Monday Open Thread (2010-08-30)

Here is your open thread for Monday August 30th, 2010. 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!

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About The Tim

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. Tim also hosts the weekly improv comedy sci-fi podcast Dispatches from the Multiverse.

72 comments:

  1. 1
    hoary says:

    http://seattletimes.nwsource.com/html/businesstechnology/2012723798_chinadeveloper29.html

    Anybody know anything about China’s housing market? I thought the article above was interesting.

    Googled “chinese real estate bubble” and got this article:

    http://online.wsj.com/article/NA_WSJ_PUB:SB10001424052748704407804575425600708056076.html

    Any armchair economist care to opine on the domestic implications of a real estate bubble in the world’s second largest economy?

  2. 2
    Scotsman says:

    RE: hoary @ 1

    China’s different. Really. With a strong central planning element and more nativist/nationalist tendencies it’s hard to make a meaningful comparison to our situation here in the U.S. But a bubble is a bubble and has to resolve one way or another. They just have more options than we do.

  3. 3
    Sniglet says:

    Any armchair economist care to opine on the domestic implications of a real estate bubble in the world’s second largest economy?

    The bubble in China, and elsewhere in the globe (e.g. Canada, Australia, etc) is exactly why I feel that deflation has MUCH further to go. Further, I believe that many other nations (with China being a prime example) are likely going to see even harsher impacts from the depression than the USA. Anyone putting their money abroad because they are worried about America will be sorely disappointed when they find that foreign economies fare even worse.

    China may well have an authoritarian government but the rules of economics can’t be repealed, no matter what form of government or economic policies you might have. When you have an excess of non-performing debt, bad things happen.

    I think it is important to point out that it isn’t the “crash”, or massive decrease in asset prices that is “bad”. Rather, it was the bubbles which caused the massive mal-investments which are the true evil. Depressions are actually “good”, and necessary for cleaning up the descructive force left over from bubbles.

  4. 4

    The Average Worker in China Gets $3500/Yr

    In America, we’re about $35,000/YR.

    Ask a Boeing or GM financial advisor if cutting American workers and replacing them with cheap globalist alternatives will help them sell more cars and airplane seats….LOL

  5. 5
    Trigger says:

    RE: softwarengineer @ 4 – No this is good. By cutting American workers they CAN boost profits and offer less expensive goods!

  6. 6
    Sniglet says:

    It looks like banks are fighting improvements to accounting rules which would give more clarity as to the true value of the assets they own.

    Fair-value, also known as mark-to-market accounting, forces companies to adjust the value of most securities they hold to market prices each quarter. It became one of the biggest flash points of the financial crisis when banks barraged lawmakers and the Securities and Exchange Commission with complaints that the rule exacerbated their problems because they had to record losses on mortgage bonds they had no intention of selling.

    FASB in April 2009 relaxed that requirement after being pressured by lawmakers on a House Financial Services subcommittee. At the time, FASB Chairman Robert Herz said Congress stepped in because of complaints from banks and their trade groups.

    http://www.bloomberg.com/news/2010-07-08/u-s-banks-recruit-investors-as-lobbyists-to-kill-fasb-fair-value-proposal.html

    This particular accounting rule doesn’t speak to how impaired assets need to be valued. In the case of non-performing loans banks are supposed to value the loan at whatever the market value for liquidating the collateral is. However, there is a HUGE amount of wiggle room here since there is no perfect way to value many assets until you actually go to sell them.

  7. 7

    By Sniglet @ 6:

    This particular accounting rule doesn’t speak to how impaired assets need to be valued. In the case of non-performing loans banks are supposed to value the loan at whatever the market value for liquidating the collateral is. However, there is a HUGE amount of wiggle room here since there is no perfect way to value many assets until you actually go to sell them.

    Until they get in and get possession it’s practically impossible to get within 10%.

    And the problem is even worse as to the performing assets, because there are simply way too many of them, and not only do you need to get in, you also need to do an analysis of the borrowers’ financial condition.

  8. 8

    Okay, I guess I’m going to have to admit I’m wrong taking the position that uncertainty regarding extending the Bush tax cuts has harmed the economy. The Seattle Times Editorial Board is saying the same thing! ;-)

    http://seattletimes.nwsource.com/html/editorials/2012743610_edit30ben.html

  9. 9
    hoary says:

    By Kary L. Krismer @ 8:

    Okay, I guess I’m going to have to admit I’m wrong taking the position that uncertainty regarding extending the Bush tax cuts has harmed the economy. The Seattle Times Editorial Board is saying the same thing! ;-)

    http://seattletimes.nwsource.com/html/editorials/2012743610_edit30ben.html

    Ha, nice cover. The only day it’s good to agree with the ST editorial board is Opposite Day.

