The Frightening Future in the Market Meltdown
For the better part of a year every senior government official involved with the economy, from Fed Chairman Ben Bernanke to Treasure Secretary Henry Paulson, has said that the bursting housing bubble and the sub-prime mortgage meltdown were “contained.” This, we now know, was the financial equivalent of “Mission Accomplished.” If only reality could be managed forever with sound bites.
The question now is not whether the problem is contained but how damaging will be the fallout. Not whether the contagion will infect other sectors of the economy, but how badly. Not whether other economies will be dragged into the maelstrom, but how many and how deeply. And the most important question, where’s the bottom?
The easy truth is that nobody knows the precise answer to these questions. The harder truth is that things will get a lot worse before they get better and that the bottom will be much lower than official posturing now dares reveal.
The problem with the market today has two roots. The first one is intrinsic to the market itself. The second is part of the larger economic context in which the market operates.
The problem intrinsic to the market itself is that investors have only a partial idea what their widely-traded mortgage-backed securities are worth. These are the instruments that the self-styled Masters of the Universe devised to turn inflated housing prices and onerous personal debt into the financial equivalent of perpetual motion.
Home mortgages were bundled into securities called collateralized debt obligations, or CDOs. These were sold, resold, re-resold, and re-re-resold, to ever more credulous buyers based on two things: 1) the flow of funds to be generated by monthly mortgage payments, and 2) the underlying worth of the real estate itself. The problem is that neither the flows nor the underlying worth are anything like what they were represented to be.
Soaring foreclosures (up 93% in July) have winnowed the flows of funds while collapsing housing prices (down nation-wide for the first time since the Great Depression) have eroded the value of the underlying collateral. It is the worst of both possible worlds.
But even as bad as that is, it gets worse still. Adjustable rate mortgage resets won’t peak until March 2008 meaning the worst of the foreclosure pain is still more than a year out. And the housing price decline is accelerating as more and more foreclosed properties flood the market.
As a result, nobody is able to state with any certainty what the actual values of many of these securities even are, and they don’t know when they will be able to know. It is this uncertainty more than anything else that has wrought such havoc with the markets.
And far from being “contained,” the “contagion” has spread from consumer real estate to commercial real estate, commercial paper, corporate buyouts, into industrial, and other financial markets, and now into the economies of other industrial nations. Indeed, throughout the global economy.
European central banks, witnessing the implosion of hedge funds that had invested in U.S. originated CDOs, were forced to inject $370 billion into financial markets in recent weeks to try to stabilize them. This is on top of the $120 billion the Federal Reserve pumped into U.S. markets, hoping to restore order and prevent another recession.
But four powerful forces now conspire to all but guarantee a recession: tighter credit standards; higher credit prices; shrinking personal wealth (a concomitant of falling housing prices); and layoffs in all industries even remotely connected to real estate, from construction, mortgage, and real estate brokerage, to household appliances, carpeting, furniture, trucking, and more.
A general recession will make everything about the real estate meltdown still worse. Faltering incomes at large will act as a veritable bellows to the twin flames of soaring foreclosures and collapsing housing prices.
The reality nobody knows is where it all ends. Until institutional investors can determine with a high degree of certainty the value of the mortgage backed securities in their portfolios, the markets will not stabilize because investors will not be able to price the risk inherent in such investments. But that is exactly what they cannot do. Until they can, the turmoil will continue.
The second root cause of the problem lies in the larger context of the U.S. economy and its dependence on debt to sustain its growth.
When Ronald Reagan took office, in 1981, the cumulative national debt stood at $1 trillion. Today, it approaches $9 trillion, more than $3 trillion of that total added by George W. Bush alone.
Consumers are especially strained. In 1975, personal household debt amounted to only 61% of disposable income. Today it stands at over 135%, more than double. Consumers have expanded mortgage debt by over $11 trillion since 2001, using mortgage equity withdrawals to purchase life styles far beyond what their incomes alone could support.
Finally, the annual trade deficit that stood at $377 billion in 2000 now exceeds $800 billion. Over the past six years, it has added a cumulative $3 trillion of debt to the economy.
Add it up: national debt; consumer debt; and trade debt. The increase in debt over the past six years comes to $17 trillion. Any economy that borrows $17 trillion in six years can be made to look good, at least for a while. The problem is, what happens when those bills become due?
