Here is your open thread for the mid-week on October 7th, 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!
AMS » Oct 7, 2009 at 8:33 am
By Kary L. Krismer @ 55:
I am going to suggest that an unmotivated seller isn’t really that concerned about any of that. You will recognize when the seller gets motivated by when these things become more important.
Did the dirty dishes peeve the buyer, or did the buyer think the seller was not motivated?
Sniglet » Oct 7, 2009 at 12:16 pm
Off topic again, but I am re-posting this since I had put it up late in the day on yesterday’s open discussion.
For those fellow SeattleBubble regulars (and guests) who are between jobs such as myself, I have put together a podcast, offering tips on how to use LinkedIn to get in touch with the people you want to know at the firms you hope to work for, and offer strategies to build relationships with them. This is far more effective than just trusting your resume to an on-line job application form.
http://bit.ly/2p91zi
I don’t profess to be an expert, but I figure I can share the few words of wisdom I have come up with.
Scotsman » Oct 7, 2009 at 1:18 pm
RE: Sniglet @ 2 –
How’s the search going? What’s your sense of the market?
Sniglet » Oct 7, 2009 at 2:11 pm
I have actually been finding companies to interview with, which is positive. However, things are definitely slow. There is a lot of competition for the positions that are there, and employers are taking their time in making decisions, and responding to people.
The volume of people looking for work has changed a lot of the dynamics in the job hunting field. Things are very different today than they have been for well over a decade (in the tech industry anyway). Posting your resumes on job boards is useless (not that it was every very helpful), and recruiters are of little help.
Interestingly, I see parallels to what is happening in the recruiting space and the mortgage brokers. In both cases, third party agencies are being squeezed out of the system. Just as banks are now focussing on direct lending, a great many employers are now opting not to work with recruiters. This is possible because there are so many job applicants these days, that employers can have pretty good pipelines of job candidates without having to pay head-hunters for their services.
Thus, if you want a job, you really need to apply directly to the firm with the position.
I suppose that the one thing that has NOT changed is the value of networking. It continues to be true (just as it always has) that your best method of finding a job is through a friend or associate. The only difference today is that there are so many social networking venues (like linkedin) that job seekers can exploit to help build relationships. But all of these innovations have an evil side. With SO many people trying to network, and become “buddies”, the value of the connecting with someone on a social network has become diminished. There are people on LinkedIn with over 10,000 contacts! There is no way these folks actually know even 1/10th of the people they are connected to.
All that said, I am still having a lot of fun meeting people, blogging (www.surkan.com), and trying some entrepreneurial things (like my source code marketplace idea http://bit.ly/CmmIU). Still, it would be nice to find a day-job once again. :)
Tyler » Oct 7, 2009 at 2:40 pm
Sniglet — best of luck on the job hunt. I like the idea of the source code marketplace, although it is a tough problem to crack.
I just posted an engineering job on craigslist in Portland yesterday afternoon. I expected a few resumes to trickle in, but instead have received almost 20 in less than a day. Of these 20, 8 are probably over-qualified, and maybe only 4 of them I wouldn’t consider. They are almost all high quality (on paper). I even got a response saying that they were a recent graduate and want to work *for free* just to gain experience (and get their foot in the door, I presume).
There is certainly a large pool of talented people out there at the moment.
AMS » Oct 7, 2009 at 3:05 pm
To: Kary L. Krismer
Regarding desperate sellers.
Sniglet posts about his job search in this thread. He also has a pod cast, which I plan to listen to hear his perspective, but I have not done so yet.
Speaking in general, the unemployed person with insurance, in other words some pay, is a lot less desperate than the person with no pay, yet the both compete in the same market. As the unemployment benefits get closer to the end, the bargaining position of the unemployed person is less and less.
Also note that the unemployment insurance allows a person to decline a much lower paying job, yet a job that pays near the old rate must be taken for continued unemployment insurance qualification. In other words, a low offer will probably be refused, at least initially, but as time goes on, expectations may change. The desire of the unemployed person to sell his or her services is very similar to the desire of the home seller to sell his or her home. If you find that perfect match right away, the unemployed is in great shape, but what are the chances of that? In a hot market the chances of finding an approximate match are much better than in a cold market.
