patrick.net

PPete says

Lets see what happens this Fall.
1) If the Republicans decide that they like the new powers of financial and medical control over the people and don’t repeal those massive bills, then yes housing will continue to fall.
2) On the other hand, if the Republicans decide to repeal both bills completely and cut the Fed budget in 1/2 then the US economy will near immediately shoot into a parabolic upward direction.
The fiasco we are in is caused by the weight of government on our backs. (and in our necks)

Nice knee-jerk reaction there.

Who started TARP and what political party was he a member of? Hint: not a Democrat.

Do you even know how much money has been spent on "medical control"? Do you even know what the provisions of the health care reform law are?

Are you aware that Bush, a republican, presided over a bigger increase in government spending than any president before him?

Didn't we just have this same discussion 5 days ago in another thread,

http://patrick.net/?p=525292

PPete says

Gameisrigged, relax…

It’s not about Parties. It’s about enacting massive controlling legislation that obscures massive additional spending by and for self serving individuals (and their friends) who weasel themselves into office.

Classic. You posted a partisan rant about how the REPUBLICANS should repeal the "new powers of financial and medical control over the people", and then say it's not about parties. I think it's obvious who needs to relax here.

gameisrigged says

Nice knee-jerk reaction there.
Who started TARP and what political party was he a member of? Hint: not a Democrat.
Do you even know how much money has been spent on “medical control”? Do you even know what the provisions of the health care reform law are?
Are you aware that Bush, a republican, presided over a bigger increase in government spending than any president before him?

TARP, no matter how distastefully you may find it, was needed. Money that was lent out from depositors accounts was not being paid back by homebuyers. Not only were consumers deposit accounts in the bank dry, but every other entity that had an account open with the banks went dry. Your employer, all other businesses large and small, educational institutions, and nonprofit-governments, state and local.

What would have happened if the next day you or your employeer found a zero balance your bank accounts. Wouldnt you ask... "Where is my Money ?"

There was only one solution, and it didnt hinge on being Republican or Democrat.

thomas.wong1986 says

Not only were consumers deposit accounts in the bank dry, but every other entity that had an account open with the banks went dry

With fractional reserve banking, accounts are always virtually "dry" because the banksters have loaned that money out at a ratio of 20 to 1. The banks pay out a measily 1% on your money, and loan it out at that 20 to 1 ratio. Then they have the audacity to charge fees along with loan shark rates on credit cards. These are the nice folks TARP bailed out. Even a mild bank run on any given day would reveal what a "pay on demand" account is; nothing other than smoke and mirrors wrapped in fraud.

TARP was nothing other than a monumental theft from the taxpayers for the banksters and Wall Street crowd.

What would have happened if the next day you or your employeer found a zero balance your bank accounts.
Thomas, How do corporations manage their cash and even have a remote chance of staying within FDIC lmits. We're an extremely small office and regularly go over the (old) limits. I still say this is a good way to encourage new banks. Set the limits back to where they were and then have the FDIC advertise every day for a year that YOU WILL LOSE YOUR SHIRT if you try to get cute and put all your eggs in one basket. None of this, we're in a crisis so let's raise the limits...

RayAmerica says

The banks pay out a measily 1% on your money, and loan it out at that 20 to 1 ratio

No, this isn't quite right. You give the bank $1000 to keep in a checking account and they can lend out up to $900 of it.

Put it in a CD and they can lend out all $1000, but banks never actually "create" money directly.

The money multiplier comes from the fact that after you deposit that $1000 you think it's still yours, when in fact the bank left an IOU in your account and gave it to someone else to spend.

EBGuy says

What would have happened if the next day you or your employeer found a zero balance your bank accounts.
Thomas, How do corporations manage their cash and even have a remote chance of staying within FDIC lmits. We’re an extremely small office and regularly go over the (old) limits. I still say this is a good way to encourage new banks. Set the limits back to where they were and then have the FDIC advertise every day for a year that YOU WILL LOSE YOUR SHIRT if you try to get cute and put all your eggs in one basket. None of this, we’re in a crisis so let’s raise the limits…

I hear what your saying.

thomas.wong1986 says

What would have happened if the next day you ... found a zero balance your bank accounts. Wouldnt you ask… “Where is my Money ?”