It’s difficult to make a case for how the U.S. can pay them back. Lawrence Kotlikoff, writing for the Federal Reserve Bank of St. Louis, revealed last year that the U.S. faces $65 trillion (yes, that’s a “t”) in “unfunded liabilities,” debts it has committed to pay but for which there is no identified source of funding. Kotlikoff suggests that the U.S. may be actuarially bankrupt, that it cannot pay its obligations under any reasonable scenario. It borrows $2.5 billion every day from the rest of the world just to keep the lights on. That amounts to 85% of the entire world’s net savings, an astonishing, unprecedented dependency that simply cannot - will not - be sustained.
This is the background context for the real estate bubble: a nation living so far beyond its means it can only maintain its lifestyle by mortgaging ever more of its assets-in this case, its houses. But when even those prove unreliable, creditors will prove unwilling to continue lending. Unless new, verifiable assets can be pledged against borrowed funds, new lending will cease.
Perhaps the most sobering fact is that this unprecedented run up in debt has occurred during a period of supposed economic prosperity. It is usually during prosperity that a nation pays down the debts incurred in the last downturn. But the U.S. has not done that. It continues to add debt at a reckless, unsustainable pace, consuming more than its entire income. Its savings rate is below zero, another first since the Great Depression.
When the next downturn occurs - not whether but when - government deficits will soar even higher. Bankruptcies will explode. Foreclosures will skyrocket. The question is, who will lend us the money to bail us out, for we don’t generate it on our own. It will surely not be those who have been burned in the latest mortgage asset meltdown. But if not them, then who? And at what price? This is the really frightening question lurking over our financial future.
Robert Freeman writes on history, economics, and education. His email address is robertfreeman10@yahoo.com.
Lending is what caused the problem in the first place. Too much wealth & the promissory aspect of money is owned by the so-called FIRE “industries”, causing an unchecked ponzi scheme to eventually reach a point of unsustainability.
Probably the best way for this problem to self-correct is to tie a regulatory noose around those sectors, and let the value of the dollar be based on what real people actually earn, and are able to buy without having to borrow.
I understand Economics 101, supply & demand. But is there anyone out there who demands paying higher interest rates? Who demands paying more to his lender over 30 years than the cost of his property itself? With that dynamic afoot, it’s not very long before corporate lenders are then positioned to own more property than people.
But in doing so they’ll be leaving less money for people to spend on other things, and they’ll cause liquidity to evaporate at various levels in their ponzi.
Meanwhile, OutSourcing Continues… I Always found it Ludicrous. How can Anyone claiming to be a Financial Expert say with a straight face that Exporting the very Base of any Economy - Manufacturing - can be a good thing. Hahahah! Other ‘Industries’ have also been allowed to die - like Fishing.
The point is, our “Economy” has NOT been growing, it has been shrinking, as anyone with more than three brain cells left can easily see. What has been ‘growing’ is the Obscene Profits of the Oligarchy. The USA has been hollowed out.
Meanwhile, we - as a people - continue to be suckered into voting for these self-same Cosmic Criminals. Are we …THAT stupid?
Wish I had something to contribute. I’m sitting here waiting for more comments from the good Common Dreams crowd. There’s only one other so far.
As a working class family, help me out folks, are we looking at a recession or a depression? Like I understand the difference. Is it money that will be in demand, or, will money not be worth the paper it’s printed on? Should we try to keep cash in the house, or assets like gold coins, or maybe goods to trade, or what? Is it time to sink a few bucks into canned goods? What’s the plan on riding out the storm, after holding on to the house?
The tragic downside is which social group will get tagged for causing this potential financial collapse?
Those who control, or are perceived to control, the societal form of money walk a perilous line. On one hand, they are highly compensated and enjoy luxuries afforded to few. On the other hand, if the skewed distribution of wealth causes intolerable stress for many others, then those perceived to control the societal form of money may suffer the wrath of a Market correction.
Albert Speer: His Battle with Truth by Gitta Sereny
“You have to think,” Dr. Huphauer said, “that multiplying that ‘seven million unemployed’ figure by a conservative three to include families, there were then about twenty million people in need, with no unemployment insurance and only the most minimal social security benefits. When the earlier catastrophe, the inflation, struck, when a loaf of bread cost a million marks and butter and meat ceased to exist for millions of people, they grew to hate - really hate - anyone who had money, thereby exacerbating the already profoundly resented class system.”
