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
Grand Wazoo
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.
bob
What, the truth hurts?
BanteringBear
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.
BanteringBear
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.
BanteringBear
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.
3niner
Grand Wazoo –
“…Intelligent…”?
“You keep using that word. I do not think it means what you think it means.” – Inigo Montoya
durhamdude
I have to agree. This type of posting does not belong on this blog. It should deal with Reno area real estate.
DD
bob
Then don’t read them. Know one is forcing you.
Phil
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!
Lurch
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.
Sully
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.
downtownjunkie
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.
doofus
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.
RenoRetiree
>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.
Reno Ignoramus
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.
Riley
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.
BanteringBear
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.
BanteringBear
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
tallguy
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.
DonC
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.
Transplant
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.
smarten
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.
billddrummer
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.
3niner
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.
BanteringBear
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.
DonC
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.
3niner
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.
3niner
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.
Phil
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.
BanteringBear
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.
downtownjunkie
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.
3niner
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.
3niner
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.
3niner
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.
tallguy
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.
BanteringBear
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.
smarten
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.
BanteringBear
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.
tallguy
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.
BanteringBear
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.
Paul
Diane, how much did the rock house sell for?
tallguy
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.
BanteringBear
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.
apple
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!
smarten
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!
Sully
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.
BanteringBear
Smarten, Sully- wake up. apple = diablo = derrick.
smarten
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?
DonC
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.
Sully
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.