Bail-out fail out
The $700 billion US bailout plan has been defeated for the time being and the markets are in turmoil. So far today the Dow has plunged by more than 770 points and the TSX is down 840.93 points. Anyone out there concerned about retirement? Are you starting to bottom fish for stocks or stockpile canned goods?
In a stunning vote that shocked the capital and worldwide markets, the House on Monday defeated a $700 billion emergency rescue for the nation’s financial system, ignoring urgent warnings from President Bush and congressional leaders of both parties that the economy could nosedive without it. The Dow Jones industrials plunged nearly 800 points, the most ever for a single day.
Democratic and Republican leaders alike pledged to try again, though the Democrats said GOP lawmakers needed to provide more votes. Bush huddled with his economic advisers about a next step. The House was to reconvene on Thursday instead of adjourning for the year as planned.
October 2nd, 2008 at 9:21 am
Or is it just me?
October 1st, 2008 at 9:23 pm
you guys are disagreeing about nothing, basically what dave is saying is that at some point the fed would re-inflate the economy.
It is not about nothing. Did you not read Dave's earlier comments:
“I think the Fed will start the printing presses and inflate the debt away. Hard assets do well in times of high inflation because they hold their relative value.”
If the inflation is a result of fighting deflation, RE will have been destroyed during the deflationary phase. A paraphrase of Dave's argument:
I have good news. You have heart disease. This is good news, because you will get a quadruple bypass, and this will improve your fitness level. Only Dave would spin bad news to be good news.
October 1st, 2008 at 9:04 pm
Dave "You are obviously not married." I suspect most of us bears ARE married however the type of person we marry is I would say someone who goes beyond Granite counter tops! I am married and the wife thinks buying in this market is as close to ridiculous as you can get, mind you she has only 40 years of experience!
Oh and we have both owned multiple homes and learned the hard way.. you?
October 1st, 2008 at 9:00 pm
you guys are disagreeing about nothing, basically what dave is saying is that at some point the fed would re-inflate the economy. first deflation (now), and then inflation. i suppose it is a government vs. market argument; no doubt it would take extreme measures to re-inflate. i wouldn't be too confident in either force; i tend to think the government will go to extremes to fight deflation. the bond market could be toast anyway.
October 1st, 2008 at 8:28 pm
Dave, don't humour me. From the same speech:
"A particularly important protective factor in the current environment is the strength of our financial system: Despite the adverse shocks of the past year, our banking system remains healthy and well-regulated, and firm and household balance sheets are for the most part in good shape"
This didn't all happen on his watch, but the man was OBLIVIOUS until the sh*t hit the fan.
Anyhow, you are up to your usual tricks conveniently misapplying concepts and using selective logic.
This started with you saying:
"I think the Fed will start the printing presses and inflate the debt away. Hard assets do well in times of high inflation because they hold their relative value."
In other words, you try to spin the financial crises into a positive for RE. Basically you reason that:
1. Economic slump.
2. U.S. will inflate.
3. RE is a real asset, so it will go up.
To back this you quote from a Bernanke speech that was 100% about how to avoid a deflationary spiral once rates have hit ZERO.
I have news for you. During a deflationary spiral, RE PLUMMETS. Yet you connected the dots so utterly conveniently that you conclude it a positive for RE.
Dave, you truly are one of a kind. I have come across many people whose opinions I disagree with, but never one who tries so HARD to pull a fast one.
October 1st, 2008 at 8:03 pm
"Houses are the only things people buy for which financing costs ever exceed the rental value."
"You are obviously not married."
i don't know what's more disturbing. the idea that you bought your wife or that you rented her.
October 1st, 2008 at 7:53 pm
Houses are the only things people buy for which financing costs ever exceed the rental value.
You are obviously not married.
October 1st, 2008 at 7:14 pm
“Great idea, I suggest you take it further though and also propose that they only provide car loans based on how much you can rent you car out to other people far.”
But chowderhead, cars are highly cash flow positive for rentals, because car rental firms, unlike specuvestors, understand that investing is about yield.
Houses are the only things people buy for which financing costs ever exceed the rental value.
October 1st, 2008 at 6:56 pm
There is no way the Fed jack up the money supply and keep 10 year rates stable.
Did you read his speech? He listed lots of ways he could do it. In fact, it has been done before.
October 1st, 2008 at 6:40 pm
I don't agree with Patriotz as he presented it. If some fool wants to lend on shaky criteria, that is his predicament (well, except for this recent madness of course).
But as I have stated before, I really would like CHMC use a formula that increases required downpayments and/or insurance premiums when rent/price ratios cross a certain threshold. That would have done the trick.
