People, your taxpayer dollars continue to bail out banks and friends of banks run by the very same multi-millionaire, ivy-league good ole boys who drove the United States of America off the economic precipice. How long can these corporate behemoths in partnership with our very own government continue to fleece the American People? The stench here is unbelievable. Thanks to RI for some of these links:
Toxic Assets: Geithner Puts Only the Rich in Titanic Life Boats
Geithner Rescue Package ‘Robbery of the American People’ - Telegraph
Geithner Update: Grab Yer Ankles and Say "Uncle Sam"
The New World Reserve Currency: Another Fairy Tale
When Bernake Says All is Well, Time to Duck & Cover
Weak Demand at Treasury Auction Gives Wall Street Pause
Bob Moriarty: Act on Contrarian Thinking
EU Leader Condems US Road to Hell
More good reading from Patrick.net
81 comments
Diane - IMHO if you are trying to run most of the intelligent people off this blog, you’re about halfway there by posting this kind of stuff repeatedly.
What, the truth hurts?
Need a hanky, Grand Wazoo?
From the first link:
“…banks are now being caught in Michael Isakoff’s Newsweek article with using bailout money to make campaign donations to both parties members on committees that will oversee new banking regulations.Our money used to bribe our Congress to vote against our best interests once again as trillions of our tax dollars are spent to bail out the last round of greedy irresponsibility and criminality.”
This is precisely what led to the current situation, and why we will never recover until it is addressed; rampant, stinking rotten corruption with a capital C. If we continue on this path, we will have a revolt in this country. For those who choose to ignore that- suffer the consequences. A good start to recovery would be for everyone to pay attention to what your local Senators and Congresspeople are doing, and what they are voting for. Most likely, they are voting for bailouts. I suggest mass e-mailing them to let them know they are being watched by yourself and others, and that you intend to vote them out because of the situation. They know how unhappy people are, and the more we bombard them, the better results we will get.
Better yet would be public demonstration, but we haven’t quite reached a level of discomfort which would generate the large numbers needed for such activism to be effective. As unemployment surges past 15% nationally (official numbers), I think we’ll start to see some pretty troubling things, and the protests might get really loud. Our politicians have sold 99% of us down the river. Enjoy.
From the second article:
“The plan involves ensuring up to $100bn of government funding is matched by private investors, with the monies combined and leveraged up, in some cases to by as much as 20:1, with the help of the Federal Reserve and the Federal Deposit Insurance Corporation (FDIC), to buy pools of unwanted assets.”
Oh, great, more leverage. You’ve got to love that hair of the dog!
“Professor Stiglitz, speaking at a conference in Hong Kong, said that the US government is essentially using the taxpayer to guarantee the downside risks, namely that these assets will fall further in value, while the upside risks, in terms of future profits, are being handed to private investors such as insurance companies, bond investors and private equity funds…”
Is this the return on investment that DonC was celebrating? If so, I’d like to pass on this taxpayer investment “opportunity”.
“It is understood that the PPIP was only finalised after Treasury officials, led by Mr Geithner, spoke to a number of senior bankers on Wall Street, including JP Morgan Chase chairman Jamie Dimon, in the hope of getting a plan that was workable for the market, following the dismissal of Mr Geithner’s earlier attempt to solve the financial crisis.”
Super, just super. Let’s go ahead and take driving lessons from the people who drove the car off the cliff. You’re right, Diane, the stench is reminiscent of a rendering plant in late July. This is terrible, terrible news for the country.
From the third:
“Geithner’s plan assumes that the market has made a terrible mistake misjudging the true value of these unloved assets. He thinks that if the government just adds a trillion or so of liquidity and its explicit Seal of Approval, the securitization markets will miraculously spring to life, the credit logjam will loosen, and Wall Street will return to the high-flying Maestro days of easy money and burgeoning profits. Geithner refuses to accept that the market is right; that assets which originated through lax lending standards, faulty ratings and hyperbolic market conditions are actually worth only pennies on the dollar. Thus, the whole concept of the PPIP which is to keep asset prices artificially high through government injections of leverage is wrong and only puts off the inevitable writing-down of bad debt until a later date. Geithner’s job is to fix a system that is on its
last legs and needs emergency triage. Instead, he is merely adding a few more gusts of helium to a burst bubble.”
This is going to be an EPIC failure with horrific consequences. This is the most dangerous, irresponsible thing that Geithner could do. I have absolutely no idea how a supposedly talented, intelligent person could develop such a braindead plan. I’m starting to wonder if they’re trying to destroy the country intentionally, while absconding with as much wealth as possible to take with them to the tropics. This is more outrageous than words can describe. There is absolutely no way possible to re-inflate the credit bubble, yet these people seem hell bent on trying. Unimaginable stupidity.
Grand Wazoo -
“…Intelligent…”?
“You keep using that word. I do not think it means what you think it means.” - Inigo Montoya
I have to agree. This type of posting does not belong on this blog. It should deal with Reno area real estate.
DD
Then don’t read them. Know one is forcing you.
What a mess!
When reading any of this you get the feeling we are in huge trouble.
I disagree with this does not belong here, I am starting to beleive a further fall of prices is very possible. And the reason behind my feeling is expressed in some of these articles.
I would love SOMEONE, ANYONE to post any article with an upside. I here housing sales in both new and used are going up. But going up by how much? Where is it rising? Is it the people with all cash buying up these homes?
Recovery in the stock market leads a recession ending, and unemployment lags the end of the recession. Normally.
Not to forget, but there are still more sub-prime loans to go! With higher unemployment as well, the pressures to lower prices is still great.
I think Giethner is a crook. He is looking out for the rich and not the average american. Maybe I am shortsighted, and we really need to prop up the richest Americans for our own good. I just don’t get why an admistration wanting to redistribute the wealth to the “average” American is letting this continue? When will America wake up?
BTW on another upnote! The Montage has closed a few units!
Diane was a lot more fun when she was still clueless!
Seriously though, her recent angst attack echoes what a lot of upper middle class Renoites are finding - they really ARE anchored here by a house that is a quarter million dollars underwater, there is NOTHING from keeping the banks or real estate bounty hunters who buy the bad paper from tracking them down and going after their assets, they WILL be losing their homes eventually and have prolonged the pain and their financial damage by hanging on this long, and that the decisions they made were blatantly STUPID in retrospect and they have to explain the rental to the kids that will miss their media room.
We are almost 4 years from the peak now. It’s been a long, slow death, but the realization is stating to dawn on some folks that it’s not just 89506 that is hosed, but 89511, 89519, and 89523 too. So Diane’s angst is forgivable. Actually, nice to hear from her again.
Phil, you asked: Is it the people with all cash buying up these homes?
Not from my viewpoint. I’m cash, and have been running into all sorts of FHA 3% down buyers. They bid up the price (in some cases ridiculously).
I finally have one in the works - got there about 1/2 hour after the listing came out. So far, I’m accepted - just waiting for bank to confirm.
My thoughts are that the FHA loans are nothing more than an extension of the sub-prime fiasco.
If the buyer loses his/her job, then no big deal - not enough skin in the game to worry about.
Also, cash buyers (that I’ve come up against) are not willing to get into a bidding war, hench the reason my last attempt failed was because of the time stamp on the offer.
I like these other topics so keep posting Diane!
To BB,
Since you are the sage of the group I want to ask you a couple of questions:
Should people be investing in gold at this point?
How long do you think till real estate returns back to 04′ levels-price wise.
How long would you wait until you start investing in residential again?
Anyone can answer..
Thanks.
junkie, we are at early 2003 levels at this point - blew through 2004 a while ago. And what isn’t at early 2003 levels can easily be back at early to mid 90’s level. It is more than a bit scary.
