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EJ
12-19-08, 01:49 PM
http://www.itulip.com/images/globe-balloon-pop.gifPop goes the Globaloney Economy

The global economy is devolving with astonishing speed. Today the Institute of International Finance (IIF) issued the following alarm: worst global recession since the 1950s.
Global economy to contract in 'severe' 2009 recession: banking group (http://www.google.com/hostednews/afp/article/ALeqM5hF3NoMkF-dvfW2IkTWi23Of5BgyQ)

WASHINGTON (AFP) — The global economy likely will contract next year for the first time in decades in a "severe" recession as the credit crunch bites, an international banking group said.

The Institute of International Finance (IIF), the Washington-based association representing more than 375 of the world's major banks and financial institutions, projected the world economy would shrink 0.4 percent in 2009, after 2.0 percent growth this year.

Charles Dallara, the managing director of the IIF, called it "the most severe, globally synchronized recession in modern economic history."

The global crisis requires a global coordinated response, he said at a news conference.

Dallara said the economy was mired in a negative feedback loop of weakening economic activity and intense financial market strains.
What the writer means is a positive feedback loop with negative results, not a negative feedback loop. As WikiPedia (http://en.wikipedia.org/wiki/Positive_feedback) says:
Positive feedback, sometimes referred to as "cumulative causation", is a feedback loop system in which the system responds to perturbation in the same direction as the perturbation. In contrast, a system that responds to the perturbation in the opposite direction is called a negative feedback system.
Nit picking aside, the writer is correct: the US has within its borders suffers a number of positive feedback loops that are bringing down the US economy that kicked off international feedback loops:

Consumer/Employment Loop
1. Falling consumer demand
2. Falling business revenues
3. Layoffs
4. Declining consumer purchasing power power from income
5. Go to 1.

Financial Crisis/Consumer Credit Loop
1. Financial Crisis
2. Credit Crunch
3. Falling consumer access to credit
4. Declining consumer purchasing power power from credit
5. Go to 1.
In the global economy, international positive feedback loops of trade and finance, with negative results, are in force.

The World Trade Organization's latest repost says:
Trade slowed down in 2007 due to weakening demand from developed economies. The slowdown of trade growth from 8.5 per cent in 2006 is due to a deceleration of import demand, mainly in the United States but also in Europe and Japan.


http://www.itulip.com/images/worldtrade2000-2007.gif
WTO Global Trade Data

"Mistakes were made"

The report goes on to state that the global contraction will be the first since the 1950s and a coordinated response is required to halt it:
"The weakening economy will increase credit losses, continuing to put pressure on bank capital. This underscores the point that capital injection alone will not be sufficient to strengthen the banking system until the economy and financial markets stabilize," Tran said.

Dallara recommended measures including the purchase of troubled assets and relief of credit bottlenecks, and said an increasing number of financial institutions were making progress in reforming operations.
Purchase of troubled assets have not resolved US, UK, or European credit market dysfunction, nor have liquidity injections, nor has debt restructuring. What is needed in the US is debt forgiveness (http://itulip.com/forums/showthread.php?p=67329#poststop) but instead the FIRE Economy leadership is pushing measures through to lock US homeowners into paying down mortgage debt (http://itulip.com/forums/showthread.php?p=67190#poststop) that was taken on when housing prices were inflated. This is a repeat of the Japanese policy error. US household cash flow will be dedicated to paying down existing debts, virtually guaranteeing that US consumers will remain moribund for an extended period; without domestic reforms the Consumer/Employment Loop and Financial Crisis/Consumer Credit Loop are here for the long haul, contributing the global feedback loops.

Our forecast for global trade in 2008 and 2009 is as follows.


http://www.itulip.com/images/worldtrade2000-2009.gif
iTulip 2008 and 2009 global growth forecast


Shall we look for Thomas Friedman's new book titled "The World is Flattened" in 2009?

iTulip Select (http://www.itulip.com/forums/showthread.php?t=1032): The Investment Thesis for the Next Cycle™
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Jim Nickerson
12-19-08, 02:16 PM
Nice article, Eric, and nothing wrong with nit-picking, clarity and brevity.

Techical site question, when I clink the hyperlink above the last graph, I get a new window asking me to sign in and I am already signed in. Is that as it should be?

icm63
12-19-08, 02:18 PM
..."What is needed in the US is debt forgiveness"...

So who then carries the cost?? Taxpayer again...:confused:

In the words of Jim Rogers..."banks have been going bust for hundreds of years"... let them fall. GM, AIG, GS etc

Let the competent people take over the assets.

Just
1) Insure the depositors
2) Individual bankruptcy recovery allowed to be quicker
3) Create a govt program to pull down the houses, remove supply.

The cost to insure depositors and pull down houses will be less than the good money after bad thats going on now !

jiimbergin
12-19-08, 02:21 PM
Purchase of troubled assets have not resolved US, UK, or European credit market dysfunction, nor have liquidity injections, nor has debt restructuring. What is needed in the US is debt forgiveness but instead the FIRE Economy leadership is pushing measures through to lock US homeowners into paying down mortgage debt (http://itulip.com/forums/showthread.php?p=67190#poststop) that was taken on when housing prices were inflated. This is a repeat of the Japanese policy error.

EJ,
Then if this is a repeat of the Japanese error, does that mean we will end up with a "lost decade", or do you still see "Poom" taking place?

Thanks for all your great posts!
Jim

FRED
12-19-08, 02:35 PM
..."What is needed in the US is debt forgiveness"...

So who then carries the cost?? Taxpayer again...:confused:

In the words of Jim Rogers..."banks have been going bust for hundreds of years"... let them fall. GM, AIG, GS etc

Let the competent people take over the assets.

Just
1) Insure the depositors
2) Individual bankruptcy recovery allowed to be quicker
3) Create a govt program to pull down the houses, remove supply.

The cost to insure depositors and pull down houses will be less than the good money after bad thats going on now !

Those are steps 2, 3, and 4.

Step 1: Elect politicians who do not represent FIRE Economy interests.

Maybe in 2010.

Jim Nickerson
12-19-08, 02:40 PM
Those are steps 2, 3, and 4.

Step 1: Elect politicians who do not represent FIRE Economy interests.

Maybe in 2010.

FRED, contact your psychiatrist immediately and get him to allow you to lessen your dose of Prozac, or was "2010" a typo and supposed to have been "2100?"

strittmatter
12-19-08, 02:48 PM
Purchase of troubled assets have not resolved US, UK, or European credit market dysfunction, nor have liquidity injections, nor has debt restructuring. What is needed in the US is debt forgiveness but instead the FIRE Economy leadership is pushing measures through to lock US homeowners into paying down mortgage debt (http://itulip.com/forums/showthread.php?p=67190#poststop) that was taken on when housing prices were inflated. This is a repeat of the Japanese policy error.

EJ,
Then if this is a repeat of the Japanese error, does that mean we will end up with a "lost decade", or do you still see "Poom" taking place?

Thanks for all your great posts!
Jim


Well it seems to be "working", at least here in the D/FW area. A friend has an employee who's wife managed to dodge all of the axes while remaining employed at Countrywide all this time. Lately she has been putting in double time and they have called a lot of people back. Refi's are booming.

don
12-19-08, 03:21 PM
Those are steps 2, 3, and 4.

Step 1: Elect politicians who do not represent FIRE Economy interests.

Maybe in 2010.

