How far down are the banks and real estate headed?

Foreclosure-next-exit-sign I think these are fair questions:

Are we headed for a general collapse of the big banks, the ones that the federal government has shoveled money into?

Is the crisis of mortgage foreclosure going to take down the structure of price and value to the point that the banks fall into an inevitable federal seizure situation?

Is the general economic trend going to be deflationary for several years?

Any good questions that I missed?

There are a lot of smart, experienced people here?

Let's hear it!  pl,0,986612.story

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47 Responses to How far down are the banks and real estate headed?

  1. Dave of Maryland says:

    If you want the debate full in the face, go to Calculated Risk (a real estate blog, often quoted by Krugman), and click on the Comments after any given post.
    My business, a mom & pop mail order bookstore, is down by half since this time last year. It is currently far below break-even. My American customers have been hit with the economic downturn. My international customers have been hammered by that, as well as a worsening exchange rate.
    Well, heck, I could see the US disaster coming years ago. Which is why I tried so hard with the international customers, who, only a few months ago, made up more than 50% of my gross. (Yes! I am, or was, one of the few people actually bringing money into the country, albeit only a tiny amount.)
    I figured, no matter how bad the US economy got, surely the many Chancellors of the Exchequer around the world would see to it that their people would not suffer. I might lose my American markets, but when the dollar collapsed, I would clean up internationally. So I thought. I was wrong.
    Economies around the world stumbled and to my horror, the result was a run on the dollar.
    The Euro is on the verge of collapse. If the Italians or Spanish or Germans (or Irish) don’t do it in, the upcoming collapse of Eastern Europe will. If you want that story, read Eurowatch, by Edward Hugh, a British economist based in Barcelona.
    Last night there was a wild rumor that someone in Asia was dumping local currencies & buying dollars.
    In a week or two or three will come a tax revolt unlike anything we’ve ever seen. Maybe that will shake Washington awake.
    How long will it last? (Make it a contest. Winner gets a lifetime supply of pies.) I’m not cheerful, but I was born that way. I don’t expect to see last year’s money again in my lifetime.

  2. Michael Angelo says:

    In a recent trip through Texas and saw a lot of wealth and people driving BMW’s across newly paved roads. New projects covered almost every square inch of the state, except for El Paso, which voted democrat and looks like an ashtray because it was “punished.”
    This economic sword cuts “two ways.”
    America is in a bad way, because of over-inflated gas prices but Texas is doing GREAT! George W. Bush and LBJ are the two WORST American presidents in our history.
    Both TEXAS MANIACS started wars bankrupting our nation, resulting in the deaths of thousands of Americans and both came from the B.S. state of TEXAS.
    Someone has to pay for this betrayal of America.
    Let’s start the TEXAS WAR BOYCOTT.
    1)Rejecting all business and vacation travel “through” or “to” the state of Texas.
    2)BOYCOTT or REJECT all Texas products & services like Exxon/MOBIL, ALL Frito-Lay Products, Doritos, Southwest Airlines, Dr. Pepper, Lone Star Beer, DELL computers, Continental, Express Jet and American Airlines, the Dallas Cowboys, Apache Computer software, Hewlett-Packard, FMC, Perot Systems, Chili’s, Maggiano’s, Romano’s, Centex Homes, Dallas Mavericks, J.C. Penney, Kimberly-Clark, Pilgrim’s Pride, SBC, Stewart Title Guaranty Co., Texas Instruments, SYSCO, Texaco and CONOCO Phillips – until these companies and organizations leave the state of Texas.
    3)Post in your home or business a computer print-out sign that says,
    “GOD-DAMNED Texas Redneck Trailer-Trash Christian Fundamentalist are
    Every square inch of Texas roads have been repaved and infrastructural building within the state is exploding from inflated gas prices that fattened up the most ignorant section of America.
    These Texas people LOVE George W. Bush.
    Help make Texas “FEEL THE PAIN!”
    Also, Karl Rove, Tom Delay & other Texas Republicans, used PSYCHOLOGICAL WARFARE-through FEAR & INTIMIDATION – AGAINST THE AMERICAN PEOPLE. Here is the “BLOW BACK” for these tactics! Give TEXAS a taste of its own medicine shoving its garbage politicians with its stupid hats, boots, buckles, & B.S. bravado, right “up” all Texas throats!

  3. eakens says:

    The stimulus bill and bailout funds, even with as many zeros behind them as they have, pale in comparison to the derivatives market which exploded during the course of the past decade.
    As a result, the deleveraging process has yet to be completed. I suspect that home prices will deteriorate a further 20% until we reach a rent/own ratio of 1. Historically that has been the ratio that we have arrived at after every major economic maelstrom and we are simply not there yet.
    With regard to the banks, the hope is that community banks will go under and deposits will shift to the big names. What is being done is that the government is carrying the big banks until the community banks begin to fail en mass. We will start seeing that happen in the next 1 to 2 quarters.

