The Irony

[pecunium]

Bear Stearns.

I suspect, when we look back (I hope in anger, not in sorrow) at the coming depression; from the far side, the Bear Stearns buyout will be seen as the toscin of doom I fear it is.

JP Morgan just got a huge gov't handout. A piece of my paycheck, and yours (for non-US taxpayers, the piece may be smaller, but I'll bet a couple of your pennies end up in JP Morgan's pockets too). JP Morgan made a huge buyout, at pennies on the dollar. The people who were invested in Bear Stearns got screwed and if the "assets" (it's actually more a case of when, the "collateral" for the debt is the same shitty mortgages Bear Stearns couldn't sell to cover margin calls) fail to pay off for JP Morgan... the taxpayer has been promised as insurance.

Gotta love those conservative monetary policies. The idea that risk is risk, and when you overextend your credit, you have to pay it back, yourself. Isn't that what the bankruptcy bill was all about? Making sure people didn't rack up huge debt and then just walk away from their obligations to creditors?

They say it's all about the fallout. Bear Stearns couldn't be allowed to fail, because the collateral damage would be too great.

Bullshit. Bear Stearns was allowed to fail. It just wasn't allowed to do it in a "big way". The days of reckoning have just been shifted. We were living on borrowed money, borrowed time, and (it seems) borrowed dreams. The fantasy that housing would never stop going up (while real wages have been stagnant), and credit was king (no need to actually produce things, service is where it's at baby... and the service we were providing, was, servicing the debt).

So who'd going to lend to us now, what have we got that's real, tangible, actually posseses value? Land ain't it. Prices in Los Osos have fallen some 15 percent in the past couple of years. That's for the land, not just built houses; empty lots cost less than they did.

The Agonist has a good breakdown of this.

Spocko has a great rant on the subject.

Krugman has a good explanation of why this line of approach was predictable, and why it's not gonna work the way the Fed wants it to.

Jesse Wendel (of the Group News Blog) tells you what he thinks of the mess, and what he's been waiting for.

Rough times ahead.

Comments

[waterlilly.livejournal.com]

My husband and I have been talking about this all week. We're watching the market the way a farmer watches the skies, and wondering if those clouds are just rain or if they're the big storm we've been waiting for, and we hope we're ready. We hope we've done everything we could to be in a financially sound position. We're worried about our friends who work for corporations and whose livelihoods depend on the stock price of their companies.

Despite the market rally yesterday, we're thinking that the BS bailout is going to be the event we all look back on, the day we all should have known.

I've also be reading Robert Reich's blog, and I've found him interesting and educational. (http://robertreich.blogspot.com/)

[pecunium.livejournal.com]

I've been waiting for it for a couple of years. I think I knew it was coming, for certain, when I saw "Zero down, negative amortization; first mortgages, being sold on television, as way to get a house.

There was no way that was going to work. That the banks were willing to sign off on that (because they were selling the paper to the Bear Stearns of the world, who were Ponzi-scheming it along) was all I needed to know about what was coming.

The question was when, and for how long.

TK

[sunfell.livejournal.com]

I've seen the handwriting on the wall, too- in the form of my hard-earned retirement savings- which are bolstered by stocks- going down.

And down. I am wondering if I should 'pause' my input, and put that money in my sock-drawer instead of seeing it fritter away on these things. I'd at least have the principal, which I could invest later.

I've worked so hard to claw my way out of poverty, and it looks like I am sliding back towards it- no matter what I do.

Still, if housing prices fell 30% like some say they might, I won't be too unhappy- I'll finally be able to afford my own home.

Funny how that happens...

[pecunium.livejournal.com]

Maia and I were looking at that, and it's a tough spot. How much capital have you got? Can you be sure of making the payments?

Can you get the loan? Right now (and for at least the next couple of years) credit is going to be both tight, and dear (the Fed's dropping rates, so are the banks; on the interest they pay. On the money they lend, not so much).

Land is a great investment; as a way to keep rent from bleeding away (you are paying yourself, not the landlord). It's security against dire need.

Or it should be, lately it's been how we keep the lurching juggernaut which is the feeble economy going. That's a ponzi-scheme. If I had the money, I'd pause the input, and look to swooping on things as they recover. Lost value is gone (sort of, AT&T was pennies on the dollar in '34, but tens on the dollar in '54. If you'd managed to sell in '32, buy in '34 and sell in '54... you'd be going broke now because Bear Stearns is tits up :]).