Fred, you have a lot of faith in elections. The struggle between the production/consumption 'old money' and the FIRE/military 'new money' wasn't settled in the voting booth.

Jeff
12-19-08, 03:54 PM
It remains difficult to follow iTulip, or talk to Eric and then go talk ith friends and neighbors. There are none so blind as those who will not see.

I feel like that kid in the movies. "I see broke people. They don't even know they're broke."

vinoveri
12-19-08, 04:01 PM
Purchase of troubled assets have not resolved US, UK, or European credit market dysfunction, nor have liquidity injections, nor has debt restructuring. What is needed in the US is debt forgiveness but instead the FIRE Economy leadership is pushing measures through to lock US homeowners into paying down mortgage debt (http://itulip.com/forums/showthread.php?p=67190#poststop) that was taken on when housing prices were inflated. This is a repeat of the Japanese policy error. US household cash flow will be dedicated to paying down existing debts, virtually guaranteeing that US consumers will remain moribund for an extended period; without domestic reforms the Consumer/Employment Loop and Financial Crisis/Consumer Credit Loop are here for the long haul, contributing the global feedback loops.


Well EJ, you've been right so far, but this broad statement makes me nervous enough to ask what do you mean or have in mind?
I realize the following will come off rather curmudgeonly but ...

If the banks loans were irresponsible, e.g., liar loans, no money down, questionable appraisal, then the banks should take the hit - not the public, e.g., if requiring them to forgive principle b/c of their own responsibility makes them insolvent or devastates their shareholders so be it (NOTE: this will never happen as we've already seen - can't have banks failing left and right).

If home buyers were irresponsible by getting caught up into bubble greed mania, then they, along with the bank should take the hit, not the public (Note: not going to happen) Joe6P says "i'm under water and won't pay", so bank says OK we'll right the principal to keep you in the house (b/c we don't really have any choice as default and foreclosure is worse for the bank (again homeowner gets a break and banks take a hit)

Or how about this, when that recent homebuyer bought an over inflated house, the seller undoubtedly received a windfall. Let's mark all those underwater homes to market, and get the difference back from those who profitted on the sale (seller, brokers, banks, appraisers etc). As absurd as this may sound, it is no less equitable, and I would submit more equitable than distributing these losses of fictitious wealth (which remember is cold hard cash in the pockets of those who participated on the way up) on the "public". And talk about future moral hazard.

I would very much appreciate understanding how you see a debt forgiveness working.

Jim Nickerson
12-19-08, 04:06 PM
Well EJ, you've been right so far, but this broad statement makes me nervous enough to ask what do you mean or have in mind?
I realize the following will come off rather curmudgeonly but ...

If the banks loans were irresponsible, e.g., liar loans, no money down, questionable appraisal, then the banks should take the hit - not the public, e.g., if requiring them to forgive principle b/c of their own responsibility makes them insolvent or devastates their shareholders so be it (NOTE: this will never happen as we've already seen - can't have banks failing left and right).

If home buyers were irresponsible by getting caught up into bubble greed mania, then they, along with the bank should take the hit, not the public (Note: not going to happen) Joe6P says "i'm under water and won't pay", so bank says OK we'll right the principal to keep you in the house (b/c we don't really have any choice as default and foreclosure is worse for the bank (again homeowner gets a break and banks take a hit)

Or how about this, when that recent homebuyer bought an over inflated house, the seller undoubtedly received a windfall. Let's mark all those underwater homes to market, and get the difference back from those who profitted on the sale (seller, brokers, banks, appraisers etc). As absurd as this may sound, it is no less equitable, and I would submit more equitable than distributing these losses on the "public".

I would very much appreciate understanding how you see a debt forgiveness working.

EJ wrote that what is needed is debt-forgiveness. I don't take his recommendation of what's needed as a forecast as to what will ultimately happen.

D-Mack
12-19-08, 04:09 PM
..."What is needed in the US is debt forgiveness"...

So who then carries the cost?? Taxpayer again...:confused:

In the words of Jim Rogers..."banks have been going bust for hundreds of years"... let them fall. GM, AIG, GS etc

Let the competent people take over the assets.

Just
1) Insure the depositors
2) Individual bankruptcy recovery allowed to be quicker
3) Create a govt program to pull down the houses, remove supply.

The cost to insure depositors and pull down houses will be less than the good money after bad thats going on now !


Those are steps 2, 3, and 4.

Step 1: Elect politicians who do not represent FIRE Economy interests.

Maybe in 2010.

I have heard that. it probably remains wishful thinking


In the period from August 1929 until he left office President Herbert Hoover oversaw a 43-month long contraction of the US economy of 33%. Barack Obama looks set to break that record, to preside over what historians could likely call the Very Great Depression of 2008-2014, unless he finds a new cast of financial advisers before Inauguration Day, January 20. Required are not recycled New York Fed presidents, Paul Volckers or Larry Summers types. Needed is a radically new strategy to put virtually the entire United States economy into some form of an emergency 'Chapter 11' bankruptcy reorganization where banks take write-offs of up to 90% on their toxic assets, that, in order to save the real economy for the American population and the rest of the world. Paper money can be shredded easily. Not human lives. In the process it might be time for Congress to consider retaking the Federal Reserve into the Federal Government as the Constitution originally specified, and make the entire process easier for all. If this sounds extreme, perhaps revisit this article in six months again.

http://www.globalresearch.ca/index.php?context=va&aid=11401

dbarberic
12-19-08, 04:22 PM
Every commentary the EJ writes always seems to get more and more depressing.

Ugh.

art
12-19-08, 04:24 PM
It remains difficult to follow iTulip, or talk to Eric and then go talk ith friends and neighbors. There are none so blind as those who will not see.

I was just ridiculed by two people at a party last night because I'm renting. I kept asking "have you read a newspaper recently?" Finally, I got them to shut up by asking "If your real estate is such a great investment, why aren't you buying more houses?" :-)

BK
12-19-08, 04:43 PM
For the last three year my wife and I have been the freaks at the Barbecue who are renting.

How can you be married - have children and not be tied to a Mortgage. The common belief is that your child will have a sad and unfulfilled childhood without the family being tied to a Mortgage/House. When financial decisions are made with the Heart/emotion - disaster is likely to be the result.

Luckily, Renting means we spend every weekend together as a family - there is no lawn to mow, no hedges to trim, no contractors to call, no painting, and no snow shoveling.

I have wasted so much time in the last 4 years Begging friends and family to Not to Buy a Home or to sell and Rent!

Needless to say Not One Friend or Family member would listen to my crazy talk that Real Estate was bad investment . One friends Mom called me Insane!

BobH
12-19-08, 04:57 PM
Eric, with all do respect debt-forgiveness won't work either. The vast majority of homeowners are just like the banks. They are way over leveraged. So you can give them money (reduce their mortgage) but the net effect is still the same. They can't go to their housing ATM and spend and they have no other credit source from which to gain additional monies. Net effect - Japan style work-out.

Sorry not buying it!

BadJuju
12-19-08, 04:58 PM
My parents purchased their house for $30,000 back in 1990. Suffice to say, they never had a mortgage. :)

FRED
12-19-08, 05:12 PM
Well EJ, you've been right so far, but this broad statement makes me nervous enough to ask what do you mean or have in mind?
I realize the following will come off rather curmudgeonly but ...