  10. 10
    Scotsman says:

    RE: Kary L. Krismer @ 8

    “I guess I’m going to have to admit I’m wrong”

    My head is spinning. . . THUNK! ;-)

  11. 11
  12. 12
    Scotsman says:

    Heh heh. . . Another leak in the dam.

    “A high-level inquiry into the Intergovernmental Panel on Climate Change found there was “little evidence” for its claims about global warming.
    It also said the panel had emphasised the negative impacts of climate change and made “substantive findings” based on little proof.”

    http://www.dailyexpress.co.uk/posts/view/196642

  13. 13
    pfft says:

    By Scotsman @ 12:

    Heh heh. . . Another leak in the dam.

    “A high-level inquiry into the Intergovernmental Panel on Climate Change found there was â��little evidenceâ�� for its claims about global warming.
    It also said the panel had emphasised the negative impacts of climate change and made â��substantive findingsâ�� based on little proof.”

    http://www.dailyexpress.co.uk/posts/view/196642

    too funny. russia and pakistan ring a bell?

  14. 14
    Ben says:

    Guys, I’ve been trying to hammer away that its the debt that is the issue. Denninger nails it again. You’ve got to see the chart to fully appreciate it.

    http://market-ticker.org/cgi-ticker/akcs-www?post=165632

    Steve Keen Nails It

    There are people in the economics world who “get it”….

    Debt reduction is now the real story of the American economy, just as real story behind the apparent free lunch of the last two decades was rising debt. The secret that has completely eluded Bernanke is that aggregate demand is the sum of GDP plus the change in debt. So when debt is rising demand exceeds what it could be on the basis of earned incomes alone, and when debt is falling the opposite happens.

    Ding ding ding ding.

    The entire mantra of “private debt doesn’t matter” is of course idiotic, but it forms the premise upon which Krugman, Bernanke and many others try to labor. Worse, some of them go a step further and say that government debt doesn’t matter. This is how you get charts that look like this:

    But of course as anyone who has ever been up to their eyeballs in debt knows, it most certainly does matter, because the amount of debt you can carry is finite – no matter who (or what) you are.

    So as debt level rises your ability to keep taking more goes down. That debt adds to aggregate demand just as would more income. But when that debt accumulation ceases, so does the demand that it sponsored, and when it reverses you wind up subtracting from demand that which goes to pay off the debt!

    Of course there are those who argue “but one man’s debt is another man’s asset”, and I’d agree with this – if all debt was paid. But defaulted debt is another matter, isn’t it? Now what’s that “asset” worth? Oops.

    The other issue, which none of these people (except Keen!) seems to appreciate is that when you’re up to your eyeballs in debt your production is inevitably shifted away from productive and saving pursuits. The first is a problem. The second is corrosive to industry, as it is savings that form the predicate for Capital Formation and it is Capital Formation that is the seed from which new businesses, and thus employment, grows.

    That sucking sound will continue for many years, because the level of debt that was racked up under Bernanke’s watch, and that of his predecessor Alan Greenspan, was truly enormous. In the years from 1987, when Greenspan first rescued the financial system from its own follies, till 2009 when the US hit Peak Debt, the US private sector added $34 trillion in debt. Over the same period, the USA’s nominal GDP grew by a mere $9 trillion.

    Yep. And guess what – now a good part of that $34 trillion has to come out. My “best guess” is about $25 trillion of it.

    This will of course whack on GDP – probably by 40% and perhaps more. That takes us back to $10 trillion.

    I’ve been arguing this for three years now in these pages. The exact amount of damage to GDP and debt that must be excised in order to bring the system back into balance is a point of contention, but that this has to happen, as the Ponzi has hit the wall, is not. That is a mathematical certainty.

    The sooner we take our medicine the better.

  15. 15
    Ben says:

    RE: Ben @ 14

    This was my very point the other day…..

    By Ben @ 144:

    RE: Scotsman @ 135

    You nailed it!

    Moron Keynesians totally ignore the level debt in the system and will happily recommend spending the country into national bankruptcy, completely oblivious to the fact that stimulus only *appears* to work until the debt level is too high to be serviced.

    Formula to make a Keynesian: add broken window with a dose of Ponzi. Shake well.

  16. 16
    pfft says:

    By Ben @ 14:

    The entire mantra of “private debt doesn’t matter” is of course idiotic, but it forms the premise upon which Krugman, Bernanke and many others try to labor.

