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The following is not simply a list of negative risks to the economy but a list of of serious economic conditions that are already placing drought-like pressures on the overall economy. This list doesn’t include the long-term structural problems with the economy, such as its high debt burden, but just the forces that have risen against it this year. Read the remainder of this entry »
Headwinds that are starting to assail deep structural flaws in the US and global economies form the basis for my 2017 economic forecast, which looks like an all-out economic crisis building throughout the world. Some of these headwinds are global; some more locally focused within the United States, but that which brings down the US economy wounds the world anyway. Ultimately, global concerns threaten the US, and US concerns threaten the globe. We’re all in this together, even as we seem to be flying apart in political whirlwinds everywhere and fracturing national alliances all over the world.
Even in the US where the Trump Triumph has ignited consumer and business hopes and inflamed the stock market, time is not on Trump’s side. Trump’s own key advisors — like Steve Bannon and Larry Kudlow — have stated unequivocally that Trump’s plans must happen quickly if they are going to save the US economy. Trump, himself, campaigned on the endless refrain that the US economy was rapidly approaching catastrophe. If we take the architects of these hope-inspiring plans at their word, 2017 is a make-or-break year for the US, and the clock is ticking against their success.
Seven headwinds in my 2017 Economic Forecast that will batter the global economy
(In no particular order of severity.)
1. 2017 starts with near-recession-level rates of growth in the US.
2016 US GDP fell to a lower barometric pressure than economists were expecting, skinning their noses for them at an annualized 1.9% rate of growth, and crashing hopes that the third quarter’s sprint to an annualized 3.5% proved the Fed’s economic recovery was solid. (The average expectation for the fourth quarter had been about 2.5%.) The fourth-quarter plunge brought the annual rate of GDP growth down to the lowest it’s been since the official end of the Great Recession. (Though, as far as I believe, the Great Recession is still a screaming vortex that lies underneath the entire global economy. Its ills have never been healed, only masked.) The services industries took a fall in February that was sharper than its January rise. That appears to mark the end of upward growth that began last September.
2. Trumphoria in the US stock market could run out of hot air
The euphoric rise of the US stock market has formed almost entirely from speculation about Trump’s tax cuts and infrastructure spending, so it is likely to lose steam now that postponement of those plans shows sentiment outpaced reality. The level of irrational exuberance in the market (which typically precedes a big crash) has trumped numerous records for its rate of rise, the duration of its rise, the overall height of its rise, and the number of days of uninterrupted record-breaking. (See “Will Trump’s Talk Turn the Trump Rally into Lasting Gold or End in the Trump Dump?“)
In spite of the fact that the market’s uplift is built on warm thoughts alone, the US stock market could get a second boost if the Eurozone crumbles and euro capital runs for cover. (Already part of the rise in US stocks.) Ultimately, the collapse of Europe will be bad for trade, so non-European companies that do a lot of exporting into Europe will still suffer. In the event of a euro collapse, any boost will go toward companies that don’t have much European trade. Money fleeing to the US from Europe and China could be the United State’s salvation, but it all depends on who starts to blow apart first — who is seen is the safest harbor in the storm.
Trump may even succeed in getting all of his plans through, though the schedule seems to be shifting toward postponement now that, as Trump revealed, it turns out no one could have foreseen that fixing Obamacare would be this difficult. (Well, except almost all of us. Makes one wonder how much other changes will prove to be more difficult than Trump thought, once actually put before the nation’s most divided congress ever.)
3. China is ready to worsen the economic forecast of the entire world in 2017
We saw it happen a couple of summers ago. A low-pressure zone opened in China that was so big it sucked all the stock markets of the world into it. The yuan crashed, and China seized national control of its stock market to avert total collapse.
While China appears to have stabilized compared to that event, China’s economy today is worse than China says. Smart money has been fleeing China ever since that big scare, going to places like Vancouver, Canada, where it has created a huge housing bubble. About a week ago, we discovered one regional government in China has overstated its GDP by almost 20%. They had reported a drop in GDP of -2.5%, but the real drop was -23%. Since China’s businesses routinely cook their books, keeping one set for the government and one for the proprietor to know what he is really making, real business statistics are almost impossible to know. (See “Data Fraud At Chinese Province Suggests Local GDP Numbers As Much As 20% ‘Overcooked’“.) In truth, we never know when China is going to blow because even China doesn’t know, and what it does know, it doesn’t tell. Corruption will be its undoing, as corruption always is.
China has been blowing through its vast reserves at a rate of $80 billion a month to support the yuan, which it does by mostly dumping US treasuries in order to diminish the value of the competing dollar by increasing the supply of dollar-denominated assets. Some estimate China really only has about $800 billion in US treasuries left that it can actually use for such support, as it must maintain a certain level of holdings for other reasons, such as trade.
If China can no longer dump dollar-denominated bonds, the yuan may crash again in value, causing more capital flight from China. If it keeps dumping US treasuries (as the once largest financier of US national debt), China makes funding the US debt more problematic.
On the one hand, devaluation of the yuan would be good for Chinese exports, but it raises other troubles for China besides capital flight. One such trouble is that Trump (along with other world leaders) will likely accuse China of currency manipulation, saying they are trying to make their exported products more competitive. That would be bad for Chinese exports, as it would lead to a tariff-based trade war.
Federal Reserve interest-rate increases (see below) raise the value of the US dollar compared to other currencies, which also presses China to do more to support the yuan to maintain its credibility as a stable foreign-exchange reserve currency now that the yuan (also called the renminbi) has gained coveted status as one of five currencies used by the IMF for its special drawing rights. Keeping the yuan in that basket is vital to China’s hopes of reducing US hegemony in the world.
With three or more Fed rate increases anticipated for this year, China may have a lot of supporting to do and less than a year before it runs out of US dollars to provide that support. The last time China’s currency faced that kind of crash, the US stock market went into free fall, as did the rest of the world’s stock markets. Because there is no assurance that the flight of capital from China helps the US, China factors into my 2017 economic forecast as a great unknown, but one that has caused a lot of problems in the recent past while not clearly resolving any of its own problems.
4. The Eurozone is blowing up a massive economic storm for 2017
The anti-establishment success that burst onto the European scene with Brexit and that was reinforced by Trump’s anti-globalist victory is emboldening other nations to consider exiting the Eurozone. The UK was not part of the Eurozone, so its departure from the European Union has not created a euro crisis so far, but the breakaway of a single nation within the Eurozone could utterly doom the euro. That would certainly be a disaster for those Eurozone banks that are already teetering on collapse, and some of those banks are so big the euro crisis could develop into a hurricane big enough to envelop the world. The increasing probability of a euro exit by so many nations in the Eurozone has to factor into anyone’s 2017 economic forecast, now that Brexit and Trump-it have proven how real the possibility is and given how they have inspired the hopes of others to follow a similar path.
Frexit is disturbing markets more in the run-up to French elections than Brexit did because investors have learned from Brexit and Trump-it that the possibility of a national exit is far more likely than they thought — even when one is certain the odds are against it. National Front’s Marine Le Pen will likely win the first round in French elections. Le Pen has promised to remove France from the Eurozone if she wins.
Le Pen’s party has said it will redenominate its national debt from euros to francs on a one-to-one basis and then devalue the franc by issuing “helicopter money” in order to reduce its debt burden. If France goes that way, Standard & Poors and Moody have already said they will rate the nation as being in default on its national debt. An independent France has a second temptation toward devaluing its currency, which would be to make itself more competitive in the European world of exports that is dominated by Germany. The currency changes would take longer than 2017 to begin, but they could start a currency war within the Eurozone if they do happen.
France is big enough with so much interbank linkage throughout the Eurozone that the economic chaos of sorting out the divorce — and rising prospect of currency wars — could mean the end of the entire European banking system as depositors run for cover.
Experts say Le Pen won’t win the second round of votes. Experts also said Trump-it and Brexit didn’t stand a chance either.
Nexit is next. The Netherlands’ parliament is blustering with debate about exiting the Eurozone. The long-winded discussion focuses on whether it is possible for the Netherlands to withdraw and how withdrawal might be done. Concerns that the European Central Bank’s low interest rates are hurting Dutch savers, have raised questions over whether the ECB’s bond buying (done to drive interest rates down) is even legal under Eurozone laws. Nexit challenges the ECB’s ability to stimulate the euro economy through quantitative easing.
Italexit advanced from the far horizon last weekend when the leader of Italy’s ruling party, Matteo Renzi, formally did an exit of his own from the prime minister’s office (Rexit) due to his failure to stem the advance of Italy’s anti-establishment parties during the last referendum. This leaves Italy under a caretaker administration, which means elections will happen this year, not in 2018. (Europe has more exits opening up than the United States has gates — watergate, travelgate, emailgate, ad nauseum)
In January, Mario Draghi, head of the European Central Bank, along with other EU chiefs, threatened any nation that exits the Eurozone with economic armageddon, saying any nations that make such a move will have to immediately pay back all euro-denominated debt if they do exit. (You know things are falling rapidly apart when the central bank has to threaten its own nations to get them to stay in the club. Sort of like a host threatening those who are attending his party with the warning that he’ll pop their tires if they try to leave. Must be a great party!) Italy may just say, “Make me!” In that case, Draghi will find that being Italian makes it hard for him to carry out this threat when it turns against mia familia. If his courage fails there, he’ll find it harder to carry out that threat with any other nation as well. To do so would be discriminatory. Besides, what is he going to do? Raise an army to force repayment?
Germany’s Merkel would like to help him with that. Italy’s second leading political party, Forza Italia, says Germany should be the only nation to leave the Eurozone. Now, THAT’S creative destruction. That’d take us from Grexit to Gerexit.
Speaking of gurrs, Grexit is growling again as it slinks along Germany’s rear flank. The Germans continue to battle with the Greeks over additional debt restructuring. Everything Germany has done to resolve the Greek crisis has made Greece’s debt payments more untenable by driving the country deeper into recession, assuring that Greece will remain Germany’s indentured servant for the next fifty years. Even the IMF agrees that Greece’s debt situation “is highly unsustainable” and presses Germany for more debt forgiveness.
Germany holds the line on debt relief because most of it would come at a cost to Germans who believe themselves to have a far better work ethic than Greeks, so they have little sympathy for Greece. More importantly, though, Germans fear other struggling nations in the Eurozone would clamor for debt relief if Greece is given any more, heaping still more burden on those hard-working Germans. (Which is all one reason the euro was an ill-fated currency from the start.)
Back in 2012, I said that Greece was a gift that would keep on giving — that Europe had far from solved the problem it claimed, at that time, to have secured a handle on. So, it all fits my long-range forecast back in 2012 to see Europe now continuing to unravel as the EU keeps kicking the Greek grenade down the road, pin removed. Once again, farmers, unions, and others worn ragged by German austerity are storming the exits. Once again, billions of euros are being sucked out of exhausted banks by panic-stricken depositors while Europe endlessly pretends it can fix a mess that is created by a currency doomed from conception. (Decades ago, I asked, “What Irish farmer is going to let Brussels tell him what he can sell his hops for?” Or, for that matter, his brussels sprouts?)
You likely recall that Greece’s ruling liberal party, Syriza, came into ascendancy because it promised to tear up the bailout deal being pushed by Germany. Syriza overplayed its hand and wound up getting stuffed like a turkey with a far more toxic deal, which it has been tasked by Europe with enforcing for the past two years. How do you say “heil” in Greek? (Add sound of boot heals clicking as all Greeks march to German drums. Sooner or later, the Greeks will break ranks — guaranteed. I’ve been saying all along that it is just a matter of time because it is a problem that is not going away by any other path than default. So far, so true.)
A Eurozone breakup and euro crash could drive money on gale-force winds into US stocks and bonds, which is where the money leaving Eurozone banks is already fleeing. That could buy the US an economic extension, or it could just cause banks everywhere to cascade into failure, collapsing financial stocks everywhere. US banks, however, have had years to reduce their exposure to the euro
Ironically, the threat of problems in the “Club Med” nations that are struggling economically is causing some of the fleeing capital to escape into German bonds as a safe haven, resulting in German bonds hitting a low interest rate of -0.92 percent. Southern Europeans, in other words, are paying to store their money in German bonds as a place of refuge. That means it pays for Germany to hold a hard line with Greece and other nations because it gets other nations to pay for the opportunity to finance German debt — like paying tribute to the empire. Sieg Heil!
