Saturday, January 19, 2008
How deep could the damage go?
I tend to be cavalier when it comes to the troubles in the economy, and Scott and I have been predicting the real estate crash over coffee at Starbucks for quite some time. Others predicted the crash would come earlier than it did, but I could not have predicted nor have I read anywhere the depths of the pain the nation could be facing. Bad news abounds, and I've only recently begun to wonder how severely we could all be affected. I don't mean this in the traditional sense, such as losing a job, or suffering through a foreclosure, or not having access to your bank account. All of these are real possibilities, and yes, access to one's bank deposits is hypothetically imperiled. The S&L crisis back in the early 90's proved this. Hit wiki and come back.
Still with me? Cool. The above mentioned risks are real, with losing your home as the biggest issue. Still, relatively few people will truly face losing their homes, though many will have to sweat through the prospect of an upside-down mortgage, myself included. Losing one's job is also very real, with the financial industry shedding jobs like a husky sheds fur in the summer. This has a trickle down effect here in the NYC area, since moving money around is a huge source of jobs and tax revenue. NYC is bracing for a sharp drop in income tax receipts as Wall Street attempts to right its ship. I believe some of this concern is a bit overblown, with many of the jobs lost originating in Indian call centers, but that's just a hunch. Still, getting another job is easier than buying another home. Accessing one's money in a failed bank should be relatively painless, if stressful and delayed. However, the FDIC has so little cash compared to imperiled banks, I cannot see a mass bailout like the S&L crisis. Essentially, not only is the national credit card maxed, we aren't even getting those letters in the mail offering new cards and balance transfers.
When The Daily Reckoning predicted the "soft slow depression" in the new century, they based the prediction on a study of fiat currencies (those not backed by gold...), debt loads, and the hysteria of the markets, be they stocks, technology, or the Louisiana Enterprise. Since we were drowning is a sea of liquidity, they figured that when the markets crashed, America's economy would become like Japan's, with a strange combination of no interest loans but no growth. What they could not know was the presence of one more asset class ripe for over expansion: real estate. Essentially, they were 5 years too early, but this does not mean their logic was wrong or that the crash would be avoided.
The massive explosion in home values was an exercise in runaway inflation - with a strange twist. Bubbles in stock prices don't really count as inflation, since no one is required to purchase them to live. In other words, you can't eat stock certificates. The increase in housing should have damaged people's standard of living; instead it made them feel richer then they actually were. Inflation is needed in an economy to insure profits, and here almost anyone who owned a home shared in the profits. Further enabling the feeling of wealth was the liquidity previously mentioned. Before the bubble was truly recognized, I remember NPR discussing the then moderate gains in home values. The show was comparing home prices in general and home payments specifically. Back in '82, when interest rates were in the double digits (say 11.5%), the monthly payment on a 200K home was nearly the same as 330K home in 1999 with a rate of 6.5%. (assuming a 30year fixed rate with prime credit...) The focus on the monthly payment is a valid point. I could have bought a much more expensive car if my rate was not 12%. I would love to own a brand new Toyota convertible instead of my Corolla. This isn't a perfect apples to apples comparison, with the tax benefit of the '82 example conspicuously ignored, but also ignoring that a $2000 a month payment is much more manageable in 1999 than in '82. This may mean it all comes out even, but it's 3am on Saturday, so you go figure it out. Anyway, the lower rates allowed people to buy more expensive homes. In and of itself, that would not be enough to cause the bubble that just popped; it needed help in the form of security-backed bonds and exotic financial instruments.
Selling the debt to investors seemed like a great deal for all. The banks received more money to lend, home buyers suddenly owned a home heretofore way outside there price range, and the owners of the mortgage could depend on rising home prices to secure the debt. If a home owner got in financial trouble, he could sell the house with no problem, covering the mortgage and maybe even scrounging up enough remainder as a down payment for something else.