>If we continue on this path, we will have a revolt in this country.
As a newcomer to this state, I’ve been reading up on Nevada history lately. Those of you who think these recent bailouts represent some sort of record for looting and plundering of the treasury might want to do likewise. From what I can tell, nothing today compares to the giveaways to the railroads and miners back in the 19th century. We recovered from that mess, we’ll recover from the current mess.
My view is that wealth and power has always been and will be concentrated in the hands of a few, whether under capitalism or communism (where “everyone is equal, but some are more equal than others”) or anything in between. There will always be a small ruling class, and the best we can hope for is for that ruling class to be intelligent and benign rather than stupid. The current transfer of wealth from middle class to rich is easily reversible (via taxes and spending) and of little long-term importance. The more important transfer is leadership of America from one set of tycoons to another. And to honest, I see replacing the Bush/Cheney oil and gas and defense industry ruling class with a hedge fund/banking ruling class as progress. Though of course there’s some overlap in these groups. For those who retort that the Wall Streeters are stupid and that is why we are in the mess we are in, I reply that they seem to have done quite nicely lining their own pockets, and that show sa certain intelligence to my way of thinking.
Meanwhile, something must be done to prevent debt deflation. Deflation sounds fine to the average Joe, who knows nothing of the world of business, but it is totally unrealistic in a large and sophicated economy like ours. If nothing else, there simply wouldn’t be enough courts and lawyers to handle the workload of a wildfire of corporate bankruptcies. FDIC takeovers of small and medium sized banks are completely different from FDIC takeovers of beasts like Citibank and BofA. Add to that AIG, GM and hundreds of other major corporations that would go under in a debt deflation and what we’d have is a total stoppage of the entire economy, which would be far more costly than throwing a few trillion at the problem to make it go away. I’m sure the Geithner plan could be improved upon, but any plan will be terribly unfair. Public-private bastardizations are unfair to begin with and cleaning up their inevitable consequences just adds to the unfairness.
On the bright side, the mess means continued opportunities in real-estate. As I mentioned before, the sub-100K market is already skating along the bottom and the rest of the market is heading down fast. For those who really want to clean up, think commercial RE or buying up a bankrupt RE-related business. Or start a new business using equipment that you bought at fire-sale prices from a bankruptcy liquidation auction.
downtown, it really depends on what house you are talking about. Many houses today are now selling for 50% of what they sold for in 2004. And remember that if a house falls 50% in value, it then must appreciate 100% to get back to its original price. So how long do you think it will take houses today to appreciate 100%? That’s your answer for many houses.
My sister and her family bought a house in Reno in December of 2004. They how have it on the market for 75% of what they paid, and they are getting no action at all. I don’t think they will have to drop down to 50% of what they paid, but yes doofus, it is very ugly.
RenoRetiree posted:
“Those of you who think these recent bailouts represent some sort of record for looting and plundering of the treasury might want to do likewise. From what I can tell, nothing today compares to the giveaways to the railroads and miners back in the 19th century.”
Apples to oranges. We didn’t have 300 million people, and jobs disappearing for good- overseas or otherwise. The quality of living was steadily improving, not taking a step backwards. What was the unemployment rate at that time? I don’t see any similarities. We have MASSIVE unemployment problems, and the politicians are worried about corporate welfare queens.
Further:
“FDIC takeovers of small and medium sized banks are completely different from FDIC takeovers of beasts like Citibank and BofA. Add to that AIG, GM and hundreds of other major corporations that would go under in a debt deflation and what we’d have is a total stoppage of the entire economy, which would be far more costly than throwing a few trillion at the problem to make it go away.”
You’re buying into the Hank Paulson crap. I don’t subscribe to that horsesh!t. It’s my contention that these mega corporations ARE the problem, and they need to fail, NOW. Spreading this sort of fear that there’s some apocalypse coming if we don’t rescue these pigs is absolute nonsense. There is no proof of such a doomsday scenario. But we’re expected to trust the word of those who created this mess we’re in? Hah! What we should be doing is sending all of these corporate behemoths to their demise, jailing their CEO’s, and giving the bailout cash in the form of low interest loans to responsible businesses, and the honest, hard working people of this country- not the wage skimping, job destroying blood suckers of the business world.
downtownjunkie:
I think the other posters have covered the housing price thing. As far as my opinions on gold, I suppose it’s good to have some as a hedge. I’m leery of anything that people are rushing into. I think it’s a little frothy myself, but it remains to be seen what’s coming down the pike for the dollar, etc. Hey, speaking of which:
http://www.nbclosangeles.com/news/local/NEW-CALIFORNIA-GOLD-RUSH.html
Couple comments..
First, I make no predictions as to what will happen in the future, I have no idea. Neither do most people, no matter how loud their voices. Loud voices and strong opinions are not often strongly correlated with wisdom, though we seem to have a natural inclination to correlate the two.
But I think one thing we don’t discuss here often is the difference between price and value. If price is a number, value might be some unit of labor required to hit that number. We often talk about how prices are dropping back to early 2000 levels, or maybe even 1990s levels. Some predict that they will stay that way for years, and even decades. But price and value diverge because of inflation and deflation, they are not the same.
If I had to make a long term guess, I might think that price could return to upward trends, maybe even sharply, sooner than some might think. When, I have no idea. Why? Because our federal and state governments ultimately control the long term relationship between price and value. And all those rapidly accumulating debts are simply a price number, one that can be manipulated if the value of each debt dollar is reduced. And it will be far easier to pay all those debts in depreciated dollars, even if the process to get there is painful for many. But, I do think it will happen. It is the easy soloution to our government debt burden. As a government, who really cares about the value of the dollar, if dropping it by printing money makes your big budget problems disappear, or recede into the future. So for real estate, while we may see long term downward trends in value, I wouldn’t be nearly so confident that price trends will follow that trend.
BB — Yes that was exactly the investment opportunity I was talking about. As Stieglitz says, it’s a superb deal if you’re on the investing side. Since the Treasury is going to do it, I don’t see why that opportunity should only be offered to large hedge funds and so forth.
FWIW I greatly admire Stieglitz and Krugman. I also suspect that, was it possible, the Treasury would follow their prescriptions. But that’s simply not possible.
Both Krugman and Stieglitz realize it’s imperative that we clean up the bad banks. But (1) neither the Treasury nor the FDIC nor the Fed has the authority to take over entities like AIG that are not banks; and (2) regional banks hold so much preferred stock in the giant banks like Citi and BoA that were the FDIC to take over those banks the regional banks would be effectively shut down. Also, Citi has so many businesses that are not banking related that the government probably couldn’t handle them effectively.
This could be done of course if Congress would authorize the $3T or $4T it would take to do the job and give the Treasury the authority to put AIG in receivership. But it won’t because the public is exorcised about the bonuses at AIG. In this sense the taxpayer’s are getting what we deserve. We could pony up the money and do it ourselves. But if we’re not willing to do that then we get little upside and a bunch of downside. (Much less than Stieglitz thinks. He had the numbers wrong).
This is the reason that Geithner is proposing new laws that allow takeovers of entities like AIG and that allow the government to limit the size of banks like Citi. That’s fine going forward but it doesn’t help with the problems at the moment.
Diane, you might consider picking up a copy of the HHGTTG, with the words “Don’t Panic” inscribed on the cover in large, friendly letters.
Tallguy, I think you hit the nail on the head when you stated “it will be far easier to pay all those debts in depreciated dollars, even if the process to get there is painful for many.”
If you believe in an economic recovery, any recovery; and you can lock in long term fixed rate financing today at historically low interest rates [and the best way to do this, IMO, is through a 30 year fixed rate mortgage]; you’re setting yourself up to be sitting pretty in the future.