    I’ve never heard that out of anyone. what are you talking about? do you have a link?

  17. 17
    pfft says:

    By Ben @ 15:

    RE: Ben @ 14

    This was my very point the other day…..

    By Ben @ 144:

    RE: Scotsman @ 135

    You nailed it!

    Moron Keynesians totally ignore the level debt in the system and will happily recommend spending the country into national bankruptcy, completely oblivious to the fact that stimulus only *appears* to work until the debt level is too high to be serviced.

    Formula to make a Keynesian: add broken window with a dose of Ponzi. Shake well.

    keynsians don’t ignore debt. you guys do. reset would have us more in debt. you guys don’t address that no matter how many times I post it.

    without government intervention we’d be $2.7 trillion more in debt just from 2010-2012 than we are now.

    the bond market has no problems with US debt but you guys will never address that. the only time you’ll listen to the bond market is when it tells you what you want to hear.

    I was originally against tarp and the stimulus but it worked. I was wrong.

  18. 18
    pfft says:

    broken window doesn’t work here. nobody has broken any windows. savers are willingly are buying government bonds. interest rates are very low. nobody is forced to fix a window incurring the opportunity cost of buying something else or keeping their money in savings.

    savers get to save their money while at the same time the government uses their money to keep the economy up. with the economy not in free fall tax revenues and hence government debt is lower. later when the economy recovers we will have the luxury of more revenue to deal with any incurred debt. in our case we saved $2.7 trillion.

  19. 19
    pfft says:

    all you good republicans your politicians rail at stimulus in washington and dole out big checks in your district.

    Republican hypocrites on the stimulus
    http://crooksandliars.com/john-amato/republican-hypocrites-stimulus

    Republican Stimulus Hypocrisy: They Knew it Would Work
    http://politics.usnews.com/opinion/blogs/john-farrell/2010/02/09/republican-stimulus-hypocrisy-they-knew-it-would-work.html

    rachel maddow had the best takedown.

    http://seminal.firedoglake.com/diary/30137

  20. 20

    On the debt issue, many businesses don’t have a choice but to reduce their debt, because it’s forced on them by their bank.

    Also, on the consumer side, do they track how much of the reduction of credit card debt is due to bankruptcy?

  21. 21
    Scotsman says:

    RE: pfft @ 18

    You drinking tonight?- the rambling is worse than usual.

  22. 22
    David Losh says:

    Debt, the debt in China, or the debt in California, will be the ultimate test of the economic system.

    Consumers will default, but will governments? Or how can they? Would that be the dominoe effect that war, or the anti communist advocates have been waiting for?

  23. 23
    Blurtman says:

    Bill Black for President. His comments on mark to fantasy fraud below. Also note that the head of FASB, a proponent of mark to market, has been shown the door recently, err.. that is, resigned for family reasons.

    Why Covering up Fraud Losses Impairs Economic Recovery. Part One.

    For a banker, what’s not to love about the right not to recognize even massive losses on assets? He gets to keep his job, reputation, and obtain bonuses for blowing up the bank. For a senior regulator whose failures allowed the bankers to cause the “epidemic” of mortgage fraud (FBI 2004), the mother of all bubbles, and the Great Recession a cover up is ideal. Bank failures are supposed to lead to investigations by the Inspector General and can lead to embarrassing congressional oversight hearings. Bankers and bad regulators sell the cover up to legislators as the miraculous “silver bullet” solution that can solve a crisis at no cost. Legislators wish everything they do could be that easy. Among my most painful memories are being in their offices to listen to their explanation of how simple, cheap, and pleasant the cover up will be. Everyone wins, no one loses. It’s just like the financial bubble that inflated the fictional asset values. Remember how wonderful the bubble was? The cover up pretends that the bubble prices were real. The cover up strategy says that the answer to a bubble is a bigger, longer bubble. Fiction can be so much more pleasant than reality.

    http://www.benzinga.com/life/politics/10/08/447366/why-covering-up-fraud-losses-impairs-economic-recovery-part-one

  24. 24
    David Losh says:

    RE: Kary L. Krismer @ 7

    The borrowers financial condition is irrelevant. The assets have a value.

  25. 25

    By David Losh @ 24:

    RE: Kary L. Krismer @ 7

    The borrowers financial condition is irrelevant. The assets have a value.

    No it’s not irrelevant. Let’s say Bill Gates bought a commercial building, and for some reason borrowed 100% of value (to make the numbers easy). Let’s say that building is worth only 50% of what it was when he bought it, per a full blown appraisal. Would you say that the note was worth only 50% of it’s value, even though Bill Gates was the maker?

