Is there another economic depression coming?

[banquo's_bumble_puppy]

Is the subprime mortgage mess a sign of bad things to come? I have heard that some conditions now mirror some of those of 1929. I heard this on (gringe) Glen Beck last night and he was interviewing an economist...the economist used the word depression (not recession). So...it was Glen Beck interviewing an economist...not to worry??

[Ronald Brak]

There is no particular reason to suspect that the United States will have a depression. A depression is much worse than a run of the mill recession. The sub prime mortgage thing need not be a major problem if things don't get out of hand. The U.S. federal bank has already lowered interest rates so people who want to pick out the good paper from the bad can more easily borrow money to do so.

[Donnie B.]

Of course there is. There always is.

The questions are, how soon, how deep, and how long.

[Decayed Orbit]

I don't know who made this statement, but here is a very recent OECD report on economic prospects in the developed world.

http://www.oecd.org/home/0,2987,en_2649_201185_1_1_1_1_1,00.html

Their view is much more guarded than the one you cite; they have concerns about recent conditions, but are not forecasting anything like a major depression. I'm sure you can find more pessimistic views out there if you go looking for them. People are forecasting war, revolution, economic depression, ecological catastrophe, and such things all the time. Every once in a while, they are right.

Since ATM economic theories seem to be exempt from the ATM rules, you'll probably get a lot of, um, "interesting" responses here...

[Doodler]

Is the subprime mortgage mess a sign of bad things to come? I have heard that some conditions now mirror some of those of 1929. I heard this on (gringe) Glen Beck last night and he was interviewing an economist...the economist used the word depression (not recession). So...it was Glen Beck interviewing an economist...not to worry??

Negative, ghostrider. In 1992, the Japanese economy, one of the hottest in history at the time, imploded so severely they were suffering a deflationary cycle (MUCH worse than inflation). It hobbled the world, but didn't trigger a depression.

People see those 200-300 point swings in the Dow Jones and whatnot, and think this is 1987 Revisited. I personally think of these people as rather moronic. In 1987, the Dow was 800 or so, its about 13000-14000. What was once a 25% swing in Stock Market value is only a few percentage points today.

There's a LOT of room for fools and their money to be parted without causing catastrophic damage to the core economy. It might contract significantly, but there's so much value in the market after the fluff is burned off, a crash just isn't in the picture.

I look at the subprime mortgage meltdown as a positive development in the long term. The big one, particularly in my area, is the return of sanity to housing prices. Lots of foreclosures with the kind of excessive stock on the housing market makes the next five years a wonderful buyers market. The idiots bought houses they couldn't afford to keep, having to continually flip them in order to stay ahead of the ARM curve. The smart ones hunkered down in rentals and waited for the inevitable.

Don't sympathize with the stupid, BBP, they brought this upon themselves. There are always the smart ones like Buffett who let the fools run wild, knowing there's even more smart money to be made in the wake of their armageddon.

[Kwalish Kid]

There is no particular reason to suspect that the United States will have a depression. A depression is much worse than a run of the mill recession. The sub prime mortgage thing need not be a major problem if things don't get out of hand. The U.S. federal bank has already lowered interest rates so people who want to pick out the good paper from the bad can more easily borrow money to do so.
This is a big problem, well at least for the rest of us.

The problem is not the subprime mortgages but really the majority of the mortgages. Whenever anyone goes into default, the mortgage holder is left with a mortgage debt that is far higher than the value of the asset that is supposed to cover that debt. Now, it would be one thing if the holder of the mortgage, who made huge profits from the practice of offering subprime mortgages and rising real estate prices, ate the cost of this debt. However, the point of government interference is to allow these companies to ride out the debt (maybe until they can pass it along to a less savvy consumer). Regardless, this interference in the economy is essentially a wealth transfer from the majority of the economy to the mortgage holders. Is it really a disaster if these mortgage holders lose profits? Or even, heaven forbid, if they go under for pursuing the bad business practice of offering mortgages that were obviously a poor risk?

[Decayed Orbit]

who made huge profits from the practice of offering subprime mortgages and rising real estate prices,

if they go under for pursuing the bad business practice of offering mortgages that were obviously a poor risk?

So which is it?

[Doodler]

They're not necessarily losing money. They still have the asset which will eventually regain value as the market corrects. They lose the profit on the loan, which is the interest that would have otherwise been paid. Its money they were expecting to make, but did not.

Real estate, in the long term, is always a money maker. The difference between a hot and cold market is the amount of equity/time you earn. Typically, it takes at least a decade before your house's value really turns a major profit. This market, which was way overheated, was doing that in months.

[Matherly]

In the case of people like me (5 years in a house in a formerly "hot" market, plus a 'vanilla' mortgage), home prices are down but have only given back a small fraction of there value. This leave me with a tidy bit of equity above and beyond what I owe the bank.

As long as I don't go stupid (i.e. "cashing out" the equity), I'll be sitting pretty.

[Ronald Brak]

Regardless, this interference in the economy is essentially a wealth transfer from the majority of the economy to the mortgage holders. Is it really a disaster if these mortgage holders lose profits? Or even, heaven forbid, if they go under for pursuing the bad business practice of offering mortgages that were obviously a poor risk?