  4. I have been reading Epictetus in a 1994 translation. The gist: don’t panic. Circumstances may look dire but there’s always opportunity. And nobody knows what’s going to happen.
    Am also reading an account by an American doctor who worked in Sidon from 1983 to 1985, during the depths of the Lebanese civil war. People managed to survive, have parties, marry, go to school, open medical practices and shops, amidst shelling, invasion, occupation, social upheavals, currency collapse, lawlessness, and breakdown of social and financial institutions.
    We have a long way to go before we are as bad off as the Lebanese in the 70s-80s, and they survived.
    What to do to hang in there? Organize in your community. Get involved in your religious group, or volunteer fire department, or community garden.
    Work to establish food security in your town: where does your food come from, and what would happen if the trucks stop rolling – even for a short while – and big corporations closed up the supermarkets? Do you have farmers’ markets in place? How many people garden at home?
    Houston supermarket shelves were bare for TWO WEEKS after Hurricane Ike this last fall. Think about that. California had rolling power blackouts throughout the summer of 2001, thanks to the Enron and Duke Power swindlers. We lost 20 billion but Bush took us to Iraq and evaded an accounting of his ties to that pack of thieves. What would power outages do to your food supply and lifestyle? How long could you cope without electricity in the summer? In the winter?
    How are your own stores looking, i.e. your emergency rations? FEMA now says everybody is on their own for two weeks after a disaster and needs to have food & water accordingly. Do you have two weeks worth of food stockpiled – stable, non-perishable in case of power cut? If not, why not?
    How well do you know your neighbors? If you do go to church, is it in your area or do you have to drive? Why not make friends with your local church and public school even if you’re not a member/believer/parent? They have resources you may need, and they can be a focal point for organizing in case of general chaos.
    In my neighborhood we are organizing (among other projects) a canning and food preservation group that forages local trees (citrus right now) and meets to put up jams and pickles. Marmalade next, then sauerkraut. Many people in our big city area now understand that we need to know how to put food by, grow food, and cooperate with our neighbors. A local pastor has offered his church kitchen – a good thing, because twenty people want to make sauerkraut, and none of us has a house big enough to hold the crowd.
    Your circumstances may vary. Adapt these ideas and others for your own use. begin with where you are and don’t worry about the big players much. They might be knocking on your door for a bit of cabbage one day.
    OH yes and think of storing food as a way to diversify your portfolio. Your money loses value in the stock market, barely gains at interest, but in the face of rising food prices, a stockpile of necessary staples is a good investment. I’ve already made about 25% on my pasta & canned beans investment of last year. Of course now that we’ve eaten that supply, I must buy more at the new price, but I did save on what I bought before prices went up.

  5. Ken Roberts says:

    The questions you asked are the ones everyone else is also asking – that is the problem! If enough people doubt that a bank is solvent, then it is not – that is the nature of fractional reserve banking; no bank retains enough quick assets to cover all obligations.
    Looking at the situation presently, my guess is that one more major firm must be failed before confidence can begin to be restored. AIG was a missed opportunity; if they were placed into a strict runoff, that might suffice. But more likely something like Citi or BoA will have to be sacrificed. Placing toxic assets into a newly created “bad bank” will likely not suffice; it will not have the traction of brand name.
    A plus is the mid-sized banks, some of which I gather are sound – but supporting the big tainted banks with credit (essentially unlimited funds) just gives them the ability to absorb mid-sized sound banks to dilute their toxins. Better to contain the problems and finance the sound firms to expand to provide necessary financial services to the general economy.
    Related reading, but not consistent with or supportive of my suggestions above, is the following document…
    Re general economic trend, I think large fraction of public service employment will help steady the economy. Probably advisable to stabilize state and municipal budgets.
    Re housing, large inventory of houses to be sold, flows still out of balance. I believe the stats are skewed because foreclosures generate sales statistics, delays, etc.
    Just my personal take. No expertise, no qualifications. Appreciate info and correction of misperceptions.

  6. Redhand says:

    There may be some snark in the “Or, how I learned to stop worrying and love the Bomb” tenor of my comment, but I’m beginning to think the best option is simply to nationalize the major failing banks (and insurance companies), leave the equity holders stiffed, and fire the rogues who caused them to fail. There has been some talk about a restructuring of the “big” banks post nationalization, as in breaking them up and establishing a series of regional banks, none of which, acting alone or in parallel in a brave new world of real regulation, will have the ability to drive the economy over the cliff the way these worthies did.
    Let’s face it: we’re looking at a grand mal systemic failure here. It’s like an expensive, uninsured stretch limo car that’s just been totaled by a chauffeur high on Speed. Why waste mega-bucks trying to fix something that’s beyond economical repair? Just junk it, and buy a more modest vehicle with a speed governor on it. And BTW, don’t continue to employ the driver who wrecked the old beast!

  7. Cujo359 says:

    These are all good questions. I’ve been trying to get an idea of just how much trouble we’re really in, without much success.
    To me, it seems like there’s an imaginary wealth we thought we had until a few months ago. That imaginary wealth was built up by inflated house prices, various “creative” accounting and financial practices, and it was all covered over with blather from both the news and the government. All that imaginary wealth is going away now.
    So the question I have to ask is, what’s the difference between the imaginary and the real? A related question is, how much of the real wealth will disappear along with the imaginary.
    It seems clear, for instance, that housing prices need to be about half what they were at the beginning of last year for people to be able to afford to own their houses. The ARMs masked that problem for a long time, and encouraged the price increases we saw. Yet, people will lose the investments they made in their houses in the foreclosures that are now happening. To me, that counts as real wealth lost – wealth based on actual work.
    I suspect that if we know the answer to those questions, answering yours will be easier.
    Back before the banks started collapsing last fall, Kevin Phillips wrote that what’s happened in the last three decades is that the portions of our economy that were accounted for by manufacturing and finance have just about reversed. Back then, about 25 percent of the economy was manufacturing, and finance about 12. Now, it’s 12 and 23, respectively. To me, that’s bad news for a number of reasons, not the least of which is that we haven’t kept a good eye on the financial sector. Now that sector is collapsing, and we don’t have nearly the manufacturing base we once did with which to try and recover. Phillips mentioned the Dutch in the 18th Century as an example of how this goes. If they’re a good example, it doesn’t go well.

  8. Mongoose says:

    Michael Angelo,
    Why don’t you let loose and tell us what you really think–you’ll feel better, I promise! I almost forgot to add my comment–I don’t like Texas either.