  26. 26

    Interesting that Dick’s Drive-in is looking to expand for the first time in 36 years. I wonder if their business is counter-cyclical?

  27. 27

    RE: Kary L. Krismer @ 25
    Bill Gates I don’t know, but it seems that whatever Paul Allen touches turns to excrement.
    At one point he was the second wealthiest American and worth 50 billion dollars. Now I don’t think he’s in the top ten and is worth closer to ten billion. So if he bought a building, would that mean it’ll immediately decline in value?

  28. 28
    Dirty_Renter says:

    RE: Sniglet @ 6

    Snig – I think I read that article this morning in Seeking Alpha by Mish.
    He doesn’t state the fact that FASB 157 was implemented in November of 2007. It was rightly adjusted in the Spring of ’09.
    Why in Sam H*ll should banks have to write down assets(loans), in a frozen market, according to a distressed sale….when they have no plan on selling the asset? It’s like telling a machine shop they have to claim a loss on their earnings because their new lathe is now only worth a tenth it’s value, regardless that the machine is earning 30% in cash flow. The machine shop owner is laughing all the way to the bank. Plenty of banks have failed, and will continue to fail, due to their cash flow problems and real charge-offs….allow it to happen.

  29. 29

    RE: Ira Sacharoff @ 27 – Interesting puzzle. What would happen if Allen bought commercial property today? Would that be like Cramer making a positive comment on the real estate market?

  30. 30
    Scotsman says:

    Good laugh for a rainy day- 7 million jobs created (or saved)!! Why the stimulus failed:

    “The Congressional Budget Office released its most recent estimates of the effectiveness of the Recovery Act. In the trailing 12 months, the midpoint of its numbers claims that 7 million jobs have been created by Recovery Act spending compared to Bureau of Labor Statistics reports showing 711,000 jobs lost over that period”

    http://www.minyanville.com/businessmarkets/articles/american-recovery-and-reinvestment-act-keynesian/8/26/2010/id/29807

    “Instead of achieving its stated goal of 90% private-sector job creation, ARRA did the exact opposite. More than 95% of any jobs created have been in the government sector (fully outlined on Recovery.gov and confirmed by the Congressional Budget Office)”

  31. 31
    Scotsman says:

    RE: Kary L. Krismer @ 26

    Or maybe it’s because the competition has moved to wraps and salads. Want a real burger- for cheap! Where ya gonna go? DICKS!

  32. 32
    pfft says:

    By Scotsman @ 30:

    Good laugh for a rainy day- 7 million jobs created (or saved)!! Why the stimulus failed:

    “The Congressional Budget Office released its most recent estimates of the effectiveness of the Recovery Act. In the trailing 12 months, the midpoint of its numbers claims that 7 million jobs have been created by Recovery Act spending compared to Bureau of Labor Statistics reports showing 711,000 jobs lost over that period”

    link? I also think you need to replace created with saved. I think the number is under 3 million jobs.

    they might be talking about the total government expenditures for the crisis started under bush.

    Using econometric models, Alan Blinder and Mark Zandi argue that the bailouts, the stimulus and other extraordinary actions saved America from nothing less than another Great Depression. Blinder was vice chairman of the Federal Reserve. Zandi is chief economist at Moody’s Analytics and advised Republican presidential candidate John McCain.

    Had Washington not taken any aggressive steps starting in 2008, the results would have been horrific, their study says. Real gross domestic product would have fallen a “stunning” 12 percent, rather than the actual decline of 4 percent. Nearly 17 million jobs would have vanished, twice as many as the real count. And the unemployment rate would have peaked at 16.5 percent.

    http://www.creators.com/liberal/froma-harrop/washington-saved-our-economic-hide.html

    remember the debt also would have been much higher w/o relief.

    If Washington had not reacted as quickly and as forcefully as it did, the two economists write, “the costs to U.S. taxpayers would have been vastly greater.”

    With no special government intervention, the 2010 deficit would have passed $2 trillion, according to their model. It would have reached $2.6 trillion in fiscal 2011 and $2.25 trillion in 2012.

  33. 33
    pfft says:

    wow than minyanville article is pretty weak.

    In the trailing 12 months, the midpoint of its numbers claims that 7 million jobs have been created by Recovery Act spending compared to Bureau of Labor Statistics reports showing 711,000 jobs lost over that period.