It's not interference in the economy, it is managing it, and it is not a wealth transfer but an attempt to avoid a destruction of wealth. There are instituions that hold sub prime mortgages that are going under. When they go bust the mortgages they hold are sold. The decrease in interest rates enables institutions in good shape to afford to by the better mortages. It also helps to avoid or minimize a recession which in in everybody's interest.

[Decayed Orbit]

A post I made earlier containing a link to an OECD report from a day or two ago on economic prospects in the developed countries has not appeared. I don't know why, I can't see how it would break any rules.

[Decayed Orbit]

It also helps to avoid or minimize a recession which in in everybody's interest.

Most people's interest.

[Spock Jenkins]

One of the significant contributing factors that led to the great depression also led to reforms that made that situation very unlikely to repeat. Back in 1929, when the stock market crashed - the banks essentially froze access to capital. This is exactly opposite of what we do today. We know that when times are tough, people need liquidity and access to cash. We know this because of the mistakes made during the great depression. Now, instead of freezing access - we drop interest rates and create programs that allow for easier access to capital.

While it doesn't make for a perfectly smooth ride, it does even things out a bit.

[Kwalish Kid]

It's not interference in the economy, it is managing it, and it is not a wealth transfer but an attempt to avoid a destruction of wealth. There are instituions that hold sub prime mortgages that are going under. When they go bust the mortgages they hold are sold. The decrease in interest rates enables institutions in good shape to afford to by the better mortages. It also helps to avoid or minimize a recession which in in everybody's interest.
It is being sold as an attempt to preserve wealth, but it does so only at the cost of transferring the losses to other sectors of the economy. If the measures being asked for by these mortgage holders preserved wealth at no cost, why don't governments all over the world implement these measures all the time?

Businesses going under is not an economic concern. Market economies are predicated on the assumption that businesses that engage in unsafe economic activities will close. Changing the rules of the game and bailing out those companies that engage in unsafe practices, if not utterly destabilizing to an economy, is simply a wealth transfer antithetical to the idea of the market economy.

Indeed, there is no fear of a recession from the failure of a few businesses and the loss of profits from a few others. There is more to fear from a government spreading around the damage from this incident from those most responsible and those most able to pay.

[banquo's_bumble_puppy]

Isn't there something essentially wrong with an economy that is hugely dependent on easy credit? If people didn't have the credit or couldn't get the credit, then where would the economy be? Isn't credit a sort of false wealth?

[Argos]

There isn´t enough info. The markets are in stand-by mode. It will depend on how many funds [and how much money] are involved. Pay attention to the balance sheets to be published in the near future.

[Decayed Orbit]

Isn't credit a sort of false wealth?

From whose perspective?

If the borrower goes on a spending binge and stupidly thinks that the money won't have to be repaid, I guess that person would have a false sense of wealth. But on an economy-wide basis, for each borrower, there is a lender. The sense of wealth of the person borrowing doesn't come out of nothing, it comes from the person lending the money. If the borrower repays the money, that wealth will be back in the hands of the lender; if the borrower doesn't, then there will have been (ex post) a transfer of wealth from the lender to the borrower.

[Doodler]

A post I made earlier containing a link to an OECD report from a day or two ago on economic prospects in the developed countries has not appeared. I don't know why, I can't see how it would break any rules.

Your account is a little young to post links yet. Its an anti-spam policy. If you want it linked, feel free to PM me the link and I'll post it in for you.

[Doodler]

Isn't there something essentially wrong with an economy that is hugely dependent on easy credit? If people didn't have the credit or couldn't get the credit, then where would the economy be? Isn't credit a sort of false wealth?

Not so long as credit is extended intelligently. False wealth does exist, especially in overheated markets, such as what the real estate market experienced, but a certain amount of steam needs to be maintained in the economic engine to continue growing it.

Its a balancing act, freezing money causes calamity, too much credit encourages wild speculation (the dotcoms and the recent real estate kaboom). Any investment with probable higher return is a form of speculation, but its regulated by the level of confidence in the lenders. Recently, a lot of lenders became exceptionally overconfident, and in the case of the arcane mortgages, outright irresponsible, and a bubble formed.

[banquo's_bumble_puppy]

[QUOTE= and a bubble formed.[/QUOTE]

was it a subspace bubble? (just kidding)

[banquo's_bumble_puppy]

whoops

[Doodler]

and a bubble formed.

was it a subspace bubble? (just kidding)

Might as well have been. It collapsed rather abruptly and with catastrophic consequences, but definitely made for an interesting story. :D

[Matherly]

was it a subspace bubble? (just kidding)

Miss Piggy (Coming offstage from a 'Pigs-in-Space' bit): Hrmph. Who's stupid idea was it to use a giant bubble?

Leonard Nimoy: Actually, in the first season of Star Trek the Enterprise was attack by... a giant bubble.

Mis Piggy: (Disgusted) No wonder you were cancelled.

(I loved Muppets Tonight. Shame it never really took off).

[Doodler]

Miss Piggy (Coming offstage from a 'Pigs-in-Space' bit): Hrmph. Who's stupid idea was it to use a giant bubble?

Leonard Nimoy: Actually, in the first season of Star Trek the Enterprise was attack by... a giant bubble.

Mis Piggy: (Disgusted) No wonder you were cancelled.

(I loved Muppets Tonight. Shame it never really took off).