When the societal form of money does not function well for many, those who maintain wealth are perceived by the others to be privileged and conspirators. When monetary stress becomes critical, the simplistic tagging of all wealthy people prevails.
The History of Money by Jack Weatherford, 1997
Everyone seemed to be looking for a scapegoat to take the blame for the calamitous monetary and economic fallout of the era. In each country, politicians attacked the wealthy class or some particular segment of it - the aristocrats and landed peasants in Russia and the Armenians in Turkey, for example, or the Jews in Germany. Perhaps in an effort to counter the hostility directed toward them, the richest of the plutocrats began performing massive and highly publicized works of charity.
http://theformofmoney.blogharbor.com/blog/_archives/2007/6/20/3015854.html
I am like whatever4, I don’t really have a good handle of economics except: save a little, give a little and spend a little. The high octane economics is like gambling and the house always wins. I have read enough to understand that the feds have endorsed the subprime mortagaging and are still trying to prop it up. When the meltdown begins you can count on the conversatives to spin the blame to anyone who didn’t buy into Bush’s plan to privatize Social Security or some other rubbish. I am not seeing the trickle down effect of tax breaks for the rich. Maybe someone could tell me just how that benefits everyone. It is not like giving a wealthy person a new mansion and inviting us all to come live with them.
I offer this to annabelle and whatever4. I am extremely fortunate to have 80 years stock market/money market and bond market experience behind me in analyzing this thing in that I was trained, starting at the age of 14 by my mother, who was trained by her father who began market investing shortly after WWI, (thats One). Having watched this unravel I can say it’s unlike anything I’ve seen or heard of since 1929. That being said however, this isn’t 1929 and I think, (fingers crossed here) we’ve got a better than 50% chance of this thing working it’s self out with out a major recession. Emphasis there on “major”. We may very well see a slow down in the economy as a result of tightening credit available to business which will slow business expansion plans. Keep an eye on Chicago business numbers and keep an eye on the enemployment numbers. Here’s the real deal; if you can manage to stay employed during this thing, you should fare o.k. You may see the value of your home decline; over time, 5 years, it’ll rise again. Whatever you do, if you have an adjustable rate mortgage, lock in a fixed if at all possible and ride it out. As for riding out the storm; yea, keep cash in the house, don’t try to sell now, especially if you’ve been there a while. I wouldn’t attempt to horde up gold coins; that’s proven to be a very bad investment over time. Having said that, I do like the silver coins and think they may be a good buy. Check out http://www.monex.com/monex/controller?pageid=prices I like the American Eagle Silver coins because they are trading around $13.00 a coin. That’s “low” value; something you could carry in your pocket and if they went to $26.00, i.e., if the bottom falls out of the american dollar, you can use them to barter with. Furthermore, they are .999999 silver content, i.e., they are real!
I wouldn’t go overboard on them however. I also wouldn’t be jumping into the stock market at the moment. But do put money away for a rainy day or a layoff. Save and whatever you do…….try, try, try, to get out of credit card debt. Otherwise, hold tight, don’t panic and wait for better times.
BTW, if you want to blame someone, blame greedy unscrupulous mortage brokers and the industry that put us into this problem.
Learn how to plant a garden in your backyard, create community gardens, learn where the good water sources are, if there are any left. Learn how to filter water, cook simply, buy good hand tools and bicylces. If anything maybe we can get to know our neighbors again and learn how to enjoy a simpler, less frantic life with community and friends.
That’s the optimistic scenario. I don’t want to think about the alternatives.
The world props up the US economy because we consume their goods. When this stops the collection of the debt will begin. What will we pay with? When the US economy can no longer consume all these goods other economies will contract resulting in anger, laying blame, and punitive action. Will we give up our power, or use it to settle the score.
whatever4/annabelle — glide625 has some good ideas — stay employed and lock in your mortgage rate — 15 or 30 years.
I became an adult during the Carter administration which made a lasting financial impression. I did two things which turned out to be smart moves — I put 20 percent down on the house so my house would be affordable if I was ever unemployed. Next thing was forcing myself to save — no matter what.
The Prime Rate went up to 21 or 22 percent. My little savings account earned me $200/month — almost enough to cover my mortgage.
