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Interesting thoughts from Michael White - mortgage banker

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  • Interesting thoughts from Michael White - mortgage banker

    Originally found via

    Some interesting anecdotes (full article worth reading)

    grannis graph.bmp

    The Grannis Hypothesis, outlined on the Calafia Beach Pundit (“There’s Still No Household Debt Crisis”, Seeking Alpha, July 8, 2009), argues that the consumer debt burden is manageable. The pundit proves it by showing that the bills we pay every month have changed very little in the last 30 years (see chart above: ”U.S. Household Financial Burdens” {the “Grannis Chart”}).
    I [Michael White] rely on a different chart. I believe our personal debts are twice what they should be (see chart above: “Household Debts as a Percentage of GDP”). I predict $7 trillion of a total of $14 trillion of household debt will either end in default or will paralyze the bill payer (The White Hypothesis).
    The White Hypothesis says we are a country with perhaps 20% of our households heavily overleveraged. Their failed-gold-rush balance sheet will lead to unprecedented mortgage and credit card defaults. The defaults lie immediately ahead and behind us.
    white chart.bmp

    Some other interesting charts:

    prop equity chart.bmp

    bad assets.bmp

    Now we have 20% of households defaulting on 40% of consumer debt. We are approaching losses of approximately $6 trillion — based on a market basket of household debt equal to 100% of Gross Domestic Product (GDP) of $14 trillion (40% of $14 trillion = $5.6 trillion = Round to $6 trillion).

    To put that number in perspective, I estimate the total equity held by the financial sector at the onset of the crisis equaled about $1.5 trillion ($15 trillion of assets * 10% = $1.5 trillion of equity). If $6 trillion disappeared in the financial sector, and granting my assumption of $1.5 trillion of initial equity, then the financial sector will go completely broke FOUR times. You only have to go bankrupt once to go bankrupt.

  • #2
    Re: Interesting thoughts from Michael White - mortgage banker

    How can we save the banking sector from this terrible threat?

    Here is my modest proposal:
    • Hold short term rates at zero.
    • Let the central bank lend freely to anyone at this rate.
    • Stoke inflation expectations by monetising debt and talking down the dollar.
    • The yield curve steepens, long term rates go sky high.
    • The regular banking business becomes very profitable once more.
    • Continue until bad debts devalued and the banks recapitalised.

    The real economy may suffer in the face of rising inflation and usurous rates, but heck, the banking sector is much more important anyway. Can I have my job as Fed chairman now please?
    It's Economics vs Thermodynamics. Thermodynamics wins.


    • #3
      Re: Interesting thoughts from Michael White - mortgage banker

      Critique: The analyst makes the same mistake as all of the novices who are new to this. He does not compare the ratios of flows of household debt payments to incomes, nor does he compare household debt payments to other expenditures. He focuses instead on total household debt levels relative to the total size of the economy, as measured by the made-up government number GDP. This is not terribly relevant. What is relevant is the portion of the flow of household debt payments relative to income and cash flow.

      He does not distinguish between the FIRE Economy and the Producer/Consumer Economy.

      He does not appear to understand the concept of debt deflation. It is the on factor more than any that distinguishes the current economic crisis from any other since the 1930s.

      We give Mr. White a C-.


      • #4
        Re: Interesting thoughts from Michael White - mortgage banker

        jesus I thought you'd totally lost the plot for second there.