How far down are the banks and real estate headed?

I think these are fair questions:

Are we headed for a general collapse of the big banks, the ones that the federal government has shoveled money into?

Is the crisis of mortgage foreclosure going to take down the structure of price and value to the point that the banks fall into an inevitable federal seizure situation?

Is the general economic trend going to be deflationary for several years?

Any good questions that I missed?

There are a lot of smart, experienced people here?

Let's hear it!  pl

http://www.latimes.com/news/nationworld/nation/la-na-finance-qna18-2009feb18,0,986612.story

Comments

[Dave of Maryland]

If you want the debate full in the face, go to Calculated Risk (a real estate blog, often quoted by Krugman), and click on the Comments after any given post.

My business, a mom & pop mail order bookstore, is down by half since this time last year. It is currently far below break-even. My American customers have been hit with the economic downturn. My international customers have been hammered by that, as well as a worsening exchange rate.

Well, heck, I could see the US disaster coming years ago. Which is why I tried so hard with the international customers, who, only a few months ago, made up more than 50% of my gross. (Yes! I am, or was, one of the few people actually bringing money into the country, albeit only a tiny amount.)

I figured, no matter how bad the US economy got, surely the many Chancellors of the Exchequer around the world would see to it that their people would not suffer. I might lose my American markets, but when the dollar collapsed, I would clean up internationally. So I thought. I was wrong.

Economies around the world stumbled and to my horror, the result was a run on the dollar.

The Euro is on the verge of collapse. If the Italians or Spanish or Germans (or Irish) don't do it in, the upcoming collapse of Eastern Europe will. If you want that story, read Eurowatch, by Edward Hugh, a British economist based in Barcelona.

Last night there was a wild rumor that someone in Asia was dumping local currencies & buying dollars.

In a week or two or three will come a tax revolt unlike anything we've ever seen. Maybe that will shake Washington awake.

How long will it last? (Make it a contest. Winner gets a lifetime supply of pies.) I'm not cheerful, but I was born that way. I don't expect to see last year's money again in my lifetime.

[Michael Angelo]

TEXAS WAR BOYCOTT
In a recent trip through Texas and saw a lot of wealth and people driving BMW’s across newly paved roads. New projects covered almost every square inch of the state, except for El Paso, which voted democrat and looks like an ashtray because it was “punished.”

This economic sword cuts “two ways.”

America is in a bad way, because of over-inflated gas prices but Texas is doing GREAT! George W. Bush and LBJ are the two WORST American presidents in our history.

Both TEXAS MANIACS started wars bankrupting our nation, resulting in the deaths of thousands of Americans and both came from the B.S. state of TEXAS.

Someone has to pay for this betrayal of America.

IT’S TIME TO BILL THE PEOPLE OF TEXAS!

Let’s start the TEXAS WAR BOYCOTT.
How?
1)Rejecting all business and vacation travel “through” or “to” the state of Texas.

2)BOYCOTT or REJECT all Texas products & services like Exxon/MOBIL, ALL Frito-Lay Products, Doritos, Southwest Airlines, Dr. Pepper, Lone Star Beer, DELL computers, Continental, Express Jet and American Airlines, the Dallas Cowboys, Apache Computer software, Hewlett-Packard, FMC, Perot Systems, Chili’s, Maggiano’s, Romano’s, Centex Homes, Dallas Mavericks, J.C. Penney, Kimberly-Clark, Pilgrim’s Pride, SBC, Stewart Title Guaranty Co., Texas Instruments, SYSCO, Texaco and CONOCO Phillips - until these companies and organizations leave the state of Texas.

3)Post in your home or business a computer print-out sign that says,
“GOD-DAMNED Texas Redneck Trailer-Trash Christian Fundamentalist are
NOT WELCOME HERE.”

Every square inch of Texas roads have been repaved and infrastructural building within the state is exploding from inflated gas prices that fattened up the most ignorant section of America.

These Texas people LOVE George W. Bush.

Help make Texas “FEEL THE PAIN!”

Also, Karl Rove, Tom Delay & other Texas Republicans, used PSYCHOLOGICAL WARFARE-through FEAR & INTIMIDATION – AGAINST THE AMERICAN PEOPLE. Here is the “BLOW BACK” for these tactics! Give TEXAS a taste of its own medicine shoving its garbage politicians with its stupid hats, boots, buckles, & B.S. bravado, right “up” all Texas throats!

[eakens]

The stimulus bill and bailout funds, even with as many zeros behind them as they have, pale in comparison to the derivatives market which exploded during the course of the past decade.

