Global financial system implosion begins

[kyser_soze]

We have council housing in this country, but nothing like it to encourage the creation of small companies.

I'm interested in the current situation with regard to all the buy to let mortgages that people took out in this country, a million of them or so, if they start to go bad in any numbers, watch house prices tank.

I was pondering something similar myself over the weekend - council-owned shops and small offices to rent to small businesses...would also work to keep high streets varied too, and provide some competition for the private sector.

 

[Jessiedog]

One of the commenters on Cynicus' blog that I always enjoy reading is MattinShanghai.....

Reminds me of the old joke when a man is told by his doctor that he has lung cancer, and the operation will cost him $100,000. When he said that he cannot possibly afford it, the doctor told him that for $1,000 he can get the X-rays retouched...

That's pretty much the situation we find ourselves in. Politicians (in our part of the world) simply do not look at fundamentals, nor do they care about what happens in 5 or 10 years time. All they care about is getting some positive statistics in the short term, so their chances of reelection improve. Arguments about the "broken windows fallacy" simply do not figure in their calculus.

This insane short-termism is also responsible for the collapse of our "real" wealth-producing capacity. For decades, CEOs have been incentivised to asset-strip, offsource, offshore, scale-down anything which may make next quarter's numbers look better, regardless of long term consequences, not only for the country but also their company. From their point of view, these actions are quite rational.

A CEO, who can make the quarterly numbers look good for a few years, will amass enough (real, tangible) personal wealth to enable him and several generations of his descendants to live in comfort, even if all hell breaks loose and they will never be able to work again.

In Soviet times, the five-year plan for porcelain factories was expressed in tonnes of finished product. So what did a savvy porcelain-factory manager switch his production to in order to maximize his chances of meeting the plan goals? Was it china cups and saucers? Nope! It was -- toilet bowls! (There was never a shortage of toilet bowls in Soviet Russia). People tend to behave rationally in the context of their incentives.

We are starting to pay for the follies of the way our system evolved. Unless there is some mass re-awakening to the reality, we are in deep doo-doo...

https://www.blogger.com/comment.g?blogID=7820485130017459619&postID=2535798037401931401




Spot on in my view.


Woof

 

[elbows]

I was pondering something similar myself over the weekend - council-owned shops and small offices to rent to small businesses...would also work to keep high streets varied too, and provide some competition for the private sector.

Away from the high street there are plenty of subsidized business startup units available all over the place, often with other startup business support facilities onsite. Various different bodies seem to mange them, county councils, local business networks, universities. Sometimes they are interesting newbuilds like one near me that is all solar and innovative, or maybe old factory renovations or something the council has got in exchange for giving planning to a whole new business estate, to meet certain community objectives. Funding comes from a variety of grants at various levels up to national and EU, all part of 'regeneration efforts'. I dont know how long such things have been going on but it must be quite a long time now, I briefly worked for a startup in such a location in 1995 so it certainly predates new labour.

On the high street I imagine things are a bit different. Whilst councils may sometimes facilitate seasonal or community shops in empty premiss, the highstreet is normally seen as a significant revenue maker for councils. Business rates within the key shopping zone in any town or city can be mind-boggling, let alone the rent. I think the government are going on about some initiatives to do with this stuff today, £3 million quid to throw at the problem apparently, which will do something, but will not fill all the stores that are closing in the current economic woetime.

 

[Corax]

This bit particularly is spot on:

We are starting to pay for the follies of the way our system evolved.

imvho

 

[Fruitloop]

Has anyone read the latest cynicus blog? The UK govt appears to have totally lost its marbles:

http://cynicuseconomicus.blogspot.com/2009/04/wealth-destruction-and-government.html

 

[elbows]

Not sure if thats government losing its marbles as opposed to the economy demonstrating what a monster it is, that it demands perverse sacrifices in order to sustain its binge-based life support.

 

[Puffer]

Copper's priced in dollars non? In what way can purchasing a dollar asset be a "hedge against the dollar falling".

Would also query "it can be stored easily" in the context of other commodities.

Commodities and the dollar have a rough inverse correlation. As the dollar falls commodity prices increase.