My principal would've been guaranteed by the printing press that backstops the FDIC.

Troy says

RayAmerica says

The banks pay out a measily 1% on your money, and loan it out at that 20 to 1 ratio

No, this isn’t quite right. You give the bank $1000 to keep in a checking account and they can lend out up to $900 of it.

Put it in a CD and they can lend out all $1000, but banks never actually “create” money directly.

The money multiplier comes from the fact that after you deposit that $1000 you think it’s still yours, when in fact the bank left an IOU in your account and gave it to someone else to spend.

Well, not exactly. First you put $1000 in. Then the bank lends out 0.9*$1000=$900, which then gets paid to some other person for some good or service. Then the $900 comes back to the bank in another account. And then the bank lends out 0.9*900=$810 of this deposit, which is spent but then ends up in the bank again. And so on and so forth.

I'm sure Troy knows this, but perhaps not everyone does. In the end, the total amount lent out from the original $1000 grows asymptotically to $10,000. For the mathematical details, look up "geometric sum" in Wikipedia.

Use a=1000 and r=0.9 and you will see that the infinite series adds up to a/(1-r) = $1000/0.1 = 10* $1000 = $10,000.

The whole business about "velocity of money" has to do with how quickly each of the steps in the progression take place in real life situations.

sybrib says

My principal would’ve been guaranteed by the printing press that backstops the FDIC.

Perhaps up to your account limit. However many business who keep their millions, well above FDIC limit, in the bank to pay for your salary and vendor wont be so lucky.

justme says

Then the $900 comes back to the bank in another account.

Or another bank entirely, however the whole banking transfer system became frozen overnight and so did the velocity of money.

EBGuy says

Set the limits back to where they were and then have the FDIC advertise every day for a year that YOU WILL LOSE YOUR SHIRT if you try to get cute and put all your eggs in one basket.

Well, yeah, sort of. But the problem is that all the big banks were doing the same type speculative loans with your deposits, so putting the eggs in multiple baskets was just a way of getting around the 100k or 250k insurance limits, and NOT a way of actually reducing the risk of banks losing your deposits, nor a way of rewarding safe banks or directing banks to be less risky with your deposits.

As we saw, all the big banks and lots of the small ones pretty much cratered at the same time. This is what happens. Same thing with the stock market. All stocks drop (and rise) in unison. The correlation between stocks prices and the index is huge, it has been averaging about 0.7 -0.8 lately and goes almost to 1 in a crash. What this means is that there are no CONVENTIONAL safe havens.

thomas.wong1986 says

Perhaps up to your account limit. However many business who keep their millions, well above FDIC limit, in the bank to pay for your salary and vendor wont be so lucky.

Perhaps? Well if I did that kind of cash in my account limit, that's a lot of money. I don't think the bank freezing up is going to be a crisis.

My salary? I think you mean one pay cycle, plus perhaps one more if I am paid in arrears. One-two paychecks from disaster? Then if that creates a personal crisis, then I was already ripe for one anyway; missing one-two paychecks would've been not much different than emergency car repair, illness, or any number of other crises that come up for working class people.

In the personal accounts, this FDIC problem is a rich folks' problem.

thomas.wong1986 says

gameisrigged says

Nice knee-jerk reaction there.

Who started TARP and what political party was he a member of? Hint: not a Democrat.

Do you even know how much money has been spent on “medical control”? Do you even know what the provisions of the health care reform law are?

Are you aware that Bush, a republican, presided over a bigger increase in government spending than any president before him?

TARP, no matter how distastefully you may find it, was needed. Money that was lent out from depositors accounts was not being paid back by homebuyers. Not only were consumers deposit accounts in the bank dry, but every other entity that had an account open with the banks went dry. Your employer, all other businesses large and small, educational institutions, and nonprofit-governments, state and local.
What would have happened if the next day you or your employeer found a zero balance your bank accounts. Wouldnt you ask… “Where is my Money ?”
There was only one solution, and it didnt hinge on being Republican or Democrat.