If the banks loans were irresponsible, e.g., liar loans, no money down, questionable appraisal, then the banks should take the hit - not the public, e.g., if requiring them to forgive principle b/c of their own responsibility makes them insolvent or devastates their shareholders so be it (NOTE: this will never happen as we've already seen - can't have banks failing left and right).

If home buyers were irresponsible by getting caught up into bubble greed mania, then they, along with the bank should take the hit, not the public (Note: not going to happen) Joe6P says "i'm under water and won't pay", so bank says OK we'll right the principal to keep you in the house (b/c we don't really have any choice as default and foreclosure is worse for the bank (again homeowner gets a break and banks take a hit)

Or how about this, when that recent homebuyer bought an over inflated house, the seller undoubtedly received a windfall. Let's mark all those underwater homes to market, and get the difference back from those who profitted on the sale (seller, brokers, banks, appraisers etc). As absurd as this may sound, it is no less equitable, and I would submit more equitable than distributing these losses of fictitious wealth (which remember is cold hard cash in the pockets of those who participated on the way up) on the "public". And talk about future moral hazard.

I would very much appreciate understanding how you see a debt forgiveness working.

Don't forget: New Road to Serfdom (http://www.itulip.com/forums/showthread.php?p=7343#post7343)

Now we enter the negative equity phase:
The problem for recent homebuyers is not just that prices are falling; it’s that prices are falling even as the buyers’ total mortgage remains the same or even increases. Eventually the price of the house will fall below what homeowners owe, a state that economists call negative equity. Homeowners with negative equity are trapped. They can’t sell—the declining market price won’t cover what they owe the bank—but they still have to make those (often growing) monthly payments. Their only “choice” is to cut back spending in other areas or lose the house—and everything they paid for it—in foreclosure.

http://www.itulip.com/images/surfdom20.jpg


As a debtor who bought during the government engineered for FIRE Economy interests housing bubble we propose that mortgage holders owe only that portion of home price that was not produced by the government sponsored asset price inflation.

For example, if comparable houses in your area sold for $100K before the bubble and $300K at the peak and $150K now, and you bought at $250K with $0 down, you still owe $100K but the bank has to eat the $150K asset price inflation difference.

What's wrong with that?

krakknisse
12-19-08, 05:17 PM
I feel like that kid in the movies. "I see broke people. They don't even know they're broke."

That, Jeff, is pure genius. You made my Christmas with that one. The 2009 motto:
http://www.itusozluk.com/img.php/a72c820590e420ebb6612be1ead5a5ec13918/i+see+dead+people
"I see broke people".

Wild Style
12-19-08, 05:19 PM
Well it seems to be "working", at least here in the D/FW area. A friend has an employee who's wife managed to dodge all of the axes while remaining employed at Countrywide all this time. Lately she has been putting in double time and they have called a lot of people back. Refi's are booming.until those people end up defaulting because of job loss or inflation so hindering that they wont be able to make all their bills?

FRED
12-19-08, 05:31 PM
Eric, with all do respect debt-forgiveness won't work either. The vast majority of homeowners are just like the banks. They are way over leveraged. So you can give them money (reduce their mortgage) but the net effect is still the same. They can't go to their housing ATM and spend and they have no other credit source from which to gain additional monies. Net effect - Japan style work-out.

Sorry not buying it!

What we mean by debt forgiveness. (http://itulip.com/forums/showthread.php?p=67329#poststop)

bart
12-19-08, 05:36 PM
What we mean by debt forgiveness. (http://itulip.com/forums/showthread.php?p=67329#poststop)

Lots cheaper than TARP, etc. and lays the costs at the feet of the FIRE freaks too.

goadam1
12-19-08, 05:49 PM
I think Jubillee would be a nice way out of this mess. A re-boot. Too bad for dumbasses like me didn't borrow more and spend it on fun stuff instead of paying off the mortgage and saving.

we_are_toast
12-19-08, 06:25 PM
EJ: Fed cuts dollar, Fire sales

In 1954 US GDP was just over $3 trillion versus $13 trillion in 2008 -- or is it $12 trillion, or $11 trillion? At the rate the US economy is collapsing, guessing at this year’s GDP is like trying to toss watermelon into getaway car chased by cops on truTV. Until the FIRE Economy finishes burning out, we won’t know how much of the US GDP was credit industry bezzle extracted from the Production/Consumption Economy, that is, how much economic growth measured as GDP came from actual production versus the portion “earned,” if that is the word, by financial firms by swapping inflated assets back and forth.

The latest data from ECRI indicate that the US economy on track to contract to near its pre-FIRE Economy level. Already automobile unit sales are back to 1983 volumes. A full retrace of the FIRE Economy puts US GDP around $6 trillion, less than half 2007 GDP. I don’t expect that to happen; a solid portion of the technology-driven New Economy is real, so a decline to 1995 levels, around $9 trillion, is more likely, near the scale of decline experienced during The Great Depression. That may sound dire, but then when I told readers three years ago that the housing bubble was going to collapse and send the financial system and economy into the worst crisis in 70 years, that sounded dire, too.A U.S. GDP drop from 12T - 9T is roughly 25%,
The chart L.1 above is suggesting world GDP of -2% for 09.
Are you suggesting that other national GDP's will not fall like the U.S. or that after 09 things REALLY fall off a cliff?


FRED:
Those are steps 2, 3, and 4.

Step 1: Elect politicians who do not represent FIRE Economy interests.

Maybe in 2010.A bit cynical, especially since the 2008 politicians haven't even arrived in DC yet, and when just a few days ago you commented on how many politicians read iTulip and how respectful we should be. ;)

Also the "what we mean by debt forgiveness " link seems to be in a loop of it's own and links back to this thread.

FlyingBoat
12-19-08, 07:10 PM
Oh, that's great. So those of us who didn't buy a bigger house because we knew they were overpriced should pay for your ignorance? So you have a larger, nicer house than mine but I stick in my house and pay for yours. Frking rediculous. Rot in hell.

No, let the banks and those who invested in them eat these mortgages and go bankrupt. You can get out of your house and buy it back for a fraction. I don't pay for your mortgage. It is the bank's stockholders who are left holding the bag. That is the way it should be.

Chris Coles
12-19-08, 07:16 PM
Don't forget: New Road to Serfdom (http://www.itulip.com/forums/showthread.php?p=7343#post7343)

Now we enter the negative equity phase:

The problem for recent homebuyers is not just that prices are falling; it’s that prices are falling even as the buyers’ total mortgage remains the same or even increases. Eventually the price of the house will fall below what homeowners owe, a state that economists call negative equity. Homeowners with negative equity are trapped. They can’t sell—the declining market price won’t cover what they owe the bank—but they still have to make those (often growing) monthly payments. Their only “choice” is to cut back spending in other areas or lose the house—and everything they paid for it—in foreclosure.


http://www.itulip.com/images/surfdom20.jpg


As a debtor who bought during the government engineered for FIRE Economy interests housing bubble we propose that mortgage holders owe only that portion of home price that was not produced by the government sponsored asset price inflation.

For example, if comparable houses in your area sold for $100K before the bubble and $300K at the peak and $150K now, and you bought at $250K with $0 down, you still owe $100K but the bank has to eat the $150K asset price inflation difference.

What's wrong with that?

Fred, you left out one small item. The short term money the banks borrowed to give to the original mortgage holder so they could pay the $250K for the house. Ergo, the bank still owes the $250K.