    I think he got things mixed up.

    increased the number of people employed by between 1.4 million and 3.3 million,

    boosted the number of “full-time-equivalent” jobs by between 2.0 million and 4.8 million, both by saving jobs and by boosting the number of hours
    worked. (Without the Recovery Act, many full-time workers would have been reduced to part-time status and fewer would have worked overtime.)

    CBO: Up to 3.3 Million People Owe Their Jobs to the Recovery Act
    http://www.offthechartsblog.org/cbo-up-to-3-3-million-people-owe-their-jobs-to-the-recovery-act/

    did he just add those numbers up and say something the government didn’t say?

  34. 34
    Don Linley says:

    Unrelated question to the thread…..when did the Seattle Real estate market peak? Spring 2007? I’m sure this topic has been broadly discussed but a friend and I were discussing again recently. He said late 2006. Thanks for your comments in advance. -Don

  35. 35
    The Tim says:

    RE: Don Linley @ 34 – Depends what you mean by “peak.” Sales volume peaked in June 2004. Prices peaked in July 2007.

  36. 36
    pfft says:

    By The Tim @ 35:

    RE: Don Linley @ 34 – Depends what you mean by “peak.” Sales volume peaked in June 2004. Prices peaked in July 2007.

    don’t forget they bottomed(for now) in march 2010.

  37. 37
    Blurtman says:

    RE: Dirty_Renter @ 28 – “Frozen market” = I do not like the results or price discovery., and if things were different, boy oh boy….

  38. 38
    pfft says:

    fun fact. in 2011 tarp, fannie/freddie and the stimulus will add $198 billion to the national debt. if the unfunded bush tax cuts are extended they will add $295 billion to the national debt. in 2010 all the recovery measures only added $44 billion more to the debt than the unfunded bush tax cuts for the rich. in 2019 the unfunded bush tax cuts for the rich will add $702 billion dollars to the national debt.

    http://www.cbpp.org/images/cms/12-16-09bud-rev6-28-10-t11.jpg

  39. 39
    Scotsman says:

    Uh Oh- car sales for August may have tanked- bad:

    “Industrywide deliveries, to be released tomorrow, may have reached an annualized rate of 11.6 million vehicles this month, the average of eight analysts’ estimates compiled by Bloomberg. That would be the slowest August since 1982, according to researcher Ward’s AutoInfoBank.”

    http://www.bloomberg.com/news/2010-08-31/auto-sales-in-u-s-may-be-worst-in-28-years-in-august-as-buyers-shun-deals.html

  40. 40
    Dirty_Renter says:

    RE: Blurtman @ 37

    What the silly boys continue to hide is the fact that FASB 157 was instituted in November of 2007.
    You fail to answer the question as to why an asset has to be written down, with the ensuing pro-cyclical swings, when there is no intention of selling it?
    You obviously read my post, so should the machine shop be closed down when it purchased the new lathe because it lost 90% of it’s value once it was delivered and used? It’s ridiculous. It’s all about cash flow. It’s obvious to anyone who has owned a business.

  41. 41
    patient says:

    RE: pfft @ 38

    Fannie and Freddie support is to cover for losses, it’s money straight into the fire pit. Tax cuts increases consumer spending. Comparing them is pretty useless.

  42. 42
    Scotsman says:

    RE: Dirty_Renter @ 40

    ” It’s ridiculous.”

    Not really. Machine shops are in the business of using lathes, so as long as they work and are cost effective it doesn’t matter. Banks are not in the business of holding collateral, especially depreciating collateral. The machine shop may never sell the lathe. The bank never really intended to take control of the houses. If all they did was hold houses they would indeed go broke, so the expectation is that they will indeed sell the house, likely at a loss. That potential loss needs to be revealed to investors and accounted for realistically in the context of the bank’s main business model.

  43. 43
    pfft says:

    By Scotsman @ 39:

    Uh Oh- car sales for August may have tanked- bad:

    “Industrywide deliveries, to be released tomorrow, may have reached an annualized rate of 11.6 million vehicles this month, the average of eight analystsâ�� estimates compiled by Bloomberg. That would be the slowest August since 1982, according to researcher Wardâ��s AutoInfoBank.”

    http://www.bloomberg.com/news/2010-08-31/auto-sales-in-u-s-may-be-worst-in-28-years-in-august-as-buyers-shun-deals.html

    the YOY comparison is to CFC.

  44. 44
    pfft says:

    By patient @ 41:

    RE: pfft @ 38

    Fannie and Freddie support is to cover for losses, it’s money straight into the fire pit. Tax cuts increases consumer spending. Comparing them is pretty useless.

    by keeping fannie and freddie from imploding the economy and decreasing consumer spending and increasing government debt through decreased tax revenue from a plunging economy. this leads to less government debt. tax cuts do not pay for themselves. we know that.

