Posted on 02/12/2009 8:52:42 PM PST by sickoflibs
For years Americans continued to live in a phony bubble economy. What we do is borrow money from all around the world and we spend it mainly on products we import. As we were borrowing and spending we dissipated the worlds wealth. We blew up this phony bubble economy that was consumer spending and built up this phony service sector economy that can only exist as long as the world was willing to fund it. But ultimately this bubble burst, like all bubbles. The Ponzi Scheme and our economy function under the same principles that Bernie Madolf used to run his investment company. And ultimately all these things fail. The free market is finally trying to cure the economy of this disease that the government policy created.. . The real engine of economic growth is under-consumption because when you don’t consume you save, and when you save you can finance capital investments. And capital investments lead to real economic growth and enhanced productivity and a rising standard of living. “
“In the USA we borrow and spend all this money we confuse reckless consumption with real economic growth because our GDP became increasing comprised of consumption and consumer spending and we counted that as growth. And we looked at rising stock and real estate prices which were bubbles and confused that with legitimate wealth creation, but there was no real wealth there. Now the market is purging itself of all those imbalances and the government is interfering with that process ……We need to reverse those policies. The government needs to shrink and spend less and the consumer needs to spend less money.”
“And one of the biggest consequences of this fiasco is that the free market is getting blamed for problems that were created by government. Ex-president Bush in his speech said “Wall street got drunk”. He was right. So did Main Street, the whole country got drunk. But what President Bush didn’t point out was where they got the alcohol. They got the alcohol from the Federal Reserve, from Alan Greenspan. He’s the one that lowered interest rates to nothing and left them there for several years and then raised them very slowly. And because of all this cheap money, Wall street speculated and speculated, Americans remodeled their homes and bought imported products and cars, all sorts of things. None of this would have happened, the subprime market, teaser rates and option Arms if it wasn’t for the Federal Reserve. “
“The biggest problem with the housing market was Fannie and Freddy, government created entities that created giant moral hazards by allowing the American citizen to borrow money with the US government as a co-signer. This is what enabled Americans to overpay for houses they couldn’t afford and allowed the creditors to loan money without consequences. Normally in a free market economy there is a counter-balance of fear. But the government intervention of the free market short circuits that leading to this reckless behavior. Now the politicians are using this crisis as an excuse to grow the government precisely when they should be shrinking it. And we run the risk of repeating all the mistakes of the 1930s creating another great depression except this time around its going to be an inflationary depression. “
“Many people think the depression was the result of Herbert Hoover didn’t do anything, he let the free market work and Roosevelt came along and saved us with a bunch of socialism. That’s not what happened. Hoover did exactly what Bush did. Hoover bailed out everybody he could. Hoover tried to set prices and wages and turned an economic downturn into the beginning of the Great Depression. “
“The rest of the world doesn’t have to continue to accumulate US dollars and US government dept that can never be repaid. As an American I can say the sooner the world stops enabling this process the sooner the American economy can rebuild by allowing this phony economy to collapse.”
Entire video at :
Peter Schiff Speech Saudi Arabia January 2009
If you think both parties in Washington think our money is theirs and you trust them to do the wrong thing, this list is for you.
If you think there is a Santa Claus who is going to get elected in Washington and cut a few taxes and spend a few trillion and jump start the economy, and get our lost money back, this list is not for you.
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Yes, he said the world needs to stop enabling the US phony economy with money so we can fix it. Intervention (A+E network ) anyone!
Americans illness and painful fix, and it’s not Obama!
Concisely stated by Mr. Schiff, as usual. I am not sure I agree on the inflation part...for a while...I myself believe we will enter and complete a deflationary era first and THEN, enter serious inflation. That inflation, measured from a deflationary trough or bottom, might, repeat might, get us back to about where we are now, in terms of that loosely defined “basket of price points” we carry around in our heads as to milk, gas, houses, etc; Or not. Other than that single point, I agree with him wholeheartedly.
Everything Obama/Pelosi wants to do is inflationary, unions, energy etc, They love inflation because of tax revenues and imaginary gains for us, and opportunities for control of economy. And current recession will cause huge commodity boom because of stoppage of development. But like you say, when???
My opinion, and it’s only my opinion, is a distinct first phase of deflation, which we’re in and we’re not done with, then inflation to da moon. I still cannot answer your question of “when?”.
For me, there are just too many moving parts to say a particular outcome is fated to occur. Plus, it’s possible to make fairly thoughtful arguments in favor of this or that outcome.
