Subprime Credit Crunch Could Trigger Collapse

[grapejelly]

Re: Subprime Credit Crunch Could Trigger Collapse


Subprime mortgage gauge has technical problems

The so-called ABX derivatives index, where investors hedge their bets on the $575 billion subprime mortgage market, has plunged to record lows, pushing the cost of insurance on bonds backed by loans to riskier borrowers to dizzying heights.


But the ABX index isn't tanking simply because of the spike in subprime loan delinquencies that is weighing on mortgage lenders' bottom lines, it's even more driven by technical factors.

The ABX is "disconnected from what it ought to be based on a fundamental analysis" of the subprime market, said Mark Adelson, head of structured finance research at Nomura Securities International in New York.

My take is this. The article says that when someone wants to sell their BBB paper, there aren't bids on the other side. This resulted in the ABX falling. And somehow, people in the know can divine that the ABX isn't fair value. Huh?

[JoeSixpack]

Re: Subprime Credit Crunch Could Trigger Collapse

Aaron,

today i noticed a reference to the "implode-o-meter" website in an article on US subprime developments by Germany's No.1 Financial Newspaper.

Congrats ;)

cheers
Joe

[grapejelly]

Re: Subprime Credit Crunch Could Trigger Collapse

Daniel, there is a religious archetype in this "things are going to crash" story.

It's punishment for Original Sin. It's Sodom and Gomorrah. Noah's Ark. Those in the know survive (without enjoying themselves) and those who are having fun (and refusing to believe) foolishly refuse to prepare and then perish when the Flood, the Fall or the Crash comes.

The person (Noah or Lott or whomever) who "knows" this will happen is in every way morally superior to the person who is just trying to make a few bucks in the bull market.

I believe this is one reason why the "survivalists" gold bug types often tend to be Christian funamentalists.

[jk]

Re: Subprime Credit Crunch Could Trigger Collapse

daniel, you are wise beyond your years. the only issue on which i part ways with you is the existence of karma, which exists, i believe, but only as instant karma - e.g. if you are cruel you are living the life of a cruel person, with its inherent problems, contradictions and dissatisfactions, and its lack of self-awareness, richness, growth and complexity. but certainly there is no natural law of which i am aware that says that any systemic retribution will be symmetric with the distortions that we have created.

[DanielLCharts]

Re: Subprime Credit Crunch Could Trigger Collapse

Yes, yes, yes! I think too many here believe in the inevitability of financial disaster because it would be a fitting antidote for the often unethical behavior of banks and financial decisions of our government during this past boom. There also may be some class-born rage and envy that for 6 years flippers, many of whom were not very educated or financially literate, took on stupid risk and won.

The "inevitable disaster' approach is more philosphical than scientific. Inherent in it may be a longing for karmic retribution after witnessing the behavior of banks, greenspan's easy money policy, bush's overspending and dumbasses that made money during the housing boom. unfortunately karma doesn't exist.

i which i had a quarter for every time i've read a blogger say, "it was the biggest boom in history, therefore we HAVE to experience the biggest bust." that philosophically-driven nonesense is just crazy talk in a world as complex as ours.

You must make the difference between the ethical question of predatory lending and the economical consequences. i suppose that unfortunately the low income class will support both (no ethical approach and bankruptcies). but for the whole economy it is not obvious. Will the subprime collapse infect everybody ? may be the US economy is largely diversified to absorb this shock.
regards
Miju

[DanielLCharts]

Re: Subprime Credit Crunch Could Trigger Collapse

i agree its valid to postulate that it could trigger failure. it certainly could excerabate a recession.

i will gripe that the personal definition of a recession that you present doesn't seem that rigorous to me. by using the definition i think you might be putting forward (crime levels and income distribution), one could argue that a country like the Philippines has been in a state of constant recession for about the past 100 years. i don't think a gauge like that is very useful. for reasons both intellectual and material, i'd rather use a more standard definition of recession. that's just me though. if the fall out i think you might be envisioning actually happens, the economic data to follow should have no problem meeting NBER's definition of recession, so why fear that definition (or any other semi-standard version)? is it just on principle because NBER is considered "official"? their track record hasn't been perfect, but neither has itulip's. there are many smart and capable people affiliated with both NBER and itulip.

Daniel:

I think it is perfectly valid to postulate that something could trigger system-wide failure. If no one is going to say it, it's just going to be that much more of a suprise if and when it happens. I have nothing to lose, so I don't mind being "that guy".