  9. Patrick Lang says:

    “Lawyers, oil (awl) men and bankers.” Those are the people who now run Texas. Let’s leave the bootmakers alone for now. There is a pair of Rocketbuster boots con la virgen de Guadeloupe on them that I still don’t have.
    Actually, I don’t mind Texas. I have other statewise bigotries. pl

  10. sixpacksongs says:

    To Michael Angelo –
    Please don’t take too broad a brush to Texas. The major metropolitan areas have not voted Republican. One reason that Texas escaped the worst of the housing bubble is that home-equity loans are limited to 80% of income – unlike most of the rest of the country. Houston and Austin, at least, have a vibrant underground and alternative culture that has been chafing under and resisting the nuttiness for years – remember Molly Ivins, Jim Hightowner, and John Henry Faulk? Texas has mandates for renewable energy sources. And finally, the economy here is slowing too and the state is in some financial difficulty.
    There are a lot of poorly-informed and poorly-educated (IMHO) folks down here in the Lone Star Republic. I can only hope they open their eyes, but that’s not very likely. However, they’re going to have enough pain in their lives (if their not feeling it already) and the large majority of them can’t point to any “rewards” from Bush. They can from Johnson but he was a “librul” so they’ve forgotten that.
    And Lone Star is the best damn domestic mass-market beer, hands-down. If only the rest of the country could experience St. Arnold’s, the Houston microbrewery, we’d be the new beer capital of the nation.
    Outsourced in Houston –

  11. sixpacksongs says:

    correction – i meant “80% of home value”, not 80% of income.
    Too much St. Arnold’s.

  12. Mike D says:

    The single best place to read about this is “The Automatic Earth” and from there you can go to “Karl Denniger” and “Ashes Ashes All Fall Down.” I find this better than “Calculated Risk.”
    Now for some practical stuff: it is believed by many pundits that the large banks are insolvent; if so, eventually something will tip them into closing their doors–you should have some cash stuffed away (say $2000) to carry you until the banks open up again. Secondly, we are all going to suffer some impoverishment so get some money saved up, reduce debt–you know–that stuff your parents or grandparents talked about.
    Pat, what happened to Walrus? I miss that guy. Did you kick him off the blog?
    Mike D

  13. The FIRE sectors of the economy are dead These are finance, insurance, real estate. No one wants to make that announcement however hoping they will awake from the dead in the meantime. Also no one wants to use the depression word even though clear we are in one, and again appears to be a world-wide event with very few countries likely to post growth in GDP in CY 2009. US Politicians including the DEMS are in la-la land. They think they can fix it ala FDR and the Depression. Differences this time are immense. Highly leveraged off-book “Assets” that never were are still keeping the FIRE sector form being bankrupt. Once these are valued (probable value using tax definition of willing buyer and willing seller each in full possession of the facts is ZERO). The current federal executive branch departments are riddled with personnel used to servicing corruption in the FIRE sector last 30 years. So these organizations cannot be relied on even to give honest factual picture to anyone. For example, as documented by Kevin Phillips corruption in the CPI accounting, or HUD pretending to regulate mortgage bankers (really unregulated and responsible for much of sub-prime mess) or mulitple banking regulators competing against each other for fees of those regulated by in fact ineffective regulation. It has all been out there but the residue of faith in the US by the rest of world makes me wonder if it is just their leadership salting corrupt monies in US and common folk are left in lurch. E.g. 75% of all commercial real estate in DC owned by foreign nationals often using layers of trust like devices. The tax code is about to blow up since much of the corporate activity now is devoted soley to manipulation of events of the down turn to avoid what meagre taxes corporations have been paying since Nixon. It will be hard to heal these systemic problems. Watch for major dissolution even in the EU and its newest membership. Predict that EURO will only be used in 7 or less countries within 10 years. Odd how convergent problems are hitting now. Example world economies in collapse and worst drought in last 500 years hitting same time world wide (climate change perhaps). Leila just remember to rotate those stockpiled goodies. I just heard the word permaculture for the first time last weekend. Amazingly timely for those wishing some self-sufficiency. Complete self-sufficiency never possible of course.

  14. curious says:

    The banks – definitely major restructuring and new set of regulations. The current form is completely broken and unsustainable. They were profitable dues to super easy money and instruments like CDO, cds, and other exotic hedges. And those profit/giant debt were made during “fat and plentiful year”. So now they only have the bad debt and slow global growth for next 15-20 months. Most honest experts says the numbers don’t add up.
    silver lining – remember during the 91 recession, there we so many programmers and engineers getting laid off that everybody ended up writing code and created the .com economy? 95% of them were pure waste of money, but out of those were things like amazon, ebay, google, yahoo, etc not to mention blogging tools.
    I am waiting for some crazy groups of people to harness current excess of manufacturing capacity in china, plenty of smart people with no job, and big internet bandwith. (I am kinda hoping do it yourself highspeed networking, home made molecular biology, cheap genomics, micro manufacturing line and really nice blog replacing radio/tv)

  15. Tacitus says:

    re: other statewise bigotries — which ones?
    (Don’t say the great Commonwealth of Massachusetts)

  16. optimax says:

    I know this solution will never happen but it is the only way I see of saving our economy: nationalize all twelve banks that make up the Federal Reserve. It would wipe out more than half of our national debt and would p*ss off the wealthiest people in the world. They would probably try to persuade China to invade us but if we honored our debt to them, they would have no reason to.
    The Fed was set up to stop panics. They haven’t done a very good job, in fact, the deeper we as a nation go into debt the richer they get. If we continue to let the Fed control monetary policy, we will forever be blowing bubbles and being surprised when they burst. Right now we are an asthmatic trying to blow another bubble.
    I know very little about economics but have read more about it in the last year than I had ever planned to in my lifetime. Always trusted the experts to keep things running smoothly. I was wrong.