Here is how this plays out so that Eurozone tax holder ultimately takes the loss: Private investors who purchased sovereign bonds from hurting nations like Italy and Greece, sell their bonds to the European Central Bank. They make a profit and reinvest that for safe keeping in German bonds. The Germans win round one. The Italian and Greek banks that issued the first round of bonds now owe repayment to the ECB, so when the Italian and Greek banks default on the debt, they take the ECB down with them. The rest of the Eurozone loses as taxpayers bail out the central bank. And that is why Germany is not likely to flex.
Thus, you can see Mario Draghi’s threats of economic armageddon mean a losing war for the Eurozone. “What it basically shows is that monetary union is slowly disintegrating despite the best efforts of Mario Draghi,” said a former ECB governor. All of that leaves German tax payers well hedged because everyone in the failing Eurozone nations is paying Germany to hold their proceeds. Nice. And Sieg Heil!
5. Rebellion on the streets plagues the 2017 economic forecast for all nations
I think all of us can easily forecast for 2017 that the US counter-revolution, which developed around Trump’s inauguration, will get rougher as Trump actually carries out some of the things the Left most hates and fears. Obama has already created an organization to encourage, focus and empower those who protest the Trump movement. George Soros sees Trump as the greatest threat to globalization on the face of the earth. These organizations will assure endless protests, and they bring the advantage of vast mainstream governmental and media connections to the backing of the protests they choose to empower.
Trump’s executive orders and deregulation moves are certain to naturally galvanize protestors. With such potent ex-POTUS backing, protests could spin out of control to something that looks more like insurrection. Increasing violence and bouts of anarchy will have a negative impact on local commerce and sometimes on national commerce. Unpredictable times make for unsteady stock markets, too.
About a week ago, for example, major riots in Paris spread to other parts of France. The riots created signification economic impact, causing millions of dollars of damage in Paris alone. Parts of the nation have been officially declared “no-go zones,” further impinging on commerce, as have parts of other European nations recently. Some of the revolts are due to immigration tensions. Some are created by immigrants. Some are due to outrage over apparent social injustice. Some are mass hysteria over Trump, whom liberals equate with Hitler, though they thought it horrible when conservatives did the same thing with Hillary. Some are just excuses for anarchy.
The riots in France, similar to the kinds of riots seen in recent years in the US, broke out in response to allegations that police officers raped a young man. Police have been beaten, shot at and had Molotov cocktails thrown at them. One officer said the police are concerned this will turn into riots like France had in 2005 when a state of emergency was declared, 10,000 cars were burned, 300 buildings were destroyed and 6,000 people were arrested.
Marine Le Penn, as with Trump, is now basing part of her campaign in France on restoring the rule of law that France’s liberal government seems unable to accomplish. So, the riots strengthen her bid to take the reins of power and steer France out of the Eurozone.
6. Rising inflation and rising interest appear to be merging into the perfect storm for 2017
Higher interest is clearly in the 2017 economic forecast for the United States. With US inflation skyrocketing at 0.6% in just the month of February from an already high 0.3% in January, the Fed may be forced to raise interest rates even more aggressively than it had forecast in December. If high month-on-month changes like that are an emerging trend and not an anomaly, annual inflation will be well over 5%. The current year-on-year change (which includes many months of inflation that were below January and February levels) is already 2.5%, which is higher than the Fed’s stated target for raising interest rates.
Fed Chair, Janet Yellen, said last week that “waiting too long to remove accommodation would be unwise.” Comments by two other Fed heads last week stoked bond yields: New York Fed President William Dudley, among the most influential U.S. central bankers, said on CNN that the case for tightening monetary policy “has become a lot more compelling.” John Williams, President of the San Francisco Fed, said that, with the economy at full employment, inflation headed higher, and upside risks from potential tax cuts waiting in the wings, “I personally don’t see any need to delay” on raising rates…. In my view, a rate increase is very much on the table for serious consideration at our March meeting.” (Newsmax) Williams even said that raising rates in March would give the Fed room for more than the anticipated three increases this year.
All this hawkish talk sounds like the Fed may be fearing that it is rapidly falling behind the curve. The Fed’s words certainly telegraph that it will take its foot off the economic accelerator under the Trump regime faster than it had originally forecast. As I pointed out last fall, interest rates are already rising on their own ahead of any moves by the Fed, forcing the Fed to play catch-up, lest its nominal rate increases look like a joke to everyone. And, with inflation going up, the Fed has no room to move in order to stimulate the economy if GDP keeps going down as it did last quarter.
We could see a virtual thermocline in interest rates that could create turbulence for the housing bubble, which depends on low interest. Rising interest is likely to turn into big trouble for the US government in less than a year, too, due to its continual need to refinance its now astronomical 20-trillion dollars of national debt. The rise in rates also comes just as total household debt in the US has returned (at $12.58 trillion) essentially to its Great Recession peak ($12.68 trillion), a fair part of which is financed with adjustable-rate mortgages. At the present rate of climb, we’ll match that peak in maximum household debt by the next quarter.
How is the Fed going to have any power to keep a lid on any of those interest-based problems if January and especially February are true indicators of where inflation is going this year?
7. Wars and rumors of war all over the world
More than a desert storm is brewing now. It seems the further we go into the twenty-first century the more concurrent wars we have. Humanity is far, far far from learning to live at peace with one another. The world is embroiled in wars of all kinds — more than I’ve seen in my lifetime. Ukraine, Libya, Syria, Iraq, Yemen, Somalia are recent headline nations, and there are skirmishes in other places and several potential wars looking like they could erupt soon.
The Middle East, where global armageddon was predicted to take its center stage, looks every day more like it will fulfill that forecast. It’s a hell-hole that grew hot under Bush, hotter under Obama, and Trump promises to turn up the heat even more in order to incinerate ISIS. Twenty-three percent of all global arms sales are made to Middle-East dictatorships. That results from an 86% jump during Obama’s final term as president! (Obama, winner of the Nobel Peace Prize.)
Elsewhere, the borders between Nato nations and Russia are stocking up on arms on both sides, which Trump has also promised to increase, stating he wants to assure the US has the largest arsenal of nuclear weapons on earth. Russia is now frequently provoking Nato and the US military, by harassing ships with fly-bys and skirting US and Nato boundaries.
But elsewhere, still, North Korea continues to rattle its nuclear sabers against the West, begging for some action from Trump, by firing missiles vaguely toward Japan and Hawaii, flaunting the fact that it intends to ignore Trump’s warnings, bating him to take action.
Nearby, China continues to aim for dominance and control in the South China sea, pushing the US to exert its right and the rights of others to travel those routes that have long been recognized by all other nations as international waters. Conflict with China over Taiwan has started to look a little more likely, too.
Coming full circle to the Middle East, the Iranium Reaction, as I’ve called it, is heating up again and could melt down faster than the China Syndrome: During his campaign Trump made it emphatically clear (as he makes most things) that he believes the Iranian nuclear deal is a horrible deal. Trump has stated clearly that he will terminate or renegotiate the nuclear deal with Iran.
One of his first acts after his inauguration was to “put Iran on notice” because it tested a missile that is allowed under the new deal. Whatever Trump’s now re-retired General Flynn meant on behalf of Trump when he said that Iran was “on notice,” Trump, in retweeting it, made the statement his own and drew another red line in the sand. Israel’s PM, Benjamin Netanyahu, responded to the statement by saying, “Iranian aggression must not go unanswered.”
The problem with drawing red lines is that they challenge weaker parties to prove their strength, and Iran does not back down. It’s like picking a fight by drawing a line in the sand and saying you dare someone to cross it. Iran will try to show that it can wiggle its toe across the line. So, another fairly certain forecast for 2017 is that Iran will seek to prove its strength against Trump, and that, too, influences the economy in ways that cannot be easily predicted.
Secretary of Defense Gen. James Mattis has accused Iran of being the world’s leading “state sponsor of terrorism,” and Trump’s new CIA chief, Mike Pompeo, advocates invading Iran. Trump’s overtures to Benjamin Netanyahu have made it clear that Trump intends to prove himself to be a much stronger friend of Bibi than Obama was, and Netanyahu has repeatedly made it clear that he hates the nuclear agreement and would prefer to see Iran bombed in order to avoid getting the bomb. So, many vectors are pointing toward conflict with Iran.
The US and its NATO allies are beginning “Operation Unified Trident” in the Persian Gulf, a joint war game intended to simulate a military confrontation with Iran. Iran has also initiated its own wars games in mouth of the gulf (the Strait of Hormuz).
Riling the likelihood of more reaction from Trump, Iran placed an order for uranium with the body that oversees the nuclear deal between Iran and the West this month. Iran claims the nuclear pact said this shipment could happen in the first three years of deal, but with Trump wanting to renegotiate and Netanyahu preferring an attack on Iran’s nuclear plants, will either leader be inclined to allow Iran to obtain 950 tons of uranium?
Three-hundred tons of that is supposed to arrive in the form of yellowcake. You probably remember that the US considered yellowcake a short enough step from being bomb grade (in terms of the amount of time required for further enrichment) that it started a war with Iraq over it. While Iran has the right under “Joint Comprehensive Plan of Action” to enrich uranium to 3.5% purity and to sell it to other nations, that’s certainly a major part of the deal that neither Trump nor Netanyahu like.
In this superheated environment, House Joint Resolution 10 was introduced in January by a Democrat, so that it is one of the few bills likely to have some bipartisan support. I certainly cannot see how it will not be loved by neocon Republicans. It states, “This joint resolution authorizes the President to use the U.S. Armed Forces as necessary in order to prevent Iran from obtaining nuclear weapons.” If it passes with its present wording, it means Trump is preauthorized by congress to initiate pre-emptive war against Iran at his sole discretion.
Leaders going into war often underestimate what powers the other side may bring to its aid. In the event of war with Iran, China and Russia have indicated they will stand with Iran.
Coinciding with all of that, we have the perpetual Palestinian-Israeli conflict, which looks likely to intensify under hardliners, particularly as Trump sides more solidly with Israel. Of course, arms races are good for the US economy, but wars can create panic in markets, too. If the US gets involved in more and more wars, up soars the national debt.
Miscellaneous breezes that could blow into a storm in the longterm 2017 economic forecast
Those are the main events I see contributing to my global 2017 economic forecast, but there are also many likely events that are lesser at the moment but that could have a modest impact or could grow to considerable impact:
Housing bubbles are starting to pop again. This is actually a big one, but I so I already gave it a full article. (See “2017 Economic Headwinds: Housing Bubbles Popping up and Just Plain Popping Everywhere.”) I merely note it here as a reminder of how many force are now looking likely to start to batter the economy.
More retail closures are in the works. JC Penny announced last week that it will close another 130-140 stores, citing week demand and online competition. Macy’s recently announced it will be closing 100 stores, too. Macy’s said profit fell another 13%, and it expects a 3% decline in sales in 2017. Kohl’s and Nordstrom are keeping things in line by reducing inventory and cutting back on promotions.
In all, things don’t look good for major retailers. It’s not all due to online competition either. Some of the overall slowdown in growth of consumer spending is attributed to inflation. Adjusted for inflation, overall consumer spending fell in January, taking its largest drop in three years.
Health insurance in the US is a rampantly spreading its own economic epidemic. Having lost a lot of money in 2016, a few major insurance companies dropped out the Affordable Care Act, and others raised their premiums an average of 25% for 2017. A third of all the counties in the US now have only one insurance carrier, and more carriers are likely to drop out in 2018, raising insurance prices even more through the loss of competition. Rising healthcare benefit costs could freeze wages, which have only just begun to trickle upward. Now that the ACA is in place, 28.5 million Americans remain without health insurance because they feel insurance is too expensive already or because they can’t qualify.