  45. 45
    One Eyed Man says:

    RE: Blurtman @ 37

    Don’t forget that “Market Price” can be an absurd bubble distorted price as well as an absurd distress sale liquidation price. Market Price isn’t always the best valuation. That’s part of the reason why commercial markets rely more on the income approach. If the residential market factored in an income approach to limit loan amount, maybe we wouldn’t have had a residential bubble and a financial system melt down. Maybe reliance on “Market Price” should bear its fair share of the blame for the bubble and the financial melt down. Maybe average joe shouldn’t have been loaned the money to buy the big new house just so he could speculate on appreciation or get his first B(letter after I) since he bought the last house his spouse got excited over. Maybe sometimes “Market Price” bears a closer relation to “animal spirits” than to fundamental economic value.

    Everythings turning into a bubble. Think about baseball, think about baseball.

    OK, I’m better now. It’s just those animal spirits start rising when I think about increasing market price.

  46. 46
    Blurtman says:

    RE: Dirty_Renter @ 40

    A home mortgage is a secured loan. If the value of the asset securing the loan drops, do you think anyone will lend you more money, even if you are making the mortgage payments?

    Now multiply that one loan by thousands, where the asset values underlying the loans have all cratered. Do you think anyone will lend that bank money? Ergo, financial crisis.

    Pretending will not make the situation better.

    Disclaimer: I am not an accountant, nor do I play one on television. 1/10 mortgages are in non-payment mode, but are recognized as still performing. 25% are under water, although I’d be the first to say that underwater does not equal strategic default. Never void where prohibited, especially in public.

  47. 47
    Scotsman says:

    RE: pfft @ 43

    Oh. I guess you missed this part:

    “That would be the slowest August since 1982”

    Still, I guess it is YOY in a way. . . on the thirty year time frame, or something. .

  48. 48
    Blurtman says:

    RE: One Eyed Man @ 45 – I used to be a fundamental value guy, but now everything is Zen – it is what it is at the present time. Of course that is influenced by animal spirits as there is no fundamental value period. Gadzooks, I’ve turned into a nihilist.

  49. 49
    Scotsman says:

    RE: One Eyed Man @ 45

    ” just so he could speculate on appreciation or get his first B(letter after I) since he bought the last house his spouse got excited over”

    So, that’s what really drove the bubble? Classic tulip bulb bubble too? Mercedes SL purchases?

    If I’m writing an equation to model the market fundamentals for real estate consumption, what would the (fractional) constant be that modifies the purchase decision as relates to this mythical B(letter after I) ?

  50. 50
    Hugh Dominic says:

    By Dirty_Renter @ 28:

    Why in Sam H*ll should banks have to write down assets(loans), in a frozen market, according to a distressed sale….when they have no plan on selling the asset? It’s like telling a machine shop they have to claim a loss on their earnings because their new lathe is now only worth a tenth it’s value, regardless that the machine is earning 30% in cash flow.

    Is this a serious comment?

    If so, the reason is because a bank is loaning other people’s money. The depositors (and regulators) want proof that the bank can return their money to them upon demand. If the banks are sitting on worthless paper, and lots of people show up to make a withdrawal, everyone is screwed.

    A machine shop owner will probably not find himself in a situation where his creditors demand that he sell off some of his equipment in order to repay them. But if he was — then yes those creditors would be keenly interested in the declining value of his collateral.

  51. 51
    Blurtman says:

    RE: Hugh Dominic @ 50 – Indeed. And revenue streams are always conditional, and likely one of many variables that are modeled. As will be the out clause scenario – if this lathe shop goes under, what can I sell the dang lathe for on which I loaned the shop the money.

  52. 52
    nov01 says:

    Do we know how many sideline buyers out there? How strong is their buying power e.g. price ranges?

    Tim, I think a poll on this subject will be helpful for both sides.

  53. 53
    pfft says:

    By Scotsman @ 47:

    RE: pfft @ 43

    Oh. I guess you missed this part:

    “That would be the slowest August since 1982”

    Still, I guess it is YOY in a way. . . on the thirty year time frame, or something. .

    in prior months YOY was pretty decent even though the conventional wisdom was sales would plunge after CFC. they didn’t.