  17. different clue says:

    Doctor Housing Bubble blogs on these questions for
    Southern California specifically. He has tried to assemble and present the facts and evidence as best as he sees them; and tell us
    what he thinks they mean.
    If the regional and local banks and credit unions can be protected from the Bad-Actor Big Banks, they might sink a lot less. I am keeping what little extra money I have in my local credit union in order to do my part to keep that part of
    the lending/saving system stable and viable. Of course everyone should have some survival money as currency in a safe jar in a safe place; in case the crashing Megabank system succeeds in crashing the parallel minibank system.
    If I had a real house of my very own, I would not worry about where its price was going. I would view my house as a place to live, not as an investment. I would be prepaying the principal on my mortgage as fast and hard as possible; in order to cut that link between me and The System as
    fast as I could.
    I visited San Francisco for 4 days in August several
    years ago. I saw three plants that might interest gardener/foragers. Fennel was growing wild everywhere, so it must grow quite well there. Unopened fennel flowerbuds taste sweeter and more aromatic than fennel seeds and give a
    very good taste to some foods. A little way past the walk-in entrance to Golden Gate Park I saw two more interesting plants. One: a viny crucifer with leaves and flowers resembling the upright stiff-stemmed dame’s rocket (hesperis) which grows around here, but with edible
    pods the size of small sugar-snap peas. The other:
    banks of semi-shrubby fuschia growing in full flower up the slope. Other fuschias have edible olive-sized fruits; and so might these.

  18. FB Ali says:

    I think a really good question that you missed is : What really caused this catastrophe? Not the mechanics of the meltdown (derivatives, etc, etc), but the root cause. There’s a good answer given by Simon Johnson, former chief economist at the IMF and now a professor at MIT’s Sloan School of Management. In a recent interview with Bill Moyers he said he’d seen similar situations while at the IMF – in Thailand, Indonesia, Russia and Korea.
    According to him each of these economies had been run into the ground by a bunch of oligarchs – a small group with a lot of power who call the shots in the country. In the US the oligarchs are the people who run the banking and financial industry. Johnson doesn’t see any real long-term solution to the crisis in which America finds itself unless and until the power of the oligarchs, the bankers, is broken. He doesn’t think this requires nationalization (as he says, “That’s not state of the art”); instead what he advocates is a government “intervention” (an FDIC supervised bankruptcy followed by a re-privatization).
    If you want to see one way out of this mess, read the interview at

  19. Different clue, we are all over the foraging here in the Bay Area. Fennel is old news. THere are foraging groups in every major town, and I’ve started a canning and preserving group in my Oakland neighborhood, focusing on free fruit from the abundant trees in people’s yards.
    My late father put up gallons of olives he foraged from trees in Alameda, CA, in the SF bay. And there is a permaculture video online describing how to harvest acorns from our native trees, and how to process them to eat (they’re not edible as is).
    Permaculture – the local community college due east of me by 2 miles, a bus ride away, has a horticulture department that specializes in permaculture. Those crazy hippies are always banging on drums, hanging up tie-dye banners, and planting food crops. The idea is spreading. Come the apocalypse, we will be eating in Oakland. (however if the water runs out, we’re fried)
    William Cummings – I have learned from Sharon Astyk (Casaubon’s Book blog) to eat what I store, and store what I eat. Items that we don’t eat in a year get sent to the food bank donation box before they expire, and we try again with something else. Canned spinach just isn’t going to cut it. We’re better off saving heirloom spinach seed and growing it in our year-round climate.

  20. My thoughts on food storage here
    and “eat what you store” ideas rounded up here:
    Lebanese, Syrians and Palestinians practice these ideas as well – they call it the “mouneh.” Every household, even in the big city, keeps a supply of grains, pulses, oil and preserves. When I was in Damascus in the fall, people were busy pickling eggplants which were in season. Others were laying up stores of olive oil and olives. In summer they dry tomatoes and figs, in spring they harvest chickpeas and lentils (or buy them). Everybody keeps flour around. Whenever there’s a big crisis with refugees etc., the local people have food ready.

  21. optimax says:

    Thank you for the information, Clue, looks like I’ll end up grazing in flowerbeds of Golden Gate Park.

  22. Cieran says:

    re: other statewise bigotries — which ones?
    He loves Oklahoma. Which does make it sorta hard to love Texas much.

  23. Ken Roberts says:

    Wow – great info! Drifting off topic but re food plants in California, long ago saw lima beans growing in sandy soil near the ramp at Grover Beach – wondered if lima bean family of plants would be good for soils which have acquired too much salinity for other crops (due to irrigation).
    Favourite state is maybe better topic than least liked. Interesting question which is one’s favourite, aside from the one where you live. My favourite Cdn province is Newfoundland – everyone so friendly, and hardly any fences and keepouts. But I’m sort of a Will Rogers traveller, never touristed to a place I didn’t like.
    If you’re an airplane enthusiast, check out the great museum in Gander. And if you’re a communications enthusiast, the cable museum at Heart’s Content is full of interesting gear. And the local strawberry wine at Rodrigues Winery…!

  24. matt says:

    Poor Massachusetts….they just assume that they are disliked now, don’t they? …..yet another unfortunate casualty of years of Republican cant about taxes and the evil ted kennedy

  25. Patrick Lang says:

    Tacitus et Matt
    We could start an interesting thread in re “most diliked states?”
    I was born at Ft, Devens, Massachusetts, a post long closed. does that make me a Bay Stater? The Duke of Wellington was asked if his Irish birth made him Irish. He replied by asking if a man was a horse if he had been born in a stable.
    Joel Garreau opined some years ago that “if the United States had been settled from West to East, new England would still be uninhabited.” pl

  26. Patrick Lang says:

    Why is Lazard Freres not involved in this devloping crash? pl

  27. Brett J says:

    re: general topic, I caught this Financial Times article on Wal-Mart’s profits : WM ‘accounted for 50 per cent of all US retail growth during 2008 – while its full-year global sales passed $400bn for the first time, and profits hit $13.4bn.’
    Big doggin’ it. No question that if this powerhouse stays profitable (and nimble! Impressive for their size…) during this economic-bottom-dropping-out, they’re going to become even more potent on the upswing, eating up the markets that others are dropping out of. They’re keeping up their cash flow and have momentum as we race to the bottom.
    Buy (mental) stocks in Chipotle (burritos) and condoms, too, from what i hear.