I was tracking a few of the automotive parts suppliers close up shop in Michigan. One had 400 employees. A few of those 400 found something new right away, but on the other side, a few might still be unemployed. It’s about the same in housing. 400 new homes come on the market. A few sell right away, yet others linger on and on. If there is a problem, a good match is hard to find.
When an offer comes in, one must always ask if the NPV to decline is positive. There are some who will always take the sure thing, even at the expense of a possible big benefit. Finding a much better position could pay off, if it is found. Is it worth the risk.
That brings up another thing that is very interesting. Risk tolerance.
If I offer you $100 or 50/50 at $200, which would you take?
If I offer you $10,000, of $2^n where n is the number of fair coin flips until a head shows up, which would you take?
In other words, if the first toss is heads, you get $2.
If the first toss is tails, but the second toss is heads, you get $4
If the first and second toss are both tails, but the third toss is heads, you get $8
and so on.
In the second example, I am yet to find a single unknowing person take the $2^n coin toss option. In fact, many knowing people would rather take the $10,000, yet clearly an unbounded opportunity has a much greater than $10,000 expected value.
Why is it so many people want the $10,000 when the expected payoff is much higher going with the coin tosses?
For those who want the expected value computation of the coin toss option:
On the first toss there is a 50% that the game ends, and a 50% that it continues.
The same is true on every individual toss, as coins do not have memory, but the chances of stopping on a given level are 1:2^n (1/2 the first round, 1/4 the second round, 1/8 the third round…)
Expected value:
$2 * 1/2 + $4 * 1/4 + $8 * 1/8 + … =
$1+$1+$1+…= $oo
($infinite)
Note that 1/2+1/4+1/8+… = 100%
Kary L. Krismer » Oct 7, 2009 at 3:23 pm
RE: AMS @ 6 – You’re making my head hurt! ;-)
FYI, I’m very risk adverse.
AMS » Oct 7, 2009 at 3:37 pm
RE: Kary L. Krismer @ 7 – Did you ever hear of the game show “Deal or No Deal,” which was based on a similar Italian show? While there are further complications to the show, basically the “banker” tries to buy off the contestant as cheap as possible. Some contestants take a very small sure thing rather than risk losing while playing for a potentially much big win.
AMS » Oct 7, 2009 at 3:51 pm
RE: Kary L. Krismer @ 7 – As a seller do you accept what you would consider to be a low offer? In other words, is a bird in hand worth the two in the bush? Just how risk averse are you?
Of course I don’t expect a personal reply, but consider this when analyzing buyers and sellers.
Kary L. Krismer » Oct 7, 2009 at 4:30 pm
RE: AMS @ 8 – Yes I’ve heard of Deal or No Deal, and even watched it a few times. I was thinking more though of Millionaire. I would never get to the million dollar stage, because I’d quit earlier.
As to number 9, it probably says something that the least expensive house I ever sold was my own, but I have actually had clients more risk adverse than me. I remember one called up and said: “You’re not going to like this, but we’re going to accept the offer.” To accept or counter is always the client’s decision, and absent having illegal surveillance equipment, there is no right answer.
AMS » Oct 7, 2009 at 4:39 pm
RE: Kary L. Krismer @ 10 – “absent having illegal surveillance equipment, there is no right answer.”
You clearly have not gone to the school of David Losh!
Even with all the illegal equipment in the world, there are many situations where the information is imperfect.
DrShort » Oct 7, 2009 at 8:32 pm
Interesting stat for the week…
For the week from 10/1 to 10/7 there was almost as many Trustee Deeds (141) as Notice of Trustee Sales (160).