Uh, hello? Miss the point much? If you actually had READ my post, you would realize that I said NOT to blame the Democrats, because it's not a partisan issue. See - Bush started TARP and Obama continued it. They are members of 2 different parties - hence, can't be blamed on either party. Yet you say so as though you are disagreeing with me. Read, don't skim.

As for your nonsense that TARP was needed, it's preposterous. Let's see....there's a possibility that you might lose some of your savings, so we're going to take your money and give it to wealthy bankers just to make sure that doesn't happen. That can't make sense even to you.

I don't even get what your doomesday scenario is supposed to be. Countrywide DID go out of business. So did WaMu. Both Wells Fargo and BofA bragged that they were never insolvent but were forced to take TARP funds anyway. Lots of smaller banks DID go out of business and NO account holders were EVER left high and dry during the whole process. So exactly what crisis did we avert? Gave a bunch of money to a couple of "too big to fail" banks that weren't even in danger of failing? Exactly what would have happened if the fatcats hadn't gotten their big bonuses?

gameisrigged says

So exactly what crisis did we avert?

We didn't avert anything. It was all hype in order to scare the American people into thinking Doomsday was right around the corner if we didn't take TAXPAYERS' money and give it to the fat cats of Wall Street and the big money Banksters.

gameisrigged says

I don’t even get what your doomesday scenario is supposed to be. Countrywide DID go out of business. So did WaMu. Both Wells Fargo and BofA bragged that they were never insolvent but were forced to take TARP funds anyway. Lots of smaller banks DID go out of business and NO account holders were EVER left high and dry during the whole process. So exactly what crisis did we avert? Gave a bunch of money to a couple of “too big to fail” banks that weren’t even in danger of failing? Exactly what would have happened if the fatcats hadn’t gotten their big bonuses?

Yes, you can argue that bonus payments due to cash shortage should have been frozen. That certainly makes sense. However if you had in your hire on contract that you were to be given a bonus X% of targets at year end and no provision to suspend such payment in case of financial trouble, then the company is obligated to make such payments.

I believe there were some who have lost their savings above the limit. Gone! IndyMac came to mind as I heard many accountholders never were covered by the FDIC limit. Small Businesses do oftern carry a greater than $100K balance for operations.

Federal authorities estimated that the takeover of IndyMac, which had $32 billion in assets, would cost the FDIC $4 billion to $8 billion. Regulators said deposits of up to $100,000 were safe and insured by the FDIC. The agency's insurance fund has assets of about $52 billion.

thomas.wong1986 says

Yes, you can argue that bonus payments due to cash shortage should have been frozen. That certainly makes sense. However if you had in your hire on contract that you were to be given a bonus X% of targets at year end and no provision to suspend such payment in case of financial trouble, then the company is obligated to make such payments.

Oh, I see - contracts must be enforced if it's convenient to YOUR argument. What about the contracts millions of people signed to pay back loans? I assume you would argue that any government "loan modification" programs or principal forgiveness shouldn't be done because it would violate the mortgage contract.

I'm sorry, but it's preposterous to argue that the government does have the power to use taxpayer money to funnel trillions of dollars to Wall Street, outright take over Fannie and Freddie, and fund 95% of all new mortgages, but somehow lacks the power to nullify bonus contracts, take over banks, or oust failed bank execs? C'mon....

I believe there were some who have lost their savings above the limit. Gone!

I'd like to see a cite on that.

thomas.wong1986 says

However if you had in your hire on contract that you were to be given a bonus X% of targets at year end and no provision to suspend such payment in case of financial trouble, then the company is obligated to make such payments.

Not true if they were operating under a bankruptcy court. Which is what should have happened instead of a bail out.

bob2356 says

Not true if they were operating under a bankruptcy court. Which is what should have happened instead of a bail out.

