By The Tim on March 9, 2009
Here is your open thread for Monday March 9th, 2009. You may post random links and off-topic discussions here. Also, if you have an idea or a topic you’d like to see covered in an article, please make it known.
Be sure to also check out the forums, and get your word in the user-driven discussions there!
Posted in Open Thread | Tagged open_thread
Tim Ellis is the founder of Seattle Bubble. His background in engineering and computer / internet technology, a fondness of data-based analysis of problems, and an addiction to spreadsheets all influence his perspective on the Seattle-area real estate market.
So what do you think about lost monetary base as a result of credit contraction. If the monetary base is not replaced ASAP then the economy will suffer deflation and contraction.
To what extent do we need to print money to get this economy off the ground.
But please do not talk about overpopulation etc. There is a simple problem – people are no longer lending to each other. As a result money velocity suffers. Banks were creating lots of money by doing the lending. Now that we no longer have this – would it make sense to just start the presses going and print just enough money to replace the lost monetary base?
RE: Ooops @ 1 –
Just once I’ll be quick and clear. In most countries people pay cash.
Our financial system seems to be based on credit.
I ran into a friend of mine at the print shop where I was getting more flyers for our business and he was setting up advertising for a new business he was starting. I asked how his Real Estate business was going and he said he had 19 properties. He was looking to buy more.
He pays cash for the properties and rents them out. By paying cash in today’s market he gets pretty good deals. His rental income is the return on investment. He showed me the books on one property and it was bringing in $20K per month.
At one time in the United States people owned businesses. Today almost every one works for a corporation. People go to school to get a degree to get a good job. It’s the smart thing to do. Doctors work for hospitals and lawyers become partners in law firms. It’s the smart thing to do.
What makes sense is for people to start producing. By owning a business or partnering you can generate your own cash. If you chose to lend that cash, great, it’s another business.
Take a risk, be stupid.
By David Losh @ 2:
And in most countries they don’t have squat. What’s that tell you?
You’re acting like credit is a bad thing. It isn’t, but like just about anything it can be over-used and abused.
The trick with credit is that it has to provide sustainable growth. It cannot replace capital.
Any system with net negative production is a big credit risk, and markets should reflect that to behave predictably. Sometimes lending the money will enable capital investment such that the production becomes net positive. But it seems to me that becoming positive is not the goal with a lot of people. Certainly CEOs would rather keep a company dead walking for a year to pick up $20m than let it fail and get nothing for that year.
The correct action for speculating badly is to lose your money. The economy of the whole planet is going down the tubes because the US government, under both the current and previous administration, is punishing success and rewarding failure. You need to punish failure so that the collective wisdom of the market can effectively price the risk of speculation. Right now you cannot predict the risk of any action in the market, because the government is big enough to make any wise move look stupid.
I was talking to Alan about this once. At the micro level, it is probably smarter to do what the average American does with their money than anything else. Because the government will do whatever is in their power to make sure that the average American rides this out OK. If inflation is needed to bring incomes in line with asset prices, then eventually they will do it. All of the sudden, the $500k house purchase by the fruit picker looks OK because fruit picking pays $250k a year. Your cash savings are worthless.
RE: Ben @ 4 – I view a lot of the problems as being related to the willingness of government to approve mergers for at least the last 20 years. Just think how much bigger of a problem WAMU was due to mergers. Or AIG. But for mergers the whole idea of “too big to fail” wouldn’t exist.
Can a guy make a go servicing foreclosures? As this is an open thread, I’d like to grab some feedback from a crowd who I admire (mostly).
I’m getting corporate burnout. Trying to think outside the box, and look for opportunities as the market and economy flounder. Thinking about a low cost start up contracting business specializing in inspecting, documenting, and perhaps rehabing foreclosed homes. A truck, a license, a bond, a little marketing budget, and some cheap labor. From everything I’ve heard, the banks are buried in paper work, so I don’t know if they are ideal customers. The basic profit model is a markup on the labor. Incidentally, I’m a former union carpenter who spent a decade in insurance adjusting, so I have a grasp of how to estimate, plan, and execute a project.