If the banks had been working within old fashioned capital strictures, then they would have borrowed the $250K long term, say over 30 years at say 2% and lent it at, say, 4% and so, while they would indeed be in difficulties, they could also wait for the 30 years to repay the money and take a hit on the overall profits. But no, instead, they have only borrowed the money for, say, three years and so, next year they have to pay that $250K back to their original source.... That is the underlying problem, they borrowed short to lend long.

The next problem is related to that short/long difference and stems from their need to raise the game to attract more funds, so they lent the original $250K at say 3% for 3 years with the need for a refi after that at a higher rate, say 5% to make up for the losses during the first 3 years... And it is that aspect that has the capacity to destroy so many previously solid deals as when the refi comes along, there is a need for a new deal between the bank and the householder. And that new deal in turn means the whole mortgage has to be completely renegotiated and that in turn requires new valuations. Insufficient value creates an automatic refusal to refi as the underlying value is now negative...

Simply leaving the original purchaser to pay back the $100K will not work as the mortgage has already defaulted and is as they say Moot. The bank meanwhile has their own creditor that has in mind exacting their own revenge and again, their acceptance of the new deal you propose is also, as they say, .... Moot.

No matter which way you look at the banks dilemma, they cannot win. I do believe that is why Japan had no other route away from their lost decade and that the same will apply to the USA except... if the banks go belly up and then the whole debt becomes a different matter altogether through good old fashioned bankruptcy.

audrey_girl
12-19-08, 09:41 PM
That, Jeff, is pure genius. You made my Christmas with that one. The 2009 motto:
http://www.itusozluk.com/img.php/a72c820590e420ebb6612be1ead5a5ec13918/i+see+dead+people
"I see broke people".


I used to work with a rather brilliant engineer who was infamous for his short temper and sarcasm. After this movie came out he had a plaque placed right behind his desk over his head,,,, it said "I see dumb people"
:D

BobH
12-19-08, 10:58 PM
Ed, debt-forgiveness still doesn't work, as in your example, if the bank or the government forgives the mortgage balance rise from a time period before.

The debt load of this type of forgiveness is put on the taxpayer. If the banks forgive this debt they go bust without a bailout from the government. The government has to give them “TARP IV” monies to cover it! Bottom line, it’s a Japan time line work-out!

Secondarily, if you reset the mortgage balance the asset balance will adjust with it. Just because a bank reset the mortgage balance from $400k to $200k doesn’t mean the house is still worth $400k. Additionally, the banks can’t and won’t do a line-of-credit, unemployment is rising, wages are stagnant, credit is shrinking, etc. Nothing else in today’s picture changes!

BTW, how do you figure adjusting all the bonds?

With another 15% decrease in national home prices we will have ½ of all mortgages under water or ~26M mortgages. Mechanically, just how long do you think it would take to reset the mortgages?<o></o>

So it’s mechanically near impossible, doesn’t reset all debt and credit and now just moves the debt from some homeowners to all taxpayers. Debt-forgiveness just removes the debt from one place and puts it somewhere else. It is clearly nothing more than a socialistic move with zero benefit.<o></o>

Sorry!

whitetower
12-20-08, 02:20 AM
In the process it might be time for Congress to consider retaking the Federal Reserve into the Federal Government as the Constitution originally specified...

I happen teach Constitutional Law and this statement jumped out at me.

There is nothing in the US Constitution that either states expressly or implies that the federal government can create a "banking sytem," "banks," or a "central bank" -- the term "bank" isn't even in the Constitution.

Now, Article I, section 8 specifies that the US Congress shall have the power to print currency (as opposed to the states doing so, a phenomena that existed from 1776-1788) but nothing is stated regarding the regulation of the flow of the currency, i.e. a central bank that would set national interest rates, etc.

The formation of a central bank did not occur until the administration of James Madison in 1819. This was challenged by the states who, while agreeing that the federal government could print the currency, argued that the states had the right to regulate it. Worried that a currency regulated by a central bank would result in spirals of inflation and deflation (!) the states challenged Madison's desire to form a central bank in the first place.

The Supreme Court ultimately decided in McCulloch v. Maryland that the Necessary and Proper Clause of Article I permitted the federal government to form a central bank and, indeed, to undertake any other power that voters deemed convenient so long as it did not contradict the Constitution. So, while the federal government cannot create a Department of Book Burning because the existence of such would contradict the 1st amendment, where the Constitution is silent, anything goes.

The states tried to argue that the 10th amendment meant that where the Constitution was silent, a governmental power could only be exercised by the states -- and since there is nothing about a central bank in the Constitution, only states could form regional or local "central banks."

This argument was rejected by the Court saying that the National Supremacy Clause in Article VI denied the states any power that would conflict with an otherwise Constitutional exercise of federal power.

So, the moral of the story: flash forward nearly 200 years and we have the feds bailing out banks, auto manufacturers, insurers, and my ugly cousin Gertrude for all I know.

For better or worse, the feds have the Constitutional authority to do all of this -- it is up to us as ctizens to vote out the politicians who want to actually exercise that authority.

Andreuccio
12-20-08, 03:46 AM
I think Jubillee would be a nice way out of this mess. A re-boot. Too bad for dumbasses like me didn't borrow more and spend it on fun stuff instead of paying off the mortgage and saving.

Or borrow and put it into something of value, like gold. ;)

Chris Coles
12-20-08, 03:56 AM
I happen teach Constitutional Law and this statement jumped out at me.

There is nothing in the US Constitution that either states expressly or implies that the federal government can create a "banking sytem," "banks," or a "central bank" -- the term "bank" isn't even in the Constitution.

Now, Article I, section 8 specifies that the US Congress shall have the power to print currency (as opposed to the states doing so, a phenomena that existed from 1776-1788) but nothing is stated regarding the regulation of the flow of the currency, i.e. a central bank that would set national interest rates, etc.

The formation of a central bank did not occur until the administration of James Madison in 1819. This was challenged by the states who, while agreeing that the federal government could print the currency, argued that the states had the right to regulate it. Worried that a currency regulated by a central bank would result in spirals of inflation and deflation (!) the states challenged Madison's desire to form a central bank in the first place.

The Supreme Court ultimately decided in McCulloch v. Maryland that the Necessary and Proper Clause of Article I permitted the federal government to form a central bank and, indeed, to undertake any other power that voters deemed convenient so long as it did not contradict the Constitution. So, while the federal government cannot create a Department of Book Burning because the existence of such would contradict the 1st amendment, where the Constitution is silent, anything goes.

The states tried to argue that the 10th amendment meant that where the Constitution was silent, a governmental power could only be exercised by the states -- and since there is nothing about a central bank in the Constitution, only states could form regional or local "central banks."

This argument was rejected by the Court saying that the National Supremacy Clause in Article VI denied the states any power that would conflict with an otherwise Constitutional exercise of federal power.

So, the moral of the story: flash forward nearly 200 years and we have the feds bailing out banks, auto manufacturers, insurers, and my ugly cousin Gertrude for all I know.

For better or worse, the feds have the Constitutional authority to do all of this -- it is up to us as ctizens to vote out the politicians who want to actually exercise that authority.

Several years ago, I presented to The Supreme Court a petition to ask the question: "Is the government Ultra Vires if it does not act to the highest ethical standards". At the time, and since, I have been unfunded and as a British citizen, unable to fund taking the matter forward from that first attempt. But I am now getting close to being able to return to this and I ask, would such a petition in a large part solve the question of a Central Bank by making it impossible to act in any way unethically?

