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WHAT HAVE WE JUST BEEN THROUGH?
1. A Mania- everyone flees from cash to
appreciating assets leading to high
leverage
2. A Panic- everyone flees from assets back
to cash leading to deleveraging
3.A Crash. There is not enough cash.
Markets don’t make. Assets go for
fire sale prices
A typical asset pricing bubble
Described by Charles Kindleberger in a book called
“Manias, Panics, and Crashes”
(lists ten year cycles back to 1857)
EXPERIENCES DURING OUR LIFETIME
1974-75: Oil embargo to Oil collapse
1980-82: Eliminating the Gold Standard:
collapse of the $ (end of Bretton Woods)
Demonetizing gold and silver
1980s- the Savings and Loan Crisis,
oil again and then real estate
1990s- the dot.com boom and collapse.
again real estate (RI)
2000s- the real estate bubble.
2010s- Health Care and Education?... Then real
estate?
Median Housing Prices v. Median Income
300
$000s per year
250
*
So far we have done
between 11% and 18%
200
150
100
50
0
95
96
97
98
99
Median Housing Price
Projected Median Housing Price
Data Source: Wells Fargo Housing Indices
0
1
2
4
Median Income
5
* m issing years
6
7
HOW LONG WILL THIS PLAY OUT?
The good news (why the economy is recovering
- Job loss is slowing – still declining but
slower!(at 8.9% going to 10% by next year)
- Interest rates are very low, considering
there is a credit crunch. (the Fed is great)
- Inflation rates and wage rates are very low
- The $ is strong (not good for exports, but
borrowers don’t lose when they hold
American debt)
- The trade balance is better (the recession is
holding down imports)
- New 1st time buyers are entering the housing
market at greater numbers then new houses
THE BAD NEWS: FORECLOSURES
California
Florida
Kentucky
Minnesota
Texas
family friends
23
29
38
38
16
emergency
shelters
15
25
19
29
16
transition shelters
16
12
0
8
5
on the streets
16
17
13
17
16
rental home
18
13
25
4
5
don't know
3
0
0
4
37
other
9
4
6
0
5
100
100
101
100
100
source: national coalition for
the homeless
Almost none of these people will buy houses
again for another decade or more
- Good riddance????
-The Housing Inventory is 10-11 months
(needs to be 6 months before recovery of
the housing construction industry- 1/3 of
economy- and it will take 6 mos.+ after
that before the recovery starts)
-That housing inventory was built in
anticipation of those people who won’t be
buying- particularly retiring baby
boomers. (overbuilt at the high end of the
market in the wrong states)
The Three Prongs of Government Effort
- that must ALL Work
1.
-
The TARP bank revitalization effort
$750 billion
debt guarantees of $ trillions
Amazing public relations success: the stress test!!!!
Unknowable: securitized mortgages, credit default
swaps, other derivatives.
2.
-
The TALF foreclosure effort
The government cannot force deals to be redone
New mortgages are still not viable.
Refinancings pirate from securitized
mortgage packages and push profits from fees
3.
-
The Stimulus Package
$750 billion. Enters very slowly.
Multiplier of 2?
Simply replaces state contractions?
Another $750 billion next year?
LONG TERM DANGERS
1. The government holds onto its stake in the financial (and
manufacturing?) sector.
2. The government does not reintroduce the firewalls between the
banking sector it subsidizes and the banking sector (the old
investment banks) that compete in the mergers and acquisition
markets.
3. Large firms are not allowed to fail- moral hazard is alive and well
4. Orderly markets (transparent, defined, enforceable property rights)
are not required for all financial instruments.
5. The opportunity is missed to be bring all organizations that create
monies or near monies under reserve requirements. There is a
rare opportunity to forge multilateral agreements on reserve
requirements on banks holding money of other countries.
6. The phobia against regulation continues. This creates its own
moral hazard- if the government won’t intervene we can get
away with ANYTHING!
What should we look for to see Recovery?
- 6 month housing inventory (check your neighborhood
to see how fast houses are selling)
- The return of inflation (look at gasoline prices daily)
- Interest rates relative to inflation; back to normal when
they are everywhere above inflation
- Better performance by local firms in transportation
(YFC, KC Southern), communication, and packaging
(their services are needed before inventories can be
built).
-
Signs that the Recession is getting Worse?
-
More homeless people
Your awareness of the plight of neighbors.
More foreclosures and involuntary auctions.
Interest rates spike and banks continue to fail to
lend.
Large scale failure of banks.
Foreign countries refuse to take U.S. debt.
The IMF makes a loan to the U.S.
People start stuffing mattresses with their life
savings.
What not to check?
- The stock market: it has predicted “9 of the
last 5 recoveries.”
- The unemployment rate: it lags the economy
- The foreclosure rate: it lags the economy
- Government spending: it rises when the
economy falls and rises when the economy
rises. Keeping us afloat right now.
- The federal deficit: it not only lags the
economy but it doesn’t make any sense
anyway- has been politicized.
US Rep Frank, other lawmakers question Fed's TALF
Fri May 8, 2009 11:52pm BST
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WASHINGTON, May 8 (Reuters) –
Democrats wrote to officials to raise issues with the Fed's massive
Term Asset-backed
Securities Loan Facility, or TALF.
The TALF was initially launched in March at $200 billion but was expanded to $1 trillion, with $100 billion
of Treasury bailout funds as capital. It was created to revive a paralyzed market for securitized small
business and household debt amid a global credit crunch.
But the lawmakers noted that the facility funded only $1.7 billion in loans in April, "a figure that was
dramatically less than that provided by the program when it was first rolled out in March.“
"To what extent has the lack of demand for secondary and tertiary tranches dampened overall demand for
TALF financing?"
The lawmakers also expressed concerns about the integrity of ratings given to triple-A asset-backed
securities, especially since many structured mortgage securities that are now considered toxic assets
were once given triple-A ratings.
http://uk.reuters.com/article/marketsNewsUS/idUKN0850373020090508
What not to check?
Special investment vehicle. Capitalized to
be self funding.
credit default swaps
Derivatives
moral hazard. Aig believes lehman never
under.
Sheila Baird