Theme song now thoroughly stuck in head, smile plastered on face. Thank you for that. :D

[farmerjumperdon]

The biggest note of interest in all of the above is the point about the swings (made by Doodler I believe). Remember the DOW was at 11,000 or so just a couple years ago. A dip below 14K, or even down to 13K is really not that big a deal. No pending financial disaster, just a little bit of rough times for people that spent or invested unwisely. This is a normal part of boom-bust cycles. Money becomes loose, lots of people living high on the hog, lots of opportunity for bad investments and questionable dealings. The along comes a little reality check in the form of a market correction that flushes all the stupid investments down to the sewer where they belong.

I have no sympathy for people that overextend themselves beyond what they can weather. I have no sympathy for lenders that make way too many high risk loans. I have no sympathy for people that take principal only loans and then find themselves owning a property worth less than what they owe on it.

Our economy is not headed down the tubes, just a couple sectors of it that will get a much needed little roto-rootering. The faster the doomed finish their well deserved crash and burn, the faster we get back on track. We are not headed for a depression, though we may see:

1 - A lot of OSB and vinyl McMansions on the market for what they should have sold for to begin with, and . . .

2 - A lot of mortgage company junior executives applying for jobs in the yard at Home Crepo.

(These are both good things).

p.s. - Anybody with patience and fortitude as an investor is doing just fine. My mutual funds investments are running an average annual rate of return over the last 3 years of just under 30%. Even with the recent volatility, my annualized return for 2007, as of end of day yesterday, is 9.3%.

As the good book says, DON'T PANIC!

[Doodler]

Heh, my buddy's house, the one I'm renting, he bought for $180k in 1987. He was spitting nails when the house proceeding to drop to 120k, but he rode it out, and its now worth over $300k, even with some downward adjustment in the last couple months. Real estate is not something that's ever been sold for profit in the course of months unless there's speculation. Houses that were sold cheap in what used to be the boonies are now worth a fortune in suburbia as development has exploded. It takes years for development to settle out and for the true value of a house to finally take root, depending on how the area around it grows. This buy and flip crap is pure churning and does not reflect the real value of a house over the course of its usable life.

[Delvo]

Real estate is not something that's ever been sold for profit in the course of months unless there's speculation....unless there's a big change in the nature of the property itself.

That's exactly the kind of situation I'm pondering right now. I'm interested in a particular piece of for-sale-by-owner property that's got a crappy run-down little abandoned building on it that seems to be keeping the place's value down and keeping buyers away. (The asking price is far lower than for surrounding lots, and it went unsold for months and now has the sign back up again with a slightly decreased asking price.) I'm going to try to have someone assess it not just for its current value but also for an estimate of what its value would be with the building replaced with a new one. If the latter minus the former exceeds the cost of building a new house, then I think I'd want to buy the land and do so, destroying the current crappy building in the process. Then there'd be an increase in the property value regardless of the forces at work in the rest of the market.

[suntrack2]

since I am interested in economics, I like this topic very much, infact depression's meaning is different than recession, recession is a depressed state of economy in which all commodities rates goes in downward direction, the demand become much scanty and so on.

the following links will be helpful for you "banquo.." :)

http://en.wikipedia.org/wiki/Great_Depression

http://skeptically.org/socialism/id16.html


sunil

[Larry Jacks]

Heh, my buddy's house, the one I'm renting, he bought for $180k in 1987. He was spitting nails when the house proceeding to drop to 120k, but he rode it out, and its now worth over $300k, even with some downward adjustment in the last couple months.

Your buddy isn't doing as well as the numbers suggest. Using the inflation calculation at this site (http://www.bls.gov/cpi/), $187,000 in 1987 would be worth $330,000 today if all it did was keep up with inflation. When you factor in all of the interest he's probably paid over the years, he's lost quite a bit of money.

Real estate tends to increase in value over time but there are tremendous local variations. I've seen firsthand what happens to real estate values when the major employer leaves an area where there aren't many alternative jobs.

[banquo's_bumble_puppy]

thanks- interesting stuff

[Gillianren]

Actually, if I may insert a brief book suggestion, I've just myself reached the section in Don't Know Much About History, by Kenneth C. Davis, about the Great Depression. Well worth reading as to what caused that depression and, as mentioned, why the circumstances leading up to it can't happen again.

[Doodler]

Heh, my buddy's house, the one I'm renting, he bought for $180k in 1987. He was spitting nails when the house proceeding to drop to 120k, but he rode it out, and its now worth over $300k, even with some downward adjustment in the last couple months.

Your buddy isn't doing as well as the numbers suggest. Using the inflation calculation at this site (http://www.bls.gov/cpi/), $187,000 in 1987 would be worth $330,000 today if all it did was keep up with inflation. When you factor in all of the interest he's probably paid over the years, he's lost quite a bit of money.

Real estate tends to increase in value over time but there are tremendous local variations. I've seen firsthand what happens to real estate values when the major employer leaves an area where there aren't many alternative jobs.

It was $370, its now $346 or so. I was rounding.

[Ronald Brak]

It is being sold as an attempt to preserve wealth, but it does so only at the cost of transferring the losses to other sectors of the economy. If the measures being asked for by these mortgage holders preserved wealth at no cost, why don't governments all over the world implement these measures all the time?

Governments all over the world do implement these measures all the time. (Or rather there central banks do as it's best not to trust governments with these powers in case they use them for party political reasons.) Their goal is to keep the economy stable. When there is an economic downturn they cut rates and when inflation accelerates they increase rates. It's what central banks do. Zimbabwe and its approaching 100,000% inflation is what happens when this process is abused.