And if we see hyper-inflation as many of us believe is destined to come [sorry BB, I disagree with your arguments to the contrary], you’re looking at a windfall.
So I say if you can refinance your long term debt; or you’re looking to purchase a new home and you can secure a 30 year fixed rate purchase money mortgage at 4.875% or less on something that fits your needs and is reasonably priced; or you need a vehicle, computer or appliance that you can purchase with 0% financing; now is the time to be pro-active.
The alternative is sitting on the sidelines; watching; and hoping things get better. Just my two cents.
Diane,
Don’t stop posting this stuff!! I think the value of this blog is ELEVATED when you provide us with looks behind the curtain, and we find out that the Wizard of Oz is just a small, frail old man pulling a lot of levers.
Another thing that spells the end of American dominance in the world is Geithner’s comments about how he considers replacing the US dollar with SDRs (special drawing rights–essentially a currency basket) as an alternative reserve currency throughout the world. In the past, the nation with the largest global military presence held the de facto position of controlling the world’s reserve currency. The ancient Romans had that power, then the Spaniards, then the British, and since WW 2, the US. To have the Treasury Secretary suggest, if only in passing, that another currency concept could supplant the US dollar as a reserve currency flies in the face of the position of Treasury Secretaries since Alexander Hamilton.
In my opinion, Geithner should be removed at once. He has done irreparable damage to the country’s reputation, and it’s particularly sensitive territory for those countries that have invested billions of dollars in Treasury securities, thinking that those investments were safe havens. That statement suggests that they are not as safe as once perceived, and may result in even lower purchases of our debt by foreign governments. And we definitely need foreigners to purchase our debt, since we are issuing it at such a maddeningly rapid pace.
Enough backbiting and sparring on this blog. The stress level is definitely up, and it almost seems as if we’re all passengers on a train without an engineer, with a broken piece of track within view.
Will someone step up to stop the train before it derails?
None of us know, but all of us care.
Sully said:
“My thoughts are that the FHA loans are nothing more than an extension of the sub-prime fiasco.
If the buyer loses his/her job, then no big deal - not enough skin in the game to worry about.”
I believe you are correct. I’ve heard that there’s a new wave of foreclosures involving people who’ve taken out FHA loans within the last year, making 0 or 1 payments. This is so blatent that it seems unlikely that most of these are caused by sudden job loss.
I’ve heard that there are a number of people who’ve discovered they can “buy” a place with minimal closing costs, then live in it for a year or more, for free. Some of these people actually collect rent, while not making payments.
This trend will probably tend to increase until we start to have some serious consequences for committing mortgage fraud.
I don’t argue that it’s easier to pay back debt with cheaper dollars, and that inflation would wash away a lot of this, but try as they might- they can’t make it happen. Let me ask you Smarten, TallGuy, etc.- what are they waiting for? If “hyperinflation” is imminent, may I ask what’s taking so long? Furthermore, how can several trillion dollars offset the tens of trillions in wealth destruction? It can’t. The only thing these bailouts, programs are doing is legitimizing past inflation.
People like to talk about Zimbabwe, etc., but we have no shortage of food or its production, goods and services, no wage inflation, or any of the many other issues which led to their situation. The two countries couldn’t be further apart. We’re in a deflationary spiral, and this is our medicine, the cure. Better to take it, than to fight it. Most businesses failing deserve to, though some innocents will be caught along the way.
We had an economy that was totally unsustainable. We didn’t need a coffee shop every 100 yds, pirate stores, spas, candle shops, boutiques- you name it, all funded by easy money through credit. This is about moving to something more sustainable. The real issue is jobs, and if the pols don’t pay attention to the outsourcing, preference of illegal labor over skilled legal citizens, and wage destruction, we’ll never recover, but instead, slip into the abyss.
RR said, “Meanwhile, something must be done to prevent debt deflation.”
The Fed just issued an extra $1,000,000,000,000, to buy up treasuries that nobody else wanted. That’s inflationary, not deflationary, and moves like that will make significant deflation impossible.
smarten — Bad sign. I’m agreeing with BB! (More with you actually but it’s a fun line).
With ten year treasuries at 2.75% or less it’s hard to see inflation on the horizon much less hyper inflation. As for inflation, I find value in viewing the economy as always having inflation — it just moves around. In the late 90s it was tech stocks. That bubble burst and we had inflation in real estate. That burst. I have no idea what is next but there’s always some sector or another where too many dollars are chasing too few whatevers.
But if you’re right, and even if you’re wrong, locking in a low interest fixed rate is a fine idea. When jobs come back interest rates will rise and/or house prices will rise. In either case, as you say, you’ll be paying less.
Of course there is some risk of BB’s deflationary cycle but Americans like to buy things too much. We’d have to have a collective personality transplant to turn into a nation of savers like Japan. Doesn’t seem likely.
To tallguy. It’s true that the government could get prices back up by causing massive inflation. Unfortunately, this is a case of the cure being worse than the disease. Even more unfortunately, those in Washington seem to intent upon doing just that.
RR - I must say your post gave me some pause for thought. I disagree about letting our country be run by the banking hedge fund guys as this mess is caused by thier greed.
While oil and gas companies make billions in profits they have not even approached what the banking crooks have gotten away with recently.
Somehow I prefer industries which actually produce something, then some banker hedge fund manager comming up with a new scheme and mathematical formual to make money.
I do understant investement and venture capitalist are responsible for funding new innovations. But the direction we are going is way beyond this type of investement.
I just wish the government never got involved in any of this. I think McCain made a huge mistake voting for the first bailout. If we are a capitialistic society and not a socialistic one then let the bank fail and take our medicine.
BB - I see inflation as a big problem in the future. The spending has just started, it will take time to be fully realized the results of this path.
DonC posted:
“Of course there is some risk of BB’s deflationary cycle but Americans like to buy things too much. We’d have to have a collective personality transplant to turn into a nation of savers like Japan. Doesn’t seem likely.”
And they’re going to buy these things how? With little money, or worse- no job, what are they going to use, credit cards? The ones with shrinking lines of credit? After the banks just took the biggest spanking of their lives, are they just going to start loaning to deadbeats again? I don’t think so.
3niner posted:
“The Fed just issued an extra $1,000,000,000,000, to buy up treasuries that nobody else wanted. That’s inflationary, not deflationary, and moves like that will make significant deflation impossible.”
A mere trillion in treasuries. How will that offset the trillions which are currently going up in smoke in , for instance, commercial real estate, etc.? And, how will this money end up in peoples pockets? Please explain to me how this drop in the bucket makes significant deflation impossible. I’m all ears. (For the record, we seem to be in agreement on a lot of things).
Further:
“It’s true that the government could get prices back up by causing massive inflation.”
So, then, how will the people afford these higher prices? Wage inflation? We have skyrocketing unemployment and FALLING wages. Prices become inflationary when there is too much money chasing too few goods. Is the fact that we have too little money and too many goods lost on everybody? I do not understand how you draw such conclusions.
Aren’t FHA loans full doc? I think the liar loans were mostly the cause. If applicants are having to show 2+ years income + reserves, I don’t think you could compare these to sub prime products.
BB posted:
“A mere trillion in treasuries. How will that offset the trillions which are currently going up in smoke in , for instance, commercial real estate, etc.?”
By doing it over and over again. This is just the start, they plan to blow through many trillions over the next few years.
BB posted: “We have skyrocketing unemployment and FALLING wages. Prices become inflationary when there is too much money chasing too few goods.”
The government has started down the too much money path. They have given every indication that they will continue it to an unprecedented degree. If you print enough money you will have inflation no matter what else happens.
downtownjunkie,
Many of the defaults are by people who CAN make the payments, but choose not to. It seems that a new group of “buyers” has discovered that they can make money by never making any payments, and waiting until they are thrown out.