    Pat – great (and hard to disagree with) Joel Garreau quote. Makes one wonder how the US would’ve developed if it were the case (A beach-bum mentality instead of a Puritan one? Only a dream in Rio…)

  28. McGee says:

    Complete aside from a Boston guy. Fort Devens is now a Federal Prison. If there are any former ASA folk on this blog, they would probably chime in that nothing has really changed…..!
    BTW great thread. I’ve learned more from following the links posted here than anything I’ve read recently in the mainstream media.

  29. jonst says:

    You wrote: ‘We have a long way to go before we are as bad off as the Lebanese in the 70s-80s, and they survived.”
    Man, that is settin the bar pretty low I’d say.
    My picks?
    Most major banks are toast. They will be nationalized.
    Ten years for the commercial and real estate markets to come back to where they where in 2000.
    If the Defense Dept, Medicare/Medicaid are not reined in we are gonna be in real trouble for a long time.
    General deflationary trend for 2-3 years. Then comes inflation as we print money to sustain a standard of living we can’t afford. i.e. two wars. Huge military.
    Those are my ‘picks’

  30. Mike D says:

    There is an interest on this blog of urbanites that want to grow their own as a hedge against the collapse of the economy. You need to meet Sharon Astyk:
    Frontline had a program devoted to this present economic problem broadcast on 2/17/09–the usual type of program we now expect–lots of drama without a lot of facts. 10 minutes worth of data drawn out over 60 minutes of television. Very sad. The real story is that there is widespread criminality involving the best educated people in America. Something went wrong, and we are going to have to suffer through it. I call this the “Age of Stupidity.” There have been other such Ages.
    Read Astyk and enjoy.
    Mike D

  31. mlaw230 says:

    The new housing program, although too small, is going to go a long way toward drawing a line under the drop in RE values, but only if the Bankruptcy provisions are approved too. That and 2-3 years of inflation should make Americans secure in their homes once again.
    More broadly, one wonders if we are not seeing the beginning of a great “leveling” across the globe caused by globalization.
    If we ultimately devalue the dollar, either expressly or through inflationary deterioration, it could well be that asset rich developing countries experience a sharp uptick in the value of their currency.
    Imagine the “stimulus” if millions of Brazilians, Iraqis, Saudis, Chinese and Indians suddenly entered the consumer market?
    1) Seize the big banks and sell them for parts.
    2) Devalue the dollar by 30% and the euro by 50%.
    3) Revalue the currencies of Mexico, Brazil, Iraq, China and India by 300-400%.
    Desperate times call for desperate measures.

  32. Hey Mike D, thanks for chiming in on Sharon Astyk, I’ve been talking up her blog here for a while. Now I don’t look like such a crank. I think those of you worried about the money ought to have a look at her place. She seems like she might be “out there” but she has just drawn conclusions about our future and is making preparations accordingly. Also writing books & blog about those preparations so we can all follow along at home.
    My opinions re: food storage and preparation strongly shaped by her blog. I don’t know if I think things are going to be as bad as she predicts. But I think many of her measures are sensible in any case.

  33. dilbert dogbert says:

    Re: Calculated Risk
    Comments are very uneven. Every once in a while a good set of arguments get posted but most of the time comments are just venting.
    The meat of CR is the Ubernerd posts on the mortgage industry by the late TANTA.
    We miss her wit and wisdom.
    CR posts a lot of “chart porn” which illustrates the state of the economy.
    Re: RE
    Irvine Renter has good stuff of the state of Orange Co Calif real estate and good stuff on how we got to where we are in real estate.
    Thanks all for the high level of most of the comments at SST.

  34. DaveGood says:

    why devalue the the US dollar by 30 per cent but the Euro by 50?
    Are you arguing that the actual value of goods, services, and commodities produced within the Euro zone has been substantially less over the last thirty years then America’s?
    Europe’s biggest economy has earned massive favourable trade balance consistently, Producing goods the world wants, despite having spent the last 20 years funding the rebuilding of an entire country (East Germany).
    Can America say the same?
    Why on earth would it benefit anyone in America, (never mind the citizens of those countries who will be extremely pissed off if this happens)…. too make, for example the peasants of China, whose savings funded the Republican engineered “Boom” and it’s two west Asian Wars, of the last decade pay twice over?
    To tell them, we’ve enjoyed the results of all your hard work, and your savings, now we are going to make sure you won’t get most of it back?
    Inflation is a method used by those in debt to cheat those who they owe to money too… and it won’t be forgotten, not by the millions of Brazilians, Iraqis, Saudis, Chinese and Indians who loaned dollars to the Bush Government and who you now say should be paid back with pennies.