Sniglet » Oct 7, 2009 at 10:59 pm
http://surkanstance.blogspot.com/2009/10/next-shoe-to-drop-reverse-mortgages.html
Sniglet » Oct 8, 2009 at 12:08 am
Off topic again. I just wanted to let people know that I have posted my first podcast interviews with individual job seekers, where we discuss their own strategies to find employment, and brainstorm on ways to make their work more effective.
http://bit.ly/29Zgoj
Scotsman » Oct 8, 2009 at 2:13 am
We are so screwed. Try to comprehend this:
Bush’s deficit last year: $459 billion
Obama’s reported deficit: $1.4 trillion
Actual cash deficit: $1.885 trillion (incl. social security ious, etc)
No wonder the dollar is falling, fed is printing like crazy and still can’t keep up, banks are on life support (estimated half or more of their profits are from the bailout and market gains), this sucker is gonna blow soon.
Trigger » Oct 8, 2009 at 5:38 am
RE: Scotsman @ 15 – Scotsman – I think the only thing left here is to start a real inflation going. I am not talking about 2% but more like 20% for a couple of years. This way the system will be purged of debt. Maybe the debt will be there but will be much more manageable! Look at what Weimar Republic did before WWII. They basically tried to purge the system before it blows up.
The US is like Germany before WWII. Lots of debt to repay which it cannot. So it needs to purge the system and resume a path of growth and happiness.
I think people will not agree with my proposal to work till they are very old. The only thing left then is to purge the system. Otherwise you are in for real pain and nobody wants to go thru the pain. It is not worth it. It is easier to purge the system. Obama said – Yes You Can. And we should say: Yes We Can. We can purge the system off debt, screw the people and countries holding debt. And after all of the system is purged – the US can send a US flag all the way to Pekin and give some nice regards etc. And say that now they can rev up the economy ASAP.
Sniglet » Oct 8, 2009 at 7:51 am
Unfortunately, a pleasant reflation is not one of the options before the policy makers. The only two choices are either a long-term deflationary depression (i.e. where the dollar gains significantly in value against ALL assets) or hyper-inflation (i.e. where th dollar is destroyed almost overnight).
If the Fed or Treasury actually started to “print” money to any significant degree (which they are not doing today), the dollar would become worthless within a week as investors around the world immediately moved their assets our of the greenback. Worse,the US government would be unable to finance its operations anymore since demand for T-bills would have vanished.
This (i.e. the destruction of the dollar) is simply not an option any policy maker wants to have occur under their watch.
This is why I believe we are going to be facing a massive deflation, where the dollar appreciates massively against nearly every asset there is (e.g. real-estate, stocks, precious metals, commodities). There is just no way to avoid deflation when there are massive amounts of non-performing private debt that need to be unwound. Japan had found this out the hard way over the last 20 years.
I have outlned the case for deflation with an in-depth podcast:
bit.ly/YlmXD
Kary L. Krismer » Oct 8, 2009 at 8:30 am
By DrShort @ 12:
And the first is a fairly high number and the second rather low, right? That’s probably just a glitch in things getting processed. But at some point we will see more deeds because of the ramp up prior to the new foreclosure laws going into effect.
Kary L. Krismer » Oct 8, 2009 at 8:33 am
RE: Sniglet @ 13 – I wish that article said more. I’m not certain whether any reverse mortgages work like HELOC, where the owner can draw. If so, I could see where that would put a senior in a bad spot as prices drop. Otherwise I don’t see how it would affect them at all. It’s only the lenders at risk, and that risk should have been obvious.
softwarengineer » Oct 8, 2009 at 10:04 am
RE: Sniglet @ 2 –
Sorry to Hear About Your Job Lapse Sniglet
Do you know who Paul Krugman is? He’s a liberal economist who predicted the RE bubble and won a Nobel.
Paul Krugman.
First, he offered a few comments about the U.S. economy:
1 – Based on GDP, “the recession is over, we’re back to a world of growth”
2 – But, “the jobs picture is continuing to deteriorate. The recession may be over, but the bad times are nowhere near over.”
LOL…….
Let’s look at the 9/30/09 Q3 BEA Data in part:
“Advance Estimate Second Estimate Third Estimate
(Percent change from preceding quarter)
Real GDP…………………………… -1.0 -1.0 -0.7″
The rest of the BEA URL:
http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm
Gee, if the recession is over, how come the GDP is still negatively contracting, especially after the horrifying Q1 contractions [we'd need some real big positive 2009 GDP growth, not Q2/Q3 contractions, to make up for the lost Q1 ground, IMO]?