I can foresee another period like the late 1970’s as county struggles to pay off the cost of this war and tries to straighten out the “easy money” mortgage debacle. Cash was king. Save, save, save — the benefits will surprise you
Forget about investing in silver coins, stashing away money, buying stupid stocks, mutual funds.. arn’t THESE all casino deals?
Didn’t we all lose so much in gambling for the next big deal?
Forget the stupid casino games capitalism offers us. Yes, one needs to get by on a daily basis.. sure.. But when are we going to see that there is NO solution for us, the working class in capitalism? How many times do we need to get screwed with these fly-by-night tricks all of which has been designed to transfer your and my wealth to the capitalists?
There is NO solution in capitalism.
Regards.
man they are pumping billions into the stock market on a daily basis and it keeps falling.
The theory states rational markets self-correct with damage only to those who didn’t know what they are doing. But like the man said, “The markets can stay irrational longer than you can stay solvent.”
The multinational oligarchy lends to make money or to foreclose and own. Profits (earnings???) are their ONLY concern. Patriotism, like religion is only a propaganda tool the oligarchy uses to manipulate the rest of us.
Some creditor countries can’t stop lending or foreclose under threat of a powerful military that does the oligarchy’s dirty work of generating their taxpayer financed corporate profits. Others are making money off selling military equipment and plastic junk. But since many of our creditors are the international oligarchy itself who gains at public expense, they will foreclose when there is no blood left to suck. Then they will own us, a new third world country under military dictatorship. And former bourgeoise conservatives will blame it all on the godless anti-war liberals.
Those of us who have been suckered into defending the oligarchy because they too want the (fat) chance of becoming oligarchs or because sharing the wealth and power is “stealing” from others, share the blame here.
Rebelnow–I agree completely with your advice and would add–get to know those who raise the crops or livestock you eat.
Barter along with locally issued currency might also prove helpful.
$17 trillion in debt. And I’m worried about my measly $90K. Ha.
Illegal invasion and occupation: $2 trillion. Tax cuts for the already wealthy: $1 trillion.
The America we used to know and love, destroyed: priceless.
Buy low. Sell high. If you see a good deal on a home, now might be the time to buy if you are a first time buyer. Deals might get even better or they might not.
The best time to buy stocks is usually when everyone is complaining about how much money they have lost in stocks, because that means stocks are worth less. The price is low.
When everyone is bragging about how much the stock they own is worth now vs. in the past; that’s not the time for you to buy. That’s the time they should think about selling.
The recession is already here. Millions have already been thrown out in the street behind the sub prime meltdown. Most of our consumer goods are manufactured abroad. As the dollar declines in value, the cost of those goods will get higher and higher and eventually the retail sales sector will also flatline. Our economy is based on churning paper, war and fraud. We don’t manufacture much of anything in this country that the rest of the world wants to buy anymore so there’s no mechanism to recapture the torrent of dollars that’s been flooding out of the country for years. About the only thing we have left to offer is food production. Will that be the next “bubble?”
When we think about money it’s a quasi-religious experience, like thinking about Judgement Day when we go before the Omnipotent Auditor to justify ourselves. If wealth were a sign of moral virtue, why is it said that it’s easier for a camel to pass through the eye of a needle than for a rich man to enter the kingdom of heaven?
It’s time to jettison this attitude and understand that money is not entrusted to us from on high according to one’s worth. Money is something we create, friends. It has value because we believe it has value.
Under the Constitution, the Congress is assigned the power to “coin” money and assign the value thereof. The Congress is not God, it is a representative body that expresses the will of the people. The people, then, create money and assign its value.
This is called the “money power”. The wealthy elite stole the money power from a sleeping Congress and public back in 1913. They create money now and assign the value thereof. They operate the money game to suit themselves. They run the casino on Wall Street and rake off the profits therefrom.
The money game, the system, is rigged. It is owned and operated by an elite group withini society. This is wrong and illegal under the Constitution.
That said, it remains for the casino operators to bankrupt the system. The golden rule is that them that has the gold makes the rules, goes the old saw. It is true insofar as the elite do not play by rules because they keep inventing them, in terms of shifting reserve requirements, and regulations of all kinds.