The rates cut in the United States increases liquidity in the entire economy and is not a bail out and is not a transfer of wealth. (If it is a transfer of wealth then what would happen when the Federal bank increased rates? Would there be wealth transfered in the reverse direction?) If the Federal bank injected liquidity into a certain instituion or institutions rather than the economy as a whole then it would be a bail out.

[jfribrg]

I'm not so certain that this will definitely not lead to a depression. I think it is doubtful, but it is possible. The negative pressure on house prices and all the related economic affects could cause some problems. If we have another shock to the system, such as another large-scale terrorist attack, or a major disruption of global oil production or transportation, and we could have a depression. I like the fact that the government is not going to bail out all of the companies that caused the problem. Preventing credit-worthy mortgage holders from going bankrupt is a great step. I'm not sure what else you can do without causing more problems than you are solving.

[Decayed Orbit]

I'm not so certain that this will definitely not lead to a depression. I think it is doubtful, but it is possible. The negative pressure on house prices and all the related economic affects could cause some problems. If we have another shock to the system, such as another large-scale terrorist attack, or a major disruption of global oil production or transportation, and we could have a depression. I like the fact that the government is not going to bail out all of the companies that caused the problem. Preventing credit-worthy mortgage holders from going bankrupt is a great step. I'm not sure what else you can do without causing more problems than you are solving.

Well, anyone who says there is no possibility of a depression in the near future is kidding himself/herself. You can always have the perfect storm, and one day, we will.

Actually, if I may insert a brief book suggestion, I've just myself reached the section in Don't Know Much About History, by Kenneth C. Davis, about the Great Depression. Well worth reading as to what caused that depression and, as mentioned, why the circumstances leading up to it can't happen again.

I agree that the mistakes that led to the great depression are unlikely to be repeated. The next depression will be brought about and/or aggravated by different mistakes :)

[Kwalish Kid]

If it is a transfer of wealth then what would happen when the Federal bank increased rates? Would there be wealth transfered in the reverse direction?
Generally, yes. Economics tends to be a zero-sum game. Often people tend to live in a fantasy where economic policy decisions never hurt anyone, but this cannot be the case.

[Decayed Orbit]

Economics tends to be a zero-sum game.

I was just typing in another thread how I thought mercantilist thinking went out a few hundred years ago. It seems I was wrong.

Often people tend to live in a fantasy where economic policy decisions never hurt anyone, but this cannot be the case.

It can if the allocation of resources is inefficient (as would clearly be the case if, for example, the BAUT membership set economic policy). If an allocation of resources is efficient, then any policy change necessarily hurts someone. Economic policy decisions usually include transfer and dead-weight loss effects, but some people live in a fantasy where economics is a zero-sum game.

[Kwalish Kid]

True, I was a little hyperbolic there. ;)

However, the measures being demanded to "save" the lending institutions are not measures that reduce inefficiency. Indeed, they are measures to increase inefficiency by removing the incentives against poor business practices.

[pizzaguy]

I look at the subprime mortgage meltdown as a positive development in the long term. The big one, particularly in my area, is the return of sanity to housing prices. Lots of foreclosures with the kind of excessive stock on the housing market makes the next five years a wonderful buyers market. The idiots bought houses they couldn't afford to keep, having to continually flip them in order to stay ahead of the ARM curve.

Don't sympathize with the stupid, BBP, they brought this upon themselves. There are always the smart ones like Buffett who let the fools run wild, knowing there's even more smart money to be made in the wake of their armageddon.

POST OF THE DAY!!!

[Doodler]

While economics is not necessarily a zero sum game, there's a limit to how much wealth can be created without invoking calamity.

Bubbles are wealth creation at such an excessive rate, that the moment there's a minor fluctuation in confidence, the whole house of cards comes down.

The mercantilist mode of thought is pure supply and demand. With the wealth creation system in place now, confidence is now a key element of the system.

How confident are investors in a supplier's ability to meet demand, how confident are suppliers in the buyer's willingness to pay what the buyer asks. In a sense, and with a lot of risk involved (take ENRON, please), the modern economy has invoked elements of Texas Hold'em into the mix. Valuation isn't strictly the physical material costs, but how much I can convince you its really worth without letting you see the whole picture. The danger arises when someone starts bluffing too much and gets called.

[Doodler]

True, I was a little hyperbolic there. ;)

However, the measures being demanded to "save" the lending institutions are not measures that reduce inefficiency. Indeed, they are measures to increase inefficiency by removing the incentives against poor business practices.

Those lending measures may give that appearance, but there's a catch. You have to demonstrate creditworthiness to qualify.

The companies that drilled their holes into the fiscal abyss are hosed, those who qualify can save those who are deserving (aka actually pay their mortgages and weren't playing the system themselves).

Basically, the Fed will prime the pump to keep the healthy institutions alive, but those who broke the system are in for a hard fall. Again, its a confidence game, but the rules are a lot more stringent.

[Ronald Brak]

However, the measures being demanded to "save" the lending institutions are not measures that reduce inefficiency. Indeed, they are measures to increase inefficiency by removing the incentives against poor business practices.