Yes if under bankruptcy laws this would be true. If say Banks went bankrupt, what would every corporation who had "bank account" to pay for their operations/salaries/vendors have to do --- Impairment of cash balances to earnings. The stock market crashed because this was the exposure to earnings process. Like a lossing assets have to be written down. Result would have been massive layoffs and much more because many employers would be/or near insolvent. This would have spread across many other sectors.

gameisrigged says

I assume you would argue that any government “loan modification” programs or principal forgiveness shouldn’t be done because it would violate the mortgage contract.

The Mortgage was secured by the home, right ? So the homes should have been foreclosed and resold for much lower price. I have no problem with that. I dont believe modification of mortgages was the right thing to do. They should have been foreclosed. But many behind the modification program, wrongfully believe home prices were legit to begin with. They were not.

gameisrigged says

I believe there were some who have lost their savings above the limit. Gone!
I’d like to see a cite on that.

What makes you feel you are obligated to be paid over the limit ?

FDIC slashes estimate of IndyMac's uninsured deposits
August 12, 2008 | 6:04 pm
From Times staff writer E. Scott Reckard:
http://latimesblogs.latimes.com/money_co/2008/08/indymac-uninsur.html

gameisrigged says

I’m sorry, but it’s preposterous to argue that the government does have the power to use taxpayer money to funnel trillions of dollars to Wall Street, outright take over Fannie and Freddie, and fund 95% of all new mortgages, but somehow lacks the power to nullify bonus contracts, take over banks, or oust failed bank execs? C’mon….

Fannie and Freddie should have been killed off many years ago. And no we shouldnt be funding 95% of the new mortgages. Ask Barney Franks and the Maxine Waters about that. But its the same two who were scapegoating banks compesation and avoiding the mess they made. The two were not complaining about their freind and FM CEO Frank Raines pay inlight of the Accounting scandals that hit early in the decade. And FM scandal was much larger than Enron. Not a single criminal charge came out of that.

Of course the government has the power to do what they want. No one is arguing that.

I was pointing out if a hire on contract between an employee and employer has any provision to suspend "year end bonus" payment, then it can do so. If not, then under common law its obligated to make such payments. If the goverment steps in and buys majority holding and states... "We will not honor the hire on contract", they have the power to fire, hire any employee, and honor or suspend any contracts.

http://housingstory.net/2010/09/09/housingstory-predicts-a-nine-percent-fall-in-property-prices-nationwide-in-2010/?source=patrick.net#post-4420

"The federal government has massively intervened in the housing market. It funds nearly 100 percent of new mortgage loans originated today."

Well I guess that shut him up... indeed Denial... Without GOV. we have no mortgage market and or not at these INSANE risk vs. reward rates. GET GOV out of RE and let it FALL to where it WOULD / SHOULD be (will be soon as Market forces win out) thus my bearishness on housing prices, down down down for years to come...

Without the Fannie/Freddie guarantee, (taxpayer backstop), few if any private lending institutions would go near mortgage financing with a barge pole.

The problem wasn't ONLY lack of regulation. It was also the implicit guarantee that banks won't be allowed to fail. When you go to Vegas, what stops you from betting every cent you have in the world? The fact that you could lose all your money is what stops you. If you knew that you would be paid back no matter what, you would be stupid NOT to bet every cent you had. If you're not going to regulate the market, then there HAS to be the risk of failure; otherwise it's nothing but a ticking time bomb. Capitalism for the profits and socialism for the losses is the most unbelievably stupid policy ever conceived by any government in history.

Nomograph says

gameisrigged says

The problem wasn’t ONLY lack of regulation. It was also the implicit guarantee that banks won’t be allowed to fail.

Incorrect.
The bankers made billions of dollars. They get to keep the money regardless of whether the bank fails or not. They couldn’t care less.

Um, no. You can't make money if you're out of business. Duh.

Remove government loan guarantees, and you’ll get private loan guarantees that might cost a little more. All risk has a dollar value attached to it, and currently the dollar value assigned to mortgage market risk is CHEAP! 1% or maybe 1.5% at the most.