The raging debate over Obamacare is delaying economic stimulus. Trump has stated publicly that it is impossible statutorily and infeasible to do tax reduction until the Affordable Care Act is sorted out because the administration has to know what the replacement plan will cost before it can enact tax reductions. The major stimulus those reductions would provide were really a dying economy’s lifeline that was needed immediately. Now they will not happen until August at the earliest.
If any ISIS or al Qaeda terrorists have entered the US by claiming to be refugees, as President Trump suggests, they are now pressed to act sooner than later because Trump is going to start to export illegal immigrants. While expulsion is intended to reduce the size of such risks and the possibility of their being carried out because sleeper cells won’t have time to build up their numbers and finish their plans, it does increase likelihood of a black-swan event moving into the 2017 economic forecast if any event is in the planning stages. For terrorist organization, border tightening looks more like now or never. (Not saying Trump shouldn’t do this, just saying it is a fact that it tightens schedules for terrorists from their perspective.)
We know the Republicans ran an entirely obstructionist government on their end for eight years (more so than anything I’ve seen in my lifetime); so we can be reasonably certain in forecasting that it is now payback time from the Democrats. Expect as much gridlock as Democrats can muster because they have never hated a president as much as the hate Trump.
A BRICS breakdown. The US dollar as reserve currency is eroding the new wealth of rising nations because loans have to be paid back in US dollars while local currencies are declining in value against the dollar. That leaves debtor nations scrambling for cash to repay these loans. I forecast, as do many others, that we’ll start to see nations, as well as individuals and corporations in developing economies, face bankruptcy problems in 2017 because of debts they owe in dollars while they make their revenue in falling currencies.
US auto debt is at a record high of $1.16 trillion, according to the Federal Reserve Bank of New York. That’s a situation we saw going into the Great Recession, and we know how badly it turned out then. The high number of sales back then was made possible by lowering credit standards and increasing the payment period to seven years and by calling leases, sales. That is also similar to tactics leading into the Great Recession when automakers found themselves teetering on bankruptcy. Delinquencies on auto loans are rising but are not as bad as student-loan delinquency.
And then there are major trends of great significance that are slowly going to get worse every year, which are just breezes in 2017, but they foretell what is coming like the gentle gust you feel before a sudden downpour of rain:
Hi-tech is eliminating jobs. This won’t be too much of a headwind for this year, but it will become increasingly a problem in years ahead. The threat to jobs will move from being off-shored to being robooted out the door. As one of this blog’s readers (QEternity) has pointed out in his comment to another article, “today’s Uber drivers will be eliminated, along with McD’s burger flippers, and a host of other jobs.” Amazon is already hugely robotic, and we may move toward “near worker-free grocery stores” and fast-food restaurants.
Rising costs of oil production as oil gets harder to access. The entire global economy depends on oil, and so far recent innovations in fracking have kept the economy afloat in cheap oil, which had its detrimental side when it got low enough to drive oil companies and their support industries out of business and imperil banks that went in too deep in financing the industry.
Fracking plays, however, play out quickly compared to the kind of reservoirs we used to be able to tap. There is lots of oil left in the world, but it becomes increasingly costly and dangerous to extract. Witness the Deep Sea Horizon to see how dangerous deep-sea oil drilling and pumping can be. Witness the massive increase in Oklahoma earthquakes and flaming well water and the USGS’s statement that the earthquakes are definitely caused by fracking waste wells to see how dangerous on-land fracking can be. (See “The OPEC Epoch is Over” to see how much the oil industry is changing.) No doubt, new technologies will draw this out some, but many of those technologies are more expensive, and our consumption-based economy demands fairly inexpensive oil to heat it up.
Baby boomers (also covered under housing) are retiring, and retirement funds are wrinkling up like dry leaves in the wind. The New York Teamsters just cut its promised benefits in half. Several other Teamster retirement plans are shriveling back to probably half of what they promised. This is symptomatic of the drying up of retirement benefits and social security and medicaid benefits as more people enter the beneficiary side and fewer productive people contribute.
This will be happening all over the nation from this point forward because retirement plans were grossly mismanaged just as the federal government grossly mismanaged Social Security by borrowing endlessly from it and never repaying what was borrowed. Everyone has knowingly ignored the reality they don’t want to deal with — the fact that demographics would turn against the cash flows of all these plans.
2017 is the year when we are starting to see this growing demographic kick in, and the cost of our delinquency will be felt for the next twenty years as more and more companies and governments seek to extricate themselves from the retirement benefits they promised (hence “entitlements” in that the main reason many people did this work was for the promised retirement, now suddenly pulled out from under their feet. But that is what happens when you spend the future’s money today. Someday, you are part of that robbed future.)
Municipal and state plans are also disintegrating. Previous stock market crashes and deregulation are largely blamed by those who oversee the funds. One more stock market crash would finish off a whole slough of them since it would be hitting just as numerous plans are in trouble. What you are actually owed or what you need is irrelevant. Math has no mercy.
Oh well. It’s better for Trump if the economy crashes sooner than later because it will give him a chance to try to put the blame where it belongs — on eight years of failed economic recovery plans that followed eight years of profligate war and trickle-down economics that created enormous debt and an ever-widening gulf between the rich and the rest.
As you question my 2017 economic forecast, ask yourself which of the above things seems unlikely to happen or improbable … and tell me about it below.
As we enter 2017, housing bubbles are showing signs of bursting all over the world. I know I’ve been promising I would lay out the economic headwinds for 2017, but 2017’s headwinds are building so fast and furious that I’m having to break that promised article out into several articles, as I’m accumulating material faster than I have time to cover.
I’m going to start with the housing bubbles that are now extremely evident in the US, Canada and Australia, noting that housing is also insane in its own weird way in China again and in many other parts of the world. The point I want to make is that, with housing bubbles now at the peak of popping in several parts of the world, this coming housing market collapse could make the US housing market crash of 2007-2009 look like the warm-up act, and housing is just one area of the global economy that is showing signs of high peril.
A 2017 housing bubble collapse in the US may be in the cards
As I wrote in “The Inevitability of Economic Collapse,” the whole US economy is a house of cards, but particularly the US housing economy where we have done everything we possibly can to pile up a potential housing collapse as precariously as we did last time around just so we can watch it all fall down again.
The hard push to get back to where we were in 2006 has been on for about seven years. In the past few months, housing has been on its fastest tear in the US with the number of new permits being issued for construction in 2017 particularly leaping up like a spring lamb, and that’s with prices that are now generally higher than they were at their peak in 2006. We are showing all the same evidence of an irrational market that we showed going into the Great Recession:
That peak was only attained because of lax credit, which made an expanding number of purchases possible after prices went beyond what people could afford. Since wages in real terms (having only recently started to rise in a few industries) are not any better than they were back in the housing crash of ’07-’09 , today’s higher prices are actually less sustainable without dangerously lax loan terms than they were back then.
That’s why we have again begun to relax loan terms for individuals buying a house. For the last eleven quarters, more lenders have relaxed mortgage standards than have tightened them. (“Minimum credit scores have dropped. Self-employment documentation has reduced. Maximum loan-to-values have been increased.”) On top of what banks are doing to relax their own self-imposed standards, Trump has ordered a review of Dodd-Frank with the hope of stripping it back in order to get banks to issue more loans in order to juice the economy (and to make things better for his real estate industry). We learn nothing.
Cohn said Friday on Fox Business that the executive orders are intended to relieve restrictions and scrutiny that post-crisis regulations have put on banks…. Trump promised to do “a big number” on the Dodd-Frank Act. (Bloomberg)
What could be better than a return to the exuberant days of banking deregulation? A Republican article of faith says that banks and the economy can always benefit from further deregulation. Dodd-Frank will be stripped down before it fully goes into practice. The unstated goal here is to fatten up some more bankers and further inflate the housing bubble because we are so incapable of thinking outside of a housing-based economic model.
The fact is that bank loans to businesses have never been higher (in total value of loans issued), so there is no problem, as Trump claims there is, of banks not issuing enough loans to businesses. The value of bank loans issued was not even this high just before the Great Recession. Likewise, the total value of bank loans for commercial real estate has never been anywhere near as high as it is right now. So, most likely those who are not being given loans (like perhaps the King of Bankruptcy) probably don’t deserve them.
For now, the race to the top in housing is still on, but there are signs that a peak is being reached. I’ referring to signs other than just the fact that we’ve passed the previous peak’s prices. January purchases of existing homes picked up to a pace not seen since 2007. The number of new-home sales jumped 3.7% in one month (in terms of number of units sold). That is in spite of the fact that the median price of a US home has risen 7.1% since the same time last year.
One caveat about this rise (until we see where it goes in the next couple of months) is that some of this activity since December’s rate hike may be due to people rushing to buy before interest rates rise even more, now that rate increases by the Federal Reserve are looking certain.
With houses in the US now remaining on the market for only fifty days, averaged across the nation (less than a month on the west coast), the market is feeling as searingly hot as it did in 2006 just before prices started to fall. So, that’s one indicator a top may be near.
Because of a shortage of inventory (the lowest number of houses on the market since 1999), bidding wars are starting again in cities like Seattle and San Francisco where houses again regularly sell for more than their list price. That kind of bubbling-over race to higher prices ran for a few years in the highest-priced markets before the last housing crash, but it is the kind of frenzy that defines “irrational exuberance” in a housing market. When people scurry to say, “I want to pay you more than you’re asking for” in a market already priced higher than ever before, you’re witnessing the kind of mania that precedes a crash. So, that’s another indicator that a top may be near.
One more kind of action that has risen back to pre-Great-Recession levels is house flipping. Foreclosures are being snapped up by mom-and-pop fixer-uppers at a level matching the superheated speculation of the last housing bubble.
Some US housing bubbles appear to be popping already. Prices on expensive homes in some places, such as Miami, are now falling quickly. Since early 2016, condo speculators in Miami (who buy condos pre-construction, hoping to sell them for a better price as soon as they are completed) have been pummeled into accepting losses. Inventory is growing in Miami; sales volume is shrinking; and total volume of sales in dollars is declining.
Same kind thing is happening in Manhattan where luxury co-op apartment contracts have collapsed 25%. Closings on high-end sales in Manhattan (number of units sold) had fallen 18.6% year on year back in October. Inventory of units in new developments was backed up at that point an additional 27.2% YoY.
Barry Sternlich, CEO of the Starwood Property Trust, which finances real estate development, calls Manhattan’s luxury condo situation “a catastrophe” that “will get worse.” Since homes in this segment of the market are typically bought by those people who make a lot of money by working on Wall Street, one has to wonder what this says about the real situation in the world of stocks and finance.
From 2017 on, the US housing market will face different kind of bubble bust than it has ever faced before. The baby-boom bubble is now moving out of the housing market. For the next two decades, the fastest rising segment of the population will be those who are seventy or more years old, while those who range from twenty to sixty nine (where homes are still being bought) will shrink in total numbers.
Seventy-plussers, whose total population is projected to quadruple during that time, buy the lowest number of homes of any age group (only about seven percent of the market). Not only do they have less need of a new home, there aren’t many banks that want to issue a thirty-year mortgage to someone who will be a hundred years old by the house it gets paid off. So, ask yourself who is going to buy up all the houses that the baby boomers evacuate when they move into retirement facilities? (The growth in nursing facilities, may keep construction going, but it isn’t going to help banks with huge numbers of home loans on their books, and boomers trying to sell in that market will be hurt badly by falling values, making it also hard to buy into retirement facilities.)
Why the real-estate mogul president of the US may cause the housing bubble to collapse in 2017
It seems counter-intuitive that a real-estate development tycoon would cause a housing bubble collapse, as there is nothing he would hate more, but consider the following:
While high-priced homes (prices and numbers of sales) are already starting to slide in some major metropolitan areas, Trump’s immigration restrictions are likely to impact the lower and mid segments of the housing market, pushing them over the cliff, too — particularly the multiple-family housing market and to some extent single-family housing. (I’m for many of his immigration reforms, but the math doesn’t care how you feel about immigration. Math is math.)