  54. 54

    By Don Linley @ 34:

    Unrelated question to the thread…..when did the Seattle Real estate market peak? Spring 2007? I’m sure this topic has been broadly discussed but a friend and I were discussing again recently. He said late 2006. Thanks for your comments in advance. -Don

    July 2007 for the King County mean and median, and for the C-S tri-county data.

  55. 55

    I suspect a lot of the profits banks have been posting lately have been the result of a lot of those so-called worthless assets being refinanced and paid off in full, when they had some sort of an allowance for bad debt already factored in.

  56. 56
    David Losh says:

    RE: Kary L. Krismer @ 25

    I’m only going to address this question because the answer is in the thread already.

    Bill Gates may make a purchase of property at a very over inflated price because the lender will look at his over all financial picture, but the value of the property is a constant.

    The property has a value based on it’s economic viability. In retail, or like in the example of the machine shop, the value of the property may change with the business operation. The cash flow makes an economic impact.

    In residential it may be harder, but come on, property has a value, no matter what, some properties are worth more than others.

  57. 57
    Blurtman says:

    RE: Kary L. Krismer @ 55 – If I could borrow from the Fed at 0% and invest the money in short term Treasuries, I would be making lots of money, too. That is one freakin’ money machine. We lend the banks the money, and we pay them interest on the Treasuries. And we earn squat on savings accounts. Seems fair to me.

  58. 58

    RE: Blurtman @ 57 – You would think, but despite that, banks still don’t want to loan to businesses.

  59. 59

    An example of the low quality of financial news on MSNBC (and NBC and CNBC). Oh no! September is approaching! ;-)

    http://www.msnbc.msn.com/id/38937155/ns/business-eye_on_the_economy/

  60. 60
    Timmcb says:

    RE: Kary L. Krismer @ 59

    Forget September, October’s where the real action is. An interesting tidbit on first true gauge of the post- tax credit housing market is the October Case-Shiller:

    http://www.calculatedriskblog.com/2010/08/on-case-shiller-house-prices-october-is.html

    Any guesses on how bad it will be?

  61. 61
    pfft says:

    top skeptic reverses on global warming.

    Noted anti-global-warming scientist reverses course
    By Brett Michael Dykes

    With scientific data piling up showing that the world has reached its hottest-ever point in recorded history, global-warming skeptics are facing a high-profile defection from their ranks. Bjorn Lomborg, author of the influential tract “The Skeptical Environmentalist,” has reversed course on the urgency of global warming, and is now calling for action on “a challenge humanity must confront.”

    http://news.yahoo.com/s/yblog_upshot/20100831/sc_yblog_upshot/noted-anti-global-warming-scientist-reverses-course

  62. 62
    pfft says:

    By Blurtman @ 57:

    RE: Kary L. Krismer @ 55 – If I could borrow from the Fed at 0% and invest the money in short term Treasuries, I would be making lots of money, too. That is one freakin’ money machine. We lend the banks the money, and we pay them interest on the Treasuries. And we earn squat on savings accounts. Seems fair to me.

    I guess we can have them undercapitalized.

  63. 63
    pfft says:

    By Kary L. Krismer @ 58:

    RE: Blurtman @ 57 – You would think, but despite that, banks still don’t want to loan to businesses.

    it’s the other way around. business don’t want to borrow money.

    I could borrow $2 billion tomorrow for 3 1/2 percent. But what am I going to do with it?”

    http://www.calculatedriskblog.com/2010/08/ceo-no-need-to-invest-right-now.html

  64. 64
    Dirty_Renter says:

    By Hugh Dominic @ 50:

    By Dirty_Renter @ 28:

    Why in Sam H*ll should banks have to write down assets(loans), in a frozen market, according to a distressed sale….when they have no plan on selling the asset? It’s like telling a machine shop they have to claim a loss on their earnings because their new lathe is now only worth a tenth it’s value, regardless that the machine is earning 30% in cash flow.

    Is this a serious comment?

    If so, the reason is because a bank is loaning other people’s money. The depositors (and regulators) want proof that the bank can return their money to them upon demand. If the banks are sitting on worthless paper, and lots of people show up to make a withdrawal, everyone is screwed.

    A machine shop owner will probably not find himself in a situation where his creditors demand that he sell off some of his equipment in order to repay them. But if he was — then yes those creditors would be keenly interested in the declining value of his collateral.

