Sunday, August 7, 2011

The World is Miss-Priced

It is Sunday night and if you follow things economic then you know there are some serious issues going on right now.

I could write about all the moving parts for hours, but let my sum it up so that we can skip the long stories.

Ever since the subprime debacle and subsequent financial crisis there is a belief held firmly by central banks and others that there is a temporary miss-pricing of assets. Mortgage pools are not worth zero, just worth zero for a small window of time. This goes on and on to Italian bonds not really needing to be sold at over 10% yield to a suddenly falling stock market. It's all temporary.

Temporary has lasted for years now.

Freshly printed money and a never ending stream of liquidity is required to keep the temporary price of numerous assets "higher than they otherwise would be". As soon as the real market price come back to where it "should" this can all stop.

When do you think that will be?

Have a good night.


GawainsGhost said...

In 1970 the finance industry produced about 7% of GDP. By 2010 it produced 40%. This is the problem.

People don't understand bankers. My grandfather was a bank manager, back when banks were sound. Today I'm on a first name basis with at least a dozen bankers.

Get this. At 5% the interest earned on a $100,000 mortgage at full amortization is $97,000. The banker takes that amount, $197,000, and counts it as income this year, even though it won't be realized for 30, then pays himself a bonus based on that amount. The bank gets its origination fee, 2%, the banker gets his bonus, and everyone is happy. See how that works?

The subprime debacle was more about the government promoting home "ownership" than anything else, because it was necessary to prop up the banks as finance is now almost half of GDP. Loans had to be made to someone, anyone. And how did that work out?

The so-called stimulus was all about bailing out the banks and the GSEs. Now you can get a mortgage at 3.5% to buy a house from Fannie Mae. This is called "special financing."

Prices are dropping, sales are slowing, people are sitting on the sidelines. Of course the world is miss-priced. What else did you expect in a world built on banking?

There's an old saying about the highway to hell. Something about being paved with good intentions.

getyourselfconnected said...

Great comment!

Stagflationary Mark said...


I don't mean to jump on the band wagon but my father was a bank manager in the 1970s.

Further, AC/DC is definitely my favorite band of all time and that song is from my favorite album. If pressed, I'd probably even rank that song as my favorite. I'd have to give it some thought.

It could be that those who have listened to Highway to Hell repeatedly (more times than I could count) may have the ability to spot highways to hell. Just a theory of course.

I would back it by saying that I doubt I could spot a chameleon in its natural habitat. I just haven't listened to that song enough.

In all seriousness, my best friend in college fell asleep wathing MTV and had a dream based on that song. He told me to never let him fall asleep while watching MTV again.

Hahaha! :)

The Sovereign Bohemian said...

As long as the Federal Reserve dictates our currency the floor we stand on will always be shifting. Better get your sea legs 'cause it it could be a long time.

The game we all play, called life, would be much better if the rules didn't keep changing. Everybody could then at least see where they stand.

Do bankers nowadays have to recite Steve Miller Band lyrics to get promoted? (hint..."Take The Money and Run")

GawainsGhost said...

If I had to pick a favorite AC/DC album, it would be Powerage. That album seriously rocks. But Highway to Hell is damn good as well.

You know, back in the day, I went to this tournament in Corpus Christi, chasing drama girls. It was part of my evil plan for the summer of love, 1978. I collected names, addresses, phone numbers of drama girls at every high school from Austin south. Made a little black book. I figured that in the summer I would cruise around from town to town, check into a hotel and start making phone calls. Ultimately, I did that, and it worked. I got laid four or five times a week, every time with a different drama girl, all summer long.

Anyway, when I got back that weekend and went to school on Monday, everybody, and I mean everybody, was wearing Highway to Hell t-shirts. I'm wondering, what's up with that?

"Dude, AC/DC rocked the Villa Real!"

What?! That was my chance, and I missed it. Shortly thereafter Bon Scott died.

Looking back, I would gladly trade one AC/DC concert for three less drama girls.

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