I must add that copies of my petition were presented to the Department of Commerce and the Department of Justice and I am intrigued by the continuous references to ethics by the Change team surrounding President Elect, Mr. Barack Obama. My petition should make for some very interesting debates when it again hits the desk of the Supreme Court.

Smitty
12-20-08, 07:08 AM
As a debtor who bought during the government engineered for FIRE Economy interests housing bubble we propose that mortgage holders owe only that portion of home price that was not produced by the government sponsored asset price inflation.

For example, if comparable houses in your area sold for $100K before the bubble and $300K at the peak and $150K now, and you bought at $250K with $0 down, you still owe $100K but the bank has to eat the $150K asset price inflation difference.

What's wrong with that?


Oh, that's great. So those of us who didn't buy a bigger house because we knew they were overpriced should pay for your ignorance? So you have a larger, nicer house than mine but I stick in my house and pay for yours. Frking rediculous. Rot in hell.

No, let the banks and those who invested in them eat these mortgages and go bankrupt. You can get out of your house and buy it back for a fraction. I don't pay for your mortgage. It is the bank's stockholders who are left holding the bag. That is the way it should be.

----------------------------------------------

Totally agree with FlyingBoat. To tag only the banks is scapegoating. The greed that led people to buy houses with "liar's loans" should not be rewarded. The banks must suffer as must the greedy liars.

Sapiens
12-20-08, 10:11 AM
Now, Article I, section 8 specifies that the US Congress shall have the power to print currency (as opposed to the states doing so, a phenomena that existed from 1776-1788) but nothing is stated regarding the regulation of the flow of the currency, i.e. a central bank that would set national interest rates, etc.



Not quite. To coin and to print are substantially different actions, and if you have been reading iTulip.com for a while you will know how critical the distinction is.



To coin money, regulate the value thereof, and of foreign coin, and fix the standard of weights and measures (http://www.law.cornell.edu/constitution/constitution.articlei.html#section8);

FRED
12-20-08, 10:11 AM
----------------------------------------------

Totally agree with FlyingBoat. To tag only the banks is scapegoating. The greed that led people to buy houses with "liar's loans" should not be rewarded. The banks must suffer as must the greedy liars.

Here's the "life isn't fair" answer.

Politicians elected by FIRE Economy are busy re-creating the Japan 1990 to who knows when scenario for the US. In Japan, mortgages are full recourse. So are the new loans being offered by the now nationalized Fanny and Freddie (http://mrmortgage.ml-implode.com/2008/12/17/fanniefreddie-come-get-your-loan-mod-pay-for-life/) that are designed to replace existing mortgage loans are for all intents and purposes full recourse.


http://www.itulip.com/images/surfdom21.jpg


If this happens in the US, cash flow from US households will be drawn off for 20 years until all of the debt taken on during the housing bubble is paid off. Here's what will happen to your home price.


http://www.itulip.com/images/surfdom17.jpg

Never mind what it will do to the US economy and your opportunities to invest because the only source of savings will be export earnings, and in a shrinking economy, as this post forecasts, where is the export demand going to come from?

labasta
12-20-08, 10:47 AM
I see your point Fred, but...

These full recourse loans have only recently started, haven't they?

If these loans had been made from 1995 onwards, I'd say your case for a Japan re-run would be strong.

How many of these new loans are people taking out now? Not many. At least not as many as before. If another housing bubble arises in say 20 years then we could go Japanese. But at the moment people are just sending jingle mail.
If this isn't like Japan, what does this mean?


Also, what about the exchange rate fiasco, boosting import prices for easy inflation. I think the UK and US would be looking at very strong inflation coupled with a shrinking economy. As you have already mentioned, a disorderly poom might occur as private investors flee, possibly resulting in hyperinflation.

That's not like Japan at all.

FRED
12-20-08, 11:17 AM
I see your point Fred, but...

These full recourse loans have only recently started, haven't they?

If these loans had been made from 1995 onwards, I'd say your case for a Japan re-run would be strong.

As housing prices decline and unemployment rise, the order of 50% of all mortgages will fall into this category.


How many of these new loans are people taking out now? Not many. At least not as many as before. If another housing bubble arises in say 20 years then we could go Japanese. But at the moment people are just sending jingle mail.

If this isn't like Japan, what does this mean?

Also, what about the exchange rate fiasco, boosting import prices for easy inflation. I think the UK and US would be looking at very strong inflation coupled with a shrinking economy. As you have already mentioned, a disorderly poom might occur as private investors flee, possibly resulting in hyperinflation.

That's not like Japan at all.That has always been our position, since 1998. You are making an understandable logical leap. Yes, policies will try to keep people in their homes. No, the overall macro outcome will not be deflationary.

World Traveler
12-20-08, 11:19 AM
Fred, you hit the nail on the head. Yves Smith, of www.nakedcapitalism.com (http://www.nakedcapitalism.com), who is VERY sharp, agrees.

U.S. "elite" are starting to comment favorably on the "Japanese solution" for examples on how to resolve our problems here in U.S.

Below are Yves' comments, exerpts from NY Times article, and link to article.

So Now We Are Trying to Emulate Japan's Lost Decade? (http://www.nakedcapitalism.com/2008/12/so-now-we-are-trying-to-emulate-japans.html)

http://s3.odiogo.com/odiogo_listen_now_77x18.gif (javascript:showOdiogoReadNowFrame%20('121381',%20 'so%20now%20we%20are%20trying%20to%20emulate%20jap ans%20lost%20decade',%20'0',%20290,%2055);)
<iframe name="iframe_odiogo_0" id="iframe_odiogo_0" src="http://www.nakedcapitalism.com/" scrolling="no" width="0" frameborder="0" height="0"></iframe> US economists have relentlessly harangued the Japanese for their supposed mismanagement of their post bubble era, which has lead to nearly 20 years of low growth, borderline deflation, with a not-much-discussed, robust export sector.

Along with others, we complained in the early days of the Fed/Treasury emergency response that they were taking one of the worst elements of the Japanese playbook, namely, trying to prop up the value of dud assets, rather than figuring out how to do more price discovery and ameliorate the attendant reaction (not damage, mind you, the damage was already done when the bad loans were made). Yes, the Treasury has made some capital injections into banks, but without cleaning up the balance sheets, the benefits are limited. Even with supposedly more aggressive action on realizing losses, our banks act a lot like their Japanese pre-writedown zombie counterparts.

So in yet another "putting lipstick on a pig" initiatives, the authorities, having unwittingly copied the heretofore-seen-as-failed Japanese playbook, are now trying to reposition Japan as a source of valuable lessons.

Trust me, you would never have seen anything along these lines two year ago, starting with the title of the New York Times story "Japan Offers a Possible Road Map for U.S. Economy. (http://www.nytimes.com/2008/12/20/business/worldbusiness/20yen.html?ref=business)" Pretty soon, we'll have our very own Ministry of Truth (I kid you not, read the article).

From the New York Times:

The Bank of Japan kept rates near zero for most of the last decade in an effort to end a long economic stagnation, and raised them only two years ago. Many economists say they believe that the zero interest-rate policy finally worked in Japan after regulators took aggressive steps that succeeded in restoring faith in Japan’s financial system and Tokyo’s ability to oversee it.