It seems a lot you economists have a variety of 2009 “recession’s over” negative GDP rationales that contradict the one’s you had before…LOL
The recession is obviously alive and kicking IMO. The recession over fairy tale is clear mathematical fiction and Paul Krugman should clarify his words, RE: America. Perhaps America and its workers aren’t important anymore…LOL
Kary L. Krismer » Oct 8, 2009 at 10:09 am
RE: softwarengineer @ 20 – I came under a fair amount of criticism here for being critical of the entity that is the so-called “official” determiner of when recessions start and stop. I think it’s too political and subjective, and prefer just to use the GDP numbers.
Joel » Oct 8, 2009 at 10:46 am
By Tyler @ 5:
So what do you think about these overqualified applicants? Do you think they only want a job with you to have some income and insurance and will walk away as soon as they can find a better job?
Sniglet » Oct 8, 2009 at 11:05 am
Paul hasn’t seen a government intervention he didn’t like (I am sure I am exagerating, but he does seem to approve of most bail-outs). Everything is fine now that the policy makers are on the job (and good riddance to those supply-sider Republicans).
http://globaleconomicanalysis.blogspot.com/2008/12/krugman-still-wrong-after-all-these.html
http://globaleconomicanalysis.blogspot.com/2009/04/neither-krugman-nor-bernanke-can.html
http://globaleconomicanalysis.blogspot.com/2009/03/krugmans-200-billion-lunch.html
Scotsman » Oct 8, 2009 at 11:56 am
Here’s a great summary of the deflation argument, and why we haven’t seen the expected results:
“Within the next twenty years, the most profound changes in all of economic history will sweep the globe. The economic chaos and turbulence we are now experiencing are merely the opening salvos in what will prove to be a long, disruptive period of adjustment. Our choices now are to either evolve a new economic model that is compatible with limited physical resources, or to risk a catastrophic failure of our monetary system, and with it the basis for civilization as we know it today.”
http://www.zerohedge.com/article/guest-post-sound-one-hand-clapping-what-deflationists-may-be-missing
Sniglet » Oct 8, 2009 at 12:03 pm
Sorry, but this chap is an inflationist, and this article is basically his refutation of the deflation argument. He believes 1) that policy makers have the power to hide problems and to inflate currency at will and 2) that we will experience resource scarcity in the coming years which will drive prices through the roof.
I vehemently disagree with both these suppositions. I the the policy makers have MUCH less power to maneuver than most people believe, and that there will be a glut of resources (and concmittant crash in commodity prices) as demand collapses in the growing deflationary depression.
Again, I would refer people to my in-depth podcast on the case for deflation:
http://bit.ly/YlmXD
Tyler » Oct 8, 2009 at 12:18 pm
RE: Joel @ 22 –
I think that they just really want a job, not necessarily because of who we are (I didn’t even give many details on the job posting).
If we can get someone who is much better than we normally could in a healthy job market, then we come out on top. It would be my job to keep that person interested in staying in the future as things do (hopefully) turnaround.
Wage deflation seems like reality for the time being.
Scotsman » Oct 8, 2009 at 12:31 pm
RE: Sniglet @ 25 –
No, you need to read more of his stuff. He’s a deflationist, but argues that it won’t happen because the system is corrupt in the sense that it no longer operates according to the rules we all think are in play. The inflation comes not because resources are scarce in the normal sense, but because they are more or less finite (true) while the amount of cash flowing into the system is ever increasing under the scheme.
With the fed buying a majority of new US debt through buy-backs with it’s primary dealers (monetization) and banks not having to take the losses that exist in reality, the supply of money is indeed growing. While we have every right to expect deflation in a world that followed normal rules, the corruption of the system has skewed the outcome toward a falsehood that, as it stands now, is apparently sustainable. We’ll see, eh?
Trigger » Oct 8, 2009 at 12:36 pm
RE: Sniglet @ 25 – Sniglet – let’s assume the US govt starts printing which in my opinion it really did. And let;s assume that people want to get out of the greenback.. So the $ collapses. Maybe 3$ = 1 EUR. So what?
