Meltdown

[BachQ]

[BachQ]

Will China bail out the West?

China's burgeoning exports over recent years have helped the country build up the world's largest foreign exchange reserves.  Figures released this week show these reserves now total $1.9 trillion. ... "The Chinese government could offer to lend up to $500bn to the US government for the rescue of its financial sector," wrote Mr Subramanian, of the Peterson Institute for International Economics. In fact the Chinese have already been doing something similar for a number of years. Beijing has been buying up US government debt, which has allowed the US to spend beyond its means. "China is already helping the US economy and, if possible, it will continue to do this," said Zhao Xijun, of Beijing's Remin University of China.

[BachQ]

Scotland Bankruptcy at record levels after 162% leap in a year

Insolvencies in Scotland hit record levels as stock markets took a further battering amid growing concerns that the global bailout of banks has come too late to avert a deep global recession. Latest statistics showed yesterday that the number of Scots going to the wall rose by more than 160% with nearly 6000 people and 300 firms going bust. There were 4055 bankruptcy cases between July and September this year, up 162% on the same time last year.

[BachQ]

Single-Family Home Starts in U.S. Fall to 26-Year Low

Oct. 17 (Bloomberg) -- Housing starts in the U.S. fell more than forecast in September as construction of single-family homes plunged to the lowest level in a quarter century, indicating the real-estate slump intensified even before the recent credit meltdown. ... ``The full impact from the financial meltdown is yet to come,'' said David Sloan, a senior economist at 4Cast Inc. in New York, whose estimate matched the lowest in the Bloomberg survey. ``Housing will be a drag on growth into the middle of next year. The bottom is now looking further away than it did previously.''

[Lilas Pastia]

Obviously, the critical issue is whether the loans will remain solid.  In the US, many of the sub-prime and Alt-A mortgages are steaming piles of worthless paper.  If the mortgages remain solid throughout the life of the loan, then the government can indeed easily turn a decent profit over the longterm.  If, however, there is a dire global recession with rampant unemployment, then all bets are off, and that assumption of longterm profitability will evaporate.

That's for sure. But according to statistics, so called risky bank loans are only a fraction of their US counterparts. The simple reason is that credit requirements are much more stringent. Until quite recently minimum down payment was 10% and maximum amortization 25 years. In the past 2 years those criteria wer relaxed but, fortunately, the door was closed again last summer and 5% / 35 years are the minimal requirements. It also helps that banks exercise due diligence in verifying income, assets and property value (professional apraisers show up and submit a detailed report within 48 hours).

Consequently, the average equity on canadian houses is much higher than in places where these measures are ignored (70% vs 46% in USA). Loan delinquencies and bankrupties are lower, too, and flat (no increase as of Q3-2008). It also helps that savings levels are higher, possibly a reflection of current higher employement rates.

Linkto study.

[BachQ]

That's for sure. But according to statistics, so called risky bank loans are only a fraction of their US counterparts. The simple reason is that credit requirements are much more stringent. Until quite recently minimum down payment was 10% and maximum amortization 25 years. In the past 2 years those criteria wer relaxed but, fortunately, the door was closed again last summer and 5% / 35 years are the minimal requirements. It also helps that banks exercise due diligence in verifying income, assets and property value (professional apraisers show up and submit a detailed report within 48 hours).

Consequently, the average equity on canadian houses is much higher than in places where these measures are ignored (70% vs 46% in USA). Loan delinquencies and bankrupties are lower, too, and flat (no increase as of Q3-2008). It also helps that savings levels are higher, possibly a reflection of current higher employement rates.

Linkto study.

Thank you for that link.  It reveals how fragile the US debt situation is, and how it is poised to worsen dramatically.

For example, as noted in Chart 3 ("Home Equity"), Canada's home equity as a percent of real estate values hovers around 70%, while in the US it has tanked at 46%.  And of course the US graph shows the equity percent sloping steeply downward in 2007, delving into negative equity territory, whereas Canada is relatively stable.  This does not bode well for the US.  Canada's larger home equity as a percent of real estate values will provide significantly more cushion to Canadian households to weather financial storms.  US loan delinquencies (mortgages and credit cards) are heading toward the stratosphere, and the slope of the graphs suggests that it will be getting worse.  I'm surprised that the US and Canada have nearly identical bankruptcy rates (@ roughly 3%), although the US has been sloping upward since 2007, and Canada's has been stable since 2000 (of course, given the recent US bankruptcy overhaul, the figures are not entirely comparable).

The Wall Street Journal has reported that, in the US, one in six households (75 million homeowners) are mired in negative equity (i.e., homeowners owe more than the home is worth).   And it's worse for newer homeowners, where almost 29% people who purchased their home in the last five years have negative equity.  In South Florida, more than 40% of homeowners who bought in the last five years are in negative equity.  For those who bought in 2006 when prices peaked, 76% of those homeowners are in negative equity, according to Zillow.com .