Now, with the Fed and President-elect Barack Obama turning to the same sorts of unconventional policy tools to battle the worst global economic crisis since the Depression, economists and bankers say they hope that Japan’s lessons are not lost on Washington. They say the United States needs to take the same kinds of confidence-building steps, and much more quickly than Japan did....
Yves here. Why does this remind me of that phase of the Iraq war when the US claimed the problem was not how the war (notice how we never say occupation?) was going, but the perceptions of the war within Iraq, and launched a PR campaign? That was such an astounding success that it gets nary a mention these days.

Back to the article:

Economists and former Bank of Japan officials say the biggest lesson they learned was that cutting rates alone has almost no effect when the financial system has fallen into a crisis as deep as the one Japan faced in the 1990s.

Japanese banks simply refused to lend in an environment where borrowers could suddenly go bankrupt, saddling lenders with huge, unforeseen losses. The Bank of Japan tried even more extreme measures, like using its powers to create money to essentially stuff cash into the nation’s commercial banks in hopes they would start lending again.

Exasperated central bankers found that commercial banks just let the money pile up instead of lending it out.

Economists say the United States faces a similar situation, after the sudden collapse in September of Lehman Brothers created fears of additional failures. Economists also fault Washington for its inconsistency in dealing with the financial crisis, leaving the impression that it does not have a clear strategy for dealing with ailing lenders.

In Japan’s case, economists and former bankers say, credit began to flow freely again only after 2003, when regulators adopted a tough new policy of auditing banks and forcing weaker ones to raise new capital or accept a government takeover. Economists said the audits finally removed paralysis in credit markets by convincing bankers and investors that sudden failures were no longer a risk, and that the true extent of problems at banks and other companies was finally being revealed.

Economists say Washington needs to do something similar to make banks and financial companies more transparent, and reassure investors that there were no more collapses like that of Lehman Brothers on the horizon.
Yves here. The need for writedowns along with recapitalization was the lesson of the widely-touted Swedish approach, in the wake of its early 1990s financial crisis. But Sweden went even further. It nationalized dud banks, replaced management, spun out bad assets into an independent company. That entity was deliberately overcapitalized, It was able to do triage on borrowers, liquidating ones that were goners, but more important, restructuring loans and often extending new credit to ones who looked viable.

Back to the Times, this time for comic relief:

Economists and former central bankers said another lesson from Japan’s experience was the importance of consistency. This became apparent in 2000, they said, during one of the bank’s more embarrassing episodes, when it raised interest rates, and lowered them back to zero a year later when the economy faltered.
It's a little late to worry about consistency....

bart
12-20-08, 11:44 AM
The formation of a central bank did not occur until the administration of James Madison in 1819.

Somewhat minor correction considering the context, but the First Bank of the United States existed from 1791-1811.


In the overall area, some hints about the framers intentions can be derived by them having rejected a clause that would have given Congress the authority to issue paper money, and also rejecting another clause that would have specifically denied that ability to the federal government.
The Coinage Act of 1792 (which established the US Mint) wherein the dollar was defined as specific weights of gold and silver further muddies the waters.

labasta
12-20-08, 02:00 PM
As housing prices decline and unemployment rise, the order of 50% of all mortgages will fall into this category.
That has always been our position, since 1998. You are making an understandable logical leap. Yes, policies will try to keep people in their homes. No, the overall macro outcome will not be deflationary.


ok, I see.

So what you are saying is that these new kind of mortgages will seep into the economy, draining consumer spending at a rate similar to the number of these mortgages being issued.

An ever increasing burden. That is of course if people are duped into these mortgages. I suspect a lot of people would be, but it also might put off an awful lot of folks too. If this happens, won't these new mortgages kill house prices as coupled with rising unemployment, prices will further shoot down with no-one buying?

It people get wise, this could kill the mortgage industry dead coudn't it?

People would buy houses for cash or borrow from relatives. Jesus, back to the ole ole days.

Then, people would reduce consumer spending by saving to buy a house outright, so we come full circle again. Mmmm.

I think if no-one took on these new loans (less pressure in a declining house price market), then the mortgage industry would have to change back, wouldn't it?


Just trying to go though some logic hoops here I think. :o

GRG55
12-20-08, 03:10 PM
As housing prices decline and unemployment rise, the order of 50% of all mortgages will fall into this category.
That has always been our position, since 1998. You are making an understandable logical leap. Yes, policies will try to keep people in their homes. No, the overall macro outcome will not be deflationary.

I suspect that the social/cultural barriers to walking away from a mortgage debt, or declaring personal bankrupcy, are probably much, much lower [and falling] in the USA than they were in Japan during its debt deflation.

This could actually be a "good thing' because it will force the asset price adjustments and debt resets to occur much faster than they did in Japan.

FRED
12-20-08, 03:19 PM
I suspect that the social/cultural barriers to walking away from a mortgage debt, or declaring personal bankrupcy, are probably much, much lower [and falling] in the USA than they were in Japan during its debt deflation.

This could actually be a "good thing' because it will force the asset price adjustments and debt resets to occur much faster than they did in Japan.

That is one of the key strengths of our system.

Chris Coles
12-20-08, 06:58 PM
ok, I see.

So what you are saying is that these new kind of mortgages will seep into the economy, draining consumer spending at a rate similar to the number of these mortgages being issued.

An ever increasing burden. That is of course if people are duped into these mortgages. I suspect a lot of people would be, but it also might put off an awful lot of folks too. If this happens, won't these new mortgages kill house prices as coupled with rising unemployment, prices will further shoot down with no-one buying?

It people get wise, this could kill the mortgage industry dead coudn't it?

People would buy houses for cash or borrow from relatives. Jesus, back to the ole ole days.

Then, people would reduce consumer spending by saving to buy a house outright, so we come full circle again. Mmmm.

I think if no-one took on these new loans (less pressure in a declining house price market), then the mortgage industry would have to change back, wouldn't it?


Just trying to go though some logic hoops here I think. :o

No, the mortgages do not seep into the system, the system brings them in as a logical part of the constant need to refi. When your initial "term" is up, and the rate changes, that is not simply a matter of telling you the rate has changed, it means you get a new mortgage and when they deliver the documents, you get no choice. So within the time needed for all the refi's to go through the entire system changes gear. Everyone that has to refi is now on a completely new deal....

vinoveri
12-20-08, 08:23 PM
I suspect that the social/cultural barriers to walking away from a mortgage debt, or declaring personal bankrupcy, are probably much, much lower [and falling] in the USA than they were in Japan during its debt deflation.

yeah, and those barriers are going to get a lot lower now that the game is exposed. if this results in a less leveraged dependent society, well good, but if it encourages the masses to game the system with a "debt doesn't matter, I can always get out of it, so just get as much credit as you can" attitude, that's bad IMO


This could actually be a "good thing' because it will force the asset price adjustments and debt resets to occur much faster than they did in Japan

It could be a good thing for the reasons you state, namely the consumer gets out from underneath that underwater mortgage, banks liquidate the repo assets and real estate prices come back down to be in line with incomes. AND iff Creditors eat the losses, not the taxpayer.

But, the banks or holders or insurers of those defaulted mortgages or securities may become insolvent and the gov will bail them out - in fact, is this not what the TARP is/was for? So here again you have specific elements of the society being bailed out at the expense of another and larger group. The argument put forward by some that no one wants home price declines in their neighborhood, and so this kind of approach benefits all home owners is specious imo. Again, banks made the loans, and whoever holds the loan or portion thereof is an investor and has assumed the risk of default - it's capitalism 101.
I own a modest home with a mortgage, but I would think it a good thing for home prices to come down (so I and others wouldn't have had to borrow so much to buy even a modest home, make sense?)