For example: It isn’t necessarily the case that “everything 0bama” is “inflationary”, and what’s more, you kind of have to say ‘inflationary to WHAT?’. This is because despite the jaw dropping amount of money being “printed” or “created” (these are colloquial terms that aren’t exactly true and don’t IMO help the discussion much) these vast sums are not keeping up with the amount of money being destroyed: by default, by writedown, by loss in value of collateral, eg; mostly stocks and real estate. You’ve undoubtedly heard opinions that if the US Tsy has to borrow all this money, then private borrowers will end up in competition with the gov’t, driving interest rates up. If rates rise, markets can take it for a while, but this will also affect the general affordability of housing (our biggest headache) by depressing the values of houses, which makes the underlying loans uglier. If money gets harder to borrow, it also depresses general economic activity as we’ve seen. If [productive] economic activity decreases, then it gets harder for folks to pay back their debts, and companies don’t want to borrow because they don’t see the consumption increasing. I’m not saying this will happen, because I am at least as bad at predicting the future as the geniuses running our economy, but I offer it as just one of several possible “threads” the economy (whatever that means!) might follow.
Anyway, there is little the Fed/Tsy fears more than deflation, so it is a certainty they will try to combat it. It’s also pretty certain they will go to war with deflation in the same goofball ways they have done so far: With an overwhelming bias towards the sort of conflicting goals of “cleaning up” bank balance sheets; while not being willing to come clean over the gaping holes, slaughtered asset values, off-bal sheet assets, and potential derivative nightmares (the size of which could blow all the previous into dust) Turbo Timmy will undoubtedy try all kinds of things, but it’s abundantly clear these guys have no great insight as to how the economy works. They know well that they have to rescue their banker buddies or credit markets will never unfreeze, and that is a true truth. That they will release news early to JPM and Goldman allowing them to frontrun market-moving news, like they did today, leaving unmistakable footprints all over the options markets, is my evidence. There’s essentially nothing they cannot do. That doesn’t mean they get it right.
So, I think they will throw everything they have and lots they don’t have at their perception of the economic problems, and no doubt they will overdo it. It is at that juncture, at some point, when IMO the economy will shift from deflation to inflation. That’s why I think the way I do, and also why I can’t predict when that point might be.
The Common Sense Fix (Dave Ramsey)
Years of bad decisions and stupid mistakes have created an economic nightmare in this country,
but $700 billion in new debt is not the answer. As a tax-paying American citizen, I will not support
any congressperson who votes to implement such a policy. Instead, I submit the following threestep
Common Sense Plan.
I. INSURANCE
a. Insure the subprime bonds/mortgages with an underlying FHA-type insurance.
Government-insured and backed loans would have an instant market all over the
world, creating immediate and needed liquidity.
b. In order for a company to accept the government-backed insurance, they must do two
things:
1. Rewrite any mortgage that is more than three months delinquent to a
6% fixed-rate mortgage.
a. Roll all back payments with no late fees or legal costs into the
balance. This brings homeowners current and allows them a
chance to keep their homes.
b. Cancel all prepayment penalties to encourage refinancing or
the sale of the property to pay off the bad loan. In the event of
foreclosure or short sale, the borrower will not be held liable
for any deficit balance. FHA does this now, and that
encourages mortgage companies to go the extra mile while
working with the borrower—again limiting foreclosures and
ruined lives.
2. Cancel ALL golden parachutes of EXISTING and FUTURE CEOs and
executive team members as long as the company holds these
government-insured bonds/mortgages. This keeps underperforming
executives from being paid when they don’t do their jobs.
c. This backstop will cost less than $50 billion—a small fraction of the current proposal.
II. MARK TO MARKET
a. Remove mark to market accounting rules for two years on only subprime Tier III
bonds/mortgages. This keeps companies from being forced to artificially mark down
bonds/mortgages below the value of the underlying mortgages and real estate.
b. This move creates patience in the market and has an immediate stabilizing effect on
failing and ailing banks—and it costs the taxpayer nothing.
III. CAPITAL GAINS TAX
a. Remove the capital gains tax completely. Investors will flood the real estate and stock
market in search of tax-free profits, creating tremendous—and immediate—liquidity in
the markets. Again, this costs the taxpayer nothing.
b. This move will be seen as a lightning rod politically because many will say it is helping
the rich. The truth is the rich will benefit, but it will be their money that stimulates the
economy. This will enable all Americans to have more stable jobs and retirement
investments that go up instead of down.
This is not a time for envy, and it’s not a time for politics. It’s time for all of us, as Americans, to
stand up, speak out, and fix this mess.