I don't think we are talking about the same thing. I'm talking about central banks moderating the business cycle and preventing deflation or hyperinflation. Are you saying you are against the inflation targeting or defacto inflation targeting that all countries engage in (with the exception of Zimbabwe and one or two others) because it is somehow a transfer of wealth? Can you tell me who is wealth being taken from when interest rates are cut and who is it given to? Would you be happier with a gold standard? Note that a gold standard would not stop the price of money going up and down, it would just be affected in a random way by things such as industrial action in Australian gold mines and changes in dentistry rather than central banks adusting interest rates and what you call "transfers of wealth" would continue to happen.

[sarongsong]

Is there another economic depression coming?Wonder how he would have answered...September 5, 2007
Ohio Representative Paul Gilmor died suddenly in Washington at age 68...Gillmor served on the Financial Services Committee, and was the ranking Republican on the Subcommittee on Financial Institutions, his Web Site said. He was a member of the Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises, and the Subcommittee on Housing and Community Opportunity...
UPI (http://www.upi.com/NewsTrack/Top_News/2007/09/05/ohio_rep_gillmor_found_dead/6304/)

[banquo's_bumble_puppy]

http://www.chron.com/disp/story.mpl/business/5142894.html

I'm not an economist by any stretch of the imagination, but I see weirdness....chaos...."something wicked this way comes"

[banquo's_bumble_puppy]

again....

oil hits $90.00 barrel and there are predictions of $5.00 gallon gasoline/not to mention the 360 point drop in the stock market on Friday- I predict that next week will be "interesting"

[Disinfo Agent]

Yeah, remember the olden days when $40 a barrel was a shock? The crazy hairstyles we had back then!

[Ronald Brak]

Yeah, remember the olden days when $40 a barrel was a shock? The crazy hairstyles we had back then!

Ah the heady days of the Volcker disinflation when interest rates were fifteen percent, unemployment was 9% and people were using hairspray like ozone was going out of style.

[banquo's_bumble_puppy]

now credit card debt

http://money.cnn.com/2007/10/29/magazines/fortune/consumer_debt.fortune/index.htm?postversion=2007103007

[closetgeek]

I agree with you Doodler. In the short term, it will look bad for the economy but the opportunists will take over shortly. Over here, the problem is all the developers who bought up huge tracks of land, squeezed as many houses as the law allows, and now they are not selling. They were so desparate at one point that they were offering free pools to buyers. Not only did they destroy the landscape but they bankrupted themselves. There was such a building exposion in this area, about two years ago, that it all came to a screeching halt due to a concrete shortage.

Negative, ghostrider. In 1992, the Japanese economy, one of the hottest in history at the time, imploded so severely they were suffering a deflationary cycle (MUCH worse than inflation). It hobbled the world, but didn't trigger a depression.

People see those 200-300 point swings in the Dow Jones and whatnot, and think this is 1987 Revisited. I personally think of these people as rather moronic. In 1987, the Dow was 800 or so, its about 13000-14000. What was once a 25% swing in Stock Market value is only a few percentage points today.

There's a LOT of room for fools and their money to be parted without causing catastrophic damage to the core economy. It might contract significantly, but there's so much value in the market after the fluff is burned off, a crash just isn't in the picture.

I look at the subprime mortgage meltdown as a positive development in the long term. The big one, particularly in my area, is the return of sanity to housing prices. Lots of foreclosures with the kind of excessive stock on the housing market makes the next five years a wonderful buyers market. The idiots bought houses they couldn't afford to keep, having to continually flip them in order to stay ahead of the ARM curve. The smart ones hunkered down in rentals and waited for the inevitable.

Don't sympathize with the stupid, BBP, they brought this upon themselves. There are always the smart ones like Buffett who let the fools run wild, knowing there's even more smart money to be made in the wake of their armageddon.

[Noclevername]

This area had been economically poor for a long time, but it's had a lot of population influx and a lot of economic growth recently, and a lot of new housing. When in the late 90s, many people made money, they made the snap decision to buy houses in the suburbs. When that bubble burst, and/or people with little experience in long term planning overspent, a lot of houses were sold or in some cases, just abandoned. The homes are slowly filling back up but the market is still very weak.

[peteshimmon]

I dunno...let me understand recent history as
I see it. Once there was lots of social
housing for unskilled people who would not have
job security and marketed houses for people to
buy through mortgages. Then owner occupiers
got all snooty about local authority housing
saying they were helping to pay for them. So
new building here was restricted. The demand
for housing stays so prices go up. Just what
those house owners wanted. Then the unskilled
trying to buy are insulted by being labled
"sub-prime". Then many start defaulting.
Suddenly those nice middle class people are
queuing round the block to get their money
out of a troubled bank! So it goes.

[Donnie B.]

Just one little thing, pete. "Sub-prime" is not a value judgment on the buyer. It refers to a loan that has a lower interest rate than the prime rate. The latter is the best rate the banks charge their most credit-worthy customers.

During the housing boom, people couldn't afford to buy houses, which meant the banks couldn't make money by issuing mortgages. So they got creative and came up with loans that charged initially low (sub-prime) rates, but were back-end loaded with higher costs later in the loan.

That was fine as long as house prices were rising. When they leveled off or started falling, mortgagees who could no longer afford the higher rates couldn't get out from under by selling, so they defaulted. That's what is being called the "sub-prime mortgage crisis". It has nothing to do with labeling the mortgagees.

[peteshimmon]

I see! It sure sounded like an insult to me.
And I suspect it is an apposite sounding term
to many for that part of the market.
The market is best, the market is pure, the
market is optimum, the market is sure!
Except when the market sucks!