The rising home prices was a fallacy, of course, and the pain is being felt all through the economy. The collapse in home prices coupled with the change in adjustable rate mortgages has put a clamp on the most abused section of the economy: consumer spending. Consumer spending makes up about 70% of the economy, and as such is an important economic indicator. As of right now, people have stopped spending. However, to say it is the result of falling home values is too simple. The holders on the debt mentioned above are mostly overseas, and these dupes have been buying all sorts of debt vehicles: those backed by cars, stocks bought on margins, and credit card debt. Burned (badly) by the collapse in mortgage backed securities, they have been looking at all the bonds available for purchase, and have suddenly stopped lending money. It's hard to blame them of course, I wouldn't lend any more money either. This credit crunch has shown to the light one of the worst aspects of the American consumer: we do not save.
So if we have no money in the bank, and suddenly we cannot borrow anymore money, what are we left to do? Yup, stop spending. With the above set-up, I can now examine the point of this entry: how far will this spread?
I'm asking this question because I received some horrible news. As I wrote a few months ago, finding my place here in Westchester has been difficult; mostly because I don't feel I make enough money to live here. I'm just holding on, and that scares me. As such, the places I feel welcome and at peace are very precious to me: Starbucks, Alive 'n Stepping, Borders Books in White Plains, etc. Unfortunately, the last one that list is closing.
The fact that Borders in WP is closing is not a surprise, merely deeply saddening. I was never convinced the entire Westchester Pavilion would survive, much less one particular store. Also, the store never seemed to be run all that well. It was always a little messy and trashy, and I figured that the reason so little attention was paid to such things was the chance the store wouldn't be around, so why bother? Well, the governor has not called, and Supreme Court did not accept any appeals, so the date for execution is set for 02/02/2008.
I found out about this via the emailed coupons Borders sends me every week or so. this one had a strange heading: "Store closing." I knew the location before I opened the email. My store was toast, and I can buy anything in the store for 25% off. This does not mean the company is going under, as there is a brand new (and hoppingly busy) store/cafe in the Poconos. My opportunistic side wondered if the sale extended to the furniture, cause the leather chairs are quite nice and roomy. Immediately I cursed myself for my greed, but the notion is as old as time: nature recycles all it can. I shouldn't feel too bad; I just wish they had couches.
Boreders in WP closing does not illustrate my point very well, but it's impending demise forced me to look at the potential destrcution this rescession could cause. I know I'm fine, for all my mewling, but what business will die because of this? Actually, what industries will die because of this?
Still with me? Cool. The above mentioned risks are real, with losing your home as the biggest issue. Still, relatively few people will truly face losing their homes, though many will have to sweat through the prospect of an upside-down mortgage, myself included. Losing one's job is also very real, with the financial industry shedding jobs like a husky sheds fur in the summer. This has a trickle down effect here in the NYC area, since moving money around is a huge source of jobs and tax revenue. NYC is bracing for a sharp drop in income tax receipts as Wall Street attempts to right its ship. I believe some of this concern is a bit overblown, with many of the jobs lost originating in Indian call centers, but that's just a hunch. Still, getting another job is easier than buying another home. Accessing one's money in a failed bank should be relatively painless, if stressful and delayed. However, the FDIC has so little cash compared to imperiled banks, I cannot see a mass bailout like the S&L crisis. Essentially, not only is the national credit card maxed, we aren't even getting those letters in the mail offering new cards and balance transfers.
When The Daily Reckoning predicted the "soft slow depression" in the new century, they based the prediction on a study of fiat currencies (those not backed by gold...), debt loads, and the hysteria of the markets, be they stocks, technology, or the Louisiana Enterprise. Since we were drowning is a sea of liquidity, they figured that when the markets crashed, America's economy would become like Japan's, with a strange combination of no interest loans but no growth. What they could not know was the presence of one more asset class ripe for over expansion: real estate. Essentially, they were 5 years too early, but this does not mean their logic was wrong or that the crash would be avoided.
