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2008 Train wreck report

One of the problems with this credit collapse –- and peak oil, and global warming for that matter — is that they move like glaciers, slowly but inexorably, and humans generally don’t seem to be evolved to sustain attention on large things that take a long time. We gleefully scamper about, picking up pennies in front of the steamroller, because that suits our attention span and time scale, and the wider problems simply cease to be news because we cannot fix them rapidly enough to make it seem worthwhile.

Yves Smith posts a report from Merrill Lynch economist David Rosenberg which takes the longer view. It’s all about the real estate.

New home sales sank to 460,000 units in August, a fresh 17-year low, and the inventory-to-sales ratio gapped up to 10.9 months’ supply (MS) from 10.3 MS in July. There is no chance that home prices stabilize until this ratio moves convincingly below 8 months. In fact, our models suggest that there is another 15-20% downside in average home prices and they are already down 20% from the peak… Sales are down to 460,000 units and yet single-family starts, while down 35% from a year ago, are still running far ahead of demand at 630,000 units… homeownership rate is still near historic highs of 68%… our estimate of the expected total losses going forward are close to $1.5 trillion or double the size of the TARP… this entire credit collapse of the past 13 months has reflected one thing and one thing only, which is the unwinding of the greatest asset bubble in modern US history – residential real estate… we are at most 60% of the way though this down cycle in banking sector credit quality… So the way to think of this credit collapse is that it is secular in nature, not merely cyclical and also deflationary… The Fed and Treasury are merely cushioning the massive deflationary forces in the financial system…. If you go back to that 1989-93 experience with RTC… it took a full year for the equity market to bottom, two years for the economy to bottom, three years for the housing market to bottom, and four years for bond yields to bottom…

Comments 5

  1. Paul wrote:

    Good political analysis from Lune at naked capitalism.

    Posted 30 Sep 2008 at 12:36 pm
  2. Paul wrote:

    LIBOR (London interbank offer rate) hits an all-time recordof 6.88%. Banks apparently now prefer to deal directly with the central bank rather than with one another.

    Posted 30 Sep 2008 at 12:39 pm
  3. Paul wrote:

    Joe Stiglitz speaks for me, calling the failed vote a “Good day for democracy”. Unfortunately, I think he is optimistic about the politicians now doing the right thing. Bush and cronies see this as yet another chance to use others’ suffering to force through changes that benefit them. Think New Orleans.

    Posted 01 Oct 2008 at 2:07 pm
  4. Paul wrote:

    Good overview of past bank crises via Mauldin’s letter:

    Laevan and Valencia identify 124 systemic banking crises between 1970 and 2007, and assemble detailed information on 42 of them, representing 37 countries… Total fiscal costs, net of eventual asset recoveries, average 13% of GDP (over $1.8 trillion for the U.S.); the average recovery of public outlays is around 18% of the gross outlay… Sweden, now widely seen as a model of swift, bold action, kept its ultimate fiscal costs relatively low –3.6% of GDP at first, almost all of which was recovered through stock and asset sales– but was unable to avoid a deep recession. At the other end of the spectrum, Japan, the model of foot-dragging half-measures, saved no money through its procrastination; its fiscal outlay was 24% of GDP, almost none of which was recovered. And it was unable to avoid recession… Of the four comparison countries, only Korea comes close to the U.S. level of red ink.

    Posted 01 Oct 2008 at 2:50 pm
  5. Paul wrote:

    Another great interview of Stiglitz, this time on Democracy Now!

    The basic lesson of economics is there’s no such thing as a free lunch, and there’s no such thing as a free war, and there’s no such thing as a free bailout. Our resources are scarce, and we’re going to have to give up something. And the amount that we have to give up will depend, in the long run, on how well we protect taxpayers in this bailout. And that’s one of the main criticisms of the Paulson plan. It’s not as well designed as it should be to protect American taxpayers.

    On the new version of the bill:

    What they did was basically old-fashioned, corrupt bribery. They found out—I was joking that they talked about a reverse auction for the—for buying the distressed assets; they had a reverse auction for buying congressmen, and they put in anything they needed to do to get the congressional support for a basically flawed bill.

    Posted 02 Oct 2008 at 12:55 pm

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