Money you keep will, in the short term, be useful for buying things. If it all comes crashing down, well that money will lose value like the peso in the early '80s.

TK

That's the scenario I'm seeing - money losing value

[shunra.livejournal.com]

I've played this out in my mind many times, always coming to the same conclusion: there's no safe place to park cash.

The dollar is losing so fast that a reasonable "investment" is the purchase of (imported!) goods whose price hasn't caught up with the loss of value. It's the opposite of good sense - except when the half life of the dollar is down from decades to months, which seems alarmingly likely.

Removing funds from retirement packages and parking them in, say, other currencies? Which currency is not linked to the dollar, by means of practically-infinite investment in U.S. bonds, including the dollar itself?

Commodities and tangible goods? What makes sense and doesn't lose value?

I fear a system-wide "correction" of mammoth proportions, and I don't see any safer place to park funds than the "usual". And I know the usual will not be very liquid for very long after the crash coalesces.

Interesting times.

Re: That's the scenario I'm seeing - money losing value

[yuripup.livejournal.com]

Not that I have any real cash to play with but I would be commodities in a big way.

Something that would roll over my money from one set of commodity future to the next: oil, gold, wheat, etc. Probably not corn, too obvious--and I think ethanol is going to be a bust.

[sunfell.livejournal.com]

I am currently putting $300 a month into various savings instruments. If I 'paused' those payments, and instead, put that money into a patch of land, it might be of benefit to me. When the economic engine restarts, hopefully, I'll have the means to restart the payments.

I think I am going to start talking to my brokers. I know that they'll try to talk me out of doing this, but land is an investment- and one day, I might even get to build a house on it.

[michiexile]

With the quite naïve attitude and remote position I have right now, so far I'm spending my energy on looking forward to the shopping I'll do on my US tour.

Since I want to go to the US for a postdoc now - my wife is going no matter what - I'm really rooting for one of my Europe-based grant agencies to come through. Living in the US on European money looks like it's going to be better than living in the US on US money right now.

On the other hand, I'm happy as long as I get food, lodgings and time to do my research.

[yuripup.livejournal.com]

Here is the problem with letting Bear Stearns fail--and I too hate this corporate welfare.

Bankruptcy would force a sale of its assets which would included its alphabet soup of illiquid sub-prime mortgage investments: SIVs, CDOs, etc.

Now because these things sell rarely and its hard to get a good valuation on them the accounting rules allow you to use the last sale price of something like it for the valuation on your books.

Should Bear been forced to face the music, the open sale of these illiquid assets would have forced everyone who is holding them to write them down on their books too. The effects of that simultaneous and large write down in assets would probably have been nothing short of catastrophic. Its wouldn't be beyond imagination that every bank, investment bank, brokerage, and hedge fund would have to have called in their loans to improve their books. And things would have really imploded.

Its quite the cycle though. Big business behaves completely irresponsibly, but the harsh consequences it would have imposed on everyone makes it more or less immune to the harshest remedies.

[pecunium.livejournal.com]

Here's the problem with that sort of propping.

Bear Stearns failure, isn't fixed by letting JP Morgan reap a profit on the backs of taxpayers. The fault, lies not within our stars, but our markets. We had a fed chief who colluded to prop one bursting bubble with another.

The correction is going to happen (a la Japan, in the '90s). The questions are:

1: Is it going to be fast, painful and (one hopes) short.

2: Is it going to be slow, grinding and long (Japan is only now, coming clear of the depressing effects of its real-estate caused collapse).

3: Will the problems be corrected?

The last is the killer question, and right now, the answer is, no. The propping up of Bear Stearns' type failures is just encouraging other companies to keep it up (in the hopes they can "ride out the storm"). The model (and the reason) is the Savings and Loan fiasco of the late '80s. We told big players (because they were, "too big to let fail") that they'd get a handout when they screwed the investors.

Skip ahead. Enron was this same problem, writ small. The guys at the top got a pass, and the peons got the shaft.

Skip ahead, Bear Stearns goes belly up, and the Fed arranges to bail out (on the QT) an undisclosed number of investment firms (i.e. Wall Street, the smart boys who are suppposed to understand the risks).