Somebody’s got to do the labor, we know realtors aren’t going to be out cutting carpet and whacking shurbs, yet.
Plus I can off anything of value left behind on craigslist. I basing my assumptions on this being a fad, or temporary market. I don’t think I’ll be building a business to leave to my kids and grandkids.
Are the banks going to polish these turds, or just sell them as is?
Any feedback will be valued, and heeded. Thanks
RE: Kary L. Krismer @ 3 –
Well, for the record, one country that uses mainly cash is France. They’ve got a lot more than squat there. What they don’t have are credit cards. Their home ownership rates are significantly lower than the US, for a variety of reasons, one of which is an aversion to debt.
Tim: I’d like to see a few more threads in the forums:
Tracking local fraud
Tracking local agent’s own foreclosures
Tracking flips by area, similar to what is being done on the eastside flops thread.
By harbord @ 8:
Rhonda over at Rain City periodically does things on local fraud. I’m not sure there’s a lot more that can be done in that area.
I don’t really see the point of the second one. It was relevant to the one situation repeatedly disclosed here because that person claims to be able to predict the market (and claims to be able to advise clients as to what to buy so that it would be easy to sell). But other than as evidence to refute the claims, I don’t see the point. Should there be a thread on newspaper reporters in foreclosure too? Contractors? Plastic Surgeons? Where would it end.
I’m not familiar with the thread you mention, so I’m not sure what you’re looking for there. As to the industry of flipping, referenced in your first post–tough time to enter that market, especially if you’re thinking resale as opposed to rental.
RE: Kary L. Krismer @ 5 – RE: Kary L. Krismer @ 3 –
Yes debt can be good. I expect a return on debt. Debt has gotten out of hand. It was the phrase that “many companies rely on debt to make pay roll” that got my attention. I heard it as an excuse to prop up the credit markets and was even used by Obama.
That brings us to mergers. Most mergers are based on swapping debt. Let’s leave that simple.
Warren buffet was whining on an interview over the week end about his jewelry business while promoting his Geico Insurance business. Warren owns a bunch of companies and the stocks that go with them. Peter is paying Paul for sure in his structured business set.
Warren is a perfect example of too big to fail. Who will pick up the slack?
My answer has been small business.
Let me walk you through a disagreement I had through the comments on another post. It has to do with savings. People actually argued that by putting savings into the bank they were funding loans being made to others. The thread went that the bank pays 3% on a savings account and lends the money out at 6% and makes money.
Let’s take the bank out of the equation.
I lend money to a friend who has a truck he owns free and clear. He’s in the hauling business. I secure my loan against the pink slip and charge him 6%, the bank would want 14% if they were to make him the loan. I get payments for about a year and he buys a new truck. He stops paying me I take the truck and in less than a year I have all my money back plus a profit by being in the hauling business, part time. I still own the truck.
That’s the worst case scenario. You have skills that you can use. You can be a lender. I have had money circulate in my little corner of the world for decades.
In Asian cultures money circulates within the Asian community. The original question here was about the velocity of money. Inside of the Asian community here in the United States, away from class restrictions, people trade dollars between each other. Asians buy at Asian markets, eat at Asian restuarants, save in Asian banks, buy from Asian retailers, and take loans from Asian banks, associations, or family.
It’s when the money starts going outside of the community that it’s lost.
RE: harbord @ 6 –
I have such a company and the problem has been getting paid in a timely manner. Banks now contract with vendors who in turn contract out the work. You can get in with a group of investors but a lot of them are tapped out.
It’s possible, it’s all possible. Start at local banks, look up Real Estate agents like Keith Brown or Pagones at Windermere and ask about the REO markets.
My new thing is going to property management companies who in my opinion are going to end up with these properties that don’t sell. Last week I went to join the Rental Housing Association.
Best of luck ask if you have questions.