Metals are at historically cheap at the moment and China's warehouses are filling up. The smelters and producers in China are being instructed to keep production levels up in spite of slowing demand.

 

[kyser_soze]

Goldman Sachs are the evilist of the evil

 

[A Dashing Blade]

Commodities and the dollar have a rough inverse correlation. As the dollar falls commodity prices increase.

Metals are at historically cheap at the moment and China's warehouses are filling up. The smelters and producers in China are being instructed to keep production levels up in spite of slowing demand.

Can't be bothered to rebutt.

 

[frogwoman]

colin hines article on quantative easing/new deal - epic fail ...

erm ...



http://www.guardian.co.uk/commentisfree/2009/apr/19/quantitative-easing-climate-change-budget

 

[Divisive Cotton]

The total cost of the financial meltdown (SO FAR!) is 4 TRILLION DOLLARS!!

http://news.bbc.co.uk/1/hi/business/8009734.stm

The International Monetary Fund (IMF) has warned that potential losses from the credit crunch could reach $4 trillion (£2.75tn) and damage the financial system for years to come.

It says that even if urgent action is taken to clean up the banking system, the process will be "slow and painful", delaying economic recovery.

It says that banks may need $1.7 trillion in additional capital.

 

[goebfwai]

I tuned into about 20 mins in to tonight (Tuesdays) Newsnight and there was something about a controversy about some IMF figures that have been published, but have now been taken down because of some inaccuracy. Not sure if it is the above figures or something else. Seemingly it will be in the papers tomorrow. Show will be on iplayer later:

http://www.bbc.co.uk/newsnight

 

[Ann Tigonie]

One result is that in some states home owners are refusing to pay back there mortgages as it takes a legal entity to begin forclosure procedings. It has occured to some of the brighter debtors and is now becoming more well known that in many states there is no legal entity owning the actual debt.

Surely the debt is owed to the mortage company/bank who loaned the mortgage in the first place? Whoever the mortgage/bank sold the debt onto shouldn't make any difference to the original loan agreement. So presumably it is the mortgage/loan company/bank who are the legal entity.

 

[Barking_Mad]

Lithuania's economy has shrunk by 12.6% this year.

 

[Dr Jon]

I see that the Treasury Select Committee have just published a report blaming bankers and the useless regulatory system for this financial shitstorm.

link

What I find absolutely outrageous is that many of these money-juggling spivs are still in their jobs, as are politicians and others responsible for this disaster.

 

[xes]

Web bot says the collapse will happen late July to august. I know it's not actually predicting the future, but it'll be interesting to see if it happens or not.

 

[goebfwai]

What collapse?

 

[gosub]

Worries about quantitative easing. Very similar to what an Investment Banker was saying at a dinner in in Bristol a couple of weekends ago.

 

[hipipol]

Barcalys profits up 15% in Q1
http://uk.reuters.com/article/businessNews/idUKTRE5461CD20090507
"Profit at Barclays Capital jumped 361 percent to 907 million pounds"

Barcap are currently hiring on a number of fronts

They will also be issuing a series of FX and Commodity ETFs which will compete head on with their recently solf iShares division......

Some are on the up then

Brown has totally lost the plot and is looking increasingly more insane every youtube posting he does...
As for dqarling, rabbit in the headlights - you knew he'd shat his pants when he started telling everyone it would be "worse than the 1930s"

Spineless fucks
Keep your ring tight boys, seepage lowers morale, dontcha know???

 

[kyser_soze]

you knew he'd shat his pants when he started telling everyone it would be "worse than the 1930s"

Managing expecatations innit? If you kick off by saying 'It'll be worse than the worse thing ever' and people believe you, almost anything that comes afterwards will be better than your prediction - unless of course things really do become worse than the 1930s...

 

[Jessiedog]

Did I just read on the BBC World News tickertape that The Bank has now confirmed that it will be printing a further GBP 50 billion to chuck into the mess?

Methinks so!

And if so, that means they've now used up GBP 125b out of the GBP 150b originally earmarked as "possibly" being required.


Worralorradosh.