We've been swindled, and paying off the swindlers (a second time) isn't going to correct the sense of systemic invulnerabilty the con-men who have been taking money from the bottom, and sequestering it in the top feel.

The thing that needs to happen, and I don't know how to do it, is to stabilise the housing market (which is overpriced) and let things settle back to a more reasonable evaluation.

But the present "fix" will involve more foreclosures (there are almost two-dozen, within mile of my house). Those will reduce the price of other houses, which will make it harder to get loans. Since we have a shortage of cash (because wages are almost flat), people can't buy things, which slows other things down (and the foreclosures are killing construction, which has been a huge part of the production side of the US economy, so the positive feedback loop is already underway), people will buy less.

Banks aren't lending money, so businesses aren't being created (or expanding). Things aren't being bought, the unemployment rate (real, not reported) is in the 8 percent range, and things are getting worse.

Putting the US in hock (some more) to drag this out, isn't helping.

[minnehaha.livejournal.com]

Good links.

Thanks.

B

[anna-en-route.livejournal.com]

We've been going through exactly the same inflation/housing bubble...which is why our Bernanke equivalent ha been raising interest rates for the last 5 years, not trying to get a handle on runaway inflation seems pretty crazy, actually encouraging it seems worse.

[pecunium.livejournal.com]

The Fed was controlling one sort of inflation (prices) by keeping interest low, which allowed businesses to keep wages low, because people's need for things was being met by borrowing against homes.

But that's, of course, a Ponzi scheme. It only works so long as banks are willing to lend more, and more, money against the same piece of collateral.

But now, well the collateral isn't worth what was last lent against it. The wages with which the loan was being paid off, aren' enough (because the property will be worth more, right? One can get a new loan, or [as was touted, honest] one should buy a house one can't afford, let it appreciate, and then buy down, to a house one could afford; with the profit from the sale).

It was crazy-stupid. People were telling the public that they needed to become real-estate speculators, one and all.

And the people who set them up for failure; the one's who perpetrated the frauds, are rich enough that they won't have to tighten their belts.

The rest of us, well it's not pretty.

TK

[anna-en-route.livejournal.com]

Which is weird because our governor raises interest rates to kill inflation (by slowing down the economy and raising our exchange rate). Lowering the cost of borrowing and increasing the amount of money flowing through the economy is a pretty sure inflation boost.


The "oh property always goes up" meme was quite common here too and has already started to lead to foreclosures but we at least have a cushion of saved government surpluses which will hopefully give the economy a softer landing (we have possibly the only truly Keynesian finance minister...and the amount of stick that he got for holding off on spending/tax cuts through record surpluses was amazing).

[pecunium.livejournal.com]

The question is... what's the rate of wage growth/production increase?

If those are rising, then money needs to be tighter, so people don't just compete for limited goods with the excess cash (at least that's how I understand it).

With a limited amount of cash on hand, the problem wasn't keeping people from spending, but rather they didn't have anything to spend. So unlocking the coffers was needed to keep people from demanding more money for their labor.

Can't have that (after all, that might damage the quarterly profits, and affect the multi-million dollar bonuses of the CEO [who is swotting up a huge portion of the 10 percent of overhead which goes to compensation, all by himself).

So a little borrowing against the future, so the peasants can be comfortable in the present, is in order.

Except that the future is now.

TK

[sinboy.livejournal.com]

I'm outa the loop on who's who in the blogosphere, but the Spocko link looks like it's really First Draft. Still bloody brilliant.

[pecunium.livejournal.com]

Spocko is writing on First Draft, or so the comments in that thread tell me.

TK

[editrx.livejournal.com]

My entire economic life and the only thing that pays my mortgage (allowing me to, say, buy bread and soy milk -- literally) is the income from my stock investments, left to me by my mother. If that fails, I will lose my house, my everything (I work at home and depend on a roof over my head to make income). There is no low-cost or even poverty housing in NH. People without a place to go live in tents, year-round, and every year there are bodies pulled out of the tents by their neighbors, frozen to death. I'm not making this up -- some of them live down the road from us.

I'm terrified, frankly. I can't afford to not have that income. We both work for ourselves, and don't make even close to enough to pay the bills without it (we make less than half that mortgage income, combined).

I got news yesterday that the small-company money changers in Amsterdam are turning away tourists who want to change American dollars to euros.

This is a terrifying peek into what is to come.