As a result, the deleveraging process has yet to be completed. I suspect that home prices will deteriorate a further 20% until we reach a rent/own ratio of 1. Historically that has been the ratio that we have arrived at after every major economic maelstrom and we are simply not there yet.

With regard to the banks, the hope is that community banks will go under and deposits will shift to the big names. What is being done is that the government is carrying the big banks until the community banks begin to fail en mass. We will start seeing that happen in the next 1 to 2 quarters.

[Leila Abu-Saba]

I have been reading Epictetus in a 1994 translation. The gist: don't panic. Circumstances may look dire but there's always opportunity. And nobody knows what's going to happen.

Am also reading an account by an American doctor who worked in Sidon from 1983 to 1985, during the depths of the Lebanese civil war. People managed to survive, have parties, marry, go to school, open medical practices and shops, amidst shelling, invasion, occupation, social upheavals, currency collapse, lawlessness, and breakdown of social and financial institutions.

We have a long way to go before we are as bad off as the Lebanese in the 70s-80s, and they survived.

What to do to hang in there? Organize in your community. Get involved in your religious group, or volunteer fire department, or community garden.

Work to establish food security in your town: where does your food come from, and what would happen if the trucks stop rolling - even for a short while - and big corporations closed up the supermarkets? Do you have farmers' markets in place? How many people garden at home?

Houston supermarket shelves were bare for TWO WEEKS after Hurricane Ike this last fall. Think about that. California had rolling power blackouts throughout the summer of 2001, thanks to the Enron and Duke Power swindlers. We lost 20 billion but Bush took us to Iraq and evaded an accounting of his ties to that pack of thieves. What would power outages do to your food supply and lifestyle? How long could you cope without electricity in the summer? In the winter?

How are your own stores looking, i.e. your emergency rations? FEMA now says everybody is on their own for two weeks after a disaster and needs to have food & water accordingly. Do you have two weeks worth of food stockpiled - stable, non-perishable in case of power cut? If not, why not?

How well do you know your neighbors? If you do go to church, is it in your area or do you have to drive? Why not make friends with your local church and public school even if you're not a member/believer/parent? They have resources you may need, and they can be a focal point for organizing in case of general chaos.

In my neighborhood we are organizing (among other projects) a canning and food preservation group that forages local trees (citrus right now) and meets to put up jams and pickles. Marmalade next, then sauerkraut. Many people in our big city area now understand that we need to know how to put food by, grow food, and cooperate with our neighbors. A local pastor has offered his church kitchen - a good thing, because twenty people want to make sauerkraut, and none of us has a house big enough to hold the crowd.

Your circumstances may vary. Adapt these ideas and others for your own use. begin with where you are and don't worry about the big players much. They might be knocking on your door for a bit of cabbage one day.

OH yes and think of storing food as a way to diversify your portfolio. Your money loses value in the stock market, barely gains at interest, but in the face of rising food prices, a stockpile of necessary staples is a good investment. I've already made about 25% on my pasta & canned beans investment of last year. Of course now that we've eaten that supply, I must buy more at the new price, but I did save on what I bought before prices went up.

[Ken Roberts]

The questions you asked are the ones everyone else is also asking - that is the problem! If enough people doubt that a bank is solvent, then it is not - that is the nature of fractional reserve banking; no bank retains enough quick assets to cover all obligations.

Looking at the situation presently, my guess is that one more major firm must be failed before confidence can begin to be restored. AIG was a missed opportunity; if they were placed into a strict runoff, that might suffice. But more likely something like Citi or BoA will have to be sacrificed. Placing toxic assets into a newly created "bad bank" will likely not suffice; it will not have the traction of brand name.

A plus is the mid-sized banks, some of which I gather are sound - but supporting the big tainted banks with credit (essentially unlimited funds) just gives them the ability to absorb mid-sized sound banks to dilute their toxins. Better to contain the problems and finance the sound firms to expand to provide necessary financial services to the general economy.

Related reading, but not consistent with or supportive of my suggestions above, is the following document...

http://www.scribd.com/doc/10713217/Volker-Recommendations

Re general economic trend, I think large fraction of public service employment will help steady the economy. Probably advisable to stabilize state and municipal budgets.

Re housing, large inventory of houses to be sold, flows still out of balance. I believe the stats are skewed because foreclosures generate sales statistics, delays, etc.

Just my personal take. No expertise, no qualifications. Appreciate info and correction of misperceptions.

[Redhand]

There may be some snark in the "Or, how I learned to stop worrying and love the Bomb" tenor of my comment, but I'm beginning to think the best option is simply to nationalize the major failing banks (and insurance companies), leave the equity holders stiffed, and fire the rogues who caused them to fail. There has been some talk about a restructuring of the "big" banks post nationalization, as in breaking them up and establishing a series of regional banks, none of which, acting alone or in parallel in a brave new world of real regulation, will have the ability to drive the economy over the cliff the way these worthies did.