October 1st, 2008 at 6:37 pm
Freako, there is a saying about fighting the Fed. Don’t do it. I’ll side with Bernanke on this discussion considering that he has access to a printing press and you don’t.
Give me a break, Dave. That is hyperbolic pile of crap. Those printing presses do not control long rates. There is no way the Fed jack up the money supply and keep 10 year rates stable.
Common sense. Who in their right mind would hold a 10 year bond yielding a fraction of inflation. Nobody.
And who the heck would lend long term in such a scenario? Nobody. You want to REALLY kill the debt markets? Drive bonds up to artificially low yields.
October 1st, 2008 at 12:43 pm
Does anyone here have estimates on the number of businesses affected by shrinking credit markets?
More evidence that Wall Street's problems aren't yet affecting the real economy…
http://www.bloomberg.com/apps/news?pid=20601109&a…
Industrial Companies Can Thank Banks for Lower Rates (Update4)
By Pierre Paulden
Sept. 29 (Bloomberg) — The same credit crunch gripping banks, brokers and insurers is providing industrial companies with the lowest short-term borrowing costs in almost four years.
Yields on commercial paper due in 30 days sold by manufacturers and retailers fell to an average 2.14 percent last week, while those for financial borrowers rose to 3.15 percent….
Money-market funds that gorged on the debt of financial companies are now pouring cash into Treasury bills and corporations which avoided the troubled mortgage bonds that contributed to the failures of New York-based Lehman Brothers Holdings Inc. and Washington Mutual Inc. of Seattle. Yields on 30-day non-financial commercial paper dropped to 1.86 percent on Sept. 24, the lowest since November 2004.
“Investors afraid of owning financials are buying industrials as a haven,'' said Ira Jersey, an interest-rate strategist at Credit Suisse Holdings USA Inc. in New York. …
General Electric Co., the world's biggest provider of aircraft leasing, jet engines, power-plant turbines, medical imaging machines and locomotives, is having no problems accessing the short-term debt market even though about half of its business comes from lending, Chief Financial Officer Keith Sherin said on a conference call with investors Sept. 25.
“Even in the last 10 days where you've had some significant disruptive days, we continue to see a flight to quality,'' Sherin said.
October 1st, 2008 at 11:46 am
patriotz, it will be interesting to see lender behaviour after prices drop about 18% from peak. At that point even some non-CMHC loans are now in the red. If it looks like another 20%+ down is a real possibility, as I think it is, you can bet they'll be re-thinking the moral hazard thing, even with a "conservative" 20% down.
October 1st, 2008 at 11:37 am
"Great idea, I suggest you take it further though and also propose that they only provide car loans based on how much you can rent you car out to other people far."
It's not such a crazy concept for an asset that has obvious and predictable cash flows, with a slow depreciation schedule. Think of it as a loan officer not wanting to lend you the $ unless he sees a plausible business plan first, like they do for — gasp — any other business loan. If he decides that speculation is a business plan, he can live and die accordingly.
As patriotz has mentioned many times, the business plan link is broken because of CMHC guaranteed loans and now we have lenders practicing moral hazard.
October 1st, 2008 at 11:27 am
Robert Shiller's newest comment on Canada's housing market:
http://tinyurl.com/3ufcef
October 1st, 2008 at 11:24 am
So Cielo has filled up after 11 months, that's good.
It's always good to ask Urban Fare employees and concierges for information (followed by security guards and mentally imbalanced warehouse workers). Does this mean it'll take four years to fill the next four? And what about Harbour Green 2?
The developers for raffles, 1212 and laguna parkside have all held back or converted unsold units to rentals and there are hundreds more coming they just haven't all been dumped on the market at once.
In most cases excess supply and low demand translates into price drops unless it's different here and the renters are also world class, or something… Of course I'll refer back to our knowledgeable urban fare employee who clearly knows fact from fiction.
October 1st, 2008 at 11:16 am
Great idea, I suggest you take it further though and also propose that they only provide car loans based on how much you can rent you car out to other people far. And credit cards only allow you to purchase a tv if you can prove you can make the payments by charging cover at your house to watch it. Eating at a restaurant you'll have to prove you could sell the manure for enough to pay for the meal. Great concept you've just solved the problem facing humankind. I nominate you for a Noble prize.
October 1st, 2008 at 11:06 am
"How about looking at the classifieds or looking at data from Statscan?"
In many cases the rental pool for certain types of properties (higher quality finishes in owner-occupied neighbourhoods for example) is too low to make a reasonable estimate. With many properties it is indeed no problem to adequately estimate rents but for other properties I don't see how it could be done without a lot of guesswork.