Woof

 

[elbows]

Yep another 50 billion QE.

Meanwhile in the USA their bank stress testing has revealed the need for another $77 billion or so to make their banks resilient enough to deal with a possible worsening of the recession.

 

[goebfwai]

Does anyone understand all this stuff about Q.E. and bond markets, I'm trying to get my head around it all. See public comment 6 from this BBC Newsnight reporters blog. Is this possible...?

"The low BOE 0.5% rate that we have today may explode upwards by the start of 2010, and carry on rising throughout the rest of the year, bringing the global economy not just to its knees but to a prone and spent position that you usually only find in one of the finer Dominatrix dungeons within walking distance of Parliament. Ironically, what the politicians are banking on saving the economy - this QE (I can't bring myself to even type it out) - could be the double whammy that comes back and hits us all making last Autumn's collapse of the investment & retail banks seem a minor disaster by comparision. That will be one dramatic result of a collapsing bond market and all the current spin, all the current PR of 'green shots', of ludicrous and stupid attempts to maintain the price of over-inflated property prices and convince us all that there will still be honey for tea will be...Well, it won't matter then whether you own gold, cash or have a horde of pot noodle and carnation milk in your cellar - overnight hundreds of companies will go bust, millions of people will find that they no longer have a job and even if they have a job they probably will not be able to afford their mortgage. It will be a party like 1929! This QE is not working. If it works it has the potential to bring the depression that it is supposed to avert and I really think we are in the Emperor who has no clothes territory now - no one has the courage to stand up and point out what a mess it is because, in truth, no one truly understands it. At best, even the best financial minds are just guessing."

http://www.bbc.co.uk/blogs/newsnight/paulmason/2009/05/quantitative_easing_vs_the_bud.html

 

[ymu]

Well, I can report that the housing market is beginning to recover, but only because there's nowhere else safe to put cash. Our house sale fell through and within a week of putting it back on the market we had 6 cash buyers fighting over it - the current offers are 5% higher than the one that fell through, with two or three of them still duking it out.

It looks pretty bad out there.

 

[kyser_soze]

Does anyone understand all this stuff about Q.E. and bond markets, I'm trying to get my head around it all. See public comment 6 from this BBC Newsnight reporters blog. Is this possible...?



http://www.bbc.co.uk/blogs/newsnight/paulmason/2009/05/quantitative_easing_vs_the_bud.html

I love the way the poster spells out step by step how the world will collapse, then ends with this:

in truth, no one truly understands it

So what on earth is going to convince me that the poster does?

 

[goebfwai]

I Missed that. Yeah, I think it is guess work for everyone.

Interesting about housing. I suppose if you own a house, and are a 'lord of land' so to speak, you can always generate income from renting out spare rooms in it to students and so on (which is tax free up to about £4500 a year I think), as well obtain living space for yourself, and minimise your outgoings by putting the garden to productive use growing fruit and veg. Plus I suppose it seems more solid and real than numbers in a bank account. It wouldn't take much effort surely to a get a higher return from a house than the 2.5% after tax you might get on the highest rate accounts at the bank or building society. The lodging within an existing house situation aside, there is a growing glut of houses on the outright private rented market, and rental rates are dropping. I wonder if the increasing numbers of people going to college and uni this fall will mop up the excess supply? If students can rent a flat outright for cheaper sharing with a couple of others, I'd imagine a lot would rather go for that than have a landlord living there breathing down their neck all the time.

I think single and small households are going to decline and communal living is going to take off in a big way during this recession.

 

[Barking_Mad]

From Cynicus

Furthermore, the IMF estimates that losses in US banks might reach $US 2.7 trillion, a figure that is simply beyond comprehension. An even greater figure comes from Nouriel Roubini, as well as a damning evaluation of the banks, as follows:

This would be good news if it were credible. But the International Monetary Fund has just released a study of estimated losses on U.S. loans and securities. It was very bleak -- $2.7 trillion, double the estimated losses of six months ago. Our estimates at RGE Monitor are even higher, at $3.6 trillion, implying that the financial system is currently near insolvency in the aggregate. With the U.S. banks and broker-dealers accounting for more than half these losses there is a huge disconnect between these estimated losses and the regulators' conclusions.