The secondary reason — second only to having a cheap-labor pool — that businesses and government want as much immigration as possible is that high immigration forces expansion of our housing-based economy. And housing expansion seems to be the only sure way of growing an economy we know about — sure, that is, until it isn’t.
Housing markets with the highest risk of an immigration-based collapse in 2017 include Los Angeles, San Francisco, Miami, Silicon Valley and New York, which have the largest populations of foreign renters and buyers. Since some of those areas are already hurting on the top end of the market, they are going to really feel the squeeze.
Consider a simple reality of the deportation threat: even those who are not deported are likely to back off from their purchasing plans. More will stay for now with renting in fear that they may be deported. Overnight, millions of people are becoming reluctant to enter long-term residential plans.
Not only do millions of families deported mean a loss in demand; they also mean millions of homes and apartments going on the market. It’s a price hit from both demand and supply sides of the market at the same time. In the old days, that was a recipe for a ghost town where people simply walked away.
The possibility of deportation also makes lenders nervous and less willing to make loans to undocumented immigrants. (Some lenders actually specialize in making mortgages to “undocumented immigrants.”) For the bank’s view, people leaving the market and selling their homes in large numbers means oversupply, which predicts falling prices, which predicts mortgages going underwater. If those underwater mortgages are adjustable-rate mortgages they cannot be refinanced when the interest increase comes. So, defaults will rise for immigration reasons just as housing prices are exceeding the peek they hit before the last major housing crisis. Smart bankers are getting nervous, but that means loan tightening will exacerbate the problem.
Then you have to factor in the millions of immigrants who won’t be coming even if deportation doesn’t happen quickly. That influx is already down because people know the risk of deportation is far more likely under Trump than it was under Obama. (Obama practically advertised for illegal immigration by letting the world know that children would not be deported, which translated to “send them quickly while you can get them in and can know they will be allowed to stay.”)
The factor here is that a third of the real-estate industry’s estimated new growth is based on new immigrants adding to demand. Whether they live in apartments, houses or condos doesn’t matter. All of that is new construction for a planned influx of new people who are no longer coming. That is going to start taking some plans off the table. Many of those permits that have been applied for may never be exercised.
While Trump’s massive immigration changes (and the fears caused by the knowledge that change is coming) are likely to effect the lower end of the market the most, they will effect mid levels as well. Immigrants with specialized skills, who are here with green cards to do specialized jobs, are becoming more skittish, too, being uncertain of how Trump’s immigration plans will effect them. Even some green-card holders who are already far along in the process of getting citizenship legally are becoming apprehensive about purchasing a home because they are concerned that the immigration issue could become more aggressive.
So, we have a rather large trigger that is already moving, which could cause a 2017 housing bubble c0llapse.
Canada’s housing bubble is more precarious and is already falling in 2017
From Miami, Florida, to Vancouver, B.C., housing is tumbling at the top. Vancouver’s housing market decapitation is partially intentional, created in part by a 15% foreign-investment tax that the city started at the end of summer in 2016. They implemented the tax because prices at the top were going insane due to Chinese investors, and that was pricing Canadians out of their own market; but that pushes somewhat wealthy Canadians down to high mid-level homes, raising prices there, which pushes mid-level buyers down and so forth.
The 15% tax hits mansions the most because that is where foreign money was percolating prices into the stratosphere (due to Chinese investors looking for ways to store their wealth outside of badly failing China). However, the price drop in top-tier housing is not entirely due to the foreign-investor tax because sales started to fall sharply (by about half the number of units sold in a month, year on year) for two months before the new tax was voted into place. (Maybe just in anticipation?) In fact, the average home price in Vancouver has fallen almost every month since March, 2016, though most of the deflation has been at the top. (So, maybe a top is in anyway.)
At the same time, the number of empty houses (including derelict mansions) in the greater Vancouver area had more than doubled from what it was back in 2001 even though prices since 2001 had risen 450%. So many empty houses means there is a lot of reason to believe prices will keep falling, especially now that the foreign investors are being driven away. Have incomes risen 450% to keep up with that? Don’t think so.
Because mansions in the best neighborhoods (where the median home price is about $5 million Canadian) were oddly being left unoccupied and deteriorating, Vancouver also imposed a one-percent surcharge on property taxes for houses that are not primary residences or are not rented out for half of the year in hopes of getting people to do something with those home in order to thin out the decay.
(The result of all this has been to push Chinese investment down to Seattle, Washington, causing the high-end home market along the US west coast to improve.)
Toronto, Canada, is as much a bubble as Vancouver. Doug Porter, the chief economist for the Bank of Montreal, told investors this past week, “Let’s drop the pretense. The Toronto housing market and the many cities surrounding it are in a housing bubble.”
Prices in that region have risen an average of 22% in just the last year. This is the fastest increase since the late eighties, which almost everyone in Canada will agree was another bubble, and it comes on top of pervious years of double-digit gains.
This is insanely bubblicious activity. Did incomes rise 22% last year? Do the math: When the cost of housing rises 22% in one year, and wages rise 2% and when the 22% is on a starting number that is maybe four times higher than the average annual wage that only rose 2%, clearly there is no more room for housing prices to rise … other than by foreign investment (now being curtailed) or further relaxation of credit terms. (Lest you think the latter is a realistic possibility, think how much you’d have to slacken credit terms in just one year to make the next year’s mortgages affordable.)
The housing bubble down under is probably going under in 2017, too
Australia appears to be trying to push its bubble higher in all the same ways the US tried leading into the Great Recession. Why? Because the Australian housing bubble is coming to an end, and what one does when that happens is loosen the strings on the net to cast a wider net. Thus, one member of parliament is now asking for banks to start giving zer0-downpayment loans. Been there, done that in the US; and the housing market collapse came shortly after.
When you have nothing down and little to lose, you walk away from your loan quite easily if housing prices fall. So, the end of the bubble comes surprisingly fast at the point.
The Australian housing bubble percolated along nicely all the way through 2016 with housing prices in Sydney and Melbourne rising fifteen and thirteen percent respectively in one year. Canberra and Hobart saw about 10% growth in prices. In Brisbane, however, where construction was soaring, growth has almost stalled. Vacancy rates have now doubled. Project approvals are dropping, so construction will begin to go down. Perth was the first major city to shift into reverse as it saw property prices slide downhill four percent last year. Smaller cities where the big money was coming from mining of resources sold to China are seeing even faster declines. They are not ghost towns, but it is the same dynamic.
One of the things the US experienced in its infamous housing bubble collapse was a lot of dishonesty in the loan approval process and the loan repackaging process that became necessary to expand the net after all possibilities of legally relaxing standards were exhausted. Now Australia is in the same place:
UBS Securities Australia reported today that about 28% of Australian mortgages issued in 2015 and 2016 are what we in the US have come to call “liar loans,” which played a big role in the housing boom and the collapse and subsequent bailout of the global financial system.
The last phase of a housing bubble needs liar loans to keep going because buyers have to reach beyond their limits, and the only way to do this is lie now, or miss out forever on buying a house to live in or get rich with quick as investor…. US-style mortgage fraud would be a “Nuclear Bomb” to Australia’s banks. (Wolf Street)
Much of this fraud has come from Chinese investors who falsely stated their income. With the Chinese running double books in China as well-known standard operating procedure, who would have thought they might have provided false data to Ausie banks? Increasingly, Australian banks are afraid to lend to them, so Chinese investment is falling off sharply.
Shanghai-based financiers claim their Chinese clients’ funding from Australian banks has been frozen and they face foreclosure – or usurious interest rates – from private financiers…. “All the deals have been frozen,” said Mark Yin, an agent with Shanghai-based Home Tree Group, about his Shanghai clients’ funding with Australian banks. “We are now looking for finance all over the world….” Billions of dollars has been invested in tens-of-thousands of high-rise apartments that are reshaping the skylines of the nation’s major capitals, particularly Melbourne, Sydney and Brisbane. Most have been sold off-the-plan, which means purchasers buy off the blueprint with a deposit and complete when it is built, which requires a second valuation and financing commitment by the lender…. Lenders, which initially fell over themselves to finance overseas’ buyers, slammed on the breaks when spot checks on the loan applications detected widespread fraud. The main problem is mainland Chinese buyers, which account for about half of the deals. That means many local lenders that agreed to provide funding when buyers made deposits, will not recommit upon completion. Nervous local lenders fear that a sharp downturn, or change of sentiment, could result in foreclosures with overseas borrowers they have little chance of locating. (Financial Review)
According to UBS, misrepresentation is systemic, and according to The Guardian, the housing bubble in some parts of Australia is “ready to hit the skids.” With things falling apart, the Reserve Bank of Australia started trying to make Donald Trump the scapegoat for the failure of its own cheap-money policies … before he was even inaugurated. (Don’t they have their own notoriously irascible PM they could blame?)
Trump’s policies may be inflationary, they whine. Wasn’t Australia’s central bank, like the rest of the civilized world, trying for the past several years to create a little inflation? Now their failures are because Trump is creating inflation?
The problem is that Trump’s talk of infrasture spending raised bond rates in Australia, too, which bleeds into mortgage rates. Interest rates are now rising outside the central bank’s control, just as they are here in the US, sending housing expansion into reverse. Market forces are wresting control over interest from central banks, so CB decisions to raise target rates at this point don’t amount to much more than catching up in order to maintain the illusion that they are still in control.
UBS also ranks Sydney as the fourth-most likely city in the world to experience the implosion of a housing bubble. (Vancouver tops the list.) Property prices there have grown almost fifty percent since 2012, while wages have stagnated. That assures it is a credit-fueled housing bubble, not a rise born of spreading prosperity.
How bad is it?
Jonathan Tepper — a US hedge-fund consultant who predicted the mortgage crises in the US, Spain and Ireland — claimed Sydney’s housing bubble was ready to burst in 2016 with a correction that could be as much as a fifty percent plunge. Stated Tepper, “Australia now has one of the biggest housing bubbles in history.” Was he wrong entirely about an Australian housing bubble crash or just a little premature on the timing?
Some developers (with their own interests to promote) say Sydney cannot crash because Australia’s population is still growing rapidly and will for another twenty year, but Sydney could still crash if the rise in values has more to do with years of speculation than with population growth, as rental rates would indicate. Prices will revert to what people can actually afford when speculation can’t go higher.
We know what happens as soon as speculative housing bubbles stop rising because they can’t find enough qualified fools (or enough cheap credit). Like all Ponzi schemes, the game is over immediately upon reaching the last tier of willing or able players. Where wages have stagnated for years, that happens as soon a speculators can no longer count on a profiting from reselling to other anxious speculators.
Higher interest disqualifies more participants. As in the US, Australian households are again already struggling under a huge debt load of $2 trillion Ausie bucks. That means a little rise in interest should shut the game down pretty quickly. That crane count over the skyline of Australian cities, which has outnumbered major cities in the US and UK, may start to look a little derelict in the years ahead, as rusting cables sway in the wind over half-finished, vacant monuments.
Stop! Don’t worry about that scenario right now. Individual banks in Australia have found a way to keep the investor pool growing even as central-bank cheap money has topped out — mortgage fraud. According to a report last spring, which was tabled by the Australian senate, many banks are falsifying applicant information in order to make applicants look more capable of paying than they really are. So, Australia is not just experience mortgage fraud from applicants, but also mortgage fraud from the banks making the loans.
You have to appreciate how much the Ausies learned from the United States’ play book where many banks in Florida ran the same game in the run-up to the Great Recession. Australia should be safe, though, because, according to the report, this is happening “with the full knowledge of Australian Securities and Investments Commission, the Australian Prudential Regulation Authority and the Reserve Bank of Australia.” (One has to wonder why they became so concerned about Chinese falsification, when others are going out of their way to create false applications; but such is the bizarre world of housing bubbles, especially when they reach their popping point and things get desperate.)