Following this premise, why isn't there already a private lending institution falling all over itself to serve the strategic defaulter? Particularly the jumbo loan defaulter with hoard-loads of cash, but only one major blemish to their credit: foreclosure. Why is all of this money being allowed to languish on the sidelines? Perhaps the interest on the loan could be a little higher, or the down payment requirements more dear in order to offset the risk, but it seems to me that these private lenders/private guarantors whom you suggest are so eager to originate and guarantee all variety of home mortgages are really asleep at the switch where this demographic is concerned.

Incorrect.

The bankers made billions of dollars. They get to keep the money regardless of whether the bank fails or not. They couldn’t care less.

I don't think it's a closed book. Witness:

http://www.ritholtz.com/blog/2010/08/coming-soon-bank-ceo-perp-walks-jail-time/

gameisrigged says

It was also the implicit guarantee that banks won’t be allowed to fail. When you go to Vegas, what stops you from betting every cent you have in the world? The fact that you could lose all your money is what stops you.

The problem is that banks have in the past and continue to this day to fail. Did this implicit guarantee help IndyMac?

@tatupu,
I shop at WalMart very rarely, and do so at opening time. Their focus is on a demographic that I am not comfortable having to deal with, observe, or have observe my family. I feel I need a shower after a WalMart visit. The parents do not control their kids. The store is made a pig pen due to selfish behavior. The workers look frustrated and are normally dressed/made-up to look like about a 75% effort was made getting ready for work. So, I happily go to SaveMart for food (17 years now) -- super clean and first name basis with me and wife, plus they pay their employees a better wage, plus there is no spanish isle signs (its a personal thing), and the difference in price is more than made up by the comfort enjoyed ... in my opinion. For the non-food stuff that can be had at WalMart we go to a Target in a "whiter/richer/cleaner" town a little ways away. It is clean, the workers are nice, and I really like the wider-than-normal parking slots. I avoid door dings like the plauge.

@Doc Nomo,
B.Frank and his boyfriend at Fanny, plus leftist social programs, carry most of the blame for setting up the system to fail .. ala Piven and Cloward. In my uneducated opinion.

BAP--I'm sorry. I've just changed my example to SaveMart instead.

Also, I agree we're not Japan. But the whole 2-4 year thing is pretty bogus. Not saying it will take longer, but you really have to intentionally ignore the govt intervention during the past 1.5 years to believe that a) we have hit a legitimate bottom and b) that there is a time expiration on a market correction. It will correct until the fundamentals support the market, which they don't.

No shit wages are higher now. That doesn't mean houses should cost double what they did then.

klarek says

That doesn’t mean houses should cost double what they did then.

15 year rates are 3.5% now, vs 8% 10 years ago.

http://research.stlouisfed.org/fred2/series/MORTGAGE15US

$2500/mo TCO @ 8% buys you $350,000, at 3.5% it buys you $600,000.

Note also the conforming limit has been raised from $240,000 to $730,000 in this time.

But what happened during the bubble blow up of 2008-2009 was mass default, and the Fed and Treasury stepped in with several trillion of backstop money to replace the bad debts.
This created permanent new money in the system.
I agree, but just to clarify, the amount created/printed was $1+ trillion (definitely less than $2 trillion). A lot of backstop money was loan programs (with no outright creation). I still think there is a lot of debt repudiation that needs to happen before the system hits sustainable levels. At this point, the scenarios you lay out (ala Japan) seem the most likely way to get us where we need to go... slowly.... and painfully....

EBGuy says

the amount created/printed was $1+ trillion (definitely less than $2 trillion

Money is coming from both the Treasury and the Fed. Wait . . . doing research TARP only cost $66B

http://in.reuters.com/article/idINIndia-50953520100819

supposedly.

LOL, "only" $66B. That's a fuckton of money, or was. 60,000 $100k/yr wage-earners working for 10 years, the payrolls of AAPL and GOOG combined.

I definitely agree that $1+trillion is nothing to sneeze at -- the Fed more than doubled its balance sheet over the course of the crisis! But then again, Ben can just pull a lever and accounts get credited. That TARP money is actual debt. The Treasury has to sell bonds and T-bills; luckily, folks are still buying from the lender of (second to last?) resort, the US gov't.