  35. regulararmyfool says:

    How about those carefully regulated and audited insurance companies?
    You have not seen jack yet.
    Wait till someone at one of the large insurance companies blows the whistle on what they actually have in the vault.
    If, after an unexpected audit by some internationally recognized non-US auditors, they are shown to be in fine shape, give them the banks.
    If not, then kiss your home insurance, car insurance and health insurance, goodby

  36. charlottemom says:

    Real Estate bottoming is coming in waves. CA, AZ, NV, FL, MI all seem to be the hardest hit, but even they have not hit bottom. Wait til California goes bankrupt, Chrysler (maybe GM too), gaming industry “folding” (Trump bankrupt, Wynn?), tourism busted (FL); it’ll get worse before it gets better in these and other regions for reasons we haven’t even thought of.
    For instance, here in Charlotte, we’d experienced slight downtick in real estate in the last year but had more or less held values until… Wachovia fell and BofA is falling (yes, I think receivership and restructuring is in its future). This is happening quickly and housing prices picking up to the downside fast.
    What I’m trying to say is the economic contraction will be across the board – asset classes, industries, regions, and don’t think it will fully “make the rounds” and be done with until 2012ish as a guess.
    Obama Home Rescue Plan
    Because we are nowhere near the housing bottom, I fear the gov attempt to put in a false floor on housing will fail. Homeowner Rescue Plan like its cousin the Stimulus Plan is destined for a sequel. See you at Homeowner Rescue II as re-modified mortgages are re-re-financed after prices continue to fall. Seems like the poor homeower debtslave will continue as such (with a ballooning interest rate no less) as the overleveraged investor/speculator gets off. (I know Obama says no, but read the plan and judge for yourself)
    More Gov money relief for “illiquid (real estate) assets” is similar to problem with banks which are trying to lift “mark to market” on their illiquid assets. Buyers/Sellers are not agreeing on the market valuation. Gov stepping in the “set the price.” Has that ever worked in economies?
    RE Banks
    If US doesn’t take over these zombie banks, they will overtake us. Nationalize tarp banks all of them…receivership, restructure, reset. And get on with it.
    No one wants to face the dire fact that we – country, company, citizen are broke and will need adjust to a new poorer life.
    P.s. re Lazard – in charlotte they’ve picked off a few locally connected, Waspy i.b.ers from BofA, Wachovia and are setting up a new office. As a boutique firm they’ve been off the radar during th FIRE implosion, kinda like Perella. And yet why that is, I’m not sure…Hmmm

  37. greg0 says:

    Michael Angelo,
    Something to warm your heart: “If Gov. Perry rejects Texas’ share of the federal aid, our state could lose as much as $27 billion to invest in infrastructure – funds that could create or save an estimated 269,000 jobs.”

  38. curious says:

    2) Devalue the dollar by 30% and the euro by 50%.
    3) Revalue the currencies of Mexico, Brazil, Iraq, China and India by 300-400%.
    Posted by: mlaw230 | 18 February 2009 at 05:31 PM
    you know that would be one cool experiment to run. (You forget Japan and russia. One is global consumer electronic, machine and car industry, the next one is european energy source and big market.)
    essentially that proposal would be for US economy to export its way out of the debt trouble. changing around currency has been done several time. (Bretton wood, Plaza accord, and last G20 meeting were essentially the world top economy rigging the exchange because the number doesn’t add up.)
    but current Brettonwood II mechanism is definitely broken and unsustainable. China and Japan both hard peg their currency against dollar. Saudi/middle east also hard peg their currency.
    the combination effect: US domestic economic policy isn’t big enough anymore to drive the planet. Japan alone was able to alter dollar trend, and now china doing the same, even more efficient. essentially suspending dollar strength way up high to create market. US consumers and living standard shot up, but industry become uncompetitive.
    if china/india/brazil currency shot up 300%, price of commodity (coal, oil, steel, lumber) will shot up for US market. Electronic and consumer product (walmart/best buy/garment) price will shot up 300% too. for period of time at least until manufacturing supply pattern changes. price of gas will goes to $3-4, unless we force saudi to keep their peg. But saudi economy will be pretty much destroyed, since they will experience 100-200% inflation. Price of walmart/electronic item will go up by 300%. A pair of shoes will go for $200-300 bucks, basic TV will be $1500-2000. A pair of jeans will be $200. a paperback novel will cost $30. This is basically, what people are paying in Tokyo.
    that’s basically what happens in iceland. (price of every imported item suddenly goes up by 5-20 times.)
    Rural, small town, suburban standard of living will be pretty much destroyed. The price of everything will shot up by 3-500% due to transportation cost. But urban and manufacturing center will thrive.
    advantage: dollar is global currency and have license to print money. the first 4-5years of economic transition can be paid using free money.

  39. curious says:

    And by the way, if banks want Uncle Sam to buy all those “toxic” assets, the government is now going to do it alongside private capital. These investors aren’t going to overpay, so that game is up as well.
    Since Mr. Geithner’s plan has been unveiled, the stock prices of the financial sector are off about 19%. This is not necessarily a bad thing. The banks were expecting another handout.
    While it was not his intention, the reality is that Mr. Geithner is going to confirm the insolvency of the financial system. Once we face this truth, there really isn’t much left to do but nationalize.