Philip Lowe, the Reserve Bank of Australia’s governor, tried last fall to blame skyrocketing home prices on a shortage of houses, rather than on the loosey-goosey interest rates of the national bank. Sorry, Pip, but if that were the case, rents would have risen parallel with housing prices; but rents have barely nudged upward for years. If there is a shortage of inventory, it’s only because you’re in a feeding frenzy of flippers, not because people can’t find enough shelter. It’s a speculative bubble, with everyone snapping up anything that flashes in the pond. Bite first, decide if its food-worthy later.
The last person we would expect to understand housing bubbles is a banker. Stay with the bubbles in your champagne flute, Phil. They’re the only ones you’re familiar with. The real problem is that years of cheap loans have enticed your people to amass the highest levels of household debt in the world! Do I hear a flush coming? But, hey, at least the RBA has set aside $300 billion dollars for its next bailout. So, you’re good, Australia … until round two. All bets are on the house in this casino.
Even ol’ Pip recognizes that one of the major reasons governments want immigrants is to keep pumping up the housing bubble. Lowe stooped to his name’s own level when he lamented last week that “the insidious” resentment that Ausies have toward immigrants, such resentment being caused by the overcrowding of Australia’s major cities. This could doom the land down under’s housing-based economy if people there start rejecting a major source of demand as is happening in the US. You see, the eternal expansion of overpopulation is essential when the only way to grow a housing economy is to grow population.
The solution, according to Lowe, is for the government to build more transportation infrastructure so the influx of people can spread out more. (Hmm, you mean take out more bonds, which will cause interest rates to rise just as happened because of Trump’s infrastructure plans? I guess Lowe likes the idea if it happens in Australia, just not when it happens to Australia.)
Hopefully, someday Australia will be one big city from coast to coast. Then they can start building islands (think how much infrastructure spending that will cause) to house more people in order to keep that real-estate-driven economy ever on the rise. (I ask the question, “Why do economies need to grow? What’s wrong with just sustaining nicely? Well, of course, they need to grow so that people can get filthy rich.)
How long can the game go on? According to The Sydney Morning Herald,
The forecasters are now saying 2017 will be the year that the housing headwinds could get stronger.
But The Herald also states that none of this points to Australia’s housing bubble bursting, but just to a little letting of the air out of the market. Ah, the perfect world where the air hisses out like a lazy snake. The problem with Ponzi schemes, though, is that as soon as the air starts coming out, the snake bites, and the whole scheme collapses. In housing that plays out as flippers stopping their investment because they get scary-close to not making money anymore. Some even start to lose money. Demand plunges as soon as the flippers stop flipping, so housing prices fall. That means mortgages go underwater.
All of that becomes a catastrophe when a nation has issued a huge number of variable-interest loans — as Australia has. When interest rise just as housing prices go down, owners cannot sell their way out of trouble as an escape hatch if they got in over their heads. The only way out is default.
Even worse are interest-only loans where speculators qualify for much more than they can actually pay for with loans that require interest payments only until a set date when a balloon payment is due. The flipper plans to sell the house into a rising market and see a big profit before that impossible event hits. The home owner who plans to stay counts on being able to refi at a more attractive interest rate once he or she has built up equity due to rising values. If they can’t? Australia has half a trillion dollars worth of these loans outstanding, comprising more than fifty percent of residential term loans.
Prices could just settle out if this wasn’t a speculative bubble of people buying and selling homes to make a quick buck in a rising market. But when prices have reached lofty heights largely because of rampant speculation, housing is likely to slide off a cliff when speculation stops and prices revert to what people can actually afford without all the baloney that pumped up the market.
Housing bubbles ready to burst all over the world in 2017
The countries I’ve covered here are no different than many others. I could as easily write about the UK housing bubble, which began to unwind last year. Barclay’s is now offering 100% loan-to-value mortgages — an obvious latch-ditch kind of effort to prop things along to anyone who has seen these things fall apart in the past. As with Vancouver, Manhattan, and Miami, London’s pricier neighborhoods have seen a decline of ten percent in value in the past year.
The Organization for Economic Co-operation and Development said at the start of this year that it now sees dangerous property bubbles in several of the world’s largest economies that risk a “massive” price collapse. It notes that New Zealand and Sweden are perched at even more precarious heights than the UK, Australia, Canada and the US.
All of this accelerating insanity has to be a top coming in. One can hope all these bubbles deflate slowly, but our experience with major bubbles says they don’t just fade. As soon as there is no greater fool qualified to enter the market, housing balloons in the US, Canada and Australia will likely implode. Likewise, elsewhere.
We have rebuilt almost exactly the same potential panic-inducing crisis that was just starting to show in 2006; only this collapse is likely to be global … all at the same time — probably starting this year and really falling apart next as contagion moves from nation to nation.
To keep qualified investors coming into this Ponzi scheme for now, nations have reverted to relaxing credit standards and the US back to deregulating banks because that’s the only way to expand to the next larger tier of fools. Same old story as last time. We’re doing this because we are so addicted to the idea of a housing-based economy as the only way to go that we bullheadedly keep thinking it has no top limit to its expansion.
We do this even though we have already experienced how quickly things go bad — very bad — when you reduce mortgage standards so much in order to rope the final round of people in. People go mad in herds, but only recover their senses one at a time, while voices of sanity pretty much talk to themselves.
For right now, the stampede in stocks and housing is still on; so don’t worry: a collapse is nowhere in site. We are no closer to a meltdown in either market than Fukushima was after a thousand earthquakes and a tsunami. If you don’t believe me, ask a banker.
Since Trump’s election, the US stock market has climbed unstoppably along a remarkably steep path to round off at a teetering height. Is this the irrational exuberance that typically marks the last push before a perilous plunge, or is the market reaching escape velocity from the relentless gravity of the Great Recession? Read the remainder of this entry »
The Federal Reserve is, at last, acknowledging at top levels that its economists are completely baffled, its recovery is failing, that the Fed cannot raise interest and may even have to heat up its stimulants … or we may end up with a permanently scarred and stagnant economy. Read the remainder of this entry »
Here’s a scary chart. Over the past three years, U.S. housing prices have risen as quickly as they did when the Federal Reserve was fueling the housing bubble with cheap and easy credit. That blew up in a housing market collapse in 2007-2009. Prices are also nearing the same peak price as their earlier crash point:
Another housing market collapse is imminent
While the Fed says that their massive money printing is not creating another bubble — “We see no evidence of any bubbles” — both the stock market and the housing market have been rising as quickly as they were during the last bubble where stocks and housing soared together. They are also nearing the same peak. And in my never-so-humble opinion, they are just as certain to crash soon as they were last time.
For some reason the Federal Reserve does not consider the huge inflation in housing prices or in stock prices to be a form of inflation. As a result, they naively believe they are creating money without creating hyper inflation. They are simply looking for inflation in the wrong places. If they were printing cash in large currency amounts, it would be happening where people spend their coins — on the smaller stuff. Because they are creating all the new money as ones and zeros inside the reserve accounts of major banks, the inflation is happening where major banks spend their money — on major assets.
And then there is the condition of those agencies that support the housing market like Fannie Mae and the FHA. Writes Jim Quinn on the Contra Corner:
Edward J. Pinto, a former Fannie Mae official, estimates that under standard accounting practices the agency is already insolvent to the tune of $25 billion. Mark to fantasy accounting hasn’t just benefitted the criminal Wall Street cabal, but also the bloated pig government housing agencies – Fannie, Freddie and the FHA. The FHA’s share of new loans with mortgage insurance stood at 16.4% in 2005 and currently stands at 44.3%. This is a ridiculously high level considering the percentage of first time home buyers is near all-time lows and low income buyers have lower real median household income than they had in 2005. Distinguished congresswoman Maxine Waters, who once declared: “We do not have a crisis at Freddie Mac, and particularly Fannie Mae, under the outstanding leadership of Frank Raines.”, prior to them imploding and costing taxpayers $187 billion in losses, thinks the FHA is doing a bang up job. Her financial acumen is unquestioned, so you can expect another bailout in the near future.
The next housing market collapse and stock market crash will be worse than the last
Consider the following:
- The number of derivative securities created from questionable mortgages is $1.5 quadrillion, which is 194% more than it was when derivatives triggered the Great Recession
- The bloated banks that we had to bailout out because they were “too big to fail” are now more than twice the size they were before the Great Recession began. That’s how attentive your government has been.
- The Federal Reserve has exhausted all of its old tricks and all of its new tricks for helping the economy when it fails.
- National debts throughout the world are logarithmically greater than they were during the last housing market collapse, leaving all governments with less capacity to stimulate economies with infrastructure projects.
- China is no longer available to help power the world through the next collapse because it had to throttle down when its own housing market superheated.
- U.S. student loans are already going into default in record numbers.
Whether the housing market collapses first or the stock market or the bond market, they will all likely disassemble together, as one puts pressure on the other and the whole economy disintegrates. The resulting economic collapse will be the worst the world has ever seen for the reasons given above (and many others).
The governments of this world will have to invent a new set of tricks in order to bring recovery. They will look for a global answer because this will be a global collapse. They will eventually look toward a global currency as being part of their answer because the internet-webbed world yearns for such a currency and because so many of the old currencies will fail together during the next crisis and because many nations do not like the hegemony of the U.S. dollar and have already started trying to create a different global trade currency.
But all of that is stuff for another article. We haven’t gotten to the Great Economic Collapse yet! I doubt you’ll have to wait long. We’ve learned nothing, and we’re probably even stupid enough to bail the banks out all over again because people want to believe their governments have it all under control.
As a result of such complacency and lack of clear vision about what is really needed, “control” will become the operative word on our shrinking globe. A greater disaster will mean that many people are willing to cede greater control for greater security. (Others may rebel on the fringes, so there will be greater hostility, too, no to mention desperation.)
Collapse of the housing market will just be a result this time, not a cause
Alas, I supersede myself. Let’s stay with the present situation: a collapse of the housing market, based on the chart above, would appear to be within a two-year horizon if prices continue rising at the same rate and then the market fail at the same point.
However, I doubt the U.S. stock market has anywhere near that long to go before it crashes, as it is already flatlining; so, a stock market crash will bring the house of cards down before houses fall on their own. However, I doubt the bond market has even that much time, so it may bring down the entire monstrosity of an economy that the Federal Reserve and other central banks have created even before the stock market crashes. I mean consider the oddball fact that, for the first time in history, people are buying bonds that they know will lose them money. There must be a lot of major investors thinking they will lose less on the bonds than they will on any alternatives.
Feeling like your world is spinning, well then, you might want to stabilize yourself:
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Tiny Bubbles Make Me Warm All Over – European housing bubbles, student loan bubbles, even China bubbles
Actually, these bubbles aren’t tiny like the ones Don Ho sang about, and they don’t make me feel warm and fuzzy either. They’re great big bubbles that make me pop…. Read the remainder of this entry »
While the Obama’a administration touted the news of the largest class-action payoff since the $350 billion tobacco settlement, I say the payoffs by banks for their mortgage foreclosure fraud are the largest travesty of justice in history. The corks are popping and so are banker’s buttons over the feast they will celebrate tonight. See why further down:
First, a summary of what the fraud by banks was, for any who haven’t followed it: The fraud centers largely around “robo-signing” where foreclosures were coming in so fast that bank employees essentially just rubber-stamped every one without reading it:
[Former BofA employee Tam Doan] didn’t have time to actually read the paperwork he was signing, he said, and in some cases, he didn’t even know what documents he was putting his pen to. “I had no idea what I was signing,” said Doan. “We had no knowledge of whether the foreclosure could proceed or couldn’t, but regardless, we signed the documents to get these foreclosures out of the way,” he said, noting that he assumed another department had checked that the review was done. (Think Progress)
Of course these pitiful employees would not have been so overburdened and would never have needed to engage in wanton practices in the first place if the banks involved had not been so sloppy in their original credit terms under the relaxed regulations that they pushed for and got on Capital Hill. Because they slobbered on the run to catch as many bad loans as they could, they, then, had to sweat on the run to process all the defaults.
