Tuesday, December 23, 2008

Housing Continues to Crash

The American housing market continues its free fall unabated, and as it falls, so will the banking system - AGAIN.  Don't let the bubble headed cheerleaders on CNBC fool you - todays numbers were TERMINAL for the U.S. banking system.

A 20% decline in housing prices from HERE means that the U.S. banks will need another round of capital similar in size and scope to the TARP from the Government - and the banks are already insolvent, RIGHT NOW.  We are past the "credit crisis", we have a solvency crisis.  I had this to say in my July 9, 2008 post "Armageddon and the End of Income Redistribution":

The financial stocks are melting down - trading like they are going out of business. Normally, that is when I would be buying. I would not touch this with a 10 foot pool, because I think many of them ARE going out of business, and that the shareholders in the surviving financial companies will be wiped out.

Further, if I am correct that millions of working folks have decided to go on a mortgage payment strike, don't worry about "Peak Oil". It will literally be TEOTWAWNI, though with a couple of positive hiccups here and there.

The effects on politics could hardly be more profound. As a hardcore libertarian, I look forward to the end of control of the political system by liberals and conservatives. This is the end of income redistribution (there won't be enough to worry about), the end of the pro choice/pro life debate (life will be dramtically more local, including local customs), the end of the infotainment culture (renting a movie will set you back $25 but your income won't rise a plug nikel), the end of high priced divorce lawyers (nothing to split, and people will NEED their families), not to mention the end your ability to spend ON CREDIT.

We will know soon enough: Peak Oil might have been beaten to the punch by Peak Credit.

The "Payment Strike" by American mortgage borrowers is, I FIRMLY believe, the most probable outcome BY FAR.  If so, the only way to save the banking system is to destroy the currency and print US$'s by the TRILLIONS.  In the near term we are in the grips of deflation.  If the U.S. Government's policy makers determined that that was unacceptable they could end deflation (and destroy the US$) with the stoke of a pen.  

Not to mention that this is in fact the beginning of the end of most of the big social programs.  In fact, it is all over but the shot to the head.  That is the longer term nightmare.  

Here is the near term nightmare.

Housing is still in decline.  That much is obvious.  If the buyers strike I speak of materializes it will trigger the currency/economic/commercial crisis because it will simply overwhelm the system.  We do not have the facilities to foreclose on the millions of homes, and no place for the evicted occupants to go. The "moral hazard" argument will hold true here, in that other mortgage borrowers will observe that they, too, do not have to continue to pay their mortgage...  Once this happens, the credit/mortgage debt/wage slave system is irretrievably broken.  Think Humpty-Dumpty.  This could very well lead to a political/food crisis unprecedented in American history.

So what the hell does a mortgage crisis have to do with food and politics?  Our entire system is predicated on housing/autos and the money creation (debt industry) that finances them.  What the hell do you sit on if you break 3 legs on the economy's stool?

Every nation, civilization, empire, etc... down through history is only "3 meals away from bloody revolution".  Food production in North America, and in much of the West, is an industrial enterprise... and didn't I just give you some of the possible reasons that industry and commercial activity can underperform to the point of critical shortages? Of food. Of energy. Of Medicine, etc...

Take a look at Iceland, this is as good a look into the future of many western nations, including the U.S., as one could expect.  Iceland, a homogenous nation and bereft of guns and a history of racism and other grudges (unlike the U.S.), is teetering on the edge.  This from the link above:

Riots in Greece this month, sparked by the police shooting of a teenager, became tinged with economic dissension. A group of Kuwaiti equity traders marched on the emir’s office in October to demand the closing of the stock exchange to stem losses. Even in U.S. cities, civil disorder is “conceivable” if unemployment rises above 10 percent from November’s 6.7 percent, Bremmer says.

Unemployment might, in fact, lead to disorder, but food is issue NUMERO UNO.  If you disagree, try this experiment:

Do not eat anything tomorrow.  Drink all the water you like.  Do not eat from tonight until the morning of the day after tomorrow.  You will understand the issue ever so perfectly.

A break down of the commercial system means that the trucking system will not be working anywhere near capacity.  Our system of "Just In Time" food delivery will display the critical failure in our planning immediately - and disastrously.  

"And the folks was freaking."  - Airplane

Good luck!

Mentatt (at) yahoo (d0t) com


the mad scientist said...


Greg the post is on Canadian oil companies production guidance.

bureaucrat said...

Oh, good grief ....

