Skip to comments.The 2007 Bust: How Could They Not Have Known?
Posted on 09/21/2011 9:09:48 AM PDT by SeekAndFind
We are still living in the wake of the great 21st century bubble. That is the dominant economic and financial fact of 2011, which applies both to the American housing and mortgage debt, and to the European sovereign debt, crises. As the massive losses keep coming, there is a lot of negotiating, suing, whining and politicking among contentious parties over who will take which losses.
Among the many losses imposed by the bubble is a well-deserved loss of credibility on the part of central bankers and economists. "Policy makers around the world didn't see the global financial crisis coming," columnist David Wessel said recently. "My own profession, economics, has not distinguished itself in recent decades," Henry Kaufman sadly wrote.
Observers at the peak of the housing bubble could count zero U.S. bank failures in 2005 and 2006, and as late as the second quarter of 2007, it seemed that bank profitability and capital were high and that the world had plenty, probably a surplus, of liquidity. Indeed, as British banking expert Charles Goodhart pointedly describes it:
"Never had the profitability and capital strength (over the last couple of decades) of the banking sector seemed higher, never had the appreciation of bank risk...seemed more sanguine than in the early summer of 2007. ... At the time neither bankers, nor regulators, nor virtually all commentators had any appreciation for the systemic risks that were being run."
Nor central bankers!
How quaint and ironic it already seems that even as the housing bubble was in the process of inflating, central bankers convinced themselves that they had discovered how to create and sustain the so-called "Great Moderation." This is reminiscent of the equally quaint, long-ago collapsed 1960s belief that economists had discovered how to "fine tune" economies.
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There is no way they didn’t know. Heck, go to youtube and search “Schiff 2006”.
They knew. But as is often the case with our elected representatives, they want to stay elected, and doing the things necessary to protect the long term they must do things to stifle the short term, and get booted out of office by the electorate.
So yest, it is the electorate’s responsibility. Did you “vote your wallet” when you voted? If so, you actually share some of the direct responsible for what happened.
BTW, by “you” I mean anyone reading this.
Heck, I’m a high school dropout and have been seeing disaster looming for more than a decade.
When we look at personal debt as a sign of a healthy economy, there’s something wrong. That’s not even looking at things like trade deficits and federal overspending.
LOTS of people knew what was coming. But NO ONE had the political will to stop it.
The US Mortgage markets were being undercut by MASSIVE inner-city mortgage frauds as far back as 1999. People were raising red flags in 2000.
The Cooked Books at Fannie Mae were covered up by the mainstream media because it could hurt Clinton, and the United Airlines Bankruptcy uncovered MANY default swap problems.
When Bush tried to step in to fix many of these problems, he was universally denounced as a RACIST, remember?
The TRUTH is that much of this was enabled by Bill Clinton’s Financial “Reforms”. But you won’t be hearing that from an incredibly-biased, largely gay mainstream media.
First is the welfare bubble in Europe which will bring down the entire fiscal underpinnings of the EU(except maybe for Germany who might just try to disengage). Decades of welfare state excesses are finally causing the inevitable collapse of the system. As the great Prime Minister of England, Margaret Thatcher said: the socialists always run out of other peoples money. Well, this is the time. The ripples will be felt here in a big way.
US Dollar Bubble - if anyone can predict what is going to happen here, you are a genius. On the one hand, we are printing money as fast as we can which should be inflationary. However, since we are still stronger than virtually every other economy in the World (save China, but time will tell how true their published numbers really are), people keep buying our Treasuries counteracting money inflation. Just amazing. If perception changes in any meaningful way, and investors flee the Treasury, it is over. If anyone can predict how this plays out over the next 5 years, get a job on Wall Street and get rich (see the book “The Big Short, where three groups of people are chronicled spending millions betting against the housing bubble, and made many millions. But at the time, they were quite concerned that they might be wrong afterall.)
Gold - is it a crazy bubble at $1,800 per ounce, on its way back to $1,200, or just the first step on its way to $5,000 per ounce?
See, in real time, it is very tough to see the future. To sit back at 2011 and query why we didn't all see the bubbles back in 2007 is easy. Tell me how the current bubbles turn out, and you have my rapt attention.
$5k/ounce seems more likely, but only because of the upcoming hyper-inflation that is bound to set in after QE1 and QE2. I'm not sure that gold, currency, or anything else won't be more valuable than canned goods and ammunition over the next decade.
I taught Real Estate Law and Econ in college for 10 years. I was on KGO radio in San Francisco in 2005 telling them what was going to happen. But I only saw a 25% hit in values coming, not the 40% and 50% hit we’ve seen. It was obvious what was going to happen.
Here is a prime example. Although I specialize in investment real estate and creative exchanging, I’ve sold and exchanged a few houses for a couple of my best clients. In 2005, a Latino couple purported to both be working and provided whatever documentation was satisfactory to the assclown doing the loan. I did not represent the seller, so I did not have any direct knowledge of their loan application or whether they were really working at all. They paid $325,000 for a planned unit development home (small lot, shared community amenities) that was about 1200 sq ft and had 3 bedrooms. Only a few thousand down, a new first and second trust deed, and my client paid about 6 grand closing costs for them. Three years later the house was trashed and on the market for $90,000. That nonsense happened everywhere.