GRG55
12-21-08, 01:22 AM
...Purchase of troubled assets have not resolved US, UK, or European credit market dysfunction, nor have liquidity injections, nor has debt restructuring. What is needed in the US is debt forgiveness (http://itulip.com/forums/showthread.php?p=67329#poststop) but instead the FIRE Economy leadership is pushing measures through to lock US homeowners into paying down mortgage debt (http://itulip.com/forums/showthread.php?p=67190#poststop) that was taken on when housing prices were inflated. This is a repeat of the Japanese policy error. US household cash flow will be dedicated to paying down existing debts, virtually guaranteeing that US consumers will remain moribund for an extended period; without domestic reforms the Consumer/Employment Loop and Financial Crisis/Consumer Credit Loop are here for the long haul, contributing the global feedback loops...

Some commentary along the same line of reasoning, from historian Niall Ferguson, writing in the FT [Don Coxe made mention of this article in his weekly conference call Friday morning]:


The age of obligation (http://www.ft.com/cms/s/0/85432b32-cd32-11dd-9905-000077b07658.html)

By Niall Ferguson
Published: December 18 2008 19:10 | Last updated: December 18 2008 19:10

In the Old Testament Book of Leviticus, God commands the children of Israel to observe a jubilee every 50 years. Nowadays we tend to associate the word with celebrations of royal anniversaries such as Queen Elizabeth’s golden jubilee in 2002. But the biblical conception of a jubilee was more precise: that of a general cancellation of debts...

...Is it really plausible that the cure for excessive leverage in the private sector is excessive leverage in the public sector? Might there not be a simpler way forward? When economists talk about “deleveraging” they usually have in mind a rather slow process whereby companies and households increase their savings in order to pay off debt. But the paradox of thrift means that a concerted effort along these lines will drive an economy such as that of the US deeper into recession, raising debt-to-income ratios.

The alternative must surely be a more radical reduction of debt. Historically, such reductions have been done in one of four ways: outright default, restructuring (for instance, bankruptcy), inflation or conversion. At the moment, more and more American households are choosing the first as a way of dealing with the problem of negative equity, while more and more companies are being driven towards bankruptcy. But mass foreclosures and bankruptcies are not a pretty prospect.

Inflation, by contrast, is hard to worry about in the short term, not least because the Fed’s expansion of the monetary base is leading to no commensurate expansion of the broad money supply; the banks would rather shrink than expand their balance sheets.

That leaves conversion, whereby, for example, all existing mortgage debts could be wholly or partly converted into long-term, low and fixed-interest loans, as recently suggested (http://www.house.gov/apps/list/hearing/financialsvcs_dem/feldstein111808.pdf)by Harvard’s Martin Feldstein. (In his scheme, the government would offer any homeowner with a mortgage the option to replace 20 per cent of the mortgage with a low-interest loan from the government, subject to a maximum of $80,000. The annual interest rate could be as low as 2 per cent and the loan would be amortised over 30 years...

labasta
12-21-08, 05:50 AM
No, the mortgages do not seep into the system, the system brings them in as a logical part of the constant need to refi. When your initial "term" is up, and the rate changes, that is not simply a matter of telling you the rate has changed, it means you get a new mortgage and when they deliver the documents, you get no choice. So within the time needed for all the refi's to go through the entire system changes gear. Everyone that has to refi is now on a completely new deal....


Ah, my mistake.

I assumed this was just for new house buying customers. It shows you just how stuck I am in my perception of an old fashioned banking system.

I'm definitely not 21st century. :rolleyes:

Wow, is all I can say now.


I think I had a past life in the 30s or 50s or something.


Oh man. Would the inflation from a weak exchange rate filter into wages and house prices too, or would the economy be too depressed to make much difference? I think that's a key question.

rchdenton
12-21-08, 08:15 PM
Fred, you have a lot of faith in elections. The struggle between the production/consumption 'old money' and the FIRE/military 'new money' wasn't settled in the voting booth.

Is that the right way around, I thought the old money was the FIRE/military? I grew up in England and it certainly was that way round there. My experience of US when I lived there was that it was the same but far more so - massive respect and brown nosing of old wealth.

Tronacate
12-21-08, 09:07 PM
Some commentary along the same line of reasoning, from historian Niall Ferguson, writing in the FT [Don Coxe made mention of this article in his weekly conference call Friday morning]:


The age of obligation (http://www.ft.com/cms/s/0/85432b32-cd32-11dd-9905-000077b07658.html)

By Niall Ferguson
Published: December 18 2008 19:10 | Last updated: December 18 2008 19:10

In the Old Testament Book of Leviticus, God commands the children of Israel to observe a jubilee every 50 years. Nowadays we tend to associate the word with celebrations of royal anniversaries such as Queen Elizabeth’s golden jubilee in 2002. But the biblical conception of a jubilee was more precise: that of a general cancellation of debts...

...Is it really plausible that the cure for excessive leverage in the private sector is excessive leverage in the public sector? Might there not be a simpler way forward? When economists talk about “deleveraging” they usually have in mind a rather slow process whereby companies and households increase their savings in order to pay off debt. But the paradox of thrift means that a concerted effort along these lines will drive an economy such as that of the US deeper into recession, raising debt-to-income ratios.

The alternative must surely be a more radical reduction of debt. Historically, such reductions have been done in one of four ways: outright default, restructuring (for instance, bankruptcy), inflation or conversion. At the moment, more and more American households are choosing the first as a way of dealing with the problem of negative equity, while more and more companies are being driven towards bankruptcy. But mass foreclosures and bankruptcies are not a pretty prospect.

Inflation, by contrast, is hard to worry about in the short term, not least because the Fed’s expansion of the monetary base is leading to no commensurate expansion of the broad money supply; the banks would rather shrink than expand their balance sheets.

That leaves conversion, whereby, for example, all existing mortgage debts could be wholly or partly converted into long-term, low and fixed-interest loans, as recently suggested (http://www.house.gov/apps/list/hearing/financialsvcs_dem/feldstein111808.pdf)by Harvard’s Martin Feldstein. (In his scheme, the government would offer any homeowner with a mortgage the option to replace 20 per cent of the mortgage with a low-interest loan from the government, subject to a maximum of $80,000. The annual interest rate could be as low as 2 per cent and the loan would be amortised over 30 years...




I also assume we will follow the rules of the Jubilee and return all the land to the original owners.
I guess my Cherokee tribal card will indeed be a worthwhile document.

Brooks Gracie
12-23-08, 04:17 PM
Repeat after me "THERE IS NOTHING WRONG WITH RENTING. THERE IS NOTHING WRONG WITH RENTING. THERE IS NOTHING WRONG WITH RENTING."

If Joe 6P bought the house for $300,000, with a 10% downpayment, then he has an existing mortgage of $270K. If his house declines in value to $200K, he is underwater for $70K. Given that, is the best thing the government can come up with is a "restructuring" where J6P pays the $270K back over 30 years with a fixed rate mortgage? He is still paying $270K for an asset valued at $200K, in a declining market. All this is being touted as a great way so that "families can stay in their homes", or that "families won't be homeless".

Helloooo! If the family merely walked away (especially if they remained in the house stopped paying the mortgage and saved the rent until the lengthy foreclosure process played out), they could likely pay the saved mortgage payments in amounts equal to 2 or 3 years of pre-paid rent.