Let's face it: we're looking at a grand mal systemic failure here. It's like an expensive, uninsured stretch limo car that's just been totaled by a chauffeur high on Speed. Why waste mega-bucks trying to fix something that's beyond economical repair? Just junk it, and buy a more modest vehicle with a speed governor on it. And BTW, don't continue to employ the driver who wrecked the old beast!

[Cujo359]

These are all good questions. I've been trying to get an idea of just how much trouble we're really in, without much success.

To me, it seems like there's an imaginary wealth we thought we had until a few months ago. That imaginary wealth was built up by inflated house prices, various "creative" accounting and financial practices, and it was all covered over with blather from both the news and the government. All that imaginary wealth is going away now.

So the question I have to ask is, what's the difference between the imaginary and the real? A related question is, how much of the real wealth will disappear along with the imaginary.

It seems clear, for instance, that housing prices need to be about half what they were at the beginning of last year for people to be able to afford to own their houses. The ARMs masked that problem for a long time, and encouraged the price increases we saw. Yet, people will lose the investments they made in their houses in the foreclosures that are now happening. To me, that counts as real wealth lost - wealth based on actual work.

I suspect that if we know the answer to those questions, answering yours will be easier.

Back before the banks started collapsing last fall, Kevin Phillips wrote that what's happened in the last three decades is that the portions of our economy that were accounted for by manufacturing and finance have just about reversed. Back then, about 25 percent of the economy was manufacturing, and finance about 12. Now, it's 12 and 23, respectively. To me, that's bad news for a number of reasons, not the least of which is that we haven't kept a good eye on the financial sector. Now that sector is collapsing, and we don't have nearly the manufacturing base we once did with which to try and recover. Phillips mentioned the Dutch in the 18th Century as an example of how this goes. If they're a good example, it doesn't go well.

[Mongoose]

Michael Angelo,

Why don't you let loose and tell us what you really think--you'll feel better, I promise! I almost forgot to add my comment--I don't like Texas either.

[Patrick Lang]

MA

"Lawyers, oil (awl) men and bankers." Those are the people who now run Texas. Let's leave the bootmakers alone for now. There is a pair of Rocketbuster boots con la virgen de Guadeloupe on them that I still don't have.

Actually, I don't mind Texas. I have other statewise bigotries. pl

[sixpacksongs]

To Michael Angelo -

Please don't take too broad a brush to Texas. The major metropolitan areas have not voted Republican. One reason that Texas escaped the worst of the housing bubble is that home-equity loans are limited to 80% of income - unlike most of the rest of the country. Houston and Austin, at least, have a vibrant underground and alternative culture that has been chafing under and resisting the nuttiness for years - remember Molly Ivins, Jim Hightowner, and John Henry Faulk? Texas has mandates for renewable energy sources. And finally, the economy here is slowing too and the state is in some financial difficulty.

There are a lot of poorly-informed and poorly-educated (IMHO) folks down here in the Lone Star Republic. I can only hope they open their eyes, but that's not very likely. However, they're going to have enough pain in their lives (if their not feeling it already) and the large majority of them can't point to any "rewards" from Bush. They can from Johnson but he was a "librul" so they've forgotten that.

And Lone Star is the best damn domestic mass-market beer, hands-down. If only the rest of the country could experience St. Arnold's, the Houston microbrewery, we'd be the new beer capital of the nation.

Outsourced in Houston -

sixpacksongs

[sixpacksongs]

correction - i meant "80% of home value", not 80% of income.

Too much St. Arnold's.

[Mike D]

The single best place to read about this is "The Automatic Earth" and from there you can go to "Karl Denniger" and "Ashes Ashes All Fall Down." I find this better than "Calculated Risk."

Now for some practical stuff: it is believed by many pundits that the large banks are insolvent; if so, eventually something will tip them into closing their doors--you should have some cash stuffed away (say $2000) to carry you until the banks open up again. Secondly, we are all going to suffer some impoverishment so get some money saved up, reduce debt--you know--that stuff your parents or grandparents talked about.

