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Old 07-13-2008, 10:07 PM   #21
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I
The Fed is doing everything possible to re-inflate the money supply and re-establish credit. This includes things (e.g. brokerage take overs, access to the Fed funds for non-banks) that most of us didn't even know they could do.
The Fed's (attempt) to inflate the money supply has become painfully obvious. They would rather fight an inflation devil (later) than institutional failure (now) brought on due to the huge de-leveraging that is going on in the credit markets. What I've been struggling with is will it work? I don't care how cheaply someone lets me borrow money - it only has value if I can put it to use and have a reasonable faith that I will get it back.

If it works, you are right, real assets (including real estate) will have to go up in price as there will be a lot more $ chasing the same set of goods and services. If it doesn't, well um, the outstanding debt gets heavier as it has to be repaid in deflated dollars, not inflated dollars, and those whole remain whole are just about the only ones "happy". (Not sure that happy is the right term as I don't think even those who were financially ok were happy with the situation in a depression.)
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Old 07-13-2008, 10:24 PM   #22
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If the FED is inflating why are the various money supply measures deflating? The answer is probably that in the past decade hedge funds and the like created far more money than the FED ever did, and now that's deleverging. Derivatives and the ilk were a good end game around the FED's monetary controls.

At any rate good try, but your scenario of housing rebounding in three years is a fantasy. Sorry.
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Old 07-13-2008, 10:25 PM   #23
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To be honest, I don't even have a ballpark number for the equity of US banks. I think its a lot higher than $200 billion though.

JPMorgan alone has a book value above $100 billion.
Citygroup has-- I have no idea after all of their deals with investors.
Wells Fargo has a book vaule of about $40 billion

There are hundreds (thousands?) of smaller banks. I think there will still be banks around after this settles out. There will be a few less, but I don't think it will be the end of the world.

Note-- A fair number of those losses will actually be absorbed by foreign banks, as they hold a fair amount of bad paper backed by US mortgages as well.

You are probably right. I'm not saying that the sky is falling, I am saying that bank stocks are going to become much more diluted going forward. $200B might not be all their capital and many of the losses might be absorbed by foreign banks, but having to raise amount that is left is going to lead to serious dilution.
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Old 07-13-2008, 10:26 PM   #24
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I just found this:

The Big Picture | Why Barron's Housing Cover Is So Terribly Wrong

A complete takedown of the Barrons article.

Seems the track record of the author is more than a little suspect.
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Old 07-14-2008, 02:19 AM   #25
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4 Million mortgages at $200000 each (just a guess) is $800 Billion.
IF that were the end of the story, maybe not a problem. The problem are the derivatives and other novel hedge-fundy financial inventions that are not performing to the model that RE only goes up and loans will be non-performing only within some narrow probability. The inverted pyramid of debt to some exponential power distorted apparent gains and will distort losses as well. None of this has gone away. I won't use the "p" word, but that's still alarming.

People talk about losses being "absorbed".. but that just means transferred to some other ignorant party - the stockholders of JPM instead of BSC.. then the stockholders of FNM since they are cushioning all these over-valued houses and $700k mortgages.. then to the holders of treasury bills. 3-card monte.

Quote:
JPMorgan alone has a book value above $100 billion.
That number should not comfort you, but frighten you.

Not a blog I follow, nor are these numbers I have checked or -I'll freely admit- have the capacity to check:
BSC: JPMorgan Steals My Thunder Over Bear Stearns | Stock Market Beat
But it paints a picture of Bear Stearns' so-called book value.

There is so much stuff off-balance-sheet that a valuation of any financial entity these days is impossible. Yet we are told that it is ridiculous to panic. That is offensive. Anyone whose house has been robbed will naturally panic; the solution is not to close the door on the wall safe and pretend that your goods are still in there.

Instead of financial entities having their old-fashioned, historical capital requirements and regulations, new ways of avoiding regulations and requirements were created. Protagonists in this were people like Henry Paulson and Phil Gramm. If you have no capital requirements, the amount of credit you can conjure into existence is infinite, as is the theoretical profit to be made. It only has to work for a short while for a small number of people to become wildly wealthy.

Average investors like me were not aware of this. [Certain people who are aware of it don't want anyone to know about it, even now.] We didn't imagine that all financial institutions were behaving like LTCM.

That phantom credit was pumped into the housing market particularly. Being unsustainable, now it has to disappear in large part. Yet having been spread into every nook and cranny the world over, the pain will be borne by savers more than spenders, and by heretofore-healthy enterprises rather than just the miscreant ones.

I guess pretending our goods are still in the safe is a valid psychological solution and some here have adopted that.. but maybe it's just the first of the widely-publicized "stages" of experiencing a loss: denial, anger, bargaining, depression, acceptance. I haven't reached acceptance yet, either.

----------
Laugh of the day:
Someone posted a video of Steve Forbes -dunderheaded as always- talking about the crisis recently. He said something to the effect that liquidity wasn't a problem, the problem was that this liquidity was FROZEN.

and a commenter wrote:
Quote:
What if that "frozen liquidity" turns right into a "gaseous liquidity" without going through the all-important "liquid liquidity" stage?
LMAO!
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Old 07-14-2008, 08:54 AM   #26
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I have a long-winded question/explanation for the people who say that inflation will simply erode cash:


How come inflationary problems are only brought up when people hold cash or cash instruments? If you hold stocks earning 10% or cash earning 2% and inflation is at 3%... the inflation at 3% IS corroding the cash and the stock. So, when you compare who did better in a time period (stocks down 14% versus cash up 3% or whatever), why does anyone ever mention that inflation hurt the cash when any stocks held in the USD is also hurt by inflation.