Anyone else than me that is surprised that there haven’t been a run on Citi and Bofa yet? I’m very surprised that people still do business with these banks. I’m not saying that is good or bad but that fear hasn’t taken a grip on depositors yet is somewhat surprising since there are daily news about their troubles and likelyhood of either failure or nationalization. Much more so than what was the case with Bear and WaMu which what I understand both experienced runs that speed-up their demise.
RE: patient @ 12 –
It’s ignorance at work. Folks think that they’re safe, even if the banks are toast, because of FDIC. What they don’t realize is that once one of the larger banks fails the whole system will be overwhelmed. The government isn’t prepared, in terms of both staff and money, to handle the fallout. The resultant chain reaction will wipe out huge amounts of wealth.
Personally, lots of cash at home and the rest spread around in small regional banks with solid balance sheets.
RE: Scotsman @ 13 –
What happens if the “system” is overwhelmed to the point where we see remonetization? Are the green pieces of paper in peoples mattresses/safes any more “reliable”? Could they go the way of other currencies throughout history and become worthless pieces of paper….literally?
I too have cash at home…not “lots”…but perhaps “enough” if cash is “rationed” due to bank holidays/withdrawal limits…however…just in case…I also have gold.
By Scotsman @ 13:
You are probably right and that it also means that people do not understand that if they don’t like bailouts of a company that is providing services to the public they can stop the bailouts by stop making business with that company. The government is powerless to save a company that depends on public customers if people do not want to do business with it.
RE: EconE @ 14 –
I don’t like to think about remonetization and all that it implies. I really don’t think we’ll see that but who knows? If we do, we’ll be well down an unknown path. And in that case you’re right- all bets are off. We’ll finally get to see if gold holds up like it’s supposed to!
As an intellectual exercise it would be fascinating to see how contemporary society responds to a Mad Max type scenario, especially in the larger cities. But I never want any of us to find out. It will be hard enough to watch people adjust to the loss of entitlements as the government has to prioritize going forward.
The best survival skill might be admitting that you’re going to work until you die.
The government could pass a law making all consumer credit capped at 12% with an opt out program of 5, 10, or 15 years. A consumer would be barred from further debt until the balances are paid off. At the same time the law could set all mortgage interest rates at 5% with 30 year fixed payments with the amortiazation schedule staying at the anniversery date of the original loan. The loans would be fully assumable.
Going forward credit companies could set thier own policies once again.
This would prop up the price of goods, the credit companies would be collectiong thier own debt and the government could go on to more, much more, important business. No bail out needed, why didn’t that happen?
RE: harbord @ 8 –
Here, here, North Seattle flops would be great….
RE: Kary L. Krismer @ 5 – Bill Virgin touches on the “too big to fail” issue in his piece today.
RE: Scotsman @ 13 –
Local Seattle banking news at this WSJ article:
http://online.wsj.com/article/SB123664245169577701.html
Apparently Seattle Home-Loan Bank is struggling…
I don’t know why people only complain about credit? And people say France is a match for the US? Look at their GDP per capita and unemployment. This is exactly what the US wants to avoid – becoming another France. The US enjoys the biggest rate of innovations and has the most competitive economy.
And telling that you need to bring manufacturing to the US? And what get people to work for $3/hr? You need to innovate. Then possibly outsource.
So let’s get the monetary base in order, get some regulations and let’s start working.
RE: Robert @ 21 –
France is a bad example. You are also right in asking why there is a concern about credit. The financial market directly effects 5% to 10% of the world’s population. Stock markets are responding to profit now based on interest income. That indirectly hampers more growth in the global economy.
The United States has engineered this scheme on the backs of it’s consumers. Wages have stayed the same, but purchasing power has increased due to credit. Wall Street is now banking on consumers paying debt.
The scramble today is to get consumers to pay 24% to 30% interest plus penalties and fees on credit card debt. The second part is that lenders want home owners, property owners to pay on ridiculous loan programs. The combination of bad loan products is making the consumer question the system that is now collapsing.