The hope was that the stress tests would be the start of a process that would lead to a cleansing of the financial system. But using a market-based scenario in the stress tests would have given worse results than the adverse scenario chosen by the regulators. For example, the first quarter's unemployment rate of 8.1% is higher than the regulators' "worst case" scenario of 7.9% for this same period. At the rate of job losses in the U.S. today, we will surpass a 10.3% unemployment rate this year -- the stress test's worst possible scenario for 2010.

The stress tests' conclusions are too optimistic about the banks' absolute health, although their relative assessment is more precise, because consistent valuation methods were used. Still, with Thursday's announcement of the results, it shouldn't be a surprise when the usual suspects emerge. We fear that we are back to bailout purgatory, for lack of a better term.

What this all amounts to is a process of smoke and mirrors. In essence, the tests are set up to allow as many banks to pass as possible, and for those that do not pass to need a minimal additional capital infusion. Despite all the bailout money from the TARP, and the massive support of the federal reserve, the changes in accounting rules and so forth...the 'financial system' is still largely insolvent.

Worth the read, some extraordinary figures in there, for all the wrong reasons...Oh and then there is this from the same piece...

Schonberger: What's your outlook for the commercial real estate market?

Kemper: I think commercial real estate has yet to play out in the banking system.

I think that we've played out subprime largely, but I think that the same practices and the same players extended lost credit into the commercial real estate space in the past five years or so, and I think those losses are yet to be realized in the system.

 

[bendeus]

Well, I can report that the housing market is beginning to recover, but only because there's nowhere else safe to put cash. Our house sale fell through and within a week of putting it back on the market we had 6 cash buyers fighting over it - the current offers are 5% higher than the one that fell through, with two or three of them still duking it out.

It looks pretty bad out there.

I don't see how this can be anything but a dead cat bounce brought about by shameless ramping in the press, and the optimism engendered by the coming of spring. I mean, the underlying economic reality of rocketing unemployment, vast swathes of bankruptcies and the continued difficulty in obtaining the type of credit you'd require to buy unless you have a deposit in the region of 25% of the value would indicate anything but a sustained rise in house prices. Add to that also the predictions of many of the economic think tanks, which seem to be pointing to further falls.

I also wonder how long interest rates will stay low given the increased difficulty the government is having in raising money on the international markets through the sale of bonds. Surely at some point they will have to go up, or the price of the bonds will have to be devalued. Any rise in the interest rates will wreak havoc.

So, sages of Urban, what do you think? I'm an absolute novice as far as the economy goes, but am predicting more falls towards the end of the summer, and possibly large ones. Am I way off the mark on this one?

 

[Jessiedog]

So, sages of Urban, what do you think? I'm an absolute novice as far as the economy goes, but am predicting more falls towards the end of the summer, and possibly large ones. Am I way off the mark on this one?

Spot on, IMO.


I'm definitely still in the "dead cat bounce" camp rather than with the "green shoots" brigade.


The global macroeconomic situation is absolutely dire and the UK is certainly not among the healthier economies, to say the least.


Be very careful peeps (and, ymu, were I you, I'd get the place sold ASAP and then sit on your cash for a while).

Personally, I don't believe that a UK housing recovery is on the cards for at least 3 years and, more likely, that prices will fall a further 20% - 30% over the next couple of years and will then bounce along the bottom there for a few more years (3 - 4) before we see a gradual, sustainable, recovery of house prices rising on average 3% per annum for another five years or more.

I think the days of quick-buck-property-speculation in the UK are dead and gone for at least a decade, possibly two.




Woof

 

[bendeus]

My reading exactly. I reckon they'll have to go waay down - to about the traditional 3.5X average salary - before they bottom out, and that this will be painfully necessary to restart the economy on any kind of sound footing. Even more worrisome is the fact that when bubbles burst they usually dip down below the average before recovering to follow the trend, so theoretically your average house (currently about £159,000) would have to dive below £80,000 before they start to rise.

Anyway, what do I know. I'm just fucking glad I sold when I did.