In the frenzy of bidding upon properties beyond any real economic reality that could be sustained, people only cared about monthly payment. If they were paying $1500 for rent, they could now own a home with next to nothing down, virtually no credit worthiness, and have payments about the same as rent. They got “liar loans” and moved on up.
Smaller bankers etc. would have had some foreboding, even smart homebuyers would have known that, but the question was "when?"
Take 4 cases:
Case 1: smart home buyer: they can see the writing on the wall as prices can't rise forever. A smart buy would buy within their means and look for the cheapest, non-floating rate. But that non-floating rate would be for a long time higher than the floating rate. And his friends etc would be living in much nicer houses with nice cars etc. all on seemingly never-ending credit. The guy would look like a chump for a long time.... until the bubble burst....
Case 2: small time banker: they would know that it was a bubble and that it was going to burst sooner or later -- just not when. They would curtail their risky loans and not go into the complex financial products like CDCs etc which quite frankly, who can properly risk-quantify? Yet, that would mean that they would make much less money than those who gambled big. In fact they would be outcompeted and lose business. They may even have been bought over by the gamblers. Or, their shareholders may have revolted saying "look at those gamblers, they're making big bucks. Why aren't you gambling?"
Case 3: big bankers in financial supermarket type companies -- too many walls, and too many short-term goals. The market decides each quarter or each month whether the bank is doing good or bad. And it punishes those who aren't gambling -- look at the fates of Citibank and JP Morgan Chase before 2007. Again, no one knew WHEN the bubble would burst
Case 4: SMART investment bankers -- they know the bubble will burst and can roughly predict the time up to a few months. However, they still need to ride this death roller-coaster as if they get off too early they risk losing everything.
—Case 1: smart home buyer: they can see the writing on the wall as prices can’t rise forever.—
We were a hybrid of that. My wife was a real estate agent. One day around 2004 or so she came home and said the banks changed the rules for loan qualification. Before then, your mortgage payment could not be more than ~30% of your income. But they changed it to 50%. I pondered that and then realized they would drain the apartment complexes with condo buyers and home buyers. The supply and demand formula would naturally increase prices. Then the interest rates went down, then reverse amortization loans, ARMs, etc. My brother’s company, normally focused on investments, got into the creative mortgage business. He was offering 100%+ mortgages.
And all this time, I was aware of the concept that when people buy a house they don’t buy a price. Rather, they buy a monthly payment. This means that as interest rates came down and demand went up, the actual home prices shot up.
We rented when I first got the information from my wife at the beginning, but were thinking of buying. At that point I said that only a fool would buy a home in such a market. If only I had been thinking like your case #4. 8-D
Anyway, we refused to buy, as prices where we lived went through the roof. But a funny thing happened. We continued to rent and notice that rental prices went DOWN. We ended up paying $1600 a month for a home valued at $525,000. But it eventually got so bad, and my view of what was happening started expanding beyond what was at that time starting to be called a “credit” bubble rather than a “housing” bubble.
It was around 2007 that I started tellin people this could get as bad or worse than the great depression. At the time it sounded like crazy talk, even to me. But what I was seeing was undeniable. Just because it “feels” like it could never happen, does not mean it can’t. And look at us today.
Well, my realization that this was global and possibly looking like it could be the greatest crisis in human history caused me to do something I would never have thought of before. I bought acreage in an incredibly self sufficient farming community in the northern “south”. The timing is comical. I bought it just before Obama was elected.
And a word about renting: The freedom it afforded us is simply amazing. The home we were renting now has a value of roughly $325,000. The landlord had actually offered to sell it to us at one time but by then I clearly saw a mortgage as a ball and chain. I actually read an article that said that wages were higher in areas where most people rent because they are not forced to find work near the home they own. They are mobile and can move to where the work is.
Well, we simply gave our 30 day notice and headed out.
I’m now putting up an 8x16 shed myself, getting a 40x60 building built, I bought my first tractor last weekend. We’re plowing a garden. We’ve already raised and slaughtered two head of steer and will be getting another couple next spring. My wife has all her canning supplies.
Oh, and every third or fourth trip down our 1/4 mile long driveway we have to wait for a group of 3-8 wild turkeys to cross in front of the car. They are HUGE and, yes, I have a rifle and a shotgun. The deer are just coming out of the cornfields that are now being harvested. The growing season is long and the rain is such that lawns are beautiful and nobody has to water them. We’ve been getting about 600 bales of hay off the property and that area is surrounded by hardwoods and several hickory trees. The nuts are awesome. We often have 20-30 Hummingbirds swarming the two feeders on our front porch. There is also a natural stream on the property. The property is shy of 13 acres.
And it cost less than one years wages and is 15 minutes from two wal-marts and a Lowes.
We expect to spend the rest of our lives there, Lord willing. We also expect serious ju-ju to come down, if not later this year, at least before the election of next year. We expect it to be worldwide.
I see us as in Summer of 1939 and the whole world is Poland.
September’s a comin’.
The home was two years old when we bought and the whole thing
good for you! I didn’t do any of that with land, but invested in the stock market and got out in Dec 2007 as the markets seemed crazily overheated.