So Americans will not be able to import things from Europe. Wo hoo! They will be really sad.
So the American salary will be 35% of what a European salary is – who cares about this in America?
So China will not be able to export toys and their industry will get pulverised. So what?
Now a low $ will encourage exports. The US could get stronger this way. There are plenty of resources in the US – the US is not like some tiny island somewhere in the Pacific. It has its own resources. Life would be cheaper here. And people would adjust.
Sniglet » Oct 8, 2009 at 1:00 pm
Corruption has nothing to do with it. The policy makers simply don’t have any other viable option (i.e. instantaneous currency destruction via hyper-inflation is even worse). Consider the case of Japan again. Their government pulled every concievable trick in the book (short of outright printing of Yen) yet has been unable to prevent deflation over the last 20 years.
The point is that policy makers just don’t have any realistic options (underhanded or otherwise) to prevent deflation from happening.
Scotsman » Oct 8, 2009 at 1:06 pm
RE: Trigger @ 28 –
All true, but our standard of living would decrease, at least temporarily, as much of what we import now and would have to continue importing until our own resources are better utilized, would be more expensive. There’s a decent argument for letting the dollar go to heck, making our debts easier to repay and making our labor and technology more competitive to foreign buyers, giving us the demand and resources to rebuild infrastructure. But there would be a rough period of readjustment… ;-)
Sniglet » Oct 8, 2009 at 1:08 pm
If the US government (or Fed) began “printing” money in any kind of quantity, the dollar would quickly be worth something like 10,000 Euros in a week. That IS a big deal, and there would be riots in the streets. Worse, the US government would suddenly be completely unable to finance it’s debt anymore (i.e. since no one would want to buy worthless t-bills anymore), and the populace would be incensed that government services were grinding to a halt. The only way t-bills could be sold is to offer some incredibly high interest rate, which would likewise cause absolute chaos in society. Middle-class home-owers would be burning the capitol if interest rates rose above 20%.
As painful as deflation might be, it is far preferable to the destruction, and opprobrium, that would be leveled at the politicians if they were to choose the hyper-inflationary path.
Just to be clear, the US government (and Fed) are not “printing” money in any significant quantities right now. The Fed has spent a little under $300 billion in a t-bill monetization program (which they are ending), but that was a piffling sum, and didn’t mean much. Almost all the money the government is spending in stimulus and bail-outs results from BORROWING, which is a completely different thing than printing money.
Scotsman » Oct 8, 2009 at 1:15 pm
RE: Sniglet @ 29 –
I think you’re too locked in to one way of seeing it. It would be very easy to make the argument that corruption and cronyism have a great deal to do with it, not in terms of possible options, but in terms of how the choices and priorities have been determined. Have you ever explored the extent to which GS employees and alumni are dispersed throughout the government and all of its policy and regulatory functions? It’s both astounding and effective. I’m one of the original Polly-Annas, but have come to see that we are far, far off the course of traditional values of service, etc that used to dominate government. Looting seems to be the new theme.
Trigger » Oct 8, 2009 at 1:17 pm
RE: Scotsman @ 30 – I think this is key to getting out of this crisis. The problem is that in China you have a worker working for $80 per month. In the US this worker would starve to death. But because currency valuations are so twisted – this worker in China can do ok.
I don’t know China but I know Eastern Europe much better because I was raised there. In 1989 before the communism collapsed – people were earning like $15 per month. Wo hoo! But people were able to buy food, rent, maybe save up for a small car etc. But when they would somehow get to Frankfurt – they would spend their entire salary just to get a dinner. And there were some crazy prices – like it cost 5 cents to travel on a train from Warsaw to Prague. After communism collapsed and they floated the currency the $ started sinking here like crazy. Like I saw it losing 20% of its value per day.