That said, I don't buy the NBER's recession-tagging policy, nor the key data it is founded upon. I consider us already in a recession by general social health (crime levels, income distribution, etc), actual GDP (adjusted for realistic levels of median, long-term average inflation), and jobs.

The latter may be surprising to you. With the latest benchmarket adjustment, employment supposedly grew an avg of more than 180k jobs/month last year, whereas about 150k are needed to keep up with population growth. But (1) there are fewer "real" jobs, given high levels of marginal employment (compulsory part-timers), and (2) most of the ~5 million "real" jobs created in this recovery are due to government expansion, health care, or housing related. In sum, all bubble-based, directly tied to the recent accelerated bulk borrowing of this country, and thus which will largely have to be given back. This is not structural growth.

See http://br.endernet.org/~akrowne/econ...v_propping.png, http://br.endernet.org/~akrowne/econ...r_force-05.gif

[miju]

Re: Subprime Credit Crunch Could Trigger Collapse

You must make the difference between the ethical question of predatory lending and the economical consequences. i suppose that unfortunately the low income class will support both (no ethical approach and bankruptcies). but for the whole economy it is not obvious. Will the subprime collapse infect everybody ? may be the US economy is largely diversified to absorb this shock.
regards
Miju

[DemonD]

Re: Subprime Credit Crunch Could Trigger Collapse

(emphasis added)

The latter may be surprising to you. With the latest benchmarket adjustment, employment supposedly grew an avg of more than 180k jobs/month last year, whereas about 150k are needed to keep up with population growth. But (1) there are fewer "real" jobs, given high levels of marginal employment (compulsory part-timers), and (2) most of the ~5 million "real" jobs created in this recovery are due to government expansion, health care, or housing related. In sum, all bubble-based, directly tied to the recent accelerated bulk borrowing of this country, and thus which will largely have to be given back. This is not structural growth.

So does that put you in the deflation camp then Aaron? Or do you think this will cause the disinflation-hyperinflation scenario?

[spunky]

Re: Subprime Credit Crunch Could Trigger Collapse

Daniel:

I think it is perfectly valid to postulate that something could trigger system-wide failure. If no one is going to say it, it's just going to be that much more of a suprise if and when it happens. I have nothing to lose, so I don't mind being "that guy".

That said, I don't buy the NBER's recession-tagging policy, nor the key data it is founded upon. I consider us already in a recession by general social health (crime levels, income distribution, etc), actual GDP (adjusted for realistic levels of median, long-term average inflation), and jobs.

The latter may be surprising to you. With the latest benchmarket adjustment, employment supposedly grew an avg of more than 180k jobs/month last year, whereas about 150k are needed to keep up with population growth. But (1) there are fewer "real" jobs, given high levels of marginal employment (compulsory part-timers), and (2) most of the ~5 million "real" jobs created in this recovery are due to government expansion, health care, or housing related. In sum, all bubble-based, directly tied to the recent accelerated bulk borrowing of this country, and thus which will largely have to be given back. This is not structural growth.

See http://br.endernet.org/~akrowne/econ...v_propping.png, http://br.endernet.org/~akrowne/econ...r_force-05.gif

I totally agree.

[akrowne]

Re: Subprime Credit Crunch Could Trigger Collapse

Daniel:

I think it is perfectly valid to postulate that something could trigger system-wide failure. If no one is going to say it, it's just going to be that much more of a suprise if and when it happens. I have nothing to lose, so I don't mind being "that guy".

That said, I don't buy the NBER's recession-tagging policy, nor the key data it is founded upon. I consider us already in a recession by general social health (crime levels, income distribution, etc), actual GDP (adjusted for realistic levels of median, long-term average inflation), and jobs.

The latter may be surprising to you. With the latest benchmarket adjustment, employment supposedly grew an avg of more than 180k jobs/month last year, whereas about 150k are needed to keep up with population growth. But (1) there are fewer "real" jobs, given high levels of marginal employment (compulsory part-timers), and (2) most of the ~5 million "real" jobs created in this recovery are due to government expansion, health care, or housing related. In sum, all bubble-based, directly tied to the recent accelerated bulk borrowing of this country, and thus which will largely have to be given back. This is not structural growth.