But this is a global phenomenon affecting Europe and Australia.  The UK Telegraph reports that "more than 60,000 [UK] families a month are now falling into negative equity, as the collapsing housing market wipes thousands of pounds off the value of homes." In Ireland, half of homeowners who bought between 2005 and 2007 will be stranded with negative equity by 2009, according to Goodbody Stockbrokers.  This research also forecasts that Ireland's unemployment will climb from 6pc to 8pc in 2009, rendering all the more difficult the ability to make mortgage payments ....

It's worth noting that none of the current government bailouts address the negative equity crisis, which is an underlying cause of the larger credit crisis.  Indeed, the government bailouts only prolong the insidious debt ponzi scheme.  As one commentator notes:

Lax lending policies, driven by a huge expansion in credit derivatives (such as CDS and CDO's) and fancy securitizations, coupled with enormous leverage, led to to the creation of a massive credit ponzi scheme and the facilitation of gigantic financial fraud worldwide. Though there is a lot of focus put on the housing crisis in the US, the truth is that housing was really only the trigger or spark which started this financial crisis. If the financial system were not without weak foundations to begin with, if the financial system was not a house of cards, the housing crisis would not have had the effect it had and a larger financial crisis would have been averted.

Current global bailout efforts merely reflect a desire to keep the ponzi scheme going a little bit longer.  But at the end of the day, the ponzi scheme will collapse because there is little of value supporting this house of cards. For example, rather than focus on rebuilding its manufacturing base, the US has opted to keep lowering interest rates, thereby creating asset bubbles which worsen the crisis.  This is a dire situation, and the bailouts only prolong (and possibly worsen) the inevitable collapse. 

Thankfully we have classical music to momentarily take our minds away from this mess. 

EDITED to add recent UK data.

[BachQ]

U.S. Economy: Sentiment Drops by Record; Housing Starts Decline -- Oct. 17 (Bloomberg) --

Confidence among U.S. consumers fell by the most on record and single-family housing starts hit a 26-year low, posing an increasing threat to household spending that accounts for more than two-thirds of the economy. The Reuters/University of Michigan preliminary index of consumer sentiment fell to 57.5 this month from 70.3 in September. The measure averaged 85.6 last year. Construction of single-family homes dropped 12 percent last month to a 544,000 annual rate, the Commerce Department said in Washington.

... Falling property values, along with the crash in stocks, threaten to cause the first decline in consumer spending since 1991, and put pressure on the Federal Reserve to cut interest rates again this month. ``Even gasoline-price decreases were overpowered by the massive destruction of wealth,'' said Michael Feroli, an economist at JPMorgan Chase & Co. in New York who used to work at the Fed. ``Things are pretty awful in the economy and that should make itself felt through weaker consumer spending.''

[BachQ]

Banks Hoard Cash as Credit Card Defaults Rise

J.P. Morgan Chase said the number of credit card loans in default rose 45 percent in the third quarter from the comparable period a year ago and predicted that default rates would sharply accelerate through 2009, with 7 percent of credit card loans going bad. "We have to be prepared that it gets a lot worse," J.P. Morgan chief executive Jamie Dimon said about the overall economic outlook. ... The deterioration in consumer credit, the latest downturn to whack Americans after the housing slump and mortgage meltdown, threatens one of the linchpins of the U.S. economy. Over the past 10 years, credit card debt has gone up 75 percent as Americans' real wages and savings rate have stayed flat. That means Americans have been spending beyond their means -- and fueling economic growth with borrowed money.

Now, the housing crash, financial downturn and contracting economy have made it more difficult for Americans to settle their bills, setting off a downward spiral. As people fail to pay off their credit card bills and other loans, banks must put away money to cover expected losses. So banks lend less. Americans who tended to rely on loans to fuel their spending must cut back, readjusting their spending habits to conform with what they earn.

"Given that the savings rate has been minuscule, there's no reserves in the tank for the consumer to tap his savings to support his spending," said Scott Valentin, a financial services analyst at Arlington investment bank Friedman Billings Ramsey. But consumers have been driving about two-thirds of the U.S. economy. Overall, the rate of credit card loans going bad increased 54 percent in the second quarter of 2008 from the same period in 2007, according to Federal Reserve data, the latest available.

A report this week from Innovest, a research firm, said banks and other credit card lenders could record nearly $100 billion in losses because of bad loans through the end of next year. Innovest said financial firms could be reaching a "tipping point" at which years of growth in credit card debt starts to decline.

[BachQ]

The $58 Trillion Elephant in the Room

[BachQ]

Mwahahaha, I ate the plan 

G$ / Greg:

It took you how many years to realize that all great screen names are 2 characters long ? .......

[Lilas Pastia]

Joseph Stieglitz' plan to the financial crisis.

[BachQ]

Joseph Stieglitz' plan to the financial crisis.

Very ambitious.  As to bondholders, he states that "[t]here needs to be a forced conversion of this debt to equity."  I wonder how bondholders can be forced to convert involuntarily?

[BachQ]

But this is a global phenomenon affecting Europe and Australia.  In Ireland, for example, half of homeowners who bought between 2005 and 2007 will be stranded with negative equity by 2009, according to Goodbody Stockbrokers.  This research also forecasts that Ireland's unemployment will climb from 6pc to 8pc in 2009, rendering all the more difficult the ability to make mortgage payments ....