The FHA loans are well suited to this when the buyer is dealing with a new home builder, who has a finance arm, which can provide ample incentives. These incentives can virtually eliminate out of pocket expenses for the buyer.
The FHA has recently changed the rules to make this more difficult, because so many were abusing it.
39er has got it right.. In the short term, BB is right, in a couple different ways. We are in a deflationary environment right now. And the government can do little to turn it around right away. But BB, I think you underestimate the power of the government to affect long term econmonic conditions. Namely, start the printing presses and run off money (remember why they called him “Helicopter Ben”). Over time, that will inevitably reverse deflation and cause inflation. I think hyperinflation unlikely, but a series of years with 3-10% inflation would drastically reduce the value burden of our government debt. That IS what will happen at some point. Probably within the next decade or so if I had to guess.
On another point BB: I agree we have an unsustainable system going, both economic and environmental. Too many people chasing too few resources to maintain current quality of life. I think the solution is developing sustainable economic and environmental systems. Green power, limit/optimize resource uses, transition to a hydrogen economy, end foreighn oil dependence, etc. Massive investment needed, massive jobs available, massive profits available if you play it right. I think it will need to happen in our lifetimes, and I am an optimist that that transition can be our economic engine for the foreseeable future. If you take the pessimistic view as to how we solve our sustainability issues, I think you are left with the Mad max option. Stock up on guns, gas, and food, and practice your aim. I’m not that pessismistic as to our ability to make the right decision once it become apparent that it is a decision we need to make.
Guys- you can’t just say “we’re going to see inflation” or “hyperinflation”. What’s the path? How do you back up your argument by illustrating how the money created not only dwarfs what is being destroyed <B<every day, but gets into the hands of those who purchase goods and services? You talk about “helicopter drops”, tallguy. What that’s referring to, is literally dropping money into the consumer’s hands. That’s not what’s happening.
We currently have a policy where the fed and the government are trying to make the banks whole, by bailing them out of their bad bets. This money is NOT going into the consumers hands. Unless they start writing checks to each and every individual in this country, and I mean big ones, or institute some policy which requires lenders to loan money which will never be paid back, we will not see any meaningful inflation to bail anyone out of this mess. Deflation is actually good for banks- bad for people. But it’s what we get, regardless.
I think that you’re overestimating the governments ability to have a substantial and lasting effect on the market, tallguy. Try as they may, there is no way to get out of this mess without taking our medicine. It was a bubble of staggering proportions, which pushed the price of everything, from assets to commodities, to levels completely unsustainable, and unhealthy for the population as a whole. Those prices are coming/have come down with a vengeance. Try as they may, our leaders will NOT be able to artificially prop them up, be it commercial or residential real estate, stock prices, or otherwise. It’s game over.
BB,
Do you think long term interest rates are going up or down?
Do you think the minimum wage is going up or down in the long run?
I understand we’re currently losing jobs but given President Obama is committed to stopping the downward trend in employment, in the long term is unemployment going to be more or less than it is today?
How about the price of gasoline? In the long term do you think it’s going up or down?
How about the price of housing? Again like unemployment prices are dropping [although interestingly, they may have bottomed (as measured by the median) or they’re getting close to bottoming]. But in the long run, up or down?
And none of this has anything directly to do with the cost of our country’s borrowing. I’ve heard estimates that within less than four years our country’s yearly deficit is going to be nearly $1T! Where is the government going to come up with the shortfall short of printing new paper or borrowing from others? Well we’re no longer the only country with budget deficits. That means other countries are going to need to either print new paper or borrow as well. With more countries chasing a finite number of investors to fund their deficits, do you think the cost of borrowing is going to increase or decrease in the long term?
Let’s assume we keep printing more paper to fund our deficits. What’s that going to do to the value of our currency? And when it falls compared to other currencies, is that going to make imported goods, services and materials, which we seem to be relying upon more and more, more or less costly than today?
Yes, we may have lost trillions of dollars worth of over valued wealth. But if we’re examing the question of inflation, I say so what!
Although we didn’t call it hyper-inflation back in the mid-80’s [when mortgage interest rates increased to close to 20%], that’s exactly what it was. And I see what we’re doing now is going to make the 80’s look like a picnic!
Again, just my two cents BB!
I am sorry to say that we are sowing the seeds for massive inflation. Since there’s little we can do to stop it, as long as the government is giving away today’s dollars, we may as well lock in as much as we can get our hands on because they’re going to be worth a heck of a lot more now than in the future.
Smarten-
In the end, we’re all dead. When is this inflation going to happen? What, again, are they waiting for? I fail to see where you answered my question. You seem to ask a lot of questions, but you haven’t illustrated how this excess money is making it into the economy and, ultimately, consumer’s hands in order to drive up prices.
Why do you think that AIG, Citibank, and the other welfare queens keep coming back with their hands out? Because the bailout money is gone! It was not lent out, but used as reserve capital, but as prices continue to fall on their assets, the money has essentially evaporated into thin air. Is this inflationary? NO! We already had inflation during this massive bubble. There was so much money sloshing around, we had pirate stores, candle shops and doggie treat businesses showing up in high dollar commercial spaces.
I DO NOT see any increase in wages in the near term (next few years). We’ve got a situation where there is competition for minimum wage jobs. DEFLATIONARY. Interest rates, you ask? The fed has maintained that they will hold rates near zero indefinitely. Gasoline prices? Somewhat steady through the summer (with the seasonal bump), but I see crude dropping substantially later this year, as the depression is kicking harder than ever. That’ll lead to lower prices at the pump. Housing prices? Down. Commercial real estate prices? Down. DEFLATIONARY.
You need to define “long term”. I cannot honestly answer any of your questions until you do so.
You posted:
“How about the price of housing? Again like unemployment prices are dropping [although interestingly, they may have bottomed (as measured by the median) or they’re getting close to bottoming].”
I am in disagreement with this statement. I think there’s much more downside risk to housing prices, as well as the next big shoe to drop which is commercial (ooooh that’s gonna hurt, BTW).
Lastly:
“I am sorry to say that we are sowing the seeds for massive inflation. Since there’s little we can do to stop it, as long as the government is giving away today’s dollars, we may as well lock in as much as we can get our hands on because they’re going to be worth a heck of a lot more now than in the future.”
I still don’t understand how you arrive at this. I’d like to see the path. Like I said, each and every day, the money that the fed, and the government, is pumping into these “too big to fail’s” is going up in smoke. It’s a wash- like it never existed. It’s only propping up a bunch of corporate welfare queens, and lining the pockets of a very select few extraordinarily wealthy individuals.
39er pointed us to the path. It really is the print too much money path. That money will initially be used to fight the fires in the banking sector and restore some kind of equilibrium. After that, stimulus efforts, infrastructure, tax incentives, loans, etc will be spreading that newly printed money around. I think its naive to think that money that initally goes to the banks and Wall Street won’t eventually find its way out into the broader economy in a big way, cascading through everything. Nothing is independent of that broader economy, and no bank created actually sits on a big vault of money. They make money by moving it around, and that’s what they’ll do. Because they are in worse straits than the average consumer, the helicopter is over them right now.
Deflation is bad for government debt obligations, and since they control the money supply, I’d put my money on aligning with governmental inflationary interests over pro-deflationary banks.
As for overestimating government’s ability to control ecomonic conditions.. I think not. Put it this way. Could the government start WW III tomorrow and transition our economy to an giant war machine, with 100% employment? They certainly could, and they have similar powers they can use in less drastic fashion, especially over the longer term (>1-5 yrs).