The lenders have a business model that was fine while the economy was expanding. People had the ability to pay, profits were good. Today our government is giving the gift of cash to this bad business model and is trying to convince other investors to take on the bad debt.
Again this is all based on the consumer paying for some reason. I don’t get it, it makes no sense. The lenders need to go back to the consumer that has thier money and make a deal to get the money back.
It should be a sweet deal. The lender lent the money, the consumer has the money, what will be the recourse. No further credit? Who would want more credit at this point?
RE: DaveyDave @ 20 –
lol thats not a real bank. its the Seattle FHLB
RE: banker? @ 23 – I wasn’t sure which was correct. The WSJ referred to it in 2 different ways…
RE: Robert @ 21 –
I mentioned France, but not to compare it to the US. Don’t know if someone else made a direct comparison.
Hey, the other day Eleua got his panties in a bunch when I outright told him that econ isn’t a science. I stand by that assessment. Folks who were interested in this line of discussion might want to read this article in the NYT today. Wall Street has recently employed many people of scientific backgrounds, but they are VERY clear that what they’re doing is NOT science:
“By their activities, quants admit that despite their misgivings they have at least given cover to some of the wilder schemes of their bosses, allowing traders to conduct business in a quasi-scientific language and take risks they did not understand.
Dr. Goldenfeld of Illinois said that when he posted scholarly articles, some of which were critical of financial models, on his company’s Web site, salespeople told him to take them down. The argument, he explained, was that “it made our company look bad to be associating with Jeremiahs saying that the models were all wrong.â€
Dr. Goldenfeld took them down. In business, he explained, unlike in science, the customers are always right.
Quants, in short, are part of the system. “They get paid, a Faustian bargain everybody makes,†said Satyajit Das, a former trader and financial consultant in Australia, who likes to refer to them as “prisoners of Wall Street.â€
“What do we use models for?†Mr. Das asked rhetorically. “Making money,†he answered. “That’s not what science is about.â€
Just sayin’.
Coincidentally earlier today I was reading another interview with the Black Swan guy. His assessment agrees with mine and apparently goes into much more detail in his book.
The news on Citi was interesting. I wonder which will turn out to be the case when the official results are announced:
1) It was bull.
2) it was accurate, but doesn’t account for additional adjustments/write-downs.
3) It was accurate because of prior adjustments/write-downs.
4. It was accurate.
RE: Kary L. Krismer @ 27 –
The corresponding article pointed out that Citi is a consumer credit lender. They purged bad debt at the end of last year and are starting with a fresh slate this fiscal year. In time it will return to normal with more bad debt piling up.
It also mentioned that there are trillions of dollars available in outstanding credit limits that will be contracting this year and only about 800 billion on current balances owed.
Then over the week end Buffet was talking about how consumers have changed. The question will be if consumers take on more debt or pay it off. If they pay it off less goes into consumer spending.
It’s a pickle.
By David Losh @ 28:
So from the part not quoted, you (or at least the article) are going with #3?
I wonder how severe and how prolonged the economic downturn will have to be to have a significant prolonged effect on the American consumer. I just have a hard time believing that Americans could that easily give up shopping and accumulating junk.
RE: Angie @ 26 –
Angie- you’re reaching. I don’t see how what you’ve quoted makes your case at all. What part isn’t science- the profit motive, or the modeling? And are they even talking about economics, or isn’t the true focus of the article trading strategies?
By your logic drug research isn’t science, because there’s a profit motive. And global warming isn’t science, because it relies on models. OK, bad example- global warming is mostly politics and business, with very little science allowed to interfere with the desired outcome. But moving right along..
By your thinking, would psychology or sociology be science? Like economics, both involve a huge number of variables that are difficult to capture and formulate into accurately predictive models. But they are predictive and replicable often enough to have real value. The same is true with economics. Just because the current state of modeling and interpretation isn’t perfect doesn’t mean it isn’t more of a science than say a philosophy.
RE: Kary L. Krismer @ 27 –
Let’s go with #2. But even that stretches the facts.