The massive explosion in home values was an exercise in runaway inflation - with a strange twist. Bubbles in stock prices don't really count as inflation, since no one is required to purchase them to live. In other words, you can't eat stock certificates. The increase in housing should have damaged people's standard of living; instead it made them feel richer then they actually were. Inflation is needed in an economy to insure profits, and here almost anyone who owned a home shared in the profits. Further enabling the feeling of wealth was the liquidity previously mentioned. Before the bubble was truly recognized, I remember NPR discussing the then moderate gains in home values. The show was comparing home prices in general and home payments specifically. Back in '82, when interest rates were in the double digits (say 11.5%), the monthly payment on a 200K home was nearly the same as 330K home in 1999 with a rate of 6.5%. (assuming a 30year fixed rate with prime credit...) The focus on the monthly payment is a valid point. I could have bought a much more expensive car if my rate was not 12%. I would love to own a brand new Toyota convertible instead of my Corolla. This isn't a perfect apples to apples comparison, with the tax benefit of the '82 example conspicuously ignored, but also ignoring that a $2000 a month payment is much more manageable in 1999 than in '82. This may mean it all comes out even, but it's 3am on Saturday, so you go figure it out. Anyway, the lower rates allowed people to buy more expensive homes. In and of itself, that would not be enough to cause the bubble that just popped; it needed help in the form of security-backed bonds and exotic financial instruments.
Selling the debt to investors seemed like a great deal for all. The banks received more money to lend, home buyers suddenly owned a home heretofore way outside there price range, and the owners of the mortgage could depend on rising home prices to secure the debt. If a home owner got in financial trouble, he could sell the house with no problem, covering the mortgage and maybe even scrounging up enough remainder as a down payment for something else.
The rising home prices was a fallacy, of course, and the pain is being felt all through the economy. The collapse in home prices coupled with the change in adjustable rate mortgages has put a clamp on the most abused section of the economy: consumer spending. Consumer spending makes up about 70% of the economy, and as such is an important economic indicator. As of right now, people have stopped spending. However, to say it is the result of falling home values is too simple. The holders on the debt mentioned above are mostly overseas, and these dupes have been buying all sorts of debt vehicles: those backed by cars, stocks bought on margins, and credit card debt. Burned (badly) by the collapse in mortgage backed securities, they have been looking at all the bonds available for purchase, and have suddenly stopped lending money. It's hard to blame them of course, I wouldn't lend any more money either. This credit crunch has shown to the light one of the worst aspects of the American consumer: we do not save.
So if we have no money in the bank, and suddenly we cannot borrow anymore money, what are we left to do? Yup, stop spending. With the above set-up, I can now examine the point of this entry: how far will this spread?
I'm asking this question because I received some horrible news. As I wrote a few months ago, finding my place here in Westchester has been difficult; mostly because I don't feel I make enough money to live here. I'm just holding on, and that scares me. As such, the places I feel welcome and at peace are very precious to me: Starbucks, Alive 'n Stepping, Borders Books in White Plains, etc. Unfortunately, the last one that list is closing.
The fact that Borders in WP is closing is not a surprise, merely deeply saddening. I was never convinced the entire Westchester Pavilion would survive, much less one particular store. Also, the store never seemed to be run all that well. It was always a little messy and trashy, and I figured that the reason so little attention was paid to such things was the chance the store wouldn't be around, so why bother? Well, the governor has not called, and Supreme Court did not accept any appeals, so the date for execution is set for 02/02/2008.
I found out about this via the emailed coupons Borders sends me every week or so. this one had a strange heading: "Store closing." I knew the location before I opened the email. My store was toast, and I can buy anything in the store for 25% off. This does not mean the company is going under, as there is a brand new (and hoppingly busy) store/cafe in the Poconos. My opportunistic side wondered if the sale extended to the furniture, cause the leather chairs are quite nice and roomy. Immediately I cursed myself for my greed, but the notion is as old as time: nature recycles all it can. I shouldn't feel too bad; I just wish they had couches.
Boreders in WP closing does not illustrate my point very well, but it's impending demise forced me to look at the potential destrcution this rescession could cause. I know I'm fine, for all my mewling, but what business will die because of this? Actually, what industries will die because of this?