So because the prices and currencies are out of whack it creates a situation that China does not consume anything and America consumes everything. To get this straight you need to get the $ to have a realistic value. I am not saying that Chinese worker will earn a US salary but it cannot be 2% of a US salary. At this rate this trade is out of whack. And I understand that China wants to learn how to manufacture things and needs to learn the technologies, get management to learn how to run companies etc. But at this point if I were in the US govt I would consider devaluing the USD. I think there would be some period of adjustment etc. But I would not sweat that Europeans will have higher salaries because as with Chinese workers – it only matters what you can buy in the local market. I think Europe would get screwed completely as their industries are dependent on the US. So they would earn a lot – just that nobody would be willing to hire anybody there.
Trigger » Oct 8, 2009 at 1:21 pm
RE: Sniglet @ 31 – Hey Sniglet – so you don’t think there can be some middle ground. You devalue the USD in such a way where it is more like 3$ = 1 EUR instead of 10,000 USD = 1 EUR.
Scotsman » Oct 8, 2009 at 1:31 pm
RE: Sniglet @ 31 –
No, the fed has taken on the majority of the new debt by behind-your-back swaps with the primary dealers where the fed essentially loans out the money to buy the t-bills. Look at the growth in the fed balance sheet- see that trillion plus addition?
http://blogs.wsj.com/economics/2009/09/24/a-look-inside-feds-balance-sheet-92309-update/
See the rising line for mortgage securities? The fed buys the securities, the dealers then use the funds to buy the treasuries.
AMS » Oct 8, 2009 at 1:35 pm
RE: Sniglet @ 31 – “If the US government (or Fed) began “printing” money in any kind of quantity, the dollar would quickly be worth something like 10,000 Euros in a week.”
Printing money makes the currency worth more?
patient » Oct 8, 2009 at 1:42 pm
RE: Scotsman @ 35 – I’m not fully clued up on this part but isn’t there also a huge trade going on where banks lends from the FED to almost 0% interrest rate and purchases Treasuries with several percent yield? Apparently banks are using a lot of the the cheap funds they have access to not to lend but to buy Treasuries. It’s a “win-win” where banks shore up their balance sheet and the treasury gets money printed by a middle man or how it works. As I said I’ have not spent any time trying to understand it properly, I’m sure Scotsman knows it by heart :-)
patient » Oct 8, 2009 at 3:01 pm
Here’s a Moody’s economist that do not believe in the “if you are going to stay in the home for at least 10 years you will be fine” argument. She predicts that nationally prices will not return to 2006 levels until 2020 and for bubble markets not until 2030. Where do Seattle qualify, 2025?
http://www.reuters.com/article/newsOne/idUSTRE59705J20091008?pageNumber=1&virtualBrandChannel=11618
Kary L. Krismer » Oct 8, 2009 at 3:08 pm
RE: patient @ 38 – And here’s what she was reported as saying in 2005 (assuming that she was with Economy.com at the time–I think the two entities are related):
“Chen expects that rising mortgage rates, combined with home prices that have spiraled beyond many buyers’ reach, will weaken demand. In some areas, that means prices will continue to rise — yet at a slower rate.
But some of the hottest markets are likely to see price drops, she said. Still, “I don’t think these areas will see the type of correction that occurred in the late ’80s and early ’90s, because we have a pretty sanguine outlook for economic activity,” Chen said. ”
http://www.marketwatch.com/story/figuring-out-the-housing-market-just-gets-tougher?pagenumber=1
(Quote from page 2 of article).
patient » Oct 8, 2009 at 3:13 pm
RE: Kary L. Krismer @ 39 – Apparently some can learn from their mistakes and do not refuse to accept that they were wrong. Kudos.
Kary L. Krismer » Oct 8, 2009 at 3:20 pm
RE: patient @ 40 – I’d put it more like having failed miserably to predict the future a few years out, she decided to go very long term, so that she’d be likely retired by the time proven wrong again.
I wonder what kind of an inflation analysis she’s doing? Is she talking in 2009 dollars? Does she expect deflation? Assuming the answer to the last two questions is no, she’s apparently expecting inflation under 4%.
AMS » Oct 8, 2009 at 4:23 pm
Regarding Jim the REALTOR’s observation about home prices, take a look at this:
http://www.housingtracker.net/asking-prices/san-diego-california
Look at 75th percentile! There is a substantial jump upward in the 75th percentile level starting a few months ago.
