Inflationary Pause Before The Deflationary Collapse

The market Oracle ^ | 12-31-2009 | Janet Tavakoli

[blam]

Inflationary Pause Before The Deflationary Collapse

Economics / Great Depression II
Dec 31, 2009 - 12:54 PM
By: Janet Tavakoli

Washington's Bipartisan Betrayal: The 2015 Global Financial Crisis - The time has come for new year's resolutions. The House passed the Wall Street Reform and Consumer Protection Act of 2009 (H.R. 4173) on December 11, 2009.
It gives $4 trillion in "emergency funding" to our largest banks during the next financial crisis. Instead of reform, Congress offers even bigger bailouts. Unless we change direction, we will have another crisis by 2015. Congress has made all the wrong moves to guarantee it.

The economy did not just have a heart attack; we are suffering from financial appendicitis. Instead of doing the necessary surgery, Congress is prescribing potent addictive painkillers.

How did we get here? Housing is the largest component of our economy. Cheap money from the Federal Reserve, crippling of states rights to reign in mortgage lenders, and failure to enforce securities laws allowed the largest Ponzi scheme in the history of the capital markets to flourish.

Wall Street's shadow banking system gave mortgage lenders large credit lines (similar to credit card debt) and packaged the loans into private-label residential mortgage backed securitizations. Most of each deal was rated "AAA," since subordinated investors absorbed the risk of a pre-agreed amount of loan losses.
But hundreds of billions of dollars in private-label deals were backed by portfolios comprising risky fraud-riddled loans. Most of the "AAA" investment was imperiled, and subordinated "investment grade" components were worthless.
Wall Street disguised these toxic "investments" with new value-destroying securitizations* and related credit derivatives.

Meanwhile, collapsing mortgage lenders paid high dividends to shareholders (old investors) and interest on credit lines to Wall Street (old investors) with money raised from new investors (perhaps your pension fund) in doomed securities. New money allowed Wall Street to temporarily hide losses and pay enormous bonuses. This is a classic Ponzi scheme.

[snip]

[Attention Surplus Disorder]

Pay as much or more attention to Janet Tavakoli as you might to a Peter Schiff or Karl Denninger type....as you will.

She is brilliant.

[rawcatslyentist]

>"hundreds of billions of dollars in private-label deals were backed by portfolios comprising risky fraud-riddled loans."

Thanks Jimmuh Smarter, for the Communist Re-incarnation Act!

0b0z0 just upped Fannie and Freddy's "credit line" to unlimited.

"The System Worked!" ~~~ quote of the decade.

[familyop]

Agreed that the crooks should be brought to justice—all of them (re. rest of article behind the link).

[Reverend Wright]

I remember reading this sort of stuff in 1992 when the S&L crisis was going to bankrupt the US govt and collapse the US economy.

Didn’t happen. In fact the RTC ended up making money for the gov’t.

[Attention Surplus Disorder]

According to whom?

Per this report: http://www.fdic.gov/bank/analytical/banking/2000dec/brv13n2_2.pdf

the cost of the S&L crisis to the US gov’t, which extended from 1986 to 1995 was $153 billion, with roughly another $1-$1.5 billion in litigation settlements which extended through Y2000.

Taking 1990 as the “centerline” of this era, US GDP was roughly in the $7 trillion (= 7000 billion) range at the time. The $155 billion lost in the S&L crisis, which occurred over about a decade, was thus about 2.2% (155/7000) of GDP for one year and thus about .22% of GDP assuming it was spread out over ten years.

The losses sustained in the current crisis are at present unknowable, but I have read estimates of from $2.5 - $4 trillion. Taking the smallest estimate, $2.5 trillion divided by $14 trillion = 17.8% of GDP or 1.78% of ten-year GDP or about 7 times greater than the impact of the S&L crisis. **SO FAR.** We are obviously nowhere near completion of the entire home foreclosure deal and the rising interest rates now appearing on the horizon are not going to make this better. (”This” = the ability of homes to re-acquire their original sales prices, or, in the case of comm RE, the ability of a comm preperty to cashflow or otherwise service its debt...not to mention recover its last purchase price) We have scarcely even touched resolution of commercial real estate bubble. Nor have we even scratched the surface of the insolvency of maybe ten major states, CA, NY, among them. So tentatively, I’m going to call our present crisis about 20-25 times, perhaps 40 times as large as the S&L crisis. Think you can so casually compare the impact of two events that far apart in scale?

[Reverend Wright]

I don’t accept this article as definitive for RTC losses because it doesn’t seem to take into account the gain in the value of the assets that were eventually sold off. The article talks about that on page 32 under “RTC Estimated Resolution Costs” but there appears to be no line item for profit due to asset sales in Table 4 where RTC cost is calculated. (maybe I am missing something here)

But my larger point is that I have heard these real estate collapse doom and gloom stories before (back in the 1990’s). They didn’t pan out then, and I doubt they will for this cycle.

Even if the real estate losses do end up being 1.8% (source?) of GDP for the next 10 years, I just don’t think an additional 1.8% GDP structural deficit is enough to tank the US economy.

Caveat. There is a limit to the borrowing power of the US Treasury. A simultaneous collapse in a stock and real estate bubble would likely be enough to force the economy into a repeat of the 1930’s Depression.

I just don’t see it for this cycle.

[HardStarboard]

Hello: In the past few days there was a thread that had, in a post, a graph of unemployment rate vs months since inception of various recessions.

It plotted 6 or 8 recessions since the 1950’s or so. Different color line for each recession.

It would have been a great conversation piece with liberals - Obamas recession is longer and deeper than any of the others. Obviously I let it get away.

If anyone can point me to that graph I would appreciate it.

Thanks....Hardstarboard