What set everyone off wasn’t an audited statement, but a leaked internal memo. Excuse my cynicism, but how convenient! Really not much more than a rumor on official letterhead.
Citi is so burdened with bad assets it’s already dead. They just haven’t rolled the body into the hole yet.
How much money do you think was made by those “in the know” on this little play? This sort of crap should be illegal, and treated as such. It’s just that people are so desperate for good news the dark side gets overlooked.
Citi can go broke, go away, never to be heard from again and it makes little difference.
In the United States we can make and spend as much money as we want. For that matter what I was thinking today is that a lender who made a good loan product could make a fortune today, right now, in today’s economy.
Why does consumer credit rely on tricky terms to get people suckered in only to charge more in interst and generate fees?
I am really thinking that paying for bad loan products and bad business models for credit is wrong. I’ve heard that in South America Visa and American Express are charging 400% interest per year.
By Scotsman @ 31:
Funny
.
An unemployed mother of 14 children qualifies for a loan for a $560,000 home……… Amazing. Totally amazing.
.
Octuplet Mom May Be Moving Into $560K Home
.
NINJ LOANS ARE ALIVE AND WELL !!!!!
Maybe better described as a DINJQA (Dubious Income No Job Questionable Assets) loan.
By TJ_98370 @ 34:
Agree she is ewwwww – but reading the article it does not look like she has qualified for anything… her father bought it
.
RE: deejayoh @ 36 –
DJO -
I won’t disagree with you. Obviously you’ve done some research. I’m just going by what I saw / heard on the 6 p.m. broadcast of KIRO 7 News. They said that she qualified due to income based on pictures of her newborn babies.
RE: Scotsman @ 13 –
I’d be fine with getting wiped out if they also lose track of what I owe on my mortgage… but I have a feeling that is the one thing that will stick with us.
Scotsman at 30: Science is about testing hypotheses and finding the best possible explanation for natural phenomena. Economics (including finance, which is the subject of that article) is primarily concerned with making people money. Apples and oranges.
I encourage you to enroll in any 100-level science course at your nearest community college to round out your education. Knock yourself out.
RE: Angie @ 39 –
Um, no. Economics is the study of allocation and scarcity, how people set priorities and make choices when faced with limited resources. It is considered by many, (albeit perhaps a bit more flexible than you), to be a science in the holistic sense of the word. You may be confusing it with finance. ;-)
Regarding community college science classes, at the 100 level or higher: my high school aged daughter attends such classes at our local community college, and she assures me that they leave much to be desired. My time is valuable- I think I’ll pass, but thanks for the suggestion!
RE: Angie @ 39 –
Financial Engineering is a science. It may be a University set of courses, but it has been a career path for about ten years, from what I understand.
It has to do with directing profits into greater profits. In theory a market place can be directed, which is different from saying it can be manipulated.
General Motors can own parts manufacturing, a robotics development company, Human Resource Management Facility, and finance the end product while controlling every aspect of distribution. It’s a science of maximizing profits within an industry.
Banking is an even larger more complex set of services. It is most definitely a science, highly directed, and deliberate.
RE: Angie @ 26 – RE: Scotsman @ 13 –
Sorry I read the article about the Stock Market. The Stock Market is very different from economics or finance. It’s not what you know it’s who you know. The term is Movers and Shakers. Who’s putting money where and why. That’s it. There is no science associated with the Stock Market.
If you get a good news letter from some one who knows what’s going on in the Stock Market you can make money. If you’re day trading based on some internet hokem you might as well go to the track.
If Pandit is lying Citi is going to get buried once and for all and Pandit will or at least should endup in jail.
RE: Angie @ 39 -
RE: Scotsman @ 40 –
The National Science Foundation classifies Economics as a “social science,” like anthropology or linguistics. Social sciences are sometimes called “soft” sciences, whereas chemistry, physics, biology, etc. are often referred to as “hard” sciences, usually because the “soft” sciences explain human behavior, whereas “hard” sciences explain phenomena in nature. Also, it is often more difficult to follow the scientific method properly in social sciences (proper human-factors experimentation is very, very difficult to get right), so a lot of what people do in the name of social science isn’t really very scientific.