See http://br.endernet.org/~akrowne/econ...v_propping.png, http://br.endernet.org/~akrowne/econ...r_force-05.gif

[Jim Nickerson]

Re: Subprime Credit Crunch Could Trigger Collapse

I did an informal survey of 5 people I know well.

Question:

What is your recollection of monthly grocery bills in 1996 vs. today?

Answer: (no particular order)

1) single man now, previously family of 3
1996: $150
2007: $400 (note this is feeding fewer people)

2) single man
1996: $100
2007: $200

3) married couple with 2 children now, married couple w/o children then
1996: $150
2007: $500

4) married couple now, single then
1996: $100
2007: $300

5) married couple then, single woman now
1996: $250
2007: $200

Obviously there are some assumptions here: that the 'basket' of food purchased is essentially identical between 1996 and now (no 'Whole Paycheck' customers included here). Also, since this is a verbal survey, no independent validation.

However, individual items reviewed show many items which are significantly higher even in this 10 year period: Bread, orange juice, meat

Other items are relatively less - but are closely regulated/monopolized: sugar, milk

I was single in 1996 and spent 231 bonars/month for food. For 2006, my wife and I spent 278 bonars/month. Neither of us are big eaters nor fat. I shopped almost exclusively at Albertson's in 1996, today we buy most food from Walmarts and Sams--not because I feel we have to, but because one just spends less money doing that.

In 1996, age 55, I spent $1,867 for health insurance, and in 2005 we spent $9056 with $5000 deductible on me and $2500 deductible on wife. I used 2005 because I came under Medicare for last four months of 2006, which reduced the outlay by $2400 for the year. What you eat might kill you, but what one must pay for health insurance will definitely "kill" what one might otherwise contribute in consumer spending to the GDP or personal savings. Heaven help those who are sick despite having health insurance, cause the health insurance leaves a whole lot that is not covered. Something else I have gleaned from health insurance: it saves one from some liability to the onerous fees charged by providers by the amounts the insurors' disallow of what is charged by providers whether paid by the insurance or the patient.

The country doesn't need to do much about the cost of food; it needs to do a whole lot about the cost of health care.

[c1ue]

Re: Subprime Credit Crunch Could Trigger Collapse

And the Fed has little choice to do what it's doing, or the dollar might suffer an extreme rout. And maybe someone over there knows what's really going on with inflation. The other day I opened the AJC and there was a nice table of cable rate increases for the last half decade. Despite the fact that the cable company is heavily-regulated, the rate increases were approximately 6% a year.

Why would that be, if inflation was not at least at that level?

In fact, real estate finance people should be thankful for 5.25%.

I did an informal survey of 5 people I know well.

Question:

What is your recollection of monthly grocery bills in 1996 vs. today?

Answer: (no particular order)

1) single man now, previously family of 3
1996: $150
2007: $400 (note this is feeding fewer people)

2) single man
1996: $100
2007: $200

3) married couple with 2 children now, married couple w/o children then
1996: $150
2007: $500

4) married couple now, single then
1996: $100
2007: $300

5) married couple then, single woman now
1996: $250
2007: $200

Obviously there are some assumptions here: that the 'basket' of food purchased is essentially identical between 1996 and now (no 'Whole Paycheck' customers included here). Also, since this is a verbal survey, no independent validation.

However, individual items reviewed show many items which are significantly higher even in this 10 year period: Bread, orange juice, meat

Other items are relatively less - but are closely regulated/monopolized: sugar, milk

[Finster]

Re: Subprime Credit Crunch Could Trigger Collapse

My primary theory on the FCB agency purchasing pattern is somewhat tinfoil hat enhanced - there are real housing assets behind them, whereas Treasuries have no fundamental longer term floor.

In addition to that, it may have not escaped their notice that over the past few years, a lot of the dollar buying power driving their export markets has come from mortgage financing ... all their bond buying depresses interest rates, but that going to the mortage market may have a more direction connection ...

[DanielLCharts]

Re: Subprime Credit Crunch Could Trigger Collapse

That chart looks gruesome, but why not wait for some signs that we are actually in a recession before entertaining thoughts of a collapse. You're putting the carriage before the horse my friend with wild statements like, :eek: "Subprime Credit Crunch Could Trigger Collapse" :eek: . It's possible, but lets see a recession first.

[Rajiv]

Re: Subprime Credit Crunch Could Trigger Collapse

Here is the corrected URL for Michael Hudson's Real Estate: Growth, Crash, or Soft Landing?