I largely agree with smarten on this one. There is no avoiding the medicine in the short term, we have one f’ed up situation. But in the long term, I think UP and SIGNIFICANTLY UP is going to be the answer to most of his questions. I don’t know for sure, but that’s my 2 cents.
I’ll happily agree to disagree with you on this one, tallguy. When the fed prints money, gives it a financial institution in order for them to avoid collapse, and they hoard that money which subsequently disappears into thin air because the assets on their balance sheets continue to erode, the money is gone. You guys seem to think that the fed, and the government are going to continue to inflate the money supply beyond what is necessary to carry these zombie institutions. <I<That’s what’s naive. If you look at all of the money printed to combat this meltdown, it pales in comparison to what has been, and continues to be, destroyed. People look at several trillion dollars in stimulus and bailout funds, and freak out and start talking about Zimbabwe. “Hyperinflation” is the new “real estate only goes up”. It’s something that the masses have latched onto, and are running with. Once prices do bottom out in the real estate market, the “printing” will subside, and, if necessary, any excess money would be drawn out of the system.
What all of you parroting inflation seem to gloss over is the fact that we already had inflation. It was the loose lending, fueled by cheap money from Greenspan, and the subsequent wild securitizations by Wall Street which ran prices into the stratosphere, and has since culminated in an absolute collapse in the prices of virtually all asset classes. You make the argument that banks are going to be sitting on a pile of cash to lend out. Well, let me tell you my friend, they’re NOT going to resort to the kind of lending of yesteryear, which is the only thing that would result in a rapid rise in prices. Going forward, they’ll be carrying the contracts, and will be making darn sure that whomever they loan to has the resources to pay them back. In a situation of 20%+ unemployment, their customer base is looking paltry at best.
Diane, how much did the rock house sell for?
BB, I’d hate to think that I’m one of the masses, that hurts. Anything but. For the record, I do not believe hyperinflation is likely, just inflation. And, while I agree that some fraction of bank bailout money evaporates to balance asset losses, you forget that a good solid fraction of that money ends up in the hands of counterparties to the transactions. Banks may lose, but there are winners on the other side. Plenty of counterparties are coming out as big winners with this whole mess, and they are smartly keeping their heads down and mouths shut. Where did lots of the AIG bailout money end up? Goldman Sachs, Merrill, HSBC etc.. Thats the fraction of government bailout money that ends up dispersed. Not all evaporates.
And yes, I do think they won’t quite stop the presses once its all stable. They have a great reason not to. And I agree that loose lending is done, but I disagree we’ll see 20+% unemployment. To me, that makes the inflation scenario even more likely, because the government will likely create WPA 2, and print lots of money to directly pay those people, increasing federal debt and increasing reasons to devalue currency.
We’ll have to wait and see what happens, tallguy. Time will certainly tell. I hope I’m wrong about future unemployment, and the direction this economy is going. I’d love nothing more than for things to get back on track, and for us to see some meaningful job creation. I’m not optimistic about that in the near term. It’s getting really, really bad.
Such a nice blog to DELETE certain posters comments. Sort of defeats the purpose doesn’t it?
I am currently looking to buy a house in the 400-500k range. Any ideas on who I should hire as a realtor? I am paying CASH.
I can tell you who I WONT hire!
Just out of curiosity apple, who WOULDN’T you hire to be your agent?
And pardon me for asking - if you have $500K cash to pay for a $500K home, why wouldn’t you get a $417K purchase money 30 year fixed rate mortgage at 4.75% or possibly even less and only use about $90K of your cash?
With the FDIC insured interest you can earn on the $417K you don’t sink into a home; plus mortgage interest write offs; it’s probably close to break even. And if interest rates go up within the next 30 years [which is GUARANTEED], you’ll be way, way ahead of the game!
apple: good luck with finding a house in this area thats actually worth 400 - 500K in todays market. I have been looking for 2 years and found only one, a REO, but was too big at 3600 sq/ft.
Then again, I guess it does depend on which area you are looking in.
Smarten, Sully- wake up. apple = diablo = derrick.
Thanks BB. Stupid me [I apologize]!
I was kind of thinking the same thing when I read that Mr. Fruit was going to pay all cash - just like he did for his Spanish Springs Stuccobox. But I didn’t want to be accusatory.
So if this is Mr. Diablo, why isn’t he enamored with Guy as his agent? Wasn’t Derrick reaping praise on Guy and Diane long ago attesting to the fact that when he was ready to make another purchase, they’d be at the top of his list?
If not, maybe he wants to look up Michele Plevel?
The entire opening of this entry is fairly lame. All the teeth gnashing over bailouts and having taxpayer’s being stuck holding the bag and so forth seem silly at this point in time. The banks can and will pay the money back. With interest. In fact the discussion now is how soon they will pay it back. The banks want it done by the end of this year. The Fed and Treasury want them to show they’re lending before the loans are paid off in full. This year. Next year. The year after even. What’s the difference.
BB - The Federal Reserve doesn’t physically print money. The idea is rhetorical. What it can do is buy long term notes which pumps up the money supply and tamps down long term interest rates. It did this on March 19th to the tune of $1.2T. When it was announced the 30 year Treasury dropped from 3.0% to 2.5% — which is huge — and the stock market rallied. If the process isn’t reversed in a timely way, meaning if the Fed doesn’t sell the long term notes at the right time, then you will see inflation.
However, just to keep this in perspective, the companies which compose the S&P 500 are siting on $8.5T in cash. Usually they’d have $1.5T or so. At some point that money will be put to use, but while they are sitting on all this cash someone has to be the ATM of the credit system.
Don, where do you find 8.5 trillion in cash?
http://moneynews.newsmax.com/streettalk/companies_hoarding_cash/2009/03/17/192753.html
This article says - The non-financial firms in the Standard & Poor’s 500-stock index — there are 419 of them — are sitting on $811 billion in cash and marketable securities right now.
Also, the companies in the S&P 500 are underfunding their pension plans by about $1 trillion.
DonC-
Perhaps a poor choice of words on my part, but all that matters is we are talking about an increase in the money supply. Which brings me to your point:
“However, just to keep this in perspective, the companies which compose the S&P 500 are siting on $8.5T in cash. Usually they’d have $1.5T or so. At some point that money will be put to use, but while they are sitting on all this cash someone has to be the ATM of the credit system.”
As Sully has asked, how do arrive at this number? Anyhow, let’s just go ahead and assume it’s accurate. Let’s also then consider the fact that residential and commercial real estate prices continue to erode at a breakneck pace, and the brunt of these losses are borne by the companies making up this list. Hence, this $8.5T continues to shrink. I have to disagree with you about much of this making it into the economy, as it will, IMO, go up in smoke like so much already has.
I can’t read any of those articles because I would find them too depressing. Yes, the government is robbing the taxpayers blind. Here is my take on what “we the people” can do about it. All Republicans in office=BAD. All Democrats in office=BAD. What we need is some good old fashioned grid-lock to render the government INEFFECTIVE and totally USELESS! So here’s to the Republicans winning back some Congressional Seats in 2010 and me remaining as non-partisan as possible!
On the bright side there are an awful lot of short-sale pendings out there and the banks are really coming around in realizing that a “bird in the hand is worth two in the bushel”. I just closed on a short-sale and it wasn’t too painful. So I guess I am no longer Future Buyer.
Sully — My bad. The number was just what I remembered. However, in thinking about it, it can’t be right because I think the S&P market cap is now roughly $10T and M2 is probably only $12T. It’s either an estimate of combined markets or I just remembered it incorrectly. I don’t think I remembered it incorrectly because it was a shock when I read it.