Thu Feb 12, 2009 1:29am EST
By Alan Wheatley and Simon Rabinovitch
BEIJING, Feb 12 (Reuters) - New lending surged at a record pace in January and money growth also perked up as Chinese banks heeded the government's call to extend more credit to support the economy.
Coming a day after grim trade figures showed plunging imports and exports, Thursday's data revived optimism among some analysts that an end to China's steep downturn might be in sight.
"The bank lending figures are just a stunningly good piece of news for China," said Glenn Maguire, chief Asian economist for Societe Generale in Hong Kong.
[snip]
So here’s the question: what are the companies to invest in, who have real assets, low debts, and will lead the re-industrialization of the American economy?
RE : I think we need to send them all to Dave Ramsey.
Before I got Fox News Business I occasionally watched Suzi Ormann and she has a load of financial basket cases call, 30K CC debt, buying the craziest stuff,
Unforfunately thes basket cases are the engine of our current economy.
Right now investing in US companies would be crazy, not only the recession but Obama/Pelosi marxist views toward business. Business and consumers only purpose is to pay taxes to fund critical government. Dont you hear Obama? “The time for greed is over. “ The government can give us everything we need.
Also, with middle class family incomes essentially flat for two decades, the ability to borrow against rapidly appreciating “assets” such as homes to support spending above income (and this was more about education, housing and medical care than “consumer goods”) was politically very convenient the people who made out best during the Greenspan era.
What really hasn’t sunk in yet is that even once “recovery” is well under way middle-class voters are going to discover that they are much less well off (in terms of net worth) than they had supposed - that in this sense America’s “Lost Decade” has already occurred.
As for complaints that it’s all the Fed’s fault, the question is “what’s the the alternative”?
The Fed is already a quasi-governmental institution specifically designed to be insulated from immediate political pressure, it’s hard to believe that moving any closer to government would make it more stable, rational, or efficient.
On the other hand we’re currently being subjected to one of the apparently regularly required demonstrations that the “market” is no solution to this problem either: for example the current mess in the derivatives markets is a demonstration of the perfect obvious truth that if you give people enormous monetary incentives to act on the basis of their short-term self-interest, while justifying this with delusional and economic rhetoric, they will do so. The only thing that’s truly astounding about Greenspan’s self-admitted late-life discovery of this fact is that he was not convinced of it in the first place - this is something that most people grasp at least as an abstract concept about the same time that her second grade.
Nor do we have the option of doing away with central bankers by to returning to primarily commodities-based currencies valuations, te 20th century experience is that countries which attempt this eventually ended up undertaking a program of self-castration in an attempt to support currency values.
Perhaps worst of all from the standpoint of putting together rational monetary policy as a world becomes more and more economically entwined it becomes less and less possible for any one economy’s central bankers to protect it from anther’s, at the moment China and the US are the two major villains (and opposite sides of the same coin) - for domestic political reasons both have embarked on unsustainable underlying economic policies, but we can be quite certain that a decade or two hence in the absence of international economic standards of reasonably behavior (which are of course unacceptable to the countries involved) a different set of that bad actors will behave be behaving as badly or worse.
It really is a highly intractable problem, with no good solution in sight.
I think the deflationary period will continue as long as the govt keeps trying to prop up home prices with mortgage modifications. Until home pricing reverts to 1996 prices we are going to see continued declines and stagflation. It's pretty obvious that 0 doesn't have the leadership skills to explain the bitter pill we are going to have to take, or the courage to lead us through it.
The credit crisis is really not going to change, because until consumers see the 'something for nothing days' are over they will not spend on big ticket items. Compounding this problem is the changing demographics of our population. The boomers are retiring and are looking to downsize.
I like this from you too: “the current mess in the derivatives markets is a demonstration of the perfect obvious truth that if you give people enormous monetary incentives to act on the basis of their short-term self-interest, while justifying this with delusional and economic rhetoric, they will do so. “
Don't underestimate the power of the bubble to suck people in. While gas, food, energy , housing prices are skyrocketing up and all their friends are getting rich and telling them they are crazy for saving or paying off debt. It's like the government/fed wants us in debt speculating, both sides. Then it crashes and the party is over and no one trusts anything, till years later the next bubble. My brother in law pressed my sister to go along with a home equity loan (they had little real equity) to buy rentals in a vacation area that is now a forclosure center of USA. He is a good person, a conservative Christian, a good father but did not know about bubbbles. After all, who would warn him? Not Hannity! Not Rush!
