economy onwards, it was used.
The only problem was they actually succeeded beyond their wildest dreams: instead of simply jolting it back to life with a chock, they rocketed the economy into over-drive: the market overheated, sending the asset bubbles (housing) into ponzification territory. The fuel? EZ, cheap "fake" money.
It's hard to say if avoiding a recession/depression by gaming the economy was worth it: I think there's a lot of truth to what Ron Paul (and the commission that investigated the situation for Bush's admin) said about why we had such a juicy bulls-eye placed on our backs, in the first place. Their conclusion: you cannot invade Muslim countries (during the original Gulf War) without stirring up a hornet's nest, and expect it NOT to have blow-back!
Unfortunately we've had a President in office who seemingly just doesn't care what ANYONE thinks, including the rest of the world: it's his way or the highway. Piss him off, and he'll draw down on you, partner. That's a dangerous stance to take in this millenium. Bush has repeatedly flipped off the world, including the United Nations, and the world is flipping us back.
We cannot proclaim ourselves God's gift to humanity, serving as the Police (and jury) of the world by ignoring diplomacy for gun-boat diplomacy, going it alone, and NOT expect it to come back to us in spades when the world rebuffs the concept.
So was it worth it? Melting down OUR economy to parade around the globe, saving it from a radical group that could be contained much better thru ideological battles than military battles?
IMO, the best way to encourage small bands of religious extremist fundamentals to develop against the predominant religious and political systems is to prosecute them, like the Roman Empire did against the early Christians. We all know how well suppression of Christianity worked: it's now one of the world's predominant religions (behind Islam).
the complete implosion is almost here, just not quite yet. want to know who is buying those assets on the cheap? Endowments. that's right. college endowments are putting up to 5% of their assets in sub-prime mortgage backed assets. I know Wake Forest and Vanderbilt University are both getting in on what Merrill is liquidating. When these guys realize what they bought wasn't as cheap as they thought, that is when things will come unglued.
Dr. HB,
If the US economy is indeed heading towards a recession, how would you recommend protecting one's investments? In particular, I'm concerned about my 401k. I'm still young, and I am mainly invested in aggressive domestic funds. I was considering moving some of my portfolio into a bond fund, but as a computer geek, I really have no idea what I'm doing when it comes to financial investments. And trying to save up enough for a downpayment on a 500k 1-bedroom condo with my fiance is plenty enough to worry about, without the danger of taking a hit on our retirement accounts.
@scooby,
I think your are spot on many of your predictions. Just look at how spooked the stock market is with the prospect of these hedge funds collapsing. This is only the first of many that we will be hearing. Keep in mind most of these people have all their hope that this summer will bring in another bounce. Nope. Not this time. How it will unfold is anyone’s guess but bottom line housing is toast. All other things will be coming online for the 2008 elections. Can we say major campaign issue?
@anon12:36,
I’m not sure how far we’ll drop. The Fed would love to inflate the market away but prices are so overly high that even high inflation will do little to alleviate a house that is overpriced by 50%. What is overpriced? Take into account the current rental market, schooling, neighborhood crime, and prospect for appreciation.
@socalwatcher,
You know what I’m talking about. We’ve all seen it. Well the new cell phone law is coming out so maybe with the drop in housing tax receipts and the increase of cell phone tickets, the state will be fine.
@anon 3:41,
810 to 840 seems reasonable as a range. The properties that make me wonder are the one’s that have a 300 to 500 range. Ummm, okay. I choose 300. Next.
@brian b,
To your first point. The current administration is going to go down as one of the worst in history. You can’t spend frivolously and give tax cuts. Typical attitude of many people. Can’t afford it? Just go into debt. I’m totally for a strong military but spending $7.5 million for a gay bomb? Get this, the government spent this much money on a bomb trying to make enemy combatants go “off” on each other so to speak. They also did research on a flatulence bomb. Yes, good pork barrel spending. Don’t believe me? Check it out Gay Bomb.
