Tuesday, October 16, 2007

Terrifying Tuesday

I must admit, I thought this week was going to be a snoozer, but it has been fireworks since Monday morning! There was quite a bit of cross-currents today, with lots of headlines and news that has direct bearing on the Economic Disconnect. I have two thoughts that I would like to put out, and I am asking for feedback because both lines of thinking are terrifying to me.

Price Fixing- Going to be attempted for Housing prices?
Treasury Secretary Henry Paulson's speech at the Georgetown University's law school was disturbing on many levels. You can read some excerpts here:
I want to highlight some key points Paulson harps on, because I think both the language and the tone of his comments are a preface of sorts for action that is already being prepared:
  • "Let me be clear, despite strong economic fundamentals, the housing decline is still unfolding and I view it as the most significant current risk to our economy."
  • "We must help as many able homeowners as possible stay in their homes"
  • The most telling is "The longer housing prices remain stagnant or fall, the greater the penalty to our future economic growth."

And just so you do not think the guys at the FED have a monopoly on totally contradictory statements, Paulson throws out this nugget "When investors are relieved of the cost of bad decisions, they are more likely to repeat their mistakes. I have no interest in bailing out lenders or property speculators."

I am of the opinion that a move will be made in the next 6 months to at least float proposal to fix home prices at some level. I am not sure what level that would be. If you can agree that the government likes their "Wars On" (War on drugs, war on poverty, war on terror, etc) a "War on Foreclosures" is not a stretch. I know this may seem crazy, but already we see that through the Superfund set-up by Citi and pals, the SIV market is being rigged right now to delay and hide losses on assets that are at values the banks simply do not and cannot have realized. That is price fixing. That is going on with not only the approval of the Treasury, but active participation. What better way to both stop the mortgage market bleeding, and endear yourself to MILLIONS of REGISTERED VOTERS than to put a floor under home prices? I hope I am as wrong as can be here. I hope someone leaves a well written comment that explains why this is impossible. To quote every Star Wars film and book ever made however, "I have a bad feeling about this!"

Revenge of the Communists

It is generally accepted that the USA won the Cold War with the Soviet Union, not through live combat, but through an ever escalating arms (Not those ARMS!) race that eventually bankrupted the old Soviet system. I do not want to debate the particulars of that story. I want to focus instead on what could be happening in a macro geopolitical sense.

Suppose you were a communist country, and saw what happened to the old Soviet Union. Perhaps you would learn that isolation from foreign trade really hurt them, and a weak economy meant ultimately they were doomed. Say you instead become a massive creditor to the United States. Your country, with terrible environmental rules, no worker rights, a police state that cracks down on dissent, and dirt cheap labor can manufacture every widget needed by the USA. Your economy is booming, and what's even better, you hold a silly (upwards of 2 Trillion?) dollars of US debt. Even sweeter, the US is totally dependant on your country continuing to buy their debt. So far so good.

Now the dollar is tanking badly. The US consumer has spent himself silly buying homes that moved in price like the old dot com stocks. The party is now ending, and massive financial losses are sure to come. The US is in a bad spot with huge budget deficits, massive entitlement programs, and facing a probable bank bailout on a historic scale.

By now you know the country is China. Faced with this tantalizing junction in history, what would be your next course of action?

  • Option1: Nuclear Option

China stops buying US debt causing a run on the dollar, and a major meltdown in US markets. A new smarter communism has crushed the US economy and exacts revenge for the loss in the 1980's.

  • Option2: Trading Time

Faced with the above mentioned nuclear option, the US signs a treaty of non aggression with China, and Taiwan is left to its own devices under a Chinese invasion. The US will sell out Taiwan in the face of such a catastrophe.

I do not want to have a debate on the merits of Taiwanese Independence, that's not the point of this thought process. I want to point out that because of the major Economic Disconnect that has gone on too long, neither of the two ideas floated here are beyond consideration. By all means, let me know what you think. Again, I hope I am very, very wrong.

Kind of a downer post. have a good night nonetheless.


donut-san said...

for china to stop buying us debt, it'll have to float its currency first. a run on the dollar and a yuan peg necessitates more sucking up of US treasuries.

currently, there's a lot of inflation pressure in china, thanks to USD, and this inflation will be exported back to US... funny how this bubble economy's worst fear of inflation (besides fed's lies) is from China instead of its own numbers...

with that in mind, the solution is option 3 - china looking to buy as much of US stuff as possible, just like rest of the world left holding the dollar (ie OPEC). Already, China is trying to behave like a Citi or a JPMC, and invest in companies, and will want to get in on the US IPOs etc. If Congress completely shut off that door in the interest of "national securities", expect some repercussion, but nothing near the 2 options you mentioned...

Anonymous said...

Well I am glad I am not the only one posting here....

First I like the way you think.

Second this entire global situation will not end well....

Many thanks for your hard work and keep posting. I like getting as many points of view as possible.


PS: I don't see a housing price net but rather more of what we have had in the past with loans for anyone who can fog a mirror.....

russdog777 said...

I think crashing housing prices will be a net positive. They are too high in relation to many local income bases. Got to return to normalcy.

First-time home buyers are incurring too much debt. Prices must come down. It's not healthy for the economy when so many consumers carry too much debt. Rising home prices and over-consumption contribute to that.

If combined with a loosening of the BK rules, then people can reduce their personal debt levels and things get back to normal. Shed that debt and flush the losses, I say.

Yes banks loose their money. Boo-hoo.

Paulson is another pandering SOB trying to endear himself to homedebtors. President Bush was supposed to have more sense than to engage in cronyism or vote-buying like this.

russdog777 said...

Lower house prices are good for millions of people, but not for everyone.

Who wins and who loses as prices fall?

People who are moving will see little effect from falling prices. They will sell for less, but they will also get a discount on their new house. Whether they come out ahead depends on whether they are moving to a more or less expensive area.

New buyers win in a big way, since they will have much less debt, which means more money to enjoy life each month.

Old sellers lose in a big way, if they were counting on their house to fund their retirement. If they don’t have to sell though, lower prices don’t hurt them, and may help by giving them property tax reductions.

Local governments hate lower prices, because lower prices mean lower property taxes.

Lenders hate lower prices, because they live off of the interest on debt. More debt is better for banks.

This housing crash is the greatest opportunity to expand house ownership ever. Every foreclosure will be balanced by a house sold to someone else at a reasonable price — unless the federal government tries to “fix” the situation once again.


getyourselfconnected said...

Hello to all that left comments. Thanks for stopping in. I would agree that China will buy more US assets, not just debt going forward. One thing to keep in mind about China though:
If the US had a major financial catastrophe and things got ugly, the populace would revolt and there would be figuritively "blood in the streets" for the government. If China does and the people revolt, there just will be blood in the streets, but not the governments.