In any event, the number isn’t that important except to the Fed, which has to manage it. The point is that sitting on cash cuts velocity, so the Fed’s increasing reserves is a good and necessary step, not a guarantee of future inflation. I can’t say if adding $1.2T to the money supply makes sense given that the companies in the S&P are sitting on $1T makes sense or not. Not my area. But obviously there is ample reasons to increase reserves.
BB - Deflationary spirals, if that is what we have, are meant to be broken. But as I mentioned before I do agree with you that deflation is a much larger danger at the moment than inflation.
BB and Sully - Deflation may be a larger danger compared to inflation AT THE MOMENT, but attacking it the way President Obama and Congress are opens the door to devestating long term consequences.
I’m not an economist so I can’t give you all of the reasons why. But I heard Senator McCain on Meet the Press this morning and he raised this very issue. According to him, NO COUNTRY has EVER been able to sustain deficits like our country is in for without serious devaluation of its currency and massive inflation. He even pointed to what happened to our economy in the late 1970’s-early 1980’s [when long term mortgage interest rates topped 18%] as evidence of the proposition stated.
All I am saying is watch out! If we try to get out of the economic mess we’re in by massive spending, we’re setting ourselves up for massive inflation. President Obama complains that he inherited a $1T deficit [actually, it was roughly half this amount before the TARP infusion, half of which will be spent on his watch]. The projections I’m hearing some four years out are calling for a yearly interest expense on our then deficit of nearly $1T!
You want me to share a GUESS as to when [and please remember, this is only a guess] we’ll be facing massive inflation in the eye? Five years!
Hey Smarten, I have a question for you as the resident Incline Village expert.
What’s the deal with MLS # 90004738, 996 Tyner Way, listed for $355K?
This seems way too low, unless there is some unknown aspect to this property. $355K for an almost new house in Incline?
Please advise. Thanks.
RI, RI, RI…
[BTW, thanks for the “resident expert” moniker. But I think I like BB’s label affixed a while back: “the oracle from Incline”]. Please don’t ask me questions like this one UNTIL a property like this has gone into escrow and is no longer on the market. Otherwise, JJIncline and I have to compete against other would be purchasers! But really I don’t mind speaking on this one because for me, this property is geographically undesireable.
The lender to which this property reverted is IndyMac; the SAME lender that came up with the way under market list price of $617.9K for 823 Ophir Peak [I’ve now learned there were 7 offers on this property and the highest priced one will probably be in excess of $700K]. Tyner sold at trustee’s sale for $936K. To bid in this amount owed at trustee’s sale and then list the property as a REO at 38% of this number [the exact opposite of what Mike was telling us was happening at some trustee’s sales] presents a new marketing philosophy I can’t recall having seen before.
Nevertheless, this property WILL be in escrow by the end of the week [just as Ophir Peak was] and at a sales price in excess of $355K. After all, priced at $137/square foot…well no IV SFR has sold at anywhere near this number.
You know, Ophir Peak and this Tyner property are examples of what I was trying to share w/BB some months ago. IMO the sub-prime mortgage mess was not the cause of the worldwide economic depression we’re in. If it were just bad mortgages, the market would take care of itself. Here neither property will be a “toxic asset” on anyone’s books, and no government bailout was necessary. And lest not anyone think IndyMac took a hit on either of these foreclosures. I’m certain these mortgages are part of a much larger pool [isn’t this precisely what IndyMac did with the vast majority of its mortgage originations] where investors in Dubai or Riydah are the ones taking it on the chin!
I still say Tyner is a typo..unless they priced it low in order to get a dozen offers??
Also 2nd Indy Mac Property listed by a Reno Broker vs someone in Incline?? hmmmm
Smarten-
I’m going to agree to disagree with you on the inflation argument, but leave it alone because I think I have said most everything that needs to be said about the current destruction of wealth, and how it dwarfs what’s being created. That means the money supply is actually shrinking, not expanding. I cannot hypothesize on future policies of an administration, the very “if’s” you use in your post, as they will largely be influenced by the events unfolding at that point in time, thus, I’m only commenting on what effects the current spending/policies are having on the money supply and the economy.
As far as the economic mess we’re in- in the grand scheme of things, it’s the bust portion of a completely unsustainable economic boom due to a failed monetary policy. Like many have opined before, it’s the job of the fed to take away the punch bowl just as the party is getting started. Instead, thanks in large part to Alan Greenspan, etc., they brought many more bowls out in addition, and kept the party going 24/7. “Subprime” is a term that was originally used for high risk mortgages written for marginal borrowers. During the boom years, we can pretty much slap the “subprime” label on most all mortgages, as the majority of people purchasing the homes had absolutely no way of paying the money back. Stalled, and subsequently eroding, property values are what precipitated this meltdown. You like to blame derivatives, but remember that there are counterparties to those transactions. The underlying problem is that all of the big players bets were based on real estate always going up. Falling prices did them all in.
Thanks for the reply, Oracle from Incline. I think then what we are seeing with this house and Ophir is a marketing strategy wherein the listing price is obviously and deliberatley set so low as to attract serious interest, and then a “bidding war” of sorts is encouraged.
Very interesting development regarding MLS# 90002830:
Active/Pending- Short Sale. Hmmm. Looks like old Allen “I don’t have to sell” Murray, had to sell after all. He was greedy (he even parroted “greed is good”), refused to lower his fantasy price a few years ago, and look where that got him. I promised him I’d be the first to post his NOD to the blog. I actually haven’t checked the recorders office to look for such, but it appears as if Allen might just escape by the skin of his teeth. He better pray this sale goes through. Allen Murray never could afford that house. He’s just another in a long list of FB’s living a life they never earned, but simply borrowed. The whole thing was quite transparent.
Interesting development on Allen’s house now showing as a short sale. Does anybody have any recent info on what the bank’s are requiring to “qualify” an owner for a short sale? It used to be that the owner had to demonstrate that he had no ability to bring any money to the table in a sales transaction. It was like an owner had to “qualify in reverse”. In other words, demonstrate he has no savings or other source of funds. Is that still true these days?
Who is Allen Murray? Was he the owner of the house up on Tyner???
Allen is the guy who called me a “hostile pessimist” about 2 years ago or so when I said that the housing market had nowhere to go but down. He is the owner of the house BB referred to in his comment just above. Apparently the house is now a short sale. BB and Allen and I and Smarten and a few others had some very shall we say “animated” discussions on the blog.
Yes, very interesting RI, and I, too, would like to know what criteria banks are looking at to qualify somebody for a short sale. As others may recall, DowntownMakeoverDude shared a story well over a year ago of a woman who bought a second home as an “investment” only to find herself upside down in it. As far as I recall, she either owned her primary residence outright, or had quite a bit of equity in it. Since her gamble turned out to be not in her favor, she figured she’d just try to go the short sale route, and make the bank take the loss. The bank laughed quite heartily at that, and expressed their interest in her other property.
What we know of Allen, from his excessive blathering about his personal wealth, is that he indeed has other properties. He was not shy about boasting of this, and so it is quite curious that he would qualify. The obvious conclusion would be that Allen Murray doesn’t have two nickels to rub together because, otherwise, a man of such considerable wealth would just write a check and be done with the whole thing. But, as Warren Buffet so accurately said, “you never know who’s swimming naked until the tide goes out.” It looks like Allen Murray didn’t own a bathing suit.
996 Tyner Way
This property was foreclosed upon..The bank owns it and is selling it as an REO
incline, the property they are talking about as a short sale is in Reno on Dant St. They are not talking about the IV property.
4271 Dant -
So I did a bit of research and of course I could be wrong, but on January 25, 2007, Mr. Murray placed a $900K first and $88K second against his personal residence - both mortgagees being Greenpoint Mortgage. This appears to been associated w/his former girl friend’s conveyance of her joint tenant interest in Allen’s home.