[banquo's_bumble_puppy]

black Tuesday

[Doodler]

black Tuesday

Let the games begin. :cool:

[Doodler]

I see a red market,
and it just turned to black.
No profit anymore,
not till the books are black.

[Argos]

Well, I´m buying everything I can. The doors of opportunity have opened.

[Whirlpool]

There's always a silver lining after a storm.

[Argos]

Panic in the morning, relief in the afternoon. The cold-blooded are having a real party...

[Maksutov]

Panic in the morning, relief in the afternoon. The cold-blooded are having a real party...Capitalism: survival of the fittest money.

[brandy]

I think this is a very interesting subject but it seems that bad astronomers are not the best people to ask when it comes to economics questions. Also it seems that people in the US are more optimistic than in Europe.

But have a look at this:
http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/01/18/do1801.xml

a good article on the US economy, Federal Reserve etc with lots of
interesting comments at the end.

[Disinfo Agent]

Yeah, remember the olden days when $40 a barrel was a shock? The crazy hairstyles we had back then!Ah the heady days of the Volcker disinflation when interest rates were fifteen percent, unemployment was 9% and people were using hairspray like ozone was going out of style.I was actually thinking of a year ago when I wrote that.

[Argos]

I think this is a very interesting subject but it seems that bad astronomers are not the best people to ask when it comes to economics questions.

I´d say quite the contrary.

There are many insightful contributions in economics at BAUT. Also, there´s a couple of economists and accountants as members. Take Ronald Brak in this thread [and many others], for example. Doesn´t he sound like a pro? :)

[montebianco]

I´d say quite the contrary.

There are many insightful contributions in economics at BAUT. Also, there´s a couple of economists and accountants as members. Take Ronald Brak in this thread [and many others], for example. Doesn´t he sound like a pro? :)

Don't get me started :silenced:

I like Ronald Brak, and he knows what he is talking about. But he's a lonely voice out there. If the rules of evidence that applied to junk science theories were also applied to junk economic theories, many regulars, including at least one moderator, would be banned.

I banned myself for over a year because I got so sick of receiving junk economics lectures, delivered with an extra helping of attitude, here. It has gotten better since I left, and I've gotten better at handling it (ignore list - it's wonderful!). But I'm on brandy's side on this. If you learn economics here, you may as well learn physics at GLP.

Perhaps I should ban myself again...

[Noclevername]

If the rules of evidence that applied to junk science theories were also applied to junk economic theories, many regulars, including at least one moderator, would be banned.

The same is true if those standards were applied to many working economists.

[farmerjumperdon]

BUY, BUY, BUY!!!!!!

Because economics is a behavioral science, there aren't any formulas for perfection, or that are guaranteed to make anyone the perfect investor or predictor. Heck, the supposed professionals get burned right along with the lay people. IIRC, there weren't a lot of blue collar folk jumping out of windows during the Great One. They were all "professionals." Almost all of whom got it wrong.

The worst thing the lay person can do is try to time the market. Find a good place for your money, investing as much as you can in a variety of industries that have a solid future, and leave it alone. Don't even think about it. When you get within 7 or 8 years of retiring, transition to fixed returns.

[Ronald Brak]

The worst thing the lay person can do is try to time the market. Find a good place for your money, investing as much as you can in a variety of industries that have a solid future, and leave it alone. Don't even think about it. When you get within 7 or 8 years of retiring, transition to fixed returns.

This is very good advice. Except I would recommend not transferring to fixed returns because you might be retired for a very long time. Just don't be the sort of person who feels they have to spend it up when their investments have a good year.

[Gillianren]

IIRC, there weren't a lot of blue collar folk jumping out of windows during the Great One. They were all "professionals." Almost all of whom got it wrong.

Not jumping out of windows, because astonishingly few people did. However, yes, a lot of blue collar folk got wiped out. Buying stock on the margin was a popular pastime of the era, it seems, and all kinds of people got their savings destroyed.

[Extravoice]

Just one little thing, pete. "Sub-prime" is not a value judgment on the buyer. It refers to a loan that has a lower interest rate than the prime rate. The latter is the best rate the banks charge their most credit-worthy customers.

Okay, I'm a little late to this discussion, and while dictionary.com (http://dictionary.reference.com/browse/subprime), defines subprime as you say, I think the term is often used to describe the quality of the borrower as evidenced below:


From wikipedia (http://en.wikipedia.org/wiki/Subprime):
Subprime lending (also known as B-paper, near-prime, or second chance lending) is the practice of making loans to borrowers who do not qualify for the best market interest rates because of their deficient credit history.

From investopedia (http://www.investopedia.com/terms/s/subprimeloan.asp):
A type of loan that is offered at a rate above prime to individuals who do not qualify for prime rate loans. Quite often, subprime borrowers are often turned away from traditional lenders because of their low credit ratings or other factors that suggest that they have a reasonable chance of defaulting on the debt repayment.

[Doodler]

Ultimately, if an economic collapse comes as a result of the sub-prime crisis, Americans have no one to blame but themselves. If this is the big crack in our foundation that causes some crumbling, let the shards fall where they may. The problem isn't the existance of sub-prime loans, its the way people used them to get more than they could possibly afford. If this causes the people in question hardship, I'm all for letting them suffer it. This is their stupidity because it is ultimately them that put their names on the line when they signed the paperwork.