These people have created a financial disaster in the making and when it finally comes down, as it will inevitably, the great masses of the people will do all the suffering. Suffering is the result of ignorance. Maybe this time the people will not be so ignorant, maybe they have learned something about money? Maybe they will finally understand that the collapse of the system is not their fault and certainly no judgement from on high. It is purely the fault of the Money Masters.
Tar and feather these money masters.
Create a new monetary system, after first throwing out the Federal Reserve.
When Germany collapsed under a burden of debt and mismanagement and the famous inflation of the 20’s happened, Germany did recover in less than a decade to become an “economic miracle”. How did this happen?
Very simple. Hitler decided to create new money, a new financial system. Like Lincoln during the Civil War when money was needed, Hitler simply issued new currency and assigned the value thereof. It is no more complicated than that. This is what tyhe Federal Reserve does today. It creates money out of thin air just by saying it is so.
The people and their Congress can do what Lincoln did, what Hitler did, and what the Federal Reserve ( the wealthy elite ) currently do. They can creeate a new currency and financial system, a new game.
That is what is going to happen in any case. These same wealthy people who have botched our current financial system through their greed, lust for power, and simple incompetence, are planning to create an “Amero”, a whole new money game. It has been done in Europe already you may have noticed. A new day will be declared, a clean slate.
But don’t let them do it. The breakdown of this financial system is an opportunity to return to the Constitutional foundations and create a people’s government, with the people’s financial system. The money power is simply too important to entrust to a wealthy elite that has shown itself utterly incompetent.
We can have it as we want it to be. We have to get rid of the moral nonsense associated with money and recognize that money is no mystery - it’s actually magic. We have that power if we would only take it.
No rational government would bring a nation to this point, and so it is logical to accept that the author of this 2005 Common Dreams article is correct, and that “breaking the bank” is part of a strategy to privatize society.
http://www.commondreams.org/views05/1011-22.htm
What way to store your savings? The dollar is not backed by gold or silver or anything else. It is worth what people will give you for it. When I was ten years old a dollar would buy twenty standard candy bars. Now a dollar will buy one candy bar and you will get some change. If I had kept some cash under a mattress it would be worth about one twentieth of its’ original value. Gold, silver, platinum and paladium are not really investments since they just sit there and do nothing but they do tend to at least keep their value. That is why these metals have more than doubled in price in the last seven years or so. The value of the dollar goes down so the price of metals goes up. When the U.S. government needs more dollars to pay off debt there is nothing to prevent the Federal Reserve from creating more dollars. They don’t even have to be printed on real paper since it can all be done on accountants ‘paper’. So, when an ear of corn is ‘worth’ a thousand dollars or ten thousand then the U.S. government will easily be able to pay off its’ foreign debt. It will also be easy to pay social security checks unless they are realistically adjusted for hyper-inflation. But will they be? Fat chance.
kayaker__ The precious metals could be a good place for some savings, but better not take possession and let anyone know about it as that could be dangerous. A small amount of land is usually a fairly stable investment even if it loses some value as it is tangible and will not be going anywhere. It is not really surprising we have gotten into this mess as from the top down we have been acting like financial idiots. We have a moron and power hungry leadership, corporations that are blind to anything but the bottom line, crooks talking vulnerable people into impossible schemes, consumers borrowing out of their houses and maxing out credit cards for things they do not need and cannot possibly afford, etc. There is not going to be an easy way out as what once was a trickle of debt has now become a Niagara Falls. This situation took years to develope and with Bush squandering the nations wealth over in the sand dunes of Iraq our luxurious life style (compared to much of the world) may come to a screeching halt. Additionally,
we keep being told that more war and tax cuts are the solution.
On a positive note, the Depression of ‘29 helped usher in FDR and the new deal. As all this subprime worthless paper comes due and is defaulted upon, with the market really losing a lot (say 45-50%) of its value, it just could be the change needed to completely scuttle and run off the corporate interests currently ruining the opportunity of most people.
George Bush just could become the new Herbert Hoover against whom the polical opposition ran for a generation and managed to remain in power. We can all hope anyway.
