The Credit Crunch - What's next?

[stogie bear]

* Short-term credit markets freeze up after French bank BNP Paribas suspends three investment funds worth 2bn euros.
The bank cited problems in the US sub-prime mortgage sector.
* During the following months, US and European banks report losses totalling hundreds of billions of dollars.
* The European Central Bank pumps 95bn euros into the eurozone banking system to ease the sub-prime credit crunch.
* The US Federal Reserve and the Bank of Japan take similar steps.

So what's next?

I only know what I read in the papers but here's my guess based on everything I've seen so far...

Property in the US has - dropped a few percentage points in value. The money machine seems to have weathered the first wave of bad lending practices whereby foreclosures were made on many people simply couldn't keep up their mortgage payments.

But the next wave is just about to start... People in the USA who simply can't be bothered to make payments because it's bad business for them.

It's my view that over the next year or so Americans will simply stop paying for their houses because it's a crappy deal for them... and it's pretty easy to re-establish your credit within a few years, so why not?

If you buy a house for X amount and it's now only worth 80% of X, then paying for it month after month is simply bad economics. In an age where those same houses may take years to reclaim those losses then walking away may be the best option for home owners in the long term.

The laws were quickly changed in the last 'great depression' in the USA in the 30s to make it easy for people to default on their mortgages and people will use those same laws today to simply stop paying and wait to be turfed out.

I'm not talking about people who want to pay and have their loans restructured or people who have banks willing to refinance and reschedule payments...

...I'm talking about the millions who will simply stop all contact with lenders and just wait till they are foreclosed on.

It may have been that in the past; you would only bail out as a last resort because of pride, shame or optimism... Now it's looking more and more like a sound business decision.

The banks are going to be left with no money and lots of unsellable property and an economic outlook that no amount of money on earth can rescue.

That's when the real hurt will set in...

Like I say - I'm an armchair expert with no real knowledge of the world economy, but it's a hunch!

Is there hope for us after this latest global depression?

Home owners... On your marks... get set... GO!

[Snick]

depending on where you are (Florida and the west are worst, North East ain't as bad), house prices have already slid 20% and many people have negative equity in their homes.
The head of Citibank was quoted as saying he thinks housing prices in USA will not stabilize for 2 years.

The Sub-Prime mess is almost over (that is crap loans to people who could never afford them)
The Alt-A mess is just getting started (that is loans to 'good but not great' customers)

There are 3 ways out of this
1) Foreclose on all bad loans, put people in the street, allow banks to fail. We tried this in the 30's and the results were not that "Great".
2) Force the mortgage companies to redo terms so that the loans are affordable. This is actually in the best interest of the mortgage companies, but the details are a bitch.
2a) Allow USA Bankruptcy courts to rewrite mortgages. This is the Nuclear Option, and is thrown about mostly to scare companies into doing #2
3) Federal Bailout. Mortgages are bought by the US Government from the Banks and Government becomes the worlds biggest property manager.

The banks want #3 since they can get more money from the govt that way. Effectively heads-i-win, tails-i-win for the banks.

I think #2 is the right choice (of a bad lot).

[strocube]

The U.S. is going for option three, although they're going to great pains to not call it a "bail-out". This looks like socialism for the investment class-- you know the same people who tout the wonders and marvels of the "free market" and who decry any kind of government programs like social security, school lunches for poor children, education, etc.
On a completely different note, I missed being able to buy a house at reasonable prices, now it looks like in about a year or so I'll be able to buy something decent I can actually afford and that I'll want to live in.

[terryw]

The credit crunch will probably continue for another 18 months due to lack of political leadership.

The US, UK, Japan, Italy and Germany all have to either hold elections in the near future or have a ruling party in crisis. Only France and China have a stable government likely to be in power for several years.

In the UK prices are likely to fall 20% but will eventually recover. There remains a shortage of housing in this country so latent demand will push prices up again. Most of those immigrants that Stogie hates so much want to join the property owning class.

[jaymee]

Mmm 2 cents here, fiat currency expansion  (extremely dovish central bank policies) to counter the credit crunch would possibly lead to the commodity asset bubble blowing up over the next few years. The premium required to trade commodities like oil for instance utilising USD as a proxy is getting increasingly expensive.

In order words, inflation is set to grow. I don't think a depression (deflation) is likely, most likely stagflation as an outcome, with hyperinflation possible but unlikely.

The credit crunch should likely continue from other forms of debt like credit cards or auto loans etc.

The Fed bailout of mortgages is quite reminiscent of history when the French during the revolution pegged the French Assignat to confiscated church properties to retire public debt which eventually led to hyperinflation and total devaluation of the Assignat. Then Napolean came around with the Franc....

I think real estate prices will continue to deleverage and soften substantially but the prime areas (manhattan etc) should stay resilent?

Also, longer term US treasuries should take a bad hit in the time to come. I would avoid them or take a short position in them.

[pacman]

You don't need to go back as far as Napoleon for guidance as to how the credit crunch will end for the US economy.

The Weimar Republic in the early 1920's in Germany is a case study of what happens to an economy that over-inflates its money supply.

Total collapse is the inevitable result. For a current day example - Zimbabwe.

The Federal Reserve will do anything to stop it happening, unfortunately it is now all too late.

The drop in the oil price is buying time but even with the intervention of the Plunge Protection Team creating the illusion that the US equity market hasn't fallen off a cliff, stagflation is commencing, soon to be followed by hyperflation & then...

Then the mother of all depressions is the only possible outcome.