Yes, I understand that stocks eventually beat out cash, but that should be the argument/point... not that inflation eats away cash. It eats away at ANYTHING that is held in fiat currency.
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Old 07-14-2008, 09:00 AM   #27
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How come inflationary problems are only brought up when people hold cash or cash instruments? If you hold stocks earning 10% or cash earning 2% and inflation is at 3%... the inflation at 3% IS corroding the cash and the stock. So, when you compare who did better in a time period (stocks down 14% versus cash up 3% or whatever), why does anyone ever mention that inflation hurt the cash when any stocks held in the USD is also hurt by inflation.
I'd say that's partially true, but stocks are more resilient to inflation than cash because they should be able to (more or less) increase their pricing to correspond to their own increased costs, and if their margin remains the same their earnings should come close to keeping up with inflation. Cash rarely does in a high-inflation environment, and especially not after taxes.
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Old 07-14-2008, 09:02 AM   #28
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Ziggy, I agree, and that is one of the major reasons WHY stocks perform better than cash over time. But, that is tied into the fact that you can tell people who hold cash that STOCKS beat CASH over time. The point shouldn't be that inflation kills CASH over time, as if it doesn't affect stocks at all.
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Old 07-14-2008, 09:41 AM   #29
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maybe the old timers will remind us, but i remember reading somewhere that the 1970's were also a time of high inflation and tight credit partly brought on by a housing bubble that ended in the late 1960's that also involved subprime mortgages
As I remember, to solve the problems of the 70's the US gov't went on a spending spree and inflated us into a new prosperity. I can't prove anything, but I read plenty of articles which say the gov't is now the biggest employer and biggest customer in the US. I agree intuitively.

Now that we have eaten from that trough, it's hard to break away. Can the gov't continue this spree and continue to grow? What will happen if they try to tighten their belts?
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Old 07-14-2008, 09:48 AM   #30
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The point shouldn't be that inflation kills CASH over time, as if it doesn't affect stocks at all.
People are far more concerned about short-term volatility than long-term inflation.

But by the time inflation has made its effect clear, those same people are also old enough that they insist they'd rather be in MMs & CDs than in those nasty stocks. They'll just cut back their lifestyle...

I think we spend more time tinkering with fractions of a basis point in bonds & CDs than we do choosing stock funds that are going to vary by hundreds of basis points.
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Old 07-14-2008, 10:42 AM   #31
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maybe the old timers will remind us, but i remember reading somewhere that the 1970's were also a time of high inflation and tight credit partly brought on by a housing bubble that ended in the late 1960's that also involved subprime mortgages
I don't remember any special "subprime mortgage" thing in the 1960's. I think the story goes like this:

In the 60's we were trying to fight a war while maintaining social programs at home. This generated inflation pressure.

Then in 1973 we had the Arab oil embargo. This made Americans poorer in real terms because it meant we had to send more US made goods abroad to pay for the same amount of oil. The Fed was concerned that the real drop in wealth would be compounded by a recession (people who feel poorer get conservative with spending, businesses cut production and employment, people cut back more, etc.) so they pumped up the money supply to offset that psychology.

Economic orthodoxy at the time held there was a long term trade-off between inflation and unemployment - pushing one down meant letting the other go up. The Fed accepted higher inflation to avoid higher unemployment.

The inflation developed a life of its own. We got into a wage-price spiral. Nobody was willing to bite the bullet and say "I guess we're just poorer." Everyone tried to stay ahead of the game. The Fed discovered that it took higher and higher rates of inflation to maintain a given unemployment rate. We drifted into a no-growth economy with high inflation.

Then the Iranians overthrew the Shah and the price of oil shot up again.

Eventually, the moneterists at the Fed (Volcker) stopped growing the US money supply. This sent the economy into our worst post-war recession. Unemployment went over 10%. People decided it was better to be working for lower wages than not working at all. The wage-price cycle slowed.

The slow US economy was partially responsible (as well as conservation actions) for reducing the demand for oil, which broke OPEC's solidarity. The price of oil fell, real incomes went up, good times followed (well, it's really more complicated than that).

Needless to say, I don't think we'll see exactly the same sequence this time. But, ... substitute "increasing demand for oil in China and India" for "Arab oil embargo", and you can see some pretty obvious parallels. The good news is that everyone at the Fed knows what worked and what didn't in the 70's and 80's. The bad news (my opinion only) is that our fundamentals are worse - more debt, the psychological effect of the housing collapse, and the fact that the high price of oil is driven more by fundamentals and less by a cartel.

So I figure I've seen much worse economies than this one. I don't think we'll ever return to the good old days of really cheap oil. But I don't think we're going to slip into a permanent depression, either.
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Old 07-14-2008, 10:54 AM   #32
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last year i read somewhere that there was some kind of housing program in the late 1960's for subprime borrowers that gave them ARM type loans with the hope of increasing home ownership
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Old 07-14-2008, 12:20 PM   #33
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I'd say that's partially true, but stocks are more resilient to inflation than cash because they should be able to (more or less) increase their pricing to correspond to their own increased costs, and if their margin remains the same their earnings should come close to keeping up with inflation. Cash rarely does in a high-inflation environment, and especially not after taxes.
Great theory, but look around and find how much pricing power is out there now.

Ha
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Old 07-14-2008, 12:48 PM   #34
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I recall the turbulence of the 60's and 70's as a long haired protester myself. And my only good feeling about what all the inflation, riots, recession and joblessness accomplished was it made us aware of how hopelessly incompetent our government was.
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