I remember around 2002-2003 BO Reilly nightly attacking Greenspan for having interest rates too high. Then he got on to ethanol would solve our inflation/dependence problems. That's why I gave him up years ago, he is stupid!
I agree with both these points but arent they opposing each other? One is pro-consume, the second is anti-consume. Also, what jobs does buying a flat screen TV provide in USA? I think the housing industry was the driver of the past few years boom (like home depot, Black and Decker ) requiring massive : legal and illegal immigration to buy and build the houses, and foriegn capital to buy the loans. Buying a car is very similar to house building so add that(although the car parts come from overseas). But that's it. No cycling through houses and no cars and no debt and we come to halt. And like Schiff says, American consumers have too many cars and houses. Time to open new markets to sell them our cars but that takes money like after WWII to prime some consumers in those countries, not ours.
“..home pricing reverts to 1996 prices...”
Pretty much agree. Though there’s nothing “magic” about 1996...stocks and RE could also revert to 1985 levels. It just depends how stressed the system gets. These things can overshoot, y’know. Stocks have given up a rock solid decade and I expect them to go somewhat lower. We also haven’t seen real revulsion, as I call it, where the idea of owning a home is an ugly one. Well, let’s see how those property taxes get piled on in this next phase, where the states are screaming broke. All the bottom fishing attempts (and, as you imply, prop-up attempts) prevent the natural action of the market from working itself through. We need that giant puke, like you have to do to get over a rotten hangover after a night of serious drinking.
Cheap and easy financing when debt appears to be easy to pay off tends to pull forward peoples' consumptive habits. Remember whan all car loans were 1-2% in the early 2000's and it was said that this was just "pulling forward" the actual level of demand? When debt is anathema, people ratchet down their consumption. If US auto sales used to be 17 MM or so and the average age of cars on the road was 4 years, then sales turn into 12 MM or so and the avg age of cars goes to 7 years, (I'm just making up those nos) some number of factories will shut down and folks will lose their jobs, simple as that.
Likewise with homes, when owning a home (vs renting) becomes less attractive, perhaps because cities and counties are going to be loading on property taxes with vigor..perhaps because appreciation curves flatten out or continue to decline....then maybe homeownership becomes an entirely less interesting thing and maybe the sales numbers NEVER go back to boomtime.
Not really, the "echo boom" generation following the baby boomers is about 1/2 the size of the boomers and they are the next group to buy in a big way. They will start buying when they are confident that prices make sense and the playing field won't change. The baby boomers are not going to get back into consuming big ticket items no matter what the govt does.
IOW, the credit crisis will loosen when the "echo boomers" start consuming, but we are not going back to where we were.
Also, what jobs does buying a flat screen TV provide in USA? I think the housing industry was the driver of the past few years boom (like home depot, Black and Decker ) requiring massive : legal and illegal immigration to buy and build the houses, and foriegn capital to buy the loans.
Consumption is not just the TV's it's also cars, appliances, remodeling, insurance etc. All these things require people to make them, sell them, repair them, etc.
And like Schiff says, American consumers have too many cars and houses.
It might be why we are still seeing deflation.
You're right. I'm thinking 1996 levels because housing seemed to be pretty stable up till then. Home pricing was still within 33-38% of mortgage cost vs. income. About 1996 I started seeing huge appreciation in multi-family properties.
Until we get back to that conservative pricing the next generation is going to be very hesitant. The problem is those that are upside down, or have lost the ridiculous appreciation, are going to be very supportive of govt. intervention.
All the bottom fishing attempts (and, as you imply, prop-up attempts) prevent the natural action of the market from working itself through. We need that giant puke, like you have to do to get over a rotten hangover after a night of serious drinking.
0 makes this very unlikely. He lacks the leadership skills and courage to explain it and get us through it. He wants to prop up the house of cards with money he does not have, which will make things worse.
The illusory possibilities of speculative investment in a bubble are, as you note, extraordinarily seductive.
As a result. one of the things that’s very difficult to get across to many people is that prudent regulation of speculative behavior is necessary not only to protect the ignorant, stupid, and greedy from themselves, but to protect the well-informed, intelligent, and temperate from from the behavior of the gullible and easily manipulated.
That while arguments to the effect that:
“It’s a matter of personal responsibility, let the market the punish people make mistakes” and keep the government’s hands off my investment choices!”
make for fine sounding slogans the financial history of investment bubbles makes it depressingly clear that it’s financially better behaved citizens who wind up footing the bill for cleaning up the mess left by those who got caught up in the speculation.
That when they start putting foreclosure notices on the door of the house next-door, and someone comes by, tears it up, and steals the copper, it depresses the quality of life and and disrupts the rational financial planning of the next-door neighbor who got a mortgage they could afford and kept it paid-up.