The family will then be more wealthy than they were before, much more weathy than if they "restructured" the mortgage so they they were $70K in the hole to start. They will have 2-3 years of prepaid rent (rent is always cheaper than a mortgage payment on the same property), will not be a "victim" of foreclosure, will not be in any stretch of the imagination homeless, and will be in better financial shape than anyone who took out an Alt-A or subprime loan who didn't act as the family described above did.

Personally, I think all the politicians' rhetoric about "keeping people in their homes" really means "keep overpaying for the benefit of the bank". Or "please don't act in your own best interest" and walk away, please continue to agree to pay $270K for an asset worth $200K.

If I have a client that comes in facing foreclosure, with little or negative equity, I hope I can convince them of this logic. Sadly, people become sentimental and attached to the house they are living in, and are more scared of renting than they are of ruining their financial future by staying in a lose-lose situation.

FlyingBoat
12-23-08, 04:39 PM
This is all about supporting the bankers and investments in equities. It has nothing to do with helping the person in the house. There is no way that could ever get through the head of Polosi or other dim wit democrats, however.

c1ue
12-23-08, 06:50 PM
Doctor Housing Bubble has a good example of the balance between interest rates and house price:

http://www.doctorhousingbubble.com/option-arms-for-dummies-why-45-percent-mortgages-rates-will-do-absolutely-nothing-for-these-toxic-assets/

A comparison between a $200K home with a 1% mortgage vs. a $105K home with a 6.25% mortgage...note the difference in monthly payment.

Now mentally add in the real estate property tax.

This is what Hudson speaks to.

908

909

BadJuju
12-23-08, 08:32 PM
When do you guys think the global economy will pick up again?

FRED
12-23-08, 09:15 PM
When do you guys think the global economy will pick up again?

How old are you again?

BadJuju
12-23-08, 09:24 PM
How old are you again?

I'm not an economist. I do not know much about economics, which is why I have come here. I am trying to prepare for my future.

But I will humor you, I am in my early 20s.

Chris Coles
12-24-08, 04:36 AM
I'm not an economist. I do not know much about economics, which is why I have come here. I am trying to prepare for my future.

But I will humor you, I am in my early 20s.

May I suggest that you back track to the beginning of the second launch of iTulip, about 2006, and read on from there. no, not every thread or posted comment, but take a broad view of the debate as it has evolved. Yes, several months reading. But by the end of the exercise you will have begun to understand why Fred made his comment. Again, a good read is The Downwave by Robert Beckman. And if you are going to bone up on investment then my suggestion is "Beginners Please" as a starter which is the book I bought when I first looked at investment in shares way back in the late 1960's.

There are no easy answers and no one can tell you with any certainty what will happen when. iTulip has gained a solid reputation from doing its best to set out a broad debate and prompting others to add their viewpoint as additional input to any ensuing discussion about the points raised. You in turn have to learn to see through the core of the debate and glean the information that is relevant to your own circumstances, which will be different to everyone else.

Also, if you find you seem to gain more from reading any particular individuals posts, you may turn to their individual place in iTulip and read everything they have posted. You will never find yourself in total agreement with anyone. You have to learn how to break threads down into those that give you what you need. Get used to placing your own opinions into the threads and from that you will see which makes progress and which do not. Start your own thread too.

Enjoy!

krakknisse
12-24-08, 07:38 AM
How old are you again?

It's been brought up before. But look up The Long Depression on Wikipedia. It could last for a long time. I've taken a liking to Catherine Austin Fitts "The Slow Burn (http://solari.com/blog/?p=818)". There's lot more loot to be had picking of the carcass of global capitalism. So they want to avoid a fast crash and heart-wrenching adjustment. Instead, we'll get "the forever recession".

And after that, Peak Oil comes and bites you.

I'm looking for a farm. (And I've spent decades on my career...) Merry Christmas!

BadJuju
12-24-08, 12:11 PM
And after that, Peak Oil comes and bites you.


Thank you for the replies, sirs. I will do as you have suggested. :)

ps; I do not really understand the concern of Peak Oil. There are far too many alternatives, and this recession is going to really burn away demand for a long time. And there is just too much lead-time for it.

FRED
12-24-08, 12:20 PM
I'm not an economist. I do not know much about economics, which is why I have come here. I am trying to prepare for my future.

But I will humor you, I am in my early 20s.

First of all, welcome. We don't have as many young members as we'd all like. More than half of us here are retirement age.

Second, it is entirely possible that the transition from the FIRE Economy to a new economy may take a decade or more. Detours, such as war, will of course extend the process.

BadJuju
12-24-08, 12:36 PM
First of all, welcome. We don't have as many young members as we'd all like. More than half of us here are retirement age.

Second, it is entirely possible that the transition from the FIRE Economy to a new economy may take a decade or more. Detours, such as war, will of course extend the process.

Thank you for the welcome, sir. :D I was introduced to this on another forum, where I have pestered a couple members about the future incessantly. :p As I am only in my early twenties, I am very concerned about my future, especially since so much of it seems to be out of my control now. I cannot help but think that my generation and every other that comes after will be the ones to suffer for all the excesses of prior generations. And it concerns me that given the global nature of human existence, that the process of recovery will be fraught with potential for utter catastrophe on a global scale, as we are seeing now. :(

Usually, when confronted with a situation I do not understand, I attempt to learn as much about it as possible. With Peak Oil, for instance, it is quite easy to learn the nature of the beast; however, economics is an entirely different monster with many, many heads to distract you with. Because of that, I tend to ask a lot of questions, some of which may seem completely nonsensical or very obvious to people that have studied economics for a while. :confused: In spite of that, I feel that I have learned a lot, certainly a great deal more than your average person about the circumstances of our situation. :cool:

FRED
12-24-08, 06:49 PM
Thank you for the welcome, sir. :D I was introduced to this on another forum, where I have pestered a couple members about the future incessantly. :p As I am only in my early twenties, I am very concerned about my future, especially since so much of it seems to be out of my control now. I cannot help but think that my generation and every other that comes after will be the ones to suffer for all the excesses of prior generations. And it concerns me that given the global nature of human existence, that the process of recovery will be fraught with potential for utter catastrophe on a global scale, as we are seeing now. :(

Usually, when confronted with a situation I do not understand, I attempt to learn as much about it as possible. With Peak Oil, for instance, it is quite easy to learn the nature of the beast; however, economics is an entirely different monster with many, many heads to distract you with. Because of that, I tend to ask a lot of questions, some of which may seem completely nonsensical or very obvious to people that have studied economics for a while. :confused: In spite of that, I feel that I have learned a lot, certainly a great deal more than your average person about the circumstances of our situation. :cool:

Then you will always be welcome here. We have infinite patience for those with questions and none for pedantics with all the answers.

Verrocchio
12-24-08, 08:13 PM
This is all about supporting the bankers and investments in equities. It has nothing to do with helping the person in the house. There is no way that could ever get through the head of Polosi or other dim wit democrats, however.

Perhaps you have greater insight into what "dim wit Democrats" have in their heads than I, but I think it reasonable to assume that Ms. Pelosi is well aware of who will benefit from legislation that she supports.

metalman
12-25-08, 12:31 AM
Perhaps you have greater insight into what "dim wit Democrats" have in their heads than I, but I think it reasonable to assume that Ms. Pelosi is well aware of who will benefit from legislation that she supports.

yes, i don't think she got where she is not knowing on which side the bread is buttered.