Best bet: stop and think. Put yourself IN that depression that’s coming! You have no job, no money, but you have a place to live. You need medicine, food, water to survive. Katrina tells you that. SO, NOW, buy food you don’t like that will last for five years or so. Buy enough to feed you and yours for six months. If you do, buy a small shotgun and a few boxes of shells, because word might get out that you have something besides worthless dollars or gold. Hard advice, but you might live through it without getting sick or starving.
http://www.emergencyessentials.org
Cruxpuppy,
A theologian friend offered this take on the “camel through the eye of a needle”: he thought a better translation would be “THE needle” (definite article) referring to a narrow passage, a cleft in the rocks through which camel caravans unavoidably needed to pass on ancient trade routes somewhere in the Mideast. Laden beasts could not squeeze through; goods had to be unloaded, hand-carried, and repacked on the other side causing frustration, labor, and delay to the merchants.
A rich man to Heaven? Not impossible, if he’s willing to carry his share of burden on earth.
How about this, Ormondotvos: Yes, perhaps get some extra supplies, but instead of adding a gun, get ready to share and co-operate with fellow human beings. Turn your back on economic or monetary values and return to human values. Create trust by sharing and co-operating. And you know what they say — trust engenders trust. Together sharing and co-operation are the only way to secure justice for all which, in turn, is the only way to secure peace at home and abroad. Who knows, we might actually end up with a sustainable environment and a viable future.
(Of course, this will never happen if you’re a cynic because you’ll pre-empt it with your profound insight in ‘human nature.’ In that case, get a copy of Alfie Kohn’s “The Brighter Side of Human Nature” to read while the rest of us are working to contribute to justice and freedom for all.)
I just hope to have enough money for food and heating oil this coming winter. Yes folks, it really is that “Bad”.
Great scenarios, and or dream sequences. Nope, when this lets go it will go down hard and be worse than any can imagine. The construct of our society the just in time inventory setup, and the lack of physical money is going to make it hard for anyone to survive without signing on to the governments program. Add to that the 90 guns per 100 people and you have a formula for a quick return to feudalism. All the interconnectivity of this modern world is going to unravel as we go down the slope of recession to depression, then to chaos. Or anarchy as you will. WIth no tax base to use to prolong the basic service, there will be no fire department, EMT, Police, not to mention water, trash collection and sewage treatment. If those workers don’t get paid how long will they be working? Won’t they have to quit and try to get the necessities for their family to survive. Leaving their job? I don’t believe that folks are really thinking in depth about the size of the problem and the possible consequences. Imagining that this will be as bad or similar to the depression of 1929 or any other is laughable. It is going to be so much worse than anyone can imagine. Then we had the family farm to rely on for living and food production, now we have agribusiness and almost no individual skills at living at that level.
We are in for a rough time and suvival will depend on talent, skills, and generally luck. LUcky you if you have water, and shelter, and food. But shame on you if you don’t. Within a short time it will be obvious that the system cannot function then the real panic will set in. Watch out for any government “Help” it will usually demand your complete loyalty and or presence in their “work Camps” Enjoy the new lifestyle coming soon. I don’t think the authorities can organize a BBQ much less something on this scale. Lucky us incompetent politicians and administrators so don’t think about them they will soon become inconsequential.
Thank you FlyOnTheWall, Poet, ormondotvos and especially glide625. I hope the a great fall doesn’t come, but that seems unlikely with so many factors are converging at the same time.
My take on this is cash, silver coins, foods with long shelf lives, hope to stay employed, hope to keep electric service and other utilities or plan around losing them, try to sort out the thieving thugs (official types and lawless types both) from good human beings worth sharing with, from a safe distance, without violence.
Did I mention I’m, like, 20 miles from DeSoto Mo? Yeah, naked beer-loving people, it’s going to be a crazy time. Can’t wait.
Best of luck to us all.
Thanks for the sound advice glide625.
Meanwhile i’ve got skills! And a large bolt of white rib knit cotton, given me by a client who made uniforms way back when Murika manufactured….. I will start an underwear factory downeast here!
Ya’ll get in your horse drawn wagons and come on up! Bring milk to trade!
The United States of America of 1929 in not even a close resembelance of what we are today. If there is a depression for any reason, say Bush does Nuke Iran for example, that will do it for certain. Anyway, another depression will be the end of our nation. That’s not being pessimestic, that’s reality. Just hope to hell it don’t happen. Any money you have will not last long and credit cards will be frozen immediately. Depressions don’t happen over a time frame, they happen overnight and get progressively worse over a time frame. It would be Katrina in the entire country without the wind and the rain.