Sub-prime loans CAN be used responsibly when the borrower uses their bloody brain. I've got a sub-prime loan on my car. My credit is pretty trashed, so I had to take second chance financing in order to get financing, and was offered 18% on up to $30,000, based on my income. Guess what? I spent $11,000. Why? Because I could afford the damned payments. I'm coming up on the 18 month threshold, after which I'll be able to refinance my loan through GMAC at the prime rate, because I haven't missed a single payment yet. That's how its supposed to work, its supposed to be a tool to help people rebuild their credit after they've destroyed it through personal stupidity (in my case) or misfortune (victims of circumstance).

But it fails because Americans are idiots, who've been conditioned by idiots, to think they're entitled to whatever they want and someone will always be there to save them. They're genuinely stupid (unlike temporary stupid, which I recovered from), and they have what's coming to them. Maybe a generation of people on the streets in a country full of houses they can't afford might inflict some necessary changes, or it could result in the US becoming a quasi-European socialist welfare state (which would really suck).

Either way, lets roll the dice and enjoy the symphony of whining that the lemmings are providing us as they dive off the Cliffs of Insolvency.

[Ronald Brak]

The sub prime problem is not that some people can't make their payments. That is part of it, but the problem is that many people bought houses that are now worth much less than the size of their mortage, so it is very tempting for them to simply declare bankruptcy and walk away. This means ginormous losses for those holding the loans and this means all sorts of knock on effects that are bad for the economy. The big 0.75% rate cut by the Fed will help, but there is still a big problem. It is not known how many financial institutions are going to suffer huge losses and go under.

[Doodler]

The sub prime problem is not that some people can't make their payments. That is part of it, but the problem is that many people bought houses that are now worth much less than the size of their mortage, so it is very tempting for them to simply declare bankruptcy and walk away. This means ginormous losses for those holding the loans and this means all sorts of knock on effects that are bad for the economy. The big 0.75% rate cut by the Fed will help, but there is still a big problem. It is not known how many financial institutions are going to suffer huge losses and go under.

The loss of house value is irrelevent. Or it WOULD be, if people had established payments they could afford. It is not unusual for houses to initially devalue when a development is complete, I've seen that happen. However, over the long term, those houses gained value. A new townhouse in a development in my area initially sold at $180,000, then immediately tanked to $120,000 after the last unit was completed. Over time, they're now worth significantly more than their initial value, some nearing $300,000, because the market shot up.

The market value of these houses is irrelevent to the current crisis. Its a symptom, not a cause. The cause is people defaulting on their initial loans and not making payments, returning to the lender the money they handed out. The market value of a home is the perceived value given the vagaries of supply and demand. Right now, the supply side is gorged. There's very little competition for someone looking to buy a home right now. Too many people are trying to get out because they overextended their buying power and they're trapped, at least until they're evicted. Because banks don't have money coming in to fund new loans, its extremely difficult to buy a home. It becomes a vicious cycle.

The market value of a home is not something regulated or set in stone. Its a statistical average of the moving value of property on the market. There is NOTHING stopping a person from varying off the market price high or low. Equity is phantom money that people draw on based on a bank's confidence that a given home can be sold at a higher price than the outstanding balance on the loan that purchased it. Its a shell game. If the banks aren't confident, your equity is GONE. PFFT, never existed. Equity is not real money, its the result of a homeowner and a banker sitting at a table and playing a high stakes game of Bull****.

The ONLY part of the whole housing mess that relates to the current economic troubles is these idiot deadbeats defaulting. If they were still paying on their loans, their homes could lose 99.9999999999% of their value, and the market would chug on unimpeded. The problem is, they're failing to keep up the payments, and the system is reacting to the loss.

That's it, bottom line.

[Ronald Brak]

The loss of house value is irrelevent. Or it WOULD be, if people had established payments they could afford.

There are many people who can afford to make their payments, but who may walk away because their house has fallen in value. Obviously due to the costs of defaulting and the damage to credit ratings people generally don't do this for a small or moderate loss in value. But for a very large loss there are people who will do it.

[Doodler]

There are many people who can afford to make their payments, but who may walk away because their house has fallen in value. Obviously due to the costs of defaulting and the damage to credit ratings people generally don't do this for a small or moderate loss in value. But for a very large loss there are people who will do it.

For which their credit rating should be thoroughly thrashed so their return to the housing market will be adequately painful as a reminder that their signatures carry a certain amount of legal weight.

Perhaps then, they might consider the added cost in interest they'll face when they buy their next home in the calculus of whether they walk away from their current one.

[peteshimmon]

After reading recent news stories on these
subjects, I think I have made a major
economic discovery! It is;

FINANCE plus CREATIVITY equals BIG TROUBLE.

Anyone think I might get the Nobel prize in
economics? Or some qudos? At least some folks
might act on it.

It should now be a legal requirement that any
employed person in the Banking, Finance or
Broking industry should be taken to a secure
area if found to be creative. Their feet should
not touch the ground when being moved. Once
securely placed they can paint pretty pictures
for all the promotional materials.

In addition, I have always suspected the World
may be more stable if stock trading only
happens every Monday with the personnel doing
something useful the rest of the time!

But all the arguments for the World as it is
are no doubt secure.

[Delvo]

"Walking away" due to the value getting too low? I never heard of that one; that's buying high and selling low!