Pat, what happened to Walrus? I miss that guy. Did you kick him off the blog?

regards

Mike D

[William R. Cumming]

The FIRE sectors of the economy are dead These are finance, insurance, real estate. No one wants to make that announcement however hoping they will awake from the dead in the meantime. Also no one wants to use the depression word even though clear we are in one, and again appears to be a world-wide event with very few countries likely to post growth in GDP in CY 2009. US Politicians including the DEMS are in la-la land. They think they can fix it ala FDR and the Depression. Differences this time are immense. Highly leveraged off-book "Assets" that never were are still keeping the FIRE sector form being bankrupt. Once these are valued (probable value using tax definition of willing buyer and willing seller each in full possession of the facts is ZERO). The current federal executive branch departments are riddled with personnel used to servicing corruption in the FIRE sector last 30 years. So these organizations cannot be relied on even to give honest factual picture to anyone. For example, as documented by Kevin Phillips corruption in the CPI accounting, or HUD pretending to regulate mortgage bankers (really unregulated and responsible for much of sub-prime mess) or mulitple banking regulators competing against each other for fees of those regulated by in fact ineffective regulation. It has all been out there but the residue of faith in the US by the rest of world makes me wonder if it is just their leadership salting corrupt monies in US and common folk are left in lurch. E.g. 75% of all commercial real estate in DC owned by foreign nationals often using layers of trust like devices. The tax code is about to blow up since much of the corporate activity now is devoted soley to manipulation of events of the down turn to avoid what meagre taxes corporations have been paying since Nixon. It will be hard to heal these systemic problems. Watch for major dissolution even in the EU and its newest membership. Predict that EURO will only be used in 7 or less countries within 10 years. Odd how convergent problems are hitting now. Example world economies in collapse and worst drought in last 500 years hitting same time world wide (climate change perhaps). Leila just remember to rotate those stockpiled goodies. I just heard the word permaculture for the first time last weekend. Amazingly timely for those wishing some self-sufficiency. Complete self-sufficiency never possible of course.

[curious]

The banks - definitely major restructuring and new set of regulations. The current form is completely broken and unsustainable. They were profitable dues to super easy money and instruments like CDO, cds, and other exotic hedges. And those profit/giant debt were made during "fat and plentiful year". So now they only have the bad debt and slow global growth for next 15-20 months. Most honest experts says the numbers don't add up.

silver lining - remember during the 91 recession, there we so many programmers and engineers getting laid off that everybody ended up writing code and created the .com economy? 95% of them were pure waste of money, but out of those were things like amazon, ebay, google, yahoo, etc not to mention blogging tools.

I am waiting for some crazy groups of people to harness current excess of manufacturing capacity in china, plenty of smart people with no job, and big internet bandwith. (I am kinda hoping do it yourself highspeed networking, home made molecular biology, cheap genomics, micro manufacturing line and really nice blog replacing radio/tv)

[Tacitus]

Col.
re: other statewise bigotries -- which ones?

(Don't say the great Commonwealth of Massachusetts)

[optimax]

I know this solution will never happen but it is the only way I see of saving our economy: nationalize all twelve banks that make up the Federal Reserve. It would wipe out more than half of our national debt and would p*ss off the wealthiest people in the world. They would probably try to persuade China to invade us but if we honored our debt to them, they would have no reason to.
The Fed was set up to stop panics. They haven't done a very good job, in fact, the deeper we as a nation go into debt the richer they get. If we continue to let the Fed control monetary policy, we will forever be blowing bubbles and being surprised when they burst. Right now we are an asthmatic trying to blow another bubble.
I know very little about economics but have read more about it in the last year than I had ever planned to in my lifetime. Always trusted the experts to keep things running smoothly. I was wrong.

[different clue]

Doctor Housing Bubble blogs on these questions for
Southern California specifically. He has tried to assemble and present the facts and evidence as best as he sees them; and tell us
what he thinks they mean.
http://www.doctorhousingbubble.com/

If the regional and local banks and credit unions can be protected from the Bad-Actor Big Banks, they might sink a lot less. I am keeping what little extra money I have in my local credit union in order to do my part to keep that part of
the lending/saving system stable and viable. Of course everyone should have some survival money as currency in a safe jar in a safe place; in case the crashing Megabank system succeeds in crashing the parallel minibank system.

If I had a real house of my very own, I would not worry about where its price was going. I would view my house as a place to live, not as an investment. I would be prepaying the principal on my mortgage as fast and hard as possible; in order to cut that link between me and The System as
fast as I could.

I visited San Francisco for 4 days in August several
years ago. I saw three plants that might interest gardener/foragers. Fennel was growing wild everywhere, so it must grow quite well there. Unopened fennel flowerbuds taste sweeter and more aromatic than fennel seeds and give a
very good taste to some foods. A little way past the walk-in entrance to Golden Gate Park I saw two more interesting plants. One: a viny crucifer with leaves and flowers resembling the upright stiff-stemmed dame's rocket (hesperis) which grows around here, but with edible
pods the size of small sugar-snap peas. The other:
banks of semi-shrubby fuschia growing in full flower up the slope. Other fuschias have edible olive-sized fruits; and so might these.