The extent of mortgage foreclosure fraud
David Knutson, a credit analyst, says the collapse of the housing bubble that created the Great Recession is “a colossal failure of basic banking. It’s surprised everyone in terms of persistence and longevity and I think it will continue to surprise. (Think Progress)
I think more people will be surprised by the extent of criminal activity that led up to all these foreclosures, as well as the criminal actions involved in the actual foreclosure process. Last year, Associated Press reported,
Counties across the United States are discovering that illegal or questionable mortgage paperwork is far more widespread than thought, tainting the deeds of tens of thousands of homes dating to the late 1990s.
According to a New York Times report over the weekend, government backed mortgage giant Fannie Mae also knew about the shoddy foreclosure practices as far back as 2003, but did nothing. The more facts that come out regarding the extent of foreclosure fraud, the more it seems that further investigations and potential court action is warranted. (Think Progress)
It is for reasons like this that some state attorneys general hesitated in settling this mortgage foreclosure fraud case. The terms of the settlement limit future investigations into the extent of criminal behavior in the banks over how mortgage foreclosures were handled. It is in that sense, that I think this is a huge payoff TO the banks. By agreeing to use their company moneys to settle these fraud cases, executives in the banks have managed to somewhat insulate themselves against criminal charges by closing the door on deeper internal investigations of the banks.
In general, the kinds of fraud involved included finding signatures of one person’s name signed by many different hands, improper notarization (by notaries who never actually saw the person sign the documents), and thousands upon thousands of titles improperly filed by banks so that homeowners could not even prove they owned their homes in order to defend themselves.
One county reported that 75% of the titles filed by banks with the county since 2006 had questionable signatures. Elsewhere a single city — Salem, Massachusetts — reported that it had found over 25,000 titles with questionable signatures, going back as far as 1998. In Illinois, one county pulled a random sample of 60 titles filed since 2007 and found that 100% of them were signed by known robo-signers.
So, it was not just the rush of foreclosures that led to this problem but the gold-rush of home loans during the expansion of the housing bubble and the sloppiness of rapacious banks under lax regulation.
Damages paid in the mortgage foreclosure fraud settlement
In the settlement, the banks agree to pay 26 billion dollars in exchange for dropping the suit and agreeing not to pursue certain other matters, but only a 17 billion of that payment goes to writing down mortgages that are in default. Five billion of it goes to paying state’s attorneys general. Heck, the bankers will spend that much in parties celebrating this settlement.
Mortgage foreclosure settlement payoff WAY too small
The payoff amount only covers 10% of the nation’s homes that are underwater and then only to a small degree. The negative equity in all the homes that are underwater in the U.S. is about $700 billion. So, this settlement is not going to do much for the housing market, but the real question of justice I’m concerned about is whether or not it even rights the banks’ wrongs:
The settlement even gives the banks more than twelve months to pay out the money while giving incentives for faster payment. Incentives? Why should evildoers get incentives to correct their wrongful actions? Everything throughout this Great Recession has been so structured around bailing out banks that even their settlements for known illegal activity are built around making sure the payoffs don’t hurt the banks, rather than giving homeowners who were harmed immediate relief. Pitty the poor fat bankers who have brought such catastrophe upon the entire world!
The Obama administration says this deal is about “righting the wrongs that led to the housing market collapse.”
Really? How much wrong does it right? The average amount that will be given by the banks to those who actually lost their homes through these wrongful foreclosures is $2,000! Wow! What’s that? One month’s mortgage payment in exchange for the loss of your home by a foreclosure that was not even legally carried out? (Some people were not even in arrears in their payments; see below.) That won’t even pay for the person’s moving expenses when they packed the family out the door and moved back to grandma’s! And that particular money, which is all for damages done, is only required to be distributed over the course of three years! Fat lot of good that does while you’re camping in the park illegally because you no longer have a home! $2,000!!! How many dead-beat dads these days get to wait three years to start paying what they owe?
“It is good for the banks to get this behind them, said Jason Goldberg, an analyst with Barclays.
I should say so! They’re probably throwing a party over this golden parachute! For each damaged party that they have to pay $2,000 to in the next three years, they’ll spend that much on caviar at tonight’s celebration over their victory!
As for those who are not already out of their homes due to illegal foreclosure processes, the few who receive anything at all will receive an average of $20,000 in write-downs on their mortgage. Whoopee! While the caviar is sliding down the bankers’ throats, the homeowners who are still in their homes can have a block party and roast Little Smokies over the fire made from their foreclosure notices. (Many of which will be reposted in a few months anyway.)
“I just don’t think it’s going to be a life-changing event for borrowers,” said Gus Altuzarra, whose company, the Vertical Capital Markets Group, buys loans from banks at a discount. (New York Times)
It’s not even going to be a mortgage-changing event! This foreclosure fraud settlement is so puny compared to the scope of the problem, or even the scope of the actual crimes, that it should be considered Edsel of justice, a one-legged horse in the race to fairness, a gnat landing on an aircraft carrier.
The bad signatures on titles alone made it impossible for hundreds of thousands of homeowners to sell their homes in short sales in order to save themselves from default back when market prices were higher. It made it impossible for some buyers to get financing or title insurance because the title was in doubt. How much has that cost people compared to the $2,000 many will receive? Never have so many been slapped so hard by the gauntlet of injustice.
Why are those who are still in their homes receiving more than those who were illegally foreclosed upon who suffered great loss and great emotional duress? I think the answer is simple: From the Obama administrations side, it is more concerned about creating future bailouts than with justice over the losses many have wrongfully endured; from the banks’ side, they were willing to cough up more money in the agreement for those still in their homes because the goal of that money is to avoid foreclosure. In other words, they know their write-offs or legal losses in the event they did move forward with foreclosures on those same homes would have amounted to far more than the settlement. Moreover, if the aid doesn’t work, they can still foreclose when those owners default again.
But here is the worst part of the settlement: It promises the bankers that the attorneys general in 49 states will take no more action against them for matters of foreclosure fraud and will do no more investigation into the matter. It gives them immunity over one huge part of their wrongdoings where there was a clear and obvious paper trail of proof. While investigators can still investigate other wrongdoings, such as the packaging of fraudulent securities, this is the end of all robo-signing criminal investigations.
Of course, individuals can pursue the banks for their own losses in non-criminal suits, but they will not have any help from their states or from the United States. The U.S. Attorney General and all state A.G’s, except Oklahoma’s, have signed off on it.
Now lets take a glance at the wrongdoing of a few of the banks named in the suit.
Bank of America foreclosure fraud
Banks in the U.S. have already lost a total of $72 billion in write-offs due to foreclosures. Bank of America (BofA) had the largest number of mortgages taken into foreclosure of any bank in the U.S. Its losses prior to the settlement, at $41.8 billion, already amounted to more than half of the all money lost by U.S. banks due to foreclosures resulting from the housing bubble collapse.
BofA actually did its own internal investigation into the “robo-signing” of foreclosure documents by its employees when charges were made back in 2010 and re-initiated the foreclosure process after a few days of shutting it down for investigation. BofA claimed at the time that they had found no problems with how employees were signing off on foreclosures. Apparently, they didn’t have their glasses on. Or maybe they just meant they found now problem with it in the sense that they wholeheartedly support forged signatures.
Bank of America would not have been into the housing bubble collapse so deeply had its CEO, Ken Lewis, not rushed through a decision to acquire Countrywide Home Loans in a fire sale — an absurdly rash decision made over the course of a weekend, which, naturally, I brashly criticized back when it happened. I suspect he contemplated the stupidest decision he would make in his career while sipping martinis on his floating pool chair stitched together from waxed Benjamin Franklins. Of course, it is for making such decisions with such panache that one is paid the big bucks.
It is a fact of this case that BofA foreclosed via robo-signing on numerous homeowners who had NEVER missed a payment because no one along the line at BofA had read the foreclosure documents before signing. How do you manage to do that by accident? BofA claimed it was buried in the paperwork from its acquisition of Countrywide. Well, of course it was. When the CEO decides over the course of a single weekend to buy a massive bank that is in bankruptcy, it is a foregone conclusion that the CEO has done NONE of his due diligence. Bank of America bought Countrywide, then spent months trying to sort out its filing system. Naturally, it had no idea what problems it was acquiring because it had been so stupid as to not look before buying.
Claiming it was not at fault because it didn’t understand the loan documents it acquired from Countrywide is like using one’s own greed to excuse his wrongdoing or negligence: “I’m not at fault, Your Honor. This only happened because my insatiable greed caused me to buy something I didn’t understand.” But, again, it is being able to make those kinds of arguments with a straight face that explains why people like Lewis get the big bucks.
J.P. Morgan Chase foreclosure fraud
J.P. Morgan certainly isn’t chaste, but they will chase you out of your home like a greyhound on a rabbit. Your home life is nothing but a number in their computer’s memory bank that can be removed with one tap of “delete.” J.P. Morgan Chase found that it had flawed foreclosure paperwork throughout about half of the United States. It was one of the first banks to freeze all foreclosures. Again, one of the problems was “robo-signing,” apparently an industry-wide practice for some unknown reason.
Spotlighted as one of the more egregious cases of mortgage and foreclosure fraud in recent memory, JPMorgan Chase was recently found to have presented false assignments of mortgages in court in order to foreclose on properties. (PRWeb)
According to this story, Chase actually had its attorney forge documents specifically for presentation in court in order to try to prove the mortgages of a number of properties had been assigned to it when they had not. Now, that’s brash!
Court found “clear and convincing evidence” that Chase had engaged in a “knowing deception.” (PRWeb)
Wells Fargo foreclosure fraud
Wells Fargo, too, engaged in nearly endless cases of robo-signing. You have to wonder how so many major banks all engaged in the same sloppy practice at the same time. Was it because the regulations they all operate under relaxed at that time, or do CEOs of major banks meet in on the golf course to discuss the new techniques they’ve discovered for raping their mortgagees, then slap each other on the back and dare the other to follow? Some of it, of course, is because they use the same mortgage or foreclosure processing agencies, but not all of it by any means. Some of the banks involved knowing created their own signature mills to accelerate foreclosures.
Maybe this is what Wells Fargo means when it says on its own website,
We’ll do our best to help you understand the foreclosure process and MOVE forward.
Yes, they will move you out of your home as expediently as possible via robo-signatures, assuring their swift dispatch of you from your home if you don’t understand the foreclosure process in order to know they are cheating. You better hang on to your wagon when these coachmen are driving. They’re the four horsemen of the mortgage apocalypse.
Wells Fargo saw its sloppiness on title transfers come back and hit it in the butt when the New York State Supreme court ruled that Wells Fargo could not foreclose on homes if the title was in dispute because it could not prove a clear chain of title giving it the right to foreclose. In other words, if you cannot prove who is the legal owner of the house because the title is in question, how can you foreclose on the owner? They get the award for ability to twist like a pretzel and bite themselves from behind.
The above are mere glints of the numerous fraudulent actions these banks and others were involved in.
Conclusions regarding this mortgage foreclosure fraud settlement
There’s lots to be mad about in this deal! If I were a homeowner who didn’t have time to do a short sale and save my credit because my bank rushed into an illegal foreclosure procedure, I’d think my government had just handed me a squirt gun to save myself from Atilla and the Huns. I’d feel like I was dying of thirst and someone just gave me a cracker.
The advent of robo-signing in the late 90’s also aligns with time period in which mortgages were being bundled into the derivative securities that were sold on Wall Street, which got us into the Great Recession. This is all core fraudulent activity that brought the Great Recession upon the entire world. And that is why these payouts are WAY too small. We can blame the downfall of the entire global economy largely upon the fraudulent activity at the center of this class-action suit.
No agreement should ever have offered immunity to further investigation into the foreclosure fraud, given that the scale of all of the crimes involved brought worldwide catastrophe. The shear scale and audacity of the wrongdoing is more than worth the cost of relentlessly pursuing these banks for every penny of damages they caused to every individual. Never has there been a class-action case so worthy of more aggressive pursuit.
President Obama excused the paltry payoff by saying,
No compensation, no amount of money, no measure of justice is enough to make it right for a family who’s had their piece of the American Dream wrongly taken from them. (BET)
No kidding! Certainly the amount his administration got for these victims isn’t!