  40. Clifford Kiracofe says:

    The Federal Reserve System should be nationalized as was the Bank of England after WWII. The BOE, despite its name, was a privately held monopoly since its founding in the late 17th century by Mr. Paterson etal. The US FED, similarly, has private and shadowy shareholders. A full accounting is needed these days of who owns what with respect to the FED. We need a Central Bank, but an authentic FEDERAL one not some shadowy privately held affair.
    I do not think nationalization for the commercial banks etc. is the best option. Rather, orderly bankruptcy and reorganization would be my preference. Of course, the strictest possible REGULATION by federal and state authorities of financial institutions is required and a sina qua non.
    Industry has become the servant of banks rather than the reverse which is the proper relationship.
    We are paying the price for our usual national lack of memory and the power of vested interests and lobbies. We have been through all this since the late 19th century. Interstate commerce began to be REGULATED by the FEDERAL government in the late 1880s. Thus, the principle of federal regulation of aspects of interstate commerce was adopted. Then we had the Progressive Era follow on and significant further regulation was established over various industries.
    Then we had the reaction of Wall Street and Big Business in the 1920s who followed the Italian Fascists very closely as TIME Magazine covers with Mussolini indicated. And if that wasn’t enough the 1933 edition of FORTUNE praising Fascist Italy and its business and government made the point to slow learners. Time-Life was in the hands of Henry Luce, a Skull and Bones/Yale member like many of the American oligarchy (President Bush41 and 43, Senator Kerry and so on.) FDR was perfectly familiar with the Wall Street and Big Business oligarchy by virtue of his own social background in high society. Thus, he continued the Progressives’ battle against vested interests in his New Deal.
    This gave rise to the Wall Street creation of the “American Liberty League” an organization modeled on Continental European Fascism particularly Italian and French. See Wiki.
    Some background on our situation can be found online in an 1982 interview with Norman Dodd (1899-1978), a retired Wall Street banker. He worked for Bankers Trust Company in the 1920s and 1930s after graduating Philips Andover Academy and then from Yale. He was a cousin of the Rockfellers through the Aldrich family and thus in high social circles and well connected. After leaving Bankers Trust, he worked with the Wall Street brokerage firm of Delafield and Delafield specializing in securities analysis. He later in the 1950s was asked by Congressman Reese to be research director of the Reese Committee to Investigate Tax Exempt Foundations because of his intimate knowledge of the ways of Wall Street and financial oligarchy.
    Lazard? Just another part of the cosmopolitan financial oligarchy but a very signifcant one historically in its support for European fascism. for example. The analysis would involve the London, Paris, and New York offices of Lazard from say the early 1900s on.

  41. mlaw230 says:

    David Good and Curious: I am not an economist. My post was more or less a thought experiment based on the following:
    1) The dollar and the euro are inevitably in for some inflation, and as compared to deflation that is a good thing.
    2) If inflation is inevitable what will happen next?
    In my opinion, the benefits of “globalization” have never quite trickled down to the citizenry because developing nations tend to keep their currency undervalued. I am sure that this is so to encourage investment, employment etc… Also, however there is the tendency of the elite to earn in dollars and pay in local currency, a pretty good deal if you can get it.
    Nevertheless, the “savings” of Chinese workers and others has been kept at the sovereign level and in dollars. It never quite got to the workers.
    Consequently, although one can not deny that the situation in many developing nations has improved, they have not quite developed the enormous middle class it requires to run a consumer economy.
    The effects here would be enormous and perhaps unpredictable, but if the average Chinese income were suddenly 500% higher as compared to the dollar, and that pattern prevailed, one would expect a change in manufacturing patterns based on productivity rather than hourly cost.
    The Chinese and Developing Nations “savings” have been frittered away, already, its gone, the only way to make it right is to revalue. As for Europe, my impression is that the Euro is much weaker than the dollar for the time being, that may change, but devaluing it further than the dollar could be an advantage to encourage reinvestment.

  42. JTCornpone says:

    I’ve been in the dentist’s chair for the last couple of days and missed the beginning of this thread. I wanted to comment even if it’s too late and no one is reading on this topic anymore.
    I think as others have said the crisis is a result of greed and power. I cannot say which is the chicken and which the egg. The solution will not be a grand plan (which we should attempt anyway) but good old human muddling through.
    I am not smart enough to do this analysis numerically but my general feeling is that things will not reach the level of financial armageddon. Institutions will fail, large ones, but there is a much larger underlying base for the survival of smaller institutions and consumption than in the 30s. PL and I are examples at hand. Military retirees and social security recipients are very numerous and will have guaranteed spendable income barring a very improbable utter catastrophe. Most folks in this demographic have stable housing within their means and generally do not engage in risky financial dealings. They will continue to spend reliably and sensibly. This is a new sustaining element in the economy compared to the past. Our impact may equal something like the WPA in economic impact.
    While growing up I was regaled with so many dire (and funny) tales of the depression from my father whose extended family had to consolidate into a single not so harmonious household to survive that I turned out to be somewhat of a financial ant as opposed to a grasshopper. Had I anticipated the present conditions two years ago I might not have decided to tear down my paid for dilapidated doublewide for a mortgaged steel framed energy star house but at least I halved my energy bills for life and improved my hurricane protection (Florida) immeasureably. If the absolute worst of the worst happens I can retreat to my fishing cabin in the Ozarks which I built out of cash on hand and has laughably small taxes and live entirely on my social security checks and (maybe)state raised trout.
    I believe in saving as much as you can and if you do spend invest in future savings. Spending on future savings helps the economy and you simultaneously. The part of the stimulus package which supports infrastructure and future energy savings is right on target in my opinion. Any tax cuts I get I will save until an opportunity to spend for my future betterment comes along. Don’t get me wrong–I am not a miser. One should spend recreationally provided you follow the philosophy that you can afford anything you want so long as you only want what you can afford. The government on the other hand lives forever and never has to reckon up as long as it can carry the payments. I believe they should salvage institutions and spend to save jobs.
    Leilas comments on gardening are right on point in thinking survival. It’s in part a resurrection of WWII victory gardens. We cannot all live on universal subsistence gardening but it again provides a floor sustainable economy in supplies , seeds, etc., and food production and something satisfying to do. You don’t have to dig up your yard. There are commercial container-based growing systems which can be home brewed which can grow astonishing amounts of vegetables on a patio. I have had amazing results with the commercial ones but will make my own from now on. See here
    and here
    I’m going to recycle my 5 gallon kitty litter buckets for these.
    I hope things aren’t as dire as WR Cummings projects but he did trigger a thought. There was an analog in the 20s to our crashing leveraged instruments based on mortgages. Then shares in stock trusts were the rage. Problem was that trusts often held not shares in companies but shares in trusts which held shares in trusts, etc. When the actual shares in companies at the bottom of the chain went down a little the pile of trusts utterly collapsed because there weren’t enough actual shares in companies involved to satisfy demand for redemptions. A mortgage based Ponzi and a stock based Ponzi are little different in their effects when a perturbation hits the system and the bigger they are the harder they fall.
    I think Texas is doing well due to huge savings realized by skimping on merge ramps on their interstates. They’re about two cars long. This will prove short sighted. When they no longer can afford to drive vehicles with large enough V8 engines to merge safely, so many will perish attempting to access their highway system that their tax base and economy will completely fail.
    Unlike Rush, I hope Obama and the country succeed. I never thought Rush would ever ally himself with Bin Laden but there it is. Apparently Obama, like the Shadow, has the power to cloud mens’ minds.
    I’m saddened by the individual pain we will suffer but I think we will muddle through as a country. Good luck to us all.