$663,000 in February 2009, this year
to
$849,000 recently!
???
One Eyed Man » Oct 8, 2009 at 5:35 pm
RE: patient @ 37 – RE: Scotsman @ 35 –
Scotsman and I discussed some of this at length last spring. He thinks the government doesn’t have the ammunition to fend off coming deflation caused by deleveraging. He might be right, but I’m staying diversified becuase the government has a plan, and they get to cheat.
It’s a rigged game and the main rule for Treasury and the FED is to save the financial system first. I think the economic and moral (as opposed to just pure insider favoratism) justification for saving the financial system first is that without it, all commerce comes to a halt as payroll checks bounce, no one can borrow funds, the FDIC runs out of assets to take over banks and pay claims, and there are no more solvent banks to take over the insolvent banks.
In my opinion, there are two basic components to the strategy. First, you slow the collapse of real estate prices and potential business failures with liquidity thru programs like TARP, TALF, PIP, etc, modifications of FHA, taking control of Fannie and Freddie to keep them buying loans and then buying their debt, the 8K first time credit, etc. But you don’t actually want to make real estate prices rise, or even stop them from falling. You just want to slow the rate at which they fall so they slowly fall to fundamentally sustainable levels. That way the losses from bad loans are recognized by the banks slowly and don’t hit all at once. If they hit all at once, the financial system fails and locks up. Backing off on mark to market is an important part of this portion of the government strategy.
The second prong of the plan is to rig the game so that financial institutions have a sure way of making profits to offset the losses, It’s the classic step yeild curve with a twist. The banks get to borrow cheap at a rigged interest rate and lend at a higher profitable rate. You do this by dropping the FED funds rate and discount rate to near zero, loaning money to the banks and keeping rates on deposits low. You also have the banks earn interest on their reserves with the Fed and buy Treasuries and Freddie and Fannie debt as well as loaning on some higher loan to value new deals in the private sector.
The end result is hopefully that you string out the losses over several years so that the banks can offset them with high earnings so they don’t lose too much capital.
So far the Fed and Treasury are winning the game. But they’re only in the second or third inning and their only up a run or two. It will probably take 4 or more years to wipe out all the bubble loan losses.
Inflation, and perhaps Sniglet’s feared hyper-inflation is the risk of holding off deflation and a collapse of the financial system. A little inflation is necessary to help make investment profitable, and avoid the quick collapse of collateral values and loan values that could further weaken and potentially destroy the financial system.
The weak dollar is at least in part caused by the increased federal debt and the purchases of treasuries and GSE debt by the FED and the financial institutions. If you take a look at the dollar index, last Feb or March when the Fed said it would buy 300 billion in Treasuries and a trillion in GSE debt, the index dropped about 2% in a matter of minutes, if I recall correctly. And the dollar index has continued to fall for the last six months.
Even if the Fed and Treasuries strategy wins, part of the result will likely be a lower standard of living for Americans as the dollar weakens and the standard of living of workers in countries supplying us (like BRICK countries) increases.
In my opinion, our best hope for the future is to hope that the FED and Treasury are successful and that the new Energy plan (based on the Picken’s Plan) that is now in committee in Congress is passed. Moving from reliance on foreign oil to a higher percentage of reliance on domestic natural gas and other energy sources is a necessary transition to avoid being crushed in the peak oil energy shortage that began to hit in 2007 and 2008 when oil demand started to exceed world oil production of something like 85 million barrels a day. A move toward energy independence will significantly help our balance of payments, make us more secure without increasing the need for military spending, create jobs and probably be good for the environment. If we don’t solve the energy problem, our economy is doomed and housing prices will be the least of our problems because we’ll be back to the horse and buggy era. The irony then will be that buggy whips will make a come back as the new hot investment opportunity.
Kary L. Krismer » Oct 8, 2009 at 7:32 pm
RE: One Eyed Man @ 43 – You bring up a point there at the end. Oil was killing us about the time this downturn started. Every dollar spent on gas is a dollar not spent on something else, and also I think it might mess with the GDP numbers too.