The banks were so haughty about their foreclosure activities that they knowingly continued the practice of robo-signing even while all of this was being tried in court. They might have, in the very least, SUSPENDED the activity until the court reached a decision on what had happened so far. Their continuance of the practice while the matter was in court does not indicate the slightest remorse or sensibility to right and wrong. So great is their hubris and greed, they seem to feel they stand above it all:
The lenders promised last fall to stop the [robo-signing] practice. But The Associated Press reported in July that robo-signing has continued. Officials in at least four states say mortgage documents with suspect signatures have been filed with counties in recent months. (Yahoo / Associated Press)
Most of us care enough about integrity to know without a second thought that having one person sign several different signatures or having many people sign one signature is fraudulent unless authorized to sign on behalf of others. In which case, we sign in our own names, and sign that we have the right to sign for the other. In this sloppy rush of documents no one was looking over the thousands upon thousands of mortgages, titles, and foreclosures that they were signing off on … all in the rush to make more money by institutions that were already bloated with wealth.
To all those who will in three years time get $2,000 for having their home illegally confiscated last year, raise a can of caviar in one hand and a glass of champaign in the other to celebrate their newfound riches. That or bring them a Little Smokie to eat and say, “I’m sorry our government cares about the needs of bankers more than your loss,” for the bankers will be firing up cigars while ex-homeowners fire up Little Smokies over a trash barrel.
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Other resource articles on robo-signing and mortgage foreclosure fraud
Apparently, experts never learn. Larry Summers writes:
“The central irony of financial crisis is that while it is caused by too much confidence, too much borrowing and lending and too much spending, it can only be resolved with more confidence, more borrowing and lending, and more spending.” (The Financial Post)
What he really means is that the only way to save the old dying economy is to revive the principles that brought it into being in the first place. But who wants it? It was a phony (bubble) economy in the first place — a housing bubble created by exactly the things Larry mentions. Obviously, if you want an economy that is based on ever-rising home prices, then you have to repeat what created that economy in the first place. Some people get so addicted to the sugar of the past that they just can’t live without it. (I notice Larry is looking a little pudgy in the face lately.)
Larry Summers Lays out His Vision to Fix the Economy
Summers goes on to write,
“Most policy failures in the United States stem from a failure to appreciate this truism.”
What truism — the truism that we must create a huge supply of very-low-interest credit with terms so easy that those who cannot ever pay their debt can still get loans if we want to accelerate the economy? Sure it works. We’ve seen it work. It’s like putting gasoline in a diesel engine. It runs real fast! For a short period of time.
It’s a lot of fun while it lasts, though. If you like big bangs.
Some people can’t take the pain of redesigning an economy from the foundations up. They just want the good times back. Larry Summers is such a man. He continues…
“Most significantly, the nation’s housing policies especially with regard to Fannie Mae and Freddie Mac … have become a textbook case of disastrous … policy.”
No, Larry. They already were a textbook case of disastrous policy. That’s how we got here. Now the nation’s housing policies have to be reshaped to a more solid and sustainable policy.
The baby always cries when weened off milk. Such is the case with Larry:
“Annual construction of new single family homes has plummeted from the 1.7 million range in the middle of the last decade to the 450,000 range at present. With housing starts averaging well over a million during the 1990s, the shortfall in housing construction now projected dwarfs the excess of construction during the bubble period and is the largest single component of the shortfall in GDP.”
Of course it has plummeted, Larry. The U.S. could never afford that many new houses in the first place. People bought them with loans that offered low interest up front, followed by more realistic interest down the road — realistic interest that the debtor could never afford. It was guaranteed to default except for one reason — the price of the home would go up enough that the debtor could refinance and get a lower interest loan because of the equity he had in the home or just sell it and buy again. That model assumed housing prices would always go up. They don’t. So, it was guaranteed to crash when the stopped. They did. It crashed.
Secondly, the crash means there are now millions and millions of foreclosed houses on the market. How are banks going to sell all those houses, Larry, if everyone goes back to buying new homes with cheap and easy credit? People don’t want to pay the old and outrageous prices for home, which put them in way over their head (and now, therefore, way underwater). So, they’re going to buy the foreclosed homes, rather than pay to buy a more expensive new one. And we have a lot of foreclosed homes to plow through. So, it’s going to take awhile for new homes sales to climb back up.
Just when you think Larry’s about to get it…
“In retrospect, it obviously would have been better if financial institutions and those involved in regulating them … recognized that house prices can go down as well as up; if more rigor had been applied in providing credit.”
…he fails to grasp anything at all:
“The question now is what should be done to address the housing market, given the drag it represents on the national economy.”
Yes, when an old economy that was based on bankrupt notions of freewheeling fun dies, it does create dead weight on the next economy you want to build. The temptation, then, is to save the old economy from extinction — to start building houses as fast as we were before and loosen credit restrictions again so that can happen. Avoid the pain of real correction. Thus, Larry states,
“FHFA has not acted on its conservatorship mandate to insure that the GSEs act to stabilize the nation’s housing market, and taken no account of the reality that the narrow financial interest of the GSEs depends on a national housing recovery.”
GSE being “Government Sponsored Enterprises,” i.e., Fannie Mae and Freddie Mac. In other words, the only way we can get those good ol’ boys back (Freddie and Fannie, which perhaps should never have existed in the first place) is to start feeding them again. True: the only way to get back to what we had is to do what we did before.
“Unfortunately, for the last several years, policy has been preoccupied with backward-looking attempts to address the consequences of past errors in mortgage extension….”
That is the only way you correct errors, Larry. You look back at the past to figure out what your mistakes were and then resolve not to repeat them. Larry loved the candy and is convinced he needs to get back on his high-sugar diet to be happy again. In other words, now that we have started dieting and eating in a more healthy manner, we feel hunger pains. It would be better, then, in Larry’s mind, to reduce the hunger pains by going back to gorging ourselves. We should, at least, gorge ourselves until the pains are past, and then we can start dieting. Never mind that getting real about our dietary needs will start the pains all over again.
“Instead of focusing on the stabilization of the housing market, its focus has been on reversing its previous policies heedless of changes in the environment”
It is a certainty, Larry, that if you change the policies that created a the old economic environment, the old environment will not stabilize, but will change. The Federal Housing and Finance Authority clearly needed to change because its policies created this catastrophe for the entire world. Change is almost always less comfortable than the status quo. That is why many seek to avoid it. Switching to a healthy diet is rarely as fun as eating all the burritos we want and washing them down by swilling all the beer we want.
The Larry Summers Formula for Fixing the Economy
Here are Larry’s specific complaints in his list of things to be corrected if we are to fix the economy:
“First, and perhaps most fundamentally, credit standards for those seeking to buy homes are too high and rigorous in America today. This reduces demand for houses.”
Of course, stricter credit standards reduce demand for houses! Why do you think the government lowered credit standards in the first place, Larry? It lowered credit standards to spur demand by increasing the ability of more people to buy through greater debt. If we want fix the old economy so we can have it back, then, yes, we need to return to the principles (or lack of principle) that created it. We need to go back to sloppy loans so more people can buy homes for higher prices. That would be Larry’s preferred solution.
Thus, Larry whines that tightening credit reduces demand for homes:
“This reduces demand for houses, lowers prices and increases foreclosures, leading to further tightening of credit standards and a vicious growth-destroying cycle.”
It is sad to see a world filled with smart people who are so stupid. Of course, tightening credit standards creates more foreclosures because people cannot get out of their adjustable-rate loans by selling their homes for what they had into them. People cannot pay the outlandish original price if credit is no longer as loose and sloppy. If all the non-credit-worthy people cannot get loans and the credit-worthy ones cannot get loans for more than they can afford (as they once so easily did), then demand has to shrink because fewer people have ability to buy at all, and those that can buy have less money to buy with. This shrinkage is the inevitable result of replacing the failed expansionary principles with stronger more sustainable economic principles. You cannot resolve the problem of sloppy credit without ending the economy it created.
Summers wants to solve the old problems by reviving the dinosaurs. The only reason I pick on him is because there are many fat capitalists like him out there suffering the same dietary pains and clamoring to return to the trough of loose credit once again in order to fill their withering bellies. Anything but the pain of correction. Anything!
“Publicly available statistics suggest that the characteristics of the average applicant in 2004 would make an applicant among the most risky today.”
Of course it would, Larry. That is almost a self-evident truth. Those people you have in mind from 2004 were risky back then. That’s why they shouldn’t have been given loans then and certainly shouldn’t be given loans today if we want to put banks back on a solid footing. Larry opines that this risk evaluation is wrong:
“Of course the pattern should be opposite, given that the odds of a further 35% decline in house prices are much lower than they were at past bubble valuations.”
How do you think we got to 2004, Larry? We got there from 2000 when prices were about what they are today. We got to 2004 by giving those risky people of 2000 loose loans until the prices rose to 2004 prices. We employed policies that escalated risk down the road.
You Can’t Fix Stupid
It is not that Larry and those like him are completely stupid or even actually stupid. (He is, after all, a Harvard professor and a former U.S. Treasury Secretary. That explains how we got into this mess in the first place.) Rather, people like Larry suffer from economic denial. Denial blinds us from seeing what we don’t want to see — particularly our own failures. Larry was part of the failure. He helped build the old economy. So, he knows well what it takes to make that old dinosaur live again. There are certain things people don’t want to see because they are not pleasant to acknowledge. The housing market was a bubble that collapsed. Our entire economy was built around housing. So, to expand the economy endlessly, we had to develop real estate endlessly. Larry is for getting that monstrosity up and running again.
There are, of course, many other things an economy can be built on than the endless expansion of new construction in homes. The old economy doesn’t need to be fixed. The economy needs to be changed to an entirely different model that is sustainable.
We will always need some new homes, but we do not need endlessly bigger ones. We need to learn to live within our means — live within debt structures that we can pay off by retirement (not in thirty years) and that we do not have to refinance in five years because of adjustable interest rates. There is no way for the old foolishness to end … except letting it end. You cannot have the old back and create the new.
What we lack now is vision for what the new economy should be. We don’t need to revive the oversized dinosaur that consumed so much and then fell upon so many. Economic recovery needs to come by new thinking — innovation and creativity that realizes a new vision and that seeks to build from this point forward by living within our means.
We spent the last thirty years buying everything with debt … including the welfare we so generously provided to others at the expense of the next generation because we couldn’t afford our own generosity. It feels good to be generous with other people’s money, but it is not sustainable. We must now bear the pain of learning to live within our means.
We need a president who can inspire such a vision. Right now I don’t see any visionary candidates out there. (In 2009, President Obama made Lawrence Summers the Director of the White House National Economic Counsel. No wonder we’re not getting anywhere. Even the man of change picks the same old fools who helped create this mess.)
Further reading for economic idiots like Larry Summers or for those who just need a basic grasp of economics:
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The economy collapsed into a great recession because it was fundamentally flawed in the first place. The U.S. housing market, which underpinned the old economy, boomed because the government deregulated banks. The deregulation that began with Reagan widened under George Bush the First. It widened a little more under William Jefferson Clinton, and it broadened even further under George Bush the Second.
As the banking economy became increasingly unregulated, it began to give out loans with almost no collateral. It gave out loans with almost no downpayment. It gave out loans with balloon payments far beyond what the mortgage holder could possibly bear when the time for those balloon payments came due. It gave out loans with adjustable interest rates that would in a few years result in interest far beyond what the mortgage holder could currently support. And all of this worked. For awhile.
Everyone went along because, so long as the housing market was rising … 1) collateral and downpayments didn’t matter because the home would be worth so much more in just a year that the bank would LOVE to foreclose and sell the home for a profit; 2) the homeowners could always meet the balloon payment by selling their houses for a profit in order to make the big payment (so they bought on speculation); 3) sudden upward adjustments of interest at the five-year point could easily be handled by refinancing because the home would have gained so much value that the owner would now have a lot of equity in it, even though he or she had not made much of a downpayment.