And we’re not singling anyone out in particular. Democrats and Republicans are both equally responsible for this mess and both benefited in some shape or form from the housing bubble. We’re living in a plutocracy with major corporate welfare. What about no bid contracts for rebuilding in the Katrina zone or Iraq? You have to bid on eBay why shouldn’t companies for multi-billion dollar contracts?
In terms of regulations. We already have enough. What we need is ENFORCEMENT. Just look at the case examples of people fraudulently obtaining millions in mortgage debt and even brag about it! The public is still in the dark. But once their livelihood is at risk via employment or losing their house, they’ll be hungry for blood. Why do you think the SEC came about because of the Great Depression? Armchair politics. Idiots went over their heads gambling on Wall Street. Now instead of stocks, we have housing. Even some brokers I work with who work for large institutions don’t have a clue about deeds of trust, contingency clauses, or basic mortgage principles. The experts.
Your point is well taken. Yet blogs such as this one seek to reach out to people that do care. For those zombified by watching TV, what can you do? But those here can educated themselves and knowledge is power.
@californian,
Insurance is about managing risk over the long-term. If anything, we need to look at them and see where they are placing their bets.
@anon 11:22,
Nothing different from the past. If anything, it will flush out the frivolous token businesses and fringe money lunatics out. Just look at all the fly by night subprime operations dropping like flies.
@12:45,
No need to fear. If anything, those who actually manage their money well, diversify, and live within their means will do well. The problem is a large portion of our society does not live within their means and they’ll be going cold turkey pretty soon. I do see a recession – the one we had for a quarter before Greenspan dropped his pants and rates to the floor flooding the market with easy credit was stifled. Recessions serve a purpose. They wash out poorly run businesses. Its all part of the business cycle. Yet the cycle was not allowed to run its course. Why do you think they call him Easy Al?
Canada is tied to us by the hip. So is Mexico. Where we go they will follow. Plus, the EU is having their own property bubble and so is Australia. This credit bubble is global folks.
@anon 1:41,
Like I mentioned before, I think the EU is having their own credit bubble. Like jumping from one sinking ship to another. In terms of what to do with your money, you definitely want to keep some in short-term CDs, commodities, real estate in growing markets (min. for now), and oil. I still think that we are way too connected to oil. In California gas hit nearly $4 and people bought more! It didn’t do anything to our habits. Plus, oil is a core substance in plastic and other products, so we’re only going to place more demand here. And what about China and India? Think they want some oil?
But ultimately folks, focus on your main earning item, you. Ensure you have a solid career and future earnings potential. Ultimately you are the most valuable asset in your portfolio.
@ Adam,
Interesting perspective. Obviously our geo-political situation isn’t helping. Hopefully folks are smart enough to realize that this problem can’t be summed up in a one second speech of “lets get em.” Get who? Or “tax cuts for growth.” Who’s growth? Maybe that’s why they don’t teach the Socratic method in high school; they fear you might ask some hard hitting questions back.
ALL:
The market fell again today on fears of hedge funds imploding. The mortgage market is a behemoth. Over $7 trillion dollars of mortgages are held in the United States. And the market freaks when $100 million is sold off by Merrill Lynch? Just goes to show how we are standing on a third leg. This thing is already set in motion. We’ve just begun to see the fallout of the subprime market. Its only been 3 months since its imploded and this takes years to filter through the economic system. It’ll be an interesting year.
Great post...And I also loved the picture!
Being that I voted for Harry Brown, that picture is hilarious--who owns it?
Check out this link! this contagion is spreading faster than crotch rot at one of our christmas lingerie parties after the drinks have been going for hours:
http://www.eos-21.com/
Here's to financial prudence! Like vultures, we will swoop down on the raging alcoholic permabulls when they keel over from cirrohis!
"...smells like victory."
Sorry for responding to an older post. Dr HB, that's some very interesting information, do you have a reference for the PMI yearly risk assessment numbers? I'd like to know what the general assessment of the Portland, OR metro area is, and basic attempts at googling the information haven't turned up anything.
Thanks!
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