AMS » Oct 8, 2009 at 8:09 pm
RE: Kary L. Krismer @ 44 – “Oil was killing us about the time this downturn started. Every dollar spent on gas is a dollar not spent on something else, and also I think it might mess with the GDP numbers too. ”
The spike in the cost of fuel was the spark that clearly put us in a deflationary pattern, in my opinion. There were all kinds of inflation claims running around at the time, but since we are talking about the price of a basic commodity, the only type of inflation we need to consider is cost-push. As the cost of fuel was going up, who was able to demand an increase in rates?
1. Transportation? The transportation industry was probably most impacted, yet airlines and trucking companies raised rates very little. “Fuel Surcharges” were put in place on some trucking services, but the surcharge was quite small relative to the added cost. Airlines were not increasing rates. Pizza Delivery persons weren’t making more–if anything less.
2. Workers? No. There was not a better opportunity closer, nor could over-leveraged workers demand much from employers, who weren’t listening anyway.
3. Gas and Oil made a lot of money. In part this was from the accounting costing principles.
We can also look at this from a monetary policy perspective. There was this giant sucking sound of dollars leaving the country to what many consider to be “terrorist friendly, oil rich” countries, yet all that money leaving the country was supposed to be inflationary.
Wife: Let’s go out! Somewhere Expensive.
Husband: Sure.
Destination: Local Gas Station
AMS » Oct 8, 2009 at 8:20 pm
The Tim-
Poll idea:
Chance the housing credit gets extended/expanded:
1. No chance
2. Low
3. Medium
4. High
5. Done Deal.
Scotsman » Oct 8, 2009 at 8:46 pm
RE: One Eyed Man @ 43 –
Hey there, One Eye! Well, I’m still pretty much in the deflationist camp, but only if the laws are going to be enforced and everybody has to play by the same rules. The extent to which the government is either manipulating or allowing others to manipulate the markets while turning a blind eye to it all is unprecedented. The net result at this time is that the collapse has been kicked way, way down the road while increasing the eventual impact should the rule of law ever return.
I think in the long run Sniglet, I, and others in the deflation camp have to be right. The value of any currency is the total amount of same in circulation divided by the productive capacity that backs it, and eventually that balance has to win out. But there are way to many games going on right now and not enough folks who care or understand, let alone are willing to stand up and fight to end them. The current equilibrium is precarious though- one good “black swan” event, political or economic, could focus the media and common man, pushing events in a whole new direction.
AMS » Oct 8, 2009 at 9:25 pm
RE: Scotsman @ 47 – “The value of any currency is the total amount of same in circulation divided by the productive capacity that backs it, and eventually that balance has to win out.”
And productive capacity includes Farming, mining and Manufacturing. Productive capacity does not include many of the services that supports life as we know it.
Scotsman » Oct 8, 2009 at 9:40 pm
RE: AMS @ 48 –
You must be referring to lawyers, realtors, and code inspectors. Or Starbucks. But some would argue they are what set us apart from third world countries.
patient » Oct 9, 2009 at 12:48 am
RE: Scotsman @ 47 – You could think I’m a republican ( I’m not ), though in this situation I would like to see all this manipulation and games being replaced by minimal spending and minimal income tax. Reduce the deficit and increase disposable income.
mikal » Oct 9, 2009 at 1:45 am
RE: One Eyed Man @ 43 – You are spot on. I’m not sure that what is being done is correct, but that is what is happening, which has thrown all the normal fundamentals out the window.
Poll: Will the role of a real estate agent be mostly replaced by technology 10 years from now? | Seattle Bubble — News & discussion about real estate & the housing bubble in the Seattle area. » Oct 11, 2009 at 9:58 am
[...] Please vote in this poll using the sidebar. Props to AMS for the poll idea. [...]
Poll: What is the chance the housing tax credit gets extended/expanded? | Seattle Bubble — News & discussion about real estate & the housing bubble in the Seattle area. » Oct 11, 2009 at 9:59 am
[...] Please vote in this poll using the sidebar. Props to AMS for the poll idea. [...]