It may be a while off, the US Government will stop at nothing to forestall it but with debts of an estimated $100 trillion US, & a GNP equal to .013% of that debt, I would love to see anyone explain how that can ever be repaid.

And every week the Fed is printing billions more only adding to the problem.

With the sub-prime mortgage disaster, where billions of crap debt was collateralised & flogged off to the very people that the US needs to save them, the US banks have really burnt their bridges & now the central banks & sovereign wealth funds who were so badly stung by the Wall Street criminals, will allow the whole stinking mess to collapse.

There is nothing new in this except the colossal scale of it, all fiat currencies (i.e. paper money with no real backing except Govt decree) that have ever been created in the world have ultimately collapsed.

[Snick]

Things are bad, they are not end-of-the-world horrible

Markets 'correct' themselves, you are already seeing commodity prices (oil, copper, gold...) go down as demand goes down.

The dollar is recovering, as the Euro zone economies weaken and Asian exports slow

These are "good" things, a little re-adjustment now will lead the way to a recovery in the future.
(look to Japan for an example of not allowing re-adjustments to occur)

The next 12-18 months will be slow, if there is a recession (currently growth is pathetic, but positive) then it its likely to be a minor one. With negative growth if 0 to -1.0% , not dramatic.

And look on the bright side, the Baht is getting weaker, ladyboys are getting needier, housing prices are going down, and Snick wants to get a condo next year.

[kahuna]

Interesting...The word from the Southern California real estate agents is that the foreign buyers/investors are furiously buying up SoCal property...

I just bought a small condo in South Orange County on a short sale for 39% less than the existing mortgage...
What paid for the property is only slightly more than it originally sold for new about 10 years ago...
I am a cash buyer so I was kinda sorta in the driver's seat...so to speak...

So I just sit in LOS waiting for escrow to close...Think I'll go find another sort of seat...

[Snick]

in New York they are posting the prices in Euros

[azza33]

nothing to worry about folks...

If interested go see Japan in about 1989... Sharemarket at record levels, property prices at prices relative to before this bubble burst in UK & US...

Look at Japan now..... sharemarket was 39000 now still at 15000 level nearly 20 years later... got down to about 8000 if that gives you any heart!!

Stagflation and deflation of prices and property for good 10 year period

Is the US,UK & even OZ gonna be the same?, well its hard to tell....

It only the 1st year into the misery, $500 billion has been lost, i suspect another $500 billion to go...

Banks are still able to hide behind accounting principles to falsely give value to billions of worthless assets, and make their balance sheets look better than they really are.

Citibank is still valuing their CDO at 53% yet companies like NAB wrote this down to 10% recently and merryl sold some off at 22%.

Bottom line is, as long as employment holds, people will try and pay their debts, but if the world economy slows for any sustained period, US, UK & OZ are totally fucked!!

[azza33]

Just an aside-

For those buying up or looking to purchase bargain property in the US just now...

I read that there are as many houses vacant in the US as homes in Australia.

Now any way you look at it, its going to take at least a decade or more for that oversupply to be met~

So even if the prices are cheap, i wouldn't be parking my hard earned there for a long time

[azza33]

Further aside... and recently noted...

I see the banks such as UBS and Citi and Meryl who have already been slaughtered due to their CDO exposures and other poor lending practises, are getting sued by everyone in the US and this will probably extend world wide.

I believe to avoid the courts the banks are agreeing to repurchase this toxic waste at full face value!!

So hold onto your shorts any shareholders in these companies, because having to repurchase 10's of billions of worthless shit and then write down their value to near zero can't be good anyones language.


*******

For a bit of history on this CDO stuff, i looked up who first came up with this product and nearly pissed myself laughing when i discovered it was Drexel Burnham Lambert. This is Michael Milkens old firm~~ ~~ Gulliani used the racketeering laws (RICO) to crush this mob!

Seems the world has short memories....

[strocube]

(kahuna @ Aug. 10 2008,20:59) Interesting...The word from the Southern California real estate agents is that the foreign buyers/investors are furiously buying up SoCal property...

I just bought a small condo in South Orange County on a short sale for 39% less than the existing mortgage...
What paid for the property is only slightly more than it originally sold for new about 10 years ago...
I am a cash buyer so I was kinda sorta in the driver's seat...so to speak...

So I just sit in LOS waiting for escrow to close...Think I'll go find another sort of seat...

Yeah, I went by an open house yesterday here in So. Cal., in a neighborhood where the houses at peak market were selling for $700,000. Yesterday I saw two houses in that same neighborhood going for $400,000. Prices a will continue to drop. From what I'm hearing, real estate prices in this market are expected to hit bottom and start to level off late next year. But who knows. . .

[Tomcat]

(Snick @ Aug. 10 2008,18:47) Markets 'correct' themselves, you are already seeing commodity prices (oil, copper, gold...) go down as demand goes down.

Copper might drop a but the price aint going down to what it what 3 years ago and the Chinese are not putting there prices down on finished goods... also steel is another problem. I get a regular monthly price hike on everything i import from Shanghai...

oil is more tricky as there are many unknowns but inflation is here to stay for a long time...in Europe anyway. Inflation and recession, a nasty mix indeed

Also you only got to have a hit on a major refinery and oil would hit 200 bucks a barrel....the chances of this are pretty high and not one in a million.

[post-op lover]

I don't believe in rational markets, so I wonder where that leaves me in forming an opinion. Maybe it makes me a contrarian. Despite the crunch, there's still a lot of liquidity in many markets, so I don't fret about some trouble spots, and instead think of new opportunities.

I love reading opinions on the economies and markets, but I don't spend much time debating them.

POL