All of this only works so long as the market is rising. That is why some people are now calling the housing market a Ponzi Scheme. Like any upside-down pyramid scheme, it only works so long as you can keep expanding it at the top. The pyramid expanded by those very government actions I mentioned above, which allowed more and more people to qualify for homes and those who were already in homes to qualify for larger homes. Every time the market began to slow down, the administration of the time (be it Republican or Democrat) agreed to deregulate banks a little more in order to increase the amount of money people could get for loans and the number who could qualify for loans. That was the only thing that allowed the price of homes to continue to escalate so rapidly. Otherwise, they would have topped out long before they did.
The problem with a Ponzi scheme is that when the growth stops, everyone who got in near the end loses big time for the sake of a few who walk away rich.
The economics as to why this was a Ponzi scheme are simple: if there are no buyers who can afford homes, the housing market will not rise. So, if everyone is already in debt to their eyeballs, the only way to make it possible for them to pay more for their next house (so housing prices can rise) is to increase their income or to decrease the regulations on debt so they can take out more debt even without an increase in income. The government, having very little control over income, eased credit regulations so buyers could expand their debt.
Every economist should have been able to see this was a Ponzi scheme on a giant government-backed scale with inevitable failure built in (yet nearly all economists missed it): Sooner or later, the banks would be as deregulated as they could get. Therefore, there would be no way to expand debt. Therefore, there would be no way to increase housing prices. Therefore, none of the things enumerated above that protected banks and buyers under loose credit rules would apply anymore. All of those factors only worked in a rising market. Nobody thought about what happens when the market stops rising. Buyers would not be able to refinance their homes or sell them for a profit, so they would not be able to meet their balloon payments or adjustable interest rates that were designed to spike upward in three to five years.
So, the logic for forecasting the end of the housing bubble was simple. Collapse was inevitable, but no one wanted to see it. It wasn’t good game for homebuilders or realtors to talk. Stopping it was not in the interest of major capitalists who were becoming fabulously wealthy in this bull market. No government administration wanted to deal with such a crash, so they all readily followed the U.S. government’s biggest trusted economic guru — Alan Greenspan — and opened the floodgates to ever more deregulation. If anyone in government did see what would happen, they worked feverishly to keep it from happening on their watch by loosening credit even more. Only a few lone voices spoke against what was happening, and no one listened. Many are in denial still.
That is also why one could know without a doubt that the actions of The Fed after the Great Recession began would do nothing to bring recovery. All of those actions were more of the same thing — trying desperately to find a way to expand credit again so that the bull housing market would recover. (More on the Fed’s actions for economic correction in my next post.) Only thing is, people had had enough. While they may not have understood the underlying flaws in the economy, they knew they were tired of having all that debt above their heads. Thus, I write at a time when the government’s attempts to free up credit have accomplished absolutely nothing.
A Ponzi scheme only works so long as there are more and more investors. Eventually, there were no more takers, and the whole thing collapsed.
Stories of Ponzi schemes:
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During the winter of our discontent, which was January and February of 2008, the Bush administration fiddled as the U.S. was falling. While the Gurus of Government played happy music on their violins, singing that the economy was “fundamentally sound,” I was telling friends that we had entered a recession that had all the makings of another depression. In the spring of 2008, while the Bush administration and congress were still arguing over whether or not we were about to enter a recession, I was stating that clearly we were already deep into a recession and that a depression was about to inundate us.
The landslide of homes into the sea was already well under way. The question was what economic waves would that landslide create. Suddenly we knew: the first tsunami wave of our own landslide hit us, for our own shores were closest to the housing collapse. Bear Stearns crashed on our shore. The Wizards of Wall Street, proclaimed that the fall of Bear Stearns was nothing compared to the failure of savings and loans in 1987. We would weather it fine. The president, in his denial, indicated we had a minor economic jolt. I, on the other hand, began talking in terms of an economic tsunami right then and said that the collapse of Bear Stearns was just the first wave of much greater destruction to come.
The world learned by observation in December of 2004 that physical tsunamis come in multiple waves, not just one big splash. You would think people would realize that’s the way it is with fiscal tsunamis, too; yet friends argued back that the U.S. could not be entering a depression because many elements that had happened in the Great Depression did not happen with the fall of Bear Stearns. I pointed out that the Great Depression did not happen on Black Tuesday in 1929. What happened on Black Tuesday was the first wave of many failures that developed into the Great Depression over a period of many months, and I predicted that’s what we were about to play out right in front of us. To clarify what I meant, I laid out what I now call my economic tsunami warning system.
The first wave that crashed in Knave Dave’s economic tsunami warnings was Bear Stearns. Within the short time it took to wash over us, I predicted that it would push heavily on two or three other core financial institutions, which would also give way. This would cause the crushing of our economic central nervous system in the U.S. and would be the second wave of the Depression.
The second wave happened in far more spectacular fashion that I envisioned. Yes, two institutions went down almost immediately after Bear Stearns. Lehman Brothers and Merrill Lynch both toppled, just as I had predicted (not that I had predicted those specific institutions, but just that two or three of that kind would fall). That was unheard of until the truly unheard of actually happened: In rapid succession Fannie Mae and Freddie Mac also crashed upon the U.S. shore, and then J.P. Morgan and Goldman Sachs and AIG piled on top … and finally Washington Mutual, the behemoth of thrift banks, collapsed of its own Gigantism. The U.S. was awash in a sea of massive failures, and the water had turned to blood! So, the second wave was more spectacularly fierce than I had anticipated. I had anticipated more would would fall after the second two or three, but not that they would all crashed on the shore at nearly the same time. It was a resounding and deafening roar.
The third wave in Knave Dave’s economic tsunami warnings was that the first and second waves that hit U.S. shores would do what tsunamis are well known for doing: they would bounce off and head over to European shores. The failure of U.S. financial institutions would certainly cause the failure of some European banks. Suddenly, even the most highly respected and conservative banks in the world, Swiss banks, took a pounding. One of the largest of all Swiss banks Credit Suisse staggered and almost fell. Several European banks would have fallen if not for massive European bailouts.
The fourth wave in the economic tsunami that I predicted would be the failure of major manufacturers in the U.S. as a result of credit challenges overseas and at home and their own loss of market. In late spring, I predicted that this wave would take a little longer in coming and would not arrive until fall of 2008, but I proclaimed that, by the advent of fall, we would be seeing bank presidents competing for jobs as hamburger flippers. In other words, we would see major increases in unemployment in the fall, starting in top management, as a result of the devastation from the waves before. This rising tide of unemployment would mean that major manufacturers would lose their markets. The manufacturing wave hit in fall, as predicted, when the big-three automakers announced simultaneously that they were on the verge of bankruptcy.
Really, anyone should have seen the fall of the Big-Three coming long ago. I had predicted the demise of that particular group back in 2005. Why? Remember the loans they were making then in order to offload product? They were “selling” their cars at zero down-payment, zero interest, and zero payments for a year, and that was when times were rosy for most in the U.S. “Heck,” I said, “That’s like a free auto lease for one year. What’s their game plan at the end of that? There’s nowhere to go. Everyone who is going to consider buying a new car for the next two or three years is going to jump on this program now, and then there will be no car sales down the road. You can’t keep giving them away forever just to keep that game up.” Meanwhile, they did just give away their cars that year because many of those people would default on those loans when it came time to pay. I said, “Heck, they’ll just consider the car a free loaner, and they won’t care that they default on their loan because they have zero money into the car. They’ll just say, ‘Thanks for the loaner, go ahead and wipe out my credit rating; it’s looking like it’s shot anyway, and come and pick the car up at your own expense.'” It was all done to pump up sales volume and look good for the short term without any regard to an end plan. The profits of 2005 were false profits.
I anticipated that GMAC, General Motors’ finance division, would be in foaming waters when it came time for people to start paying on those loans. Is it any wonder that GMAC is now the whirlpool at the center of General Motors, sucking it under? So, the fourth wave of the economic tsunami hit almost as spectacularly as the second wave had, and it happened with the manufacturers that I was certain must be sitting in a precarious position.
What did Knave Dave say would be the fifth wave of the depression that was sweeping over us? He said that a shocked and reeling public, fearing unemployment, would fail to buy at Christmas time, causing major retail failures. Some will say, “Aha! You were wrong. Sales were not that bad during the holidays.” Ah, but they are wrong. I explained this in December to my friends. “The black lining on this silver cloud,” I said, “is that there are no profits in any of those sales. Just as the Big Three did a few years ago, all the major retailers pumped out their entire inventory at a break-even level just to clear it out and cut their losses.” You see, sales volume can be tabulated right away, so that is the first news we hear; but it takes a month to calculate the profit of the month before after all returns are in. So, the sales volume figures did not look too bad.
Mark my word, though, we are in for some black news when the books are finally closed on December. Actually, it will be more like red news. Before the end of January, you will see major retailers beginning to report that they had no profits at Christmas time or even minor losses. This is major bad news because major retailers make well over sixty percent of their profits for the entire year at Christmas time. You will see Target, Sam’s Club, Walmart and other giants of the retail industry start to announce layoffs before January closes and throughout February.
Already the smaller retailers have begun to go out of business entirely. News came in at the beginning of January that mall vacancies are at a ten-year high. It’s not the big stores that have closed there doors yet, but the smaller retail businesses that have less staying power. Some major malls in retail Meccas, such as Honolulu, are already facing bankruptcy. While 700,000 jobs were lost in the U.S. economy in December alone, this fourth wave is still passing over us, so the bodies cannot yet be counted in its wake. Unemployment hit 7% in December. As the retail body count stacks up over the next couple of months, I predict we will finally enter double-digit unemployment, which we haven’t seen in a quarter of a century.
This adds up to the sixth wave of our plunge into a depression, which is the failure and foreclosure of commercial real estate. The landslide that triggered this whole tsunami, remember, was the failure of residential real estate. As commercial real estate slides away, the sixth wave is a repeat of everything that happened with the first real-estate failure, possibly on a smaller scale, but still badly damaging.
Office vacancies in the U.S. have already hit 14%, and rents have fallen in 65 of the 79 major U.S. markets. Already 1.5 square miles of office floor space were vacated in 2008. Once you start adding the vacating of retail floor space and more vacating of office floor space, you can see that commercial real estate is already beginning its long slide into the sea.
Great plagues come in sevens, don’t they? So, what will be the seventh wave of this depression? The seventh wave may be a ways off with small reflections of waves 1-6 in the meantime as more foreclosures lead to more unemployment and a few more bank failures. These are the tsunami waves bouncing off shores for the third and fourth times before they finally settle down to where we can start to pull ourselves out. Part of this bouncing will be seeing all the same things happen in countries all over the world, thanks to the U.S. debt addiction.
The seventh wave is the wave of ultimate destruction, and it’s building out at sea right now. It’s a rogue wave, which scientists say forms when large waves pile on top of each other. This rogue is the inability of the U.S. government to finance its debt. Many of us have seen this coming for a long time, but the present scenario makes it almost inevitable that the time is soon upon us, especially with the bailouts. Countries have been talking for the past year or more about moving away from investing in U.S. dollars (i.e., U.S. Treasury notes) because they do not see the U.S. as a secure investment any more. The U.S. has probably permanently lost its financial reputation.
Right now, the U.S. is facing the prospect of trillion-dollar deficits for the next few years, which could double the total U.S. debt in one presidential term. These enormous deficits make it look all the less secure. Right now, the U.S. is selling bonds to finance that debt at about 1-2% interest, the lowest interest it has had to pay ever (because no one wants to buy stocks, so money is pouring into bonds). What happens when the U.S. has to raise those interest rates that it pays out to their norm of 4-5% in order to attract the investment of foreign governments into financing its economy? What happens if that foreign money starts to run away, and the U.S. has to pay 7-8% to attract it to stay? The interest on the national debt alone is about $450 billion a year now. That’s half of the entire proposed bail out, just being paid in interest. Double the interest, and we’re talking adding a whole bailout to the U.S. budget every single year in interest alone.
That’s when total collapse comes, and the “fundamentally sound” little island sinks into the sea, and a whole new world has to begin. And there is already serious planning for that brave new world to form via unified global economic policies and structures. More on that at another time.