  43. euclidcreek says:

    Mr. Stress writes: one of my favorite nasty Texas lines “If the nation ever needs an enema Texas is the right place to put the hose”

  44. optimax says:

    An interesting article in the NYT December, 30, 1892. Shows things haven’t changed except for journalism and malleability of Presidents.

  45. curious says:

    watch out, all those banking scandal is about to reveal major political corruption.
    on top of that, this is down economy, a lot of the most powerful people need cash. (enter drug money) They better keep track of all those high power weapons and munition dump.
    We’re learning that one of the ways Sir Allen Stanford plied U.S. lawmakers was through a little-known non-profit group called the Inter-American Economic Council. At one point, the group was focused on easing the restrictions that the Patriot Act imposed on offshore banks like Stanford’s. Zack Roth has the background on Stanford’s relationship with the group — and pictures of Stanford attending an IAEC event with lawmakers in Washington.
    Late Update: I’m not sure “little-known” is the best description of this group. Last year’s keynote speaker at IAEC’s annual awards gala, which is held at the headquarters of the Organization of American States in Washington, was Rep. Charlie Rangel (D-NY). In 2006, when Sir Allen was given the group’s top award, President George Bush and First Lady Laura Bush were the honorary co-chairs of the event. Tickets for this year’s black-tie affair, set for next Friday, are $500 apiece, and sponsorships of the event go for as much as $250,000.
    The cartels have responded to Calderón’s war with the kind of buchon savagery that so struck me upon returning to Mexico. In addition to fighting each other, the cartels are now increasingly fighting the Mexican state as well, and the killing shows no sign of slowing. The Mexican Army is outgunned, even with U.S. support. Calderón’s purges of hundreds of public officials for corruption, cops among them, may look impressive, but they accomplish little. The problem isn’t individuals; it’s systemic. Until cities have the power and funding to provide strong and well-paid local police, Mexico’s criminal gangs will remain a national threat, not a regional nuisance.
    There’s little reason to believe 2009 won’t look a lot like 2008. And there’s reason to fear it will be worse. The financial crisis is hitting Mexico hard. How long it can hang on is unclear. The momentum still favors the gangs, meaning the bloodshed will likely subside only when they tire of warring.

  46. curious says:

    very cool article
    A year ago,it was hardly unthinkable that a math wizard like David X. Li might someday earn a Nobel Prize. After all, financial economists—even Wall Street quants—have received the Nobel in economics before, and Li’s work on measuring risk has had more impact, more quickly, than previous Nobel Prize-winning contributions to the field. Today, though, as dazed bankers, politicians, regulators, and investors survey the wreckage of the biggest financial meltdown since the Great Depression, Li is probably thankful he still has a job in finance at all. Not that his achievement should be dismissed. He took a notoriously tough nut—determining correlation, or how seemingly disparate events are related—and cracked it wide open with a simple and elegant mathematical formula, one that would become ubiquitous in finance worldwide.
    For five years, Li’s formula, known as a Gaussian copula function, looked like an unambiguously positive breakthrough, a piece of financial technology that allowed hugely complex risks to be modeled with more ease and accuracy than ever before. With his brilliant spark of mathematical legerdemain, Li made it possible for traders to sell vast quantities of new securities, expanding financial markets to unimaginable levels.
    His method was adopted by everybody from bond investors and Wall Street banks to ratings agencies and regulators. And it became so deeply entrenched—and was making people so much money—that warnings about its limitations were largely ignored.
    Then the model fell apart. Cracks started appearing early on, when financial markets began behaving in ways that users of Li’s formula hadn’t expected. The cracks became full-fledged canyons in 2008—when ruptures in the financial system’s foundation swallowed up trillions of dollars and put the survival of the global banking system in serious peril.
    David X. Li, it’s safe to say, won’t be getting that Nobel anytime soon. One result of the collapse has been the end of financial economics as something to be celebrated rather than feared. And Li’s Gaussian copula formula will go down in history as instrumental in causing the unfathomable losses that brought the world financial system to its knees.

  47. curious says:

    instability and volatility is growing again. Thanks to uncertainty in banks nationalization. (citi and BoA are insolvent.)
    Asian stocks fell sharply on Tuesday amid renewed fears over the health of the global financial sector and after US stocks hit a near 12-year low.
    Japan’s Nikkei index closed down 1.46%, the Hong Kong index was down 3.6% and the Shanghai index fell 4.3%.
    South Korean shares dropped 3.5%, while indexes in Singapore, Taiwan and India shed more than 1%.
    Most Asian indexes had risen on Monday on hopes the US government was to increase its stake in Citigroup.
    However, no formal move was made. US regulators said they were considering boosting government ownership in financial institutions, but without going all the way and nationalising them.
    On Monday in the US, the Dow Jones Industrial Average closed down 250.9 points, or 3.4%, at 7,114.8, its lowest level since October 1997.
    The tech-heavy Nasdaq index closed down 3.7%, while the Standard & Poor’s 500 index fell 3.5% to 743.33, its lowest finish since 11 April, 1997.

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