[FB Ali]

Colonel,

I think a really good question that you missed is : What really caused this catastrophe? Not the mechanics of the meltdown (derivatives, etc, etc), but the root cause. There’s a good answer given by Simon Johnson, former chief economist at the IMF and now a professor at MIT’s Sloan School of Management. In a recent interview with Bill Moyers he said he’d seen similar situations while at the IMF – in Thailand, Indonesia, Russia and Korea.

According to him each of these economies had been run into the ground by a bunch of oligarchs – a small group with a lot of power who call the shots in the country. In the US the oligarchs are the people who run the banking and financial industry. Johnson doesn’t see any real long-term solution to the crisis in which America finds itself unless and until the power of the oligarchs, the bankers, is broken. He doesn’t think this requires nationalization (as he says, “That’s not state of the art”); instead what he advocates is a government “intervention” (an FDIC supervised bankruptcy followed by a re-privatization).

If you want to see one way out of this mess, read the interview at
http://www.truthout.org/021609J

[Leila Abu-Saba]

Different clue, we are all over the foraging here in the Bay Area. Fennel is old news. THere are foraging groups in every major town, and I've started a canning and preserving group in my Oakland neighborhood, focusing on free fruit from the abundant trees in people's yards.

My late father put up gallons of olives he foraged from trees in Alameda, CA, in the SF bay. And there is a permaculture video online describing how to harvest acorns from our native trees, and how to process them to eat (they're not edible as is).

Permaculture - the local community college due east of me by 2 miles, a bus ride away, has a horticulture department that specializes in permaculture. Those crazy hippies are always banging on drums, hanging up tie-dye banners, and planting food crops. The idea is spreading. Come the apocalypse, we will be eating in Oakland. (however if the water runs out, we're fried)

William Cummings - I have learned from Sharon Astyk (Casaubon's Book blog) to eat what I store, and store what I eat. Items that we don't eat in a year get sent to the food bank donation box before they expire, and we try again with something else. Canned spinach just isn't going to cut it. We're better off saving heirloom spinach seed and growing it in our year-round climate.

[Leila Abu-Saba]

My thoughts on food storage here

http://foragelaurel.blogspot.com/2009/02/store-food-for-crisis.html

and "eat what you store" ideas rounded up here:

http://foragelaurel.blogspot.com/2009/02/pantry-cooking.html

Lebanese, Syrians and Palestinians practice these ideas as well - they call it the "mouneh." Every household, even in the big city, keeps a supply of grains, pulses, oil and preserves. When I was in Damascus in the fall, people were busy pickling eggplants which were in season. Others were laying up stores of olive oil and olives. In summer they dry tomatoes and figs, in spring they harvest chickpeas and lentils (or buy them). Everybody keeps flour around. Whenever there's a big crisis with refugees etc., the local people have food ready.

[optimax]

Thank you for the information, Clue, looks like I'll end up grazing in flowerbeds of Golden Gate Park.

[Cieran]

Tacitus:

re: other statewise bigotries -- which ones?

He loves Oklahoma. Which does make it sorta hard to love Texas much.

[Ken Roberts]

Wow - great info! Drifting off topic but re food plants in California, long ago saw lima beans growing in sandy soil near the ramp at Grover Beach - wondered if lima bean family of plants would be good for soils which have acquired too much salinity for other crops (due to irrigation).

Favourite state is maybe better topic than least liked. Interesting question which is one's favourite, aside from the one where you live. My favourite Cdn province is Newfoundland - everyone so friendly, and hardly any fences and keepouts. But I'm sort of a Will Rogers traveller, never touristed to a place I didn't like.

If you're an airplane enthusiast, check out the great museum in Gander. And if you're a communications enthusiast, the cable museum at Heart's Content is full of interesting gear. And the local strawberry wine at Rodrigues Winery...!

[matt]

Tacitus:

Poor Massachusetts....they just assume that they are disliked now, don't they? .....yet another unfortunate casualty of years of Republican cant about taxes and the evil ted kennedy

[Patrick Lang]

Tacitus et Matt

We could start an interesting thread in re "most diliked states?"

I was born at Ft, Devens, Massachusetts, a post long closed. does that make me a Bay Stater? The Duke of Wellington was asked if his Irish birth made him Irish. He replied by asking if a man was a horse if he had been born in a stable.

Joel Garreau opined some years ago that "if the United States had been settled from West to East, new England would still be uninhabited." pl