Once I go thru the latest post, I'll refresh my list of things to REALLY worry about :)

1) You look forward to the end of the Republican/Democrat political system? They likely thought that way too in 1920-30s Germany when inflation was WAY worse and their economy was really in the tank. Know what they got? REALLY different government, in the name of Adolf. Hitler was an economic creation. Be careful what you wish for ...

2) Millions of people have and will walk away from their mortgages cause it makes sense for them to do so (no down payment .. why not?). But 1/3rd of homes are owned free and clear, and most people pay on time. The "payment strike" will be limited.

3) While I know this blog has its share of apocylyptos and off-the-gridders, and expect a "revolution," (hell, they think they WANT one), many more know that a "revolution to what?" becomes the next question. The world has already tried the communist thing. Anarchy is fun only for the first few hours. Authoritarian governments are all around us, and the world hasn't ended. Change to what?

4) Civil disorder? Which is usually kids/student driven? The kids of the baby boomers? The most "established" and "babied" generation ever? All of them first borns and lovers of the status quo (like me)? Successfully starting mass civil disorder???? Hahahahahahahahaha!!!

5) Food versus water. You can live days without food (not well, but you'll live). It is water you can't live more than 1-2 days without. If the North Koreans can stay alive with no food this long (though it's not fun living), I'm sure we can last a little while. We have a massive short-term oversupply of food (and everything else) anyway.

Now, what are the REAL problems ...

A) The coming inflation, when all that govt. bailout money is released from the banks in the form of loans, all of it hitting the economies of the world at once, with no credit available to build new mines, farms, factories, etc. to boost commodity supply. Massive dollars/demand and fixed supply ..... yyyyyeeeeeee gad!!!!!

B) A negative oil situation that continues unabated, especially with dirt-cheap prices. People are still consuming a lot of oil, and in looking at all the alternatives to oil for transportation, they alllll suck!!! Electricity is the most likely alternative, but we are in no way ready for it.

C) The poor American children, who will have to pay the interest on all the money Bush/Obama are borrowing to avoid the necessary bankruptcies. It's pathetic.

Merry Christmas, Mr. Jeffers!!! :)

Greg T. Jeffers said...

And Merry Christmas to you!

Wheat and Corn inventories are at their lowest, in terms of days of supply, since 1974.

Any commercial disinclination to extend credit will very possibly lead to shortages. Until you have walked into a Costco or a Publix after a hurricane has been announced it will be hard for you to envision.

Further, I never said anything was FOR SURE. If housing falls a further 20% we will the odds would be at least 50/50. If housing stablizes, well, problem solved.

We are a fractional reserve system. You can argue over whether or nor that is a good idea, but that is where we are. Declining asset values will bring money supply down further (deflation, your favorite).

You say no buyers strike? I say even money, and will be happy to change my opinion if the data changes.

Anonymous said...

Bureaucrat- there you go again with the wackiness. Here are a few replies to your numbered pronouncements-

1.Germany experienced inflation in the early 20s. This was a war and reparation related phenomenon. When the mark was replaced by the Reichsmark, it went away. The German economy was in fine shape in the late 20s until sucked into global depression. Hitler emerged as the German economy tanked.

2.Yes millions have their houses paid off...which makes the bad housing numbers even worse for the mortgaged folks. And lots of the paid off mortgages are old people with houses in small towns.

3.A revolution to what? How about taking power AWAY from the current thieves and imcompetents as a good reason for revolution?

4.The evil baby boomers were the driving force in the Vietnam war protest movement and the civil rights movements. Maybe you were not around to experience the many energetic demonstrations of the 60s and 70s- some with a million participants or more. I remember 100,000 people locked up in RFK stadium by the National Guard in 1971- Mayday 1971 was an attempt to shut down the Fedgov. I was there.

5.We are not talking about 2 days of hunger before the Walmart food shelves are again overflowing. We are talking a systemic breakdown in the supply chains. Ever think about the Boston-DC corridor? 50 million people and 500 miles of concrete that do not produce a single thing except paper documents. Every bit of food, energy, and manufactures come to there from 500+ miles away.

a.Banks do not release loans into the economy. Borrowers must be ready to take on risk and reasonably confident that everything will work out OK. When borrowing does not occur(Japan in the 90s), then the system collapses with contractionary forces.

b. OK good point on the oil. I agree.

c.They will pay it back in Argentinian type dollars if at all. Japan just today floated the idea of a debt forgiveness for the USA. Of course our dolt leaders will probably just take that as a signal to pull more of the credit shenanigans while the US continues to produce nothing of value.

Actually, the idea of Japan forgiving our debt is an insult of the highest degree.