In some ways, social science is actually “harder” than the natural sciences, because we know so little about the human mind and human behavior, in comparison to how much we know about natural phenomena. In either type of science, poor method is inexcusable. I have the feeling these “quants” were not using the proper scientific method (e.g., using controlled experimentation to validate their hypotheses).
By David Losh @ 41:
First, there isn’t universal agreement that the discipline of “computational finance” is actually “engineering.” Isn’t “directing profits into greater profits” the ultimate objective of all business disciplines? Why does that make it engineering? Business disciplines are not engineering.
Second, even if computational finance were an engineering discipline, engineering is not a science. Engineering uses science (and business skills, too, for what it’s worth) but engineering itself is not a science. Being “directed and deliberate” does not make a discipline a science. Research in 16th century English literature can be very directed and deliberate, but it is not a science.
RE: vermillionsky @ 45 –
For some reason, as I understand it, Universities have been churning out these degrees. They call it a science.
Look up the definition of science.
Also look up business, business is an endeavor. Profit is a goal, but business in an entity. Business for profit, just for profit, is a problem.
By patient @ 43:
Emails to employees are not really a credible source of information, IMHO. I don’t follow Citi, but I’d guess we have two months or so to get some real results–and even they could be suspect.
I could actually see that on the housing side things might be bottoming out for the banks because so many of the ultra-populated areas seem to be bottoming (CA, AZ, FL, etc.). Those few states managed to really hurt the banks on the way down, so their being more stable could help a lot.
On the credit card side of things I’d think things are likely to get much worse.
By David Losh @ 46:
wow, there is so much wrong with this statement.. where to begin?
Universities “churn out degrees” for just about everything.. so what? Are they accredited programs? If they are accredited, in what discipline? For engineering degrees, ABET (Accreditation Board for Engineering and Technology) is the best. I admit that I am unfamiliar with the best accreditation board for the sciences, but perhaps Angie (who is a scientist, I believe) would know that.
Oh really? Name one university with a degree program in “computational finance/financial engineering” in their school of sciences.
Please, enlighten me! Tell me what you consider to be the definition of “science,” and why you think “financial engineering” is one.
The purpose of science is to understand and explain phenomena. However, in order to be considered a science, this process of understanding and explaining must follow a rigorous method. I could come up with an explanation for why the sky is blue, why metal feels cold to the touch, why there is more spam in my inbox on wednesdays than on saturdays, why people follow a “herd” mentality, etc. but if my explanation was created without following the scientific method, it’s not science. (note: observation and recording of a phenomena alone is not science.)
We learn the scientific method in elementary school (albeit a very basic version):
The problem with calling “computational finance/financial engineering” a science is that they usually don’t really follow the scientific method (where is the controlled experimentation?). Perhaps it is closer to engineering, in that the purpose of engineering is to apply science to produce things and good computational finance might produce profits, but it is not a science.
I don’t understand what you’re saying here.. are you saying all of the degree programs traditionally housed in “business” schools, aren’t actually “business” but are “science”? Or are you saying that the primary objective of “business” isn’t profit?
test
RE: TJ_98370 @ 49 – schmest
RE: vermillionsky @ 48 –
Hey, take it out on our educational system. They call it science, and get a dictionary, that’s what I used.
RE: The Tim @ 50 –
Hi Tim. I was performing an inept investigation as to why my gravatar does not seem to be working. So much for being discreet.
Tj- try clearing your cache and cookies. Then gravatar will pick up the current input?
RE: TJ_98370 @ 52 – http://en.gravatar.com/site/check
There are several areas of science where there are no controlled experiments: cosmology, string theory, archeology, geology, to name a few. They gather data and match the results to theory, but there are no controls.
Finance on the other hand has massive experiments being run all the time to test various strategies, which are in essence hypothesis about how markets work. The math is very similar to various scientific disciplines also.