    The source of capital is irrelevant to FASB 157.
    You’ve not answered the question.
    Should the machine shop be liquidated if it has capital of $100,000 and it buys a new lathe for $200,000 and upon deliverance to it’s shop and 1 day’s use, said lathe is worth $50,000 on the open market, even though it will add $60,000 to profits each year?
    If you support FASB 157, then the answer is yes, close it down.
    It’s asinine…and that is why the rule was amended in the Spring of ’09.
    Again, it was implemented in November of 2007 and it’s timing was impeccable, the beginning of the collapse of the housing bubble. On the other hand, can you imagine the distortions had it been implemented in 2002? The banks would have owned the world…equally as asinine. Why write down loans that are current and paying?

    Let the bad loans emerge, let the banks sell the collateral and take their charge-offs; let them provision as best they can, force them to put off-balance sheet items onto their BS, and fail by the 1000’s…but make no mistake, FASB 157 is a joke.

  65. 65
    Dirty_Renter says:

    By Blurtman @ 57:

    RE: Kary L. Krismer @ 55 – If I could borrow from the Fed at 0% and invest the money in short term Treasuries, I would be making lots of money, too. That is one freakin’ money machine. We lend the banks the money, and we pay them interest on the Treasuries. And we earn squat on savings accounts. Seems fair to me.

    3 mo – 0.14%
    5 yr – 1.34%
    10 yr – 2.48%
    ‘lots of money’ ‘freakin’ money machine’ ?

  66. 66
    Dirty_Renter says:

    By Blurtman @ 51:

    RE: Hugh Dominic @ 50 – Indeed. And revenue streams are always conditional, and likely one of many variables that are modeled. As will be the out clause scenario – if this lathe shop goes under, what can I sell the dang lathe for on which I loaned the shop the money.

    You’re not connecting the dots.
    FASB 157 demanded that the machine shop write down the value of the lathe to market value(mark to market), regardless of the revenue stream, and deem the shop insolvent with a Friday night get-together.

  67. 67
    David Losh says:

    RE: hoary @ 1

    If we take the example presented in the first comment, these two people built a Real Estate empire of questionable value, but that isn’t where they made the money. They made the money offering an IPO based on the value of the Real Estate empire.

    Mid way through the article they say they discovered maintaining, and managing the property was important because their name was on the properties. In other words the properties were falling apart, and they have a stock to protect.

    What we are going to find is that much more was lent than can ever be repaid. It’s personal, government, business, and corporate.

    The only reason that any one is talking about the value of hard assets is because so much has been based on that. Banks fought for years on the idea that they wanted quick foreclosure as a guarantee for a mortgage. Really though, who wants the assets?

    If a lender does take the lathe, there is a loss of income, a loss of rent, a loss of taxes. We do need to know that the loan is unsecured, but that is exactly the case.

    Money, trillions of dollars of money, has been lent without sufficient collateral.

  68. 68
    Blurtman says:

    RE: Dirty_Renter @ 65 – $500 million at 1% is $5 million with absolutely no risk and no effort. Yes, that is a money machine.

  69. 69
    B&W Nikes says:

    I think I picked this up somewhere here while browsing, (next time I’ll wear gloves):
    http://www.aei.org/docLib/Reinhart-After-the-Fall-August-17.pdf
    If I read correctly, the Reinharts seem to indicate inducing 1970s-style inflation is a preferred policy posture over the recent and current actions to date?

  70. 70
    Blurtman says:

    RE: Dirty_Renter @ 66 – FASB 157 would describe the definition of fair value for the lathe, and would say that it is based upon the market value of the lathe, i.e., it is worth what the market would pay for it. You are looking only at a hypothetical revenue stream for one lathe operator, which by no means is guaranteed, and not the lathe operating market in general, which to continue your analogy, is in terrible shape. Again, as you do not seem to be able to make the transition, 1/10 lathe operators are tetering on bankruptcy and cannot pay their lathe loans. 25% of lathe loans are underwater. So the market does not value lathe loans highly because the lathe business is in terrible shape. There is currently an over supply of lathes on the market selling for a fraction of what your hypothetical lathe operator borrowed money to pay for his. And yet you argue that in this special case of the noble lathe operator, his lathe should be valued not at what the market will pay for it, but what the poor investor lathe operator paid for it.

    Is this really your argument?

  71. 71
    pfft says:

    one more piece of bad data(see how easy that is bears?)

    Restaurant Index shows contraction in July
    http://www.calculatedriskblog.com/2010/08/restaurant-index-shows-contraction-in.html

  72. 72
    pfft says:

    By Blurtman @ 68:

    RE: Dirty_Renter @ 65 – $500 million at 1% is $5 million with absolutely no risk and no effort. Yes, that is a money machine.

    yeah except interest rate risk and inflation. other than that it’s easy money. $5 million is nothing. it’s 1%.

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