Today's Telegraph reports that "more than 60,000 [UK] families a month are now falling into negative equity, as the collapsing housing market wipes thousands of pounds off the value of homes."

***
Negative equity will affect more homeowners during the current financial crisis than the crash of the 1990s, according to new predictions.  By the end of this month 335,000 homes will be worth less than their mortgages - a rise of 260,000 in four months, figures from the Standard & Poor's ratings agency show.  If trends continue 2 million households will be caught up in the trap by 2010, more than the 1.8 million who fell victim to negative equity in the 1990s property crash.  Figures to be released this week are expected to show that the British economy shrank over the last quarter, signaling that the UK's descent into recession is well underway.

[greg]

G$ / Greg:

It took you how many years to realize that all great screen names are 2 characters long ? .......

4 years? 
(5?)

[Lilas Pastia]

Very ambitious.  As to bondholders, he states that "[t]here needs to be a forced conversion of this debt to equity."  I wonder how bondholders can be forced to convert involuntarily?

They can be forced either if the bonds are convertible (usually one of the options the issuer can avail itself of), or if forced by law. Recently Canada's Supreme Court denied bondholders any claim to preference against shareholders in a proposed takeover of giant Bell Canada by Teachers, an Ontario pension fund.

"The business world has long argued directors' duties must be focused on maximizing value for shareholders, and now legal experts say this decision solidifies that tradition in law. It looks like the idea that some accounts should be taken of other stakeholders within the corporate entity, principally bond-holders in this case, doesn't have a legal foundation to it."

Source: The Gazette

[BachQ]

For a short article on the inter-relatedness of peak oil and the current banking crisis, CLICK HERE.

***
[With respect] to the financial crisis, we have witnessed an impressive fall in oil prices over recent weeks under fears of an imminent global recession. However, the massive US bailout plan and similar European supports to the banking sector are likely to maintain an artificial growth at high costs and to the detriment of states' debts. Once we realize oil demand will not decline and will even continue to grow, as mentioned last week by the IEA, oil prices will once again surge.

Regrettably, when facing the next crisis which is likely to be unprecedented, the world will no longer [be able to] afford an emergency plan. In fact, the US bailout makes an emergency plan to develop alternatives to oil improbable. We have used our last bullets, and missed the target. Recent events have showed us how officials and mainstream commentators failed to forecast the current crisis. It is time to finally take the Peak Oil movement seriously, failing to do so would result in a nightmare scenario, Dr. Campbell and others have been desperately warning for too long.

[BachQ]

***Recently Canada's Supreme Court denied bondholders any claim to preference against shareholders in a proposed takeover of giant Bell Canada by Teachers, an Ontario pension fund.

"The business world has long argued directors' duties must be focused on maximizing value for shareholders, and now legal experts say this decision solidifies that tradition in law. It looks like the idea that some accounts should be taken of other stakeholders within the corporate entity, principally bond-holders in this case, doesn't have a legal foundation to it."

Source: The Gazette

Interesting.  As an aside, a majority of states in the US have adopted "stakeholder constituency statutes" that allow (but do not mandate) directors to consider the interests of stakeholders (creditors, employees, customers, etc.) in their decisionmaking.  But if the issuer has a contractual right to convert the debt to equity, then the stakeholder issue becomes moot.

[BachQ]

Russia's crude oil output declined 0.6% year-on-year in January-September to 365 million metric tons (2.7 billion barrels), the country's top statistics body stated.  Mexico's state-owned oil company (PEMEX) fell 14% to the lowest level since 1995.

More on Russia and more on Mexico's oil production.

[BachQ]

New Zealand Herald

Engineers are warning politicians that the lull in oil prices will be short-lived, and New Zealand is headed for sustained job losses unless it boosts energy efficiency efforts.  Senior North Shore City transport strategist Archer Davis, speaking on behalf of Engineers for Social Responsibility, said a conservative estimate of a 4 per cent annual decline in oil supply raises the prospect of a 12 per cent contraction of New Zealand's economy over 15 years. "We are looking at losses of jobs, people losing their income, we are looking at severe issues here," he told Auckland Regional Council members in a call to action after a joint conference of the engineers' group and the Sustainable Energy Forum on how to prepare for oil shortages. "It will have a major impact and it will be ongoing - it won't be short term."

[BachQ]

Ambrose Evans-Pritchard: 2008 Financial Crisis may make 1929 look a "walk in the park"

Twenty billion dollars here, $20bn there, and a lush half-trillion from the European Central Bank at give-away rates for Christmas. Buckets of liquidity are being splashed over the North Atlantic banking system, so far with meagre or fleeting effects.  As the credit paralysis stretches through its fifth month, a chorus of economists has begun to warn that the world's central banks are fighting the wrong war, and perhaps risk a policy error of epochal proportions.

"Liquidity doesn't do anything in this situation," says Anna Schwartz, the doyenne of US monetarism and life-time student (with Milton Friedman) of the Great Depression. "It cannot deal with the underlying fear that lots of firms are going bankrupt. The banks and the hedge funds have not fully acknowledged who is in trouble. That is the critical issue," she adds. Lenders are hoarding the cash, shunning peers as if all were sub-prime lepers.

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