Also interestingly, Mr. Murray is in arrears in at least his last four real property tax installment payments - for a total of $11.2K. So all along while Allen was bantering w/RI, BB and I insofar as being heeled enough to weather the storm, he wasn’t paying his property taxes.
The $799K or less pending sales price is still pretty pricey for Reno but regardless, Greenpoint is going to take a haircut.
I don’t know Greenpoint’s guidelines for short sales but from what I’ve seen recently w/other lenders, at least insofar as first mortgages are concerned, is the decision is pretty much governed by the security’s fmv. Of course at this stage, the pending sale could be awaiting Greenpoint’s consent to accept less than what’s owed.
The more interesting question [at least to me] is whether Greenpoint will require Allen to reaffirm his obligation to repay any deficiency [at least $265K]. If Allen’s still lurking out there, maybe he can clue us in [or maybe he rather than Derrick is Mr. “Apple”]?
anyone seen the inside of dant? is it priced to sell?
I have a friend who tried to get his lender to accept a short sale. He had to provide his most recent tax returns to the bank, and the bank scrutinized the return to see if he had any other assets available to him from which he could have made up the deficiency at the close of escrow. It was only after the bank determined that he was really broke that it would agree to a short sale. I don’t think the bank would have accepted a short sale if my friend had been able to come up with deficiency between the debt and the sales price. I’m not saying all banks do this, but it was my friend’s experience.
It only makes sense that the bank is not going to agree to write off, say, $200K in a short sale if the owner/borrower/seller has $200K in other assets he could use to bring to the table at closing. I would think it’s quite understandable that the bank wants proof the owner/seller is broke before it agrees to get paid less than it is owed. Doesn’t it?
Why would a bank allow an owner/seller/borrower to walk away with money he could have used to pay off the debt at closing?
Despite your histrionic attempt to characterize the administration’s actions as based on social class, the simple fact is that the banking system has to be restored for the simple good of all. Keynes pointed out a long time ago that massive deficit spending by the government was the only cure for a depression (and a modern depression is what we are in). What ended the Great Depression was not all the public works projects but World War II. In the absence of another world war, the massive deficit spending the government is embarking upon is really the only solution for the current global mess. Sorry if that offends your social tastes.
OH NO CALBOOMER…WAVE OFF! WAVE OFF!
PULL UP! PULL UP!
Too late…
smarten — Just a couple of points of clarification. Bush ran deficits much larger than what his budgets showed. Why? Basically he made liberal use of creative accounting. For example, the wars in Iraq and Afghanistan were never part of the budget. Also the budget never had entries for things like emergencies, apparently on the theory that hurricanes and tornadoes and floods only happened in movies.
The Concord Coalition, which is a respected bi-partisan organization devoted to budget matters, has said the Obama budget is, in stark contrast to the Bush budget, a basically honest document. Yes there are some shadings here and there but by and large it’s transparent.
Second, John McCain has said he doesn’t know much about the economy. He probably shouldn’t talk too much about it. At the end of WWII the ratio of government debt to GNP was far higher. During the war our deficit as a percentage of GNP was much higher it’s not even close. Interestingly in the years following WWII inflation was quite tame.
My bigger beef with McCain is that he’s always willing to spend trillions on any and all wars. When he said during the campaign that we could stay in Iraq for a hundred years so long as we didn’t suffer casualties, it was the perfect example of how clueless the man was about the economy. I was like: “Earth to John, we can’t AFFORD to stay in Iraq for a hundred years regardless of casualties. We’ll go broke”.
I just don’t know what to say about a guy who thinks it’s a great idea to spend $2T on the rat hole we call Iraq but thinks the country is going bankrupt spending $50B educating our kids.
BB - The theory goes something like this: Increasing the money supply will drive down interest rates and make marginal deals attractive. It will also introduce inflation, which is a disincentive for people to sit on cash.
CalBoomer - The deficits at the moment are not exactly massive. One criticism is that they are too small. If demand is expected to be off by $3T over two years a stimulus of $800B can’t replace it.
WOW! This is better than taking a economics class!
Well Obama has one thing right, he seems to be giving up on Government Moters! And Fiat is going to join Chrysler? Why not just wait till they get restructured as well.
Now if we can get Geithner to give up some banks. Did anyone catch him say a lot mroe money is going to be needed to “invest in” (bail out) them.
In response to Raymond’s statement that “it only makes sense that the bank is not going to agree to write off, say, $200K in a short sale if the owner/borrower/seller has $200K in other assets he could use to bring to the table at closing,” let me attempt to share why in the real world, it may not make sense.
First, you have to remember bankers are by and large stupid.
Second, you must realize that the overwhelming majority of financial institutions that hold most residential mortgages these days, have no skin in the game; by and large, they’re nothing more than “servicers” for OP [other persons’] mortgages.
Whose other mortgages? Investors from all over the world via fractionalized interests [meaning they have no say so in the managing partner’s decision in what to do with any particular mortgage] in pools of thousands of mortgages.
So really, these institutions need only go through the motions to make it look to their investors as if they and their pools’ managing partners acted “prudently.”
Third, you have to remember that a mortgage is nothing more than security for an underlying obligation [here, a promissory note]. Foreclosure is a remedy available when there is a breach of either the note [generally in repayment] or independently, the mortgage itself [such as where there is waste to the security or an additional advance (such as delinquent property taxes or default under a senior mortgage)].
But foreclosure isn’t the only remedy [the lender can always disregard the security altogether and bring a lawsuit directly on the note].
Generally, a mortgagee can’t have its cake and eat it too. So when there’s a default, it needs to make an election as to what remedy to pursue. Once it has made that election, it is generally precluded from later exercising a different one.
The easiest, quickest, least costly and least brainy remedy is non-judicial foreclosure [it can also be the dumbest where the security is worth far less than the underlying obligation it secures]. And this is the remedy of choice for most institutional lenders.
So let’s say a lender is owed $950K under its $900K note [the extra $50K represents non-payments, late charges, costs of foreclosure, etc.] secured by a first mortgage against a borrower’s home [like Dant]. But let’s say the home isn’t worth more than $700K. If the lender’s mentality allows for only non-judicial foreclosure as a remedy, IT DOESN’T MATTER WHAT ASSETS OR INCOME THE MORTGAGOR HAS - because foreclosure as a remedy, once consummated, wipes out the lender’s claim to any deficiency.
That’s why a lender who is committed to non-judicial foreclosure as the only realistic remedy can care less what the mortgagor as opposed to his/her mortgaged property is worth. Understand?
Now if we’re talking about a junior mortgagee against the same property, the short sale query becomes a little bit different - especially if the junior mortgagee chooses to let the holder of a senior mortgage foreclose so its junior mortgage is wiped out. At that point, the “sold out junior” can simply file suit on the underlying note because it hasn’t exercised any remedy at all and due to extinguishment of its junior mortgage as a matter of law, it no longer posesses any other remedy.
So before a junior mortgagee agrees to a short sale where it will get nothing, it may very well be interested in the mortgagor’s income/assets. Understand?
Hope I wasn’t too “legal” in the explanation and you can see why asset managers may agree to a short sale, even where the mortgagor has net worth. But generally in those circumstances, they may require the mortgagor to reaffirm his/her obligation for any deficiency as part of the deal - something I would never agree to do for the reasons stated above.
Always wondered if Allen Murray = Derrick.
CalBoom - we’ve been down this path ad nauseum. One’s belief that Keynes was right and ‘ended’ the Great Depression is usually a self-reliant partisan belief. There is ample evidence - usually from the other political party than yours - that both Keynes’ theory is wrong and that his policies as instituted in the FDR administration were not at all helpful in ending the GD. In fact his policies clearly prolonged the GD, in my and many an opinion. Your comment is a very interesting one that sheds light to the human manipulation of fact and history (on both our parts, just fyi).