The mystery to me is why the reporters always kept calling it a good thing when house prices were going up fast and now all call it a bad thing that they're not going up so fast or going down. Any price condition is good for some people and not for others. High house prices are good for stupid people who get stupid loans and bad for people like me to won't buy what they can't afford and won't get stupid loans to do it. Lower house prices might be bad for those people who already got stupid loans, but they're good for people like me who might like home ownership but have sat out of the market aghast at the ludicrous impossible prices. This "crisis", if it continues, apparently could be one of the best things that could have happened for me financially, and a "bailout" will only work against me by continuing to favor the idiots instead. So what gets reported as a universal condition of "good" or "bad" is only really that way to one type of party, the one whose perspective the reporters try to impose on all of us. How did the entire news reporting industry decide on whose side to take?

[Donnie B.]

Okay, I'm a little late to this discussion, and while dictionary.com (http://dictionary.reference.com/browse/subprime), defines subprime as you say, I think the term is often used to describe the quality of the borrower as evidenced below:
<snip>
Yes, I was going to make a post about this myself. It does seem that the term is sometimes (perhaps more often than not) used to describe people with less than pristine credit.

In which case, I have to agree with the poster who complained about such usage being pejorative. Of course, it's a bit less so than some alternative terms, such as "deadbeat" or "scum of the earth"... ;)

However, the repercussions of this situation are severe enough to make concerns about political correctness seem somewhat trivial. The crisis is hurting a lot of people -- not just the lenders and their shareholders and the people who are having their homes repossessed, but other property owners whose real estate has lost value. Not to mention other investors who held securities that were invested in the bad paper (often without their knowledge). And, of course, if it really leads to a recession, the pain gets spread far and wide as people lose jobs, tax revenues fall, and on and on.

[Extravoice]

And, of course, if it really leads to a recession, the pain gets spread far and wide as people lose jobs, tax revenues fall, and on and on.

I have mixed feelings about how the situation should be handled. At heart, I agree with Doodler. If we exclude any situations where outright fraud was involved, sub-prime lending involved a risk-benefit analysis by the lenders, investors, and borrowers. Each participant decided it was worth the risk. People seem to have forgotten that when you take a risk, you have to be willing to accept failure as a possible outcome. You win some, and you lose some. The trick is to balance the risk of failure and reward of success. Taking out an adjustable loan for the maximum you can afford when rates are are at historic lows, sounds a bit too risky for me, but that is a personal choice. So, my gut reaction is to let the borrowers, lenders, and investors lose money. They can considerer it a hard lesson.

That said, I don't want to "bite my nose to spite my face." If the result of letting the chips fall where they may is a serious recession and I end up without a job, feeling smug about other people's bad decisions won't help my situation. For better or worse, we are all interconnected, and the financial decisions of other people (especially when they act en masse) can directly affect each of us.

[Doodler]

but other property owners whose real estate has lost value.

As I said before, equity is phantom money. People who count on it are deservedly suffering.

[peteshimmon]

Thing about getting into debt, I have noticed,
is that it is something like losing a gamble.
Years ago such things as Hire Purchase
agreements were carefully considerd
undertakings with both parties knowing
fully all options if the payments were not
met. Like repossessing the goods. Nowadays
repossessing odd electrical items is a
nightmare for the seller, they dont want
that cr.. stuff back, it is worthless. But
properties are a different matter. Loans
secured against houses are the thing.
If people buy a house for a family, it
should be irrelevant if the value drops.
The problem is if they want or have to
move then selling up is nessesary. This
is what causes values to drop, distress
sales. I sometimes wonder if someone in
this position who keeps dropping the price
gets visited by the neighbours telling him
or her to cut it out, their home values are
suffering. The early ninties housing
implosion in the UK saw all this. People did
walk away from their morgages and as Building
Societies had imdemnity relief insurance for
just this possibility, the insurance houses
covered the loss. And they went after the
defaulters. But it was strongly suspected
that one society took money for imdemnity
but had no policies. Those defaulters may
have been "lucky". But then they paid out
much of their income for no eventual return,
just a temporary roof over their heads for a
few years. Very expensive rent. And the
societies never really lost, the houses
were auctioned with much of the value
recovered. Just the poor dumb buyers lost
out, upstanding people when buying, deadbeats
when they lost!

Oh yes, debt. People get into debt these
days, like they are convinced they are going
to win the lottery shortly. But the irony is
they keep commerce going while getting into
dept. That makes them patriotic I suppose.

[NosePicker]

I personally see a lot of creativity in budgeting outside of the gloom of the housing market. Americans can get very crafty in stretching the dollar when required.

Over 50% of Americans have turned to growing edibles because of high prices and various nasties in the food chain. It can be anything from a full garden to a simple pot of tomatoes on the porch.

There are even yard farms popping up amidst community gardens. That's right, people are turning their front and back yards into profitable mini-farms. Eco-friendly veggies that don't travel far from farm to plate with today's gas prices are good business.

Scooters and mopeds are selling extremely well while SUV's linger on the car lots. The transportation of the entire family will probably require Joe Average to pull his SUV out of the driveway, but you can bet Joe has a scooter or a moped for going to work or running the one man errand or will be getting one shortly as gas prices rise.

One thing that has me worried is the commodification of life basics like food and water. Commodities brokers hoard them, driving up the price, causing the very poor to starve and the pensioners to choose between medication or food or shelter.