And that the only way to control such behavior is to put common sense regulatory mechanisms (”Don’t make mortgages to people whose income makes it highly unlikely they can make the payments”) in place to ‘just say no” when people succumb to such temptations.
That otherwise the flipside of this coin - that intelligent people who are incentivized to rationalize behavior certain to be destructive in the long term if it lines their pockets handsomely in the meantime - will inevitably create mechanisms to extract money from those less intelligent, less well-informed, and in more desperate financial situations themselves.
As nothing more than casual observation of human behavior is needed to know that this is so, I find it at particularly embarrassing that many “conservatives” - the people who are supposed to be the flinty eyed unbiased observers of human nature, and suspicious of every scheme that ignores it - were often supporters of clearly misguided economic fantasies sold to them under the rubric of “market capitalism”, when in fact they were in elaborate schemes to distort the market and mislead investors as to actual levels of risk.
So here we are, once again.
“Those of us who have looked to the self-interest of lending institutions to protect shareholders’ equity, myself included, are in a state of shocked disbelief.”
Listening to Greenspan one wonders how such a naif could have been taken seriously not once but twice in his contention that one could never identify a “bubble” in advance of its bursting.
But then one remembers that this is not a humbling exception, but rather only the latest manifestation of the human tendency to ignore human nature when profitable.
And all we can hope for, I suppose, is that over time and after enough repetitions of this kind of societal idiocy, we will gradually get the message that human nature is not a unfortunate complicating factor, but rather the deciding fact, in determining economic behavior.
And that - gradually, grudgingly, but increasingly - we will accept the fact that the market requires that reasonable limits be placed on the inevitable excesses resulting from human nature.
Μολὼν λάβε
“I’m thinking 1996 levels because housing seemed to be pretty stable up till then. Home pricing was still within 33-38% of mortgage cost vs. income.”
Well, regardless of whatever “price-year” we may bandy about, IMO it’s that 33-38% number that is the absolute dead nuts inescapable fundamental behind the pricing of SFHs. That is the “do not exceed” number that has worked for 75+ years. I think the actual number is 36%, and there was a time, a long time, if you had a good down payment and a good credit history but the pmts were 36.7% of your income you DIDN’T get the loan.
I just flat out do not see the mathematical solution to the problem of “how do we support house prices”. Never mind the doomsday scenarios, if the world or the US is going to ratchet downwards, from 17 MM cars sold to 12 MM, if those better-wage jobs are going to be lost, if taxes are going to rise, if mort rates rise (in response to frenetic Fed borrowing) if credit gets just a tad tougher to get, then all these forces converge back to that time-tested 36% number (or lower) and that’s where the mkt will go, regardless of all the gov’t artifice these peanut-brains can come up with. EsPECially in light of the 10 month - 2 year inventory out there. And oh yeah...the GREATEST density of Alt-A resets comes in spring 2009.
RE : the “echo boom” generation following the baby boomers is about 1/2 the size of the boomers and they are the next group to buy in a big way.
Harry Dent THE GREAT DEPRESSION AHEAD predicts depression and inflation then in 2020s a major recovery.
http://www.hsdent.com/the-great-depression-ahead-qa-harry-dent-jr/
Depressions occur after long bubble booms like 1816 – 1834 and 1914 – 1929, and now 1983 to 2007/2009. Such bubbles leverage capital for exploiting and experimentation in radical new technologies and business models when they first move mainstream and create new economic models for prosperity that last for many decades to follow. Such bubble booms bring stock, real estate and commodity prices to unsustainable levels. When the fundamental demographic and technology trends underlying such booms finally wane, the bubbles have to deflate and this results in a “survival of the fittest” shake-out that makes the best businesses and new business models even stronger. These businesses gain market share and scale which makes them more cost effective, and the deflation of asset values brings costs and prices down as well. Are high real estate values really good for our cost of living and business costs long term, or for the next generation that are our kids and grandkids? This very difficult crisis paradoxically brings new technologies and products to greater affordability and lays the groundwork for a middle class boom in prosperity to follow – as opposed to the “rich getting richer” bubble booms like 1914 – 1929 and 1983 – 2007. There will be a broader-based boom that favors the everyday household and worker in the 2020s and beyond, like the boom from 1942 – 1968.
Only union road builders will profit from the stimulus while severe socialist agendas are being implemented according to the terms of the stimulus bill no body had the courage to read before the voted to approve. With a dead economy, who will pay back the loan?
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