To Smarten,
I believe you’re substantially accurate. However, in NV, unlike CA, under a non-judicial foreclosure, the lender has the power to proceed against the debtor for any deficiency. CA operates with a single-action rule, which in effect states that recovery under foreclosure is the single action allowed to the mortgage holder to recover sums due under a default.
Now, what appears is happening here is that lenders aren’t bothering to proceed to recover the deficiency left. Many times, there are no substantial assets to recover a defiency from. (Pardon the twisted syntax.)
So while the lenders retain the power to proceed against the borrower, many times it’s just not worth the trouble. And what you pointed out is correct: That the overwhelming volume of these defaulted loans have been fractionalized to numerous ‘owners,’ who are less interested in recovering a deficiency than in getting anything from the sale of the property.
BB - you have numerous good points, so does Smarten, et.al. One of your most poignant, to me at least, is the concept of the wealth-loss-effect on the economy as a whole and the relative smaller effect these massive gov’t stimuli has on the in/de-flation argument. Namely, the economy is down more than the money supply is up. Well, can one only hope in this example this condition will not too suddenly reverse?!. You have me pondering and have done so on this point for several months.
Lost in the rest of your argument, though, is the effect of money “in the consumers’ hands” to the inflation argument. Can you name an historical example where the people had buckets full of money simultaneously in a gov’t with horrific inflation or hyper inflation? Germany 1930s? Russia 1990’s? Mexico crisis? Zimbabwe? Not to my limited knowledge. What we saw is a situation where the people have the same amount, fixed salaries, fixed savings, etc. but the gov’t got in a bind and printed too much money (or defaulted causing the pain thru its burdensome debt obligations).
You describe correctly that we have been thru our inflation period already, namely the past 5+ years where we all readily point to real estate inflation. I’ve been saying for years that our inflation was not inflation in the textbook sense, but in the AGGREGATE. Namely, we did not necessarily pay more for Goods A, B and C, but we bought more of them. How much junk does the typical American’s garage have stuffed in it? We bought more, not paid more with some items excepted. However, that in no way means we did not have ‘inflation’ in the aggregate.
Now, we have de-flation in BOTH the pricing and in the aggregate senses. Housing prices are falling, but then so are the number of homes-per-household such as 2nd homes for retirees. Prices for, say, jeans are down, but then people are holding off buying that other pair of jeans until they are more certain of their incomes. So, sales of goods are falling AND prices, too. My point here is not so simple as supply-vs-demand because in our current deflation, caused by poor sentiment and over-extension of consumers’ balance sheets, it does not matter how much the price of X falls, ‘cuz I ain’t buying! This mentality is leading the average person to save/horde cash and pay down debt, which we are also experiencing. This is the effect you allude to whereby citizens are removing money supply from the system, at least temporarily, while the government is putting money into the system, albeit to banks who are not lending back to citizens.
I’m not sure I agree with you that inflation is not around the corner again. When citizens and banks start getting their money out again, we’ll have dangerously too much money supply. I agree I’m having a time trying to figure the catalyst that will swing us quite uncomfortably from de- to in- flation, but I feel confident we will in the not distant future. The simple fact is that these govt surpluses and excessive bond sales will, despite the consumer/publics lack of direct benefit at the moment, cause our fiat currency to be valued less in the future than now. This is more so true if a backup or secondary (or new primary) reserve currency is established, heaven forbid. The Chinese and other bond holders will look at the US government and demand higher rates for this monetary over stimulus, or will shun the greenback to the same effect.
That’s totally irrespective of whether we consumers will have too much money in our hands and therefore start paying too much for loaves of bread and houses. So, there’s your path you seek. Indeed, this is exactly what happened to each country listed above - watch out little guy and pensioner.
Finally, let’s keep in perspective that the late 1970’s massive inflation and high interest rates (real) came in that order. The baby boomers were just getting on the scene, women en masse entered the workforce, the govt printed too much money to fund the Vietnam war, etc. Volcker correctly realized that inflation was the enemy and embarked on a policy to raise interest rates dramatically. Greenspan was the reverse, I believe. He did not realize that goods in the aggregate were being consumed in my theoretical explanation of a secondary cause of inflation, and tried to manage what was a temporary employment blip post dot.com and 9/11 by reducing rates. This caused more people to buy more things and some with pricing inflation (houses, high end cars for example).
This is why we are left to face very painful deflation, but the inflation that will result particularly from today’s late-Bush and early-Obama policies will come home to roost via weakened dollar and higher bond yields. We have not seen this so far by virtue of the fact everyone else on earth is similarly situated so the relative dollar demand is hovering around a flatline.
All that said, BB, the wildcard to our discussion of if or when deflation will turn to inflation is demographics. Those same babyboomers are starting to retire and horde cash, buy less and generally be net sellers/users of their assets. Is this demographic effect enough to keep us out of a near term inflationary whipsaw?
And to CalBoomer,
I was late to the discussion, but it wasn’t only WWII that ‘ended’ the Great Depression, but the end of protectionistic trade practices conducted by the Hoover Administration. FDR’s cabinet was aware that protectionism was hampering export business, and moved to cancel many of the tariffs and trade protections that were put in place to ‘prop up’ American businesses.
As it turned out, the propping up didn’t work, and 25% unemployment was the result. Now the WPA’s make work programs provided jobs, but I believe the removal of trade sanctions played a large role in the aftermath.
billddrummer, with all due respect, I don’t think your distinction is accurate.
In California, a mortgagee cannot secure a deficiency judgment, regardless of the remedy elected, if his/her/its mortgage was used for purchase-money purposes and the security represents a 1-4 unit housing unit. In all other circumstances, there is no prohibition against obtaining a deficiency judgment.
In Nevada, there is no anti-deficiency bar regardless of the property or use of the mortgage proceeds.
However in BOTH states, you’re stuck with the same election of remedies quandary I highlighted. Thus in Nevada [as well as California], if you foreclose by means of non-judicial foreclosure, you LOSE your right to recover ANY deficiency because the act of foreclosure extinguishes the underlying obligation TOTALLY. The ONLY way you can preserve your right to recover a deficiency, is to proceed by means of judicial foreclosure. But this means filing a lawsuit, getting an order for a foreclosure sale, proving that the price obtained at sale represented fair market value, and then proceeding against the mortgagor[s] after the sale is complete - expensive, non-timely, questionable, and requiring a brain to process.
So the majority of institutional lenders aren’t refusing to collect the deficiencies they’re arguably entitled to after they’ve completed non-judicial foreclosure. They’re refusing to foreclose by means of judicial foreclosure - the only procedural vehicle which allows them to secure a possible deficiency after foreclosure!
If every lender who had foreclosed by means of non-judicial foreclosure and realized less at sale than the amount owed still had a claim for that deficiency [but was too lazy to pursue it], people like me would be buying the claim for fractions of pennies on the dollar.
BTW, consider the principles I have outlined with respect to the Cal Neva Hotel which is facing trustee’s sale. Half of the hotel is located in NV., and the other half in CA. There are two mortgages being foreclosed upon; one in CA. and the other in NV. Both mortgages are for the entire amount of the underlying obligation for the entire hotel.
So let’s assume trustee’s sale #1 takes place in NV. and the entire amount owed is bid in at sale. Thus that amount is extinguished and technically, the CA. mortgage secures an underlying obligation that no longer exists. I can see someone bidding in $1 and buying half the hotel or alternatively the amount owed being bid in twice [once in CA. and once in NV.] and the current owners of the property having a claim for $25M as the overbid. A very interesting legal issue.
“Keynes pointed out a long time ago…”
Keynes pointed out many things that are not, in fact, true.