For buy-to-let properties I am in more agreement but with some properties there may be an anticipation of future rent increases with gentrification, renovation or re-development so this would need to be taken into account.
October 1st, 2008 at 10:30 am
"We need to get rid of deposit insurance so that depositors are paid a higher rate commensurate with the risk of bank failure."
I'd like to see you pull that one off. Unfortunately bank runs are much worse than the moral hazard, otherwise people will hoard cash in their mattresses. Let me ask you this: if you have $100K in a tin, what interest rate would you have required to put your $ into WaMu's venerable hands a month ago?
October 1st, 2008 at 10:27 am
How could a bank estimate imputed rent on most properties?
How about looking at the classifieds or looking at data from Statscan? We're not talking pinpoint accuracy here, just ballpark.
It's easier to estimate market rent for a property than market price. No reason why the bank's appraiser couldn't do both.
October 1st, 2008 at 10:25 am
If the economy gets worse, and we have a deep recession, I can definitely imagine over 3% drop each month. Buyers will evaporate from the market at a much faster rate.
Ironically, if the buyers disappear that much faster, more inventory will be spilled onto the market as sellers that thought they could hold, then change their mind and try to dump their units because of their job security.
October 1st, 2008 at 10:22 am
You only have to look back to the 50’s to see that the Fed fixed long term interest rates. They will do it again if they have to.
Dave, in the 50's the US loaned money to the rest of the world (like Japan does), rather than borrowing $2bn/day like it does now.
The US current account deficit is a real deficit (importation of capital) and it has to pay whatever rates foreign lenders demand. These are the marginal lenders who determine all US rates past the short term. Not the Fed.
October 1st, 2008 at 10:15 am
Douglas Rushkoff:
http://rushkoff.com/2008/09/30/no-money-down/
October 1st, 2008 at 10:10 am
"Price fixing isn’t a solution. It’s an economic inefficiency that would express itself in a negative way somehow. "
That is exactly right. We need to abolish central banks that interfere in the free market by determining interest rates. We need to get government out of insuring morgages so that mortgage rates rise to reflect the real risk of default. We need to get rid of deposit insurance so that depositors are paid a higher rate commensurate with the risk of bank failure.
Lets end all government price interference. The day that happens, real estate would drop 60% in year. I would love that.
October 1st, 2008 at 10:09 am
"I think the next intervention will be providing long term (5 to 10 year) low interest rate loans (near overnight rate) to borrowers deemed at risk."
An unemployed worker with no savings will still default even if the interest rate is almost zero. These bailouts don't work because they contribute nothing to the economy and delay allocating capital to places where it is more productive.
October 1st, 2008 at 10:00 am
"Here’s an easy one: forbid financial institutions from making mortgage loans for which the payments (in aggregate for 1st’s & 2nd’s) would exceed the market rent for the property."
How could a bank estimate imputed rent on most properties? I don't see this as practical.
October 1st, 2008 at 10:00 am
Freako, there is a saying about fighting the Fed. Don't do it. I'll side with Bernanke on this discussion considering that he has access to a printing press and you don't.
Bernanke has studied deflation extensively. If you believe that deflation is coming to the US, then you know EXACTLY how the Fed is going to respond to it. I just gave you the playbook. If deflation comes, it sure won't last long.
You only have to look back to the 50's to see that the Fed fixed long term interest rates. They will do it again if they have to.
If the crisis in the US deepens, then I think the next intervention will be providing long term (5 to 10 year) low interest rate loans (near overnight rate) to borrowers deemed at risk.
October 1st, 2008 at 9:32 am
One approach, similar to an action taken in the past couple of years by the Bank of Japan, would be for the Fed to commit to holding the overnight rate at zero for some specified period.
10 years? Get serious. Inflationary pressures would derail that completely.
Because long-term interest rates represent averages of current and expected future short-term rates, plus a term premium, a commitment to keep short-term rates at zero for some time–if it were credible–would induce a decline in longer-term rates.
Again, the market would not take that seriously, so it would have no impact.
The Fed could enforce these interest-rate ceilings by committing to make unlimited purchases of securities up to two years from maturity at prices consistent with the targeted yields.
Paid for how? Thought theoretically possible (and at great cost), it is simply not going to happen. Remember the Greenspan conundrum? He dropped short rates and the long rose. For Bernanke the reverse.
October 1st, 2008 at 9:23 am
It's not price fixing, dummy. It's preventing financial institutions which are explicitly backstopped by the government (deposit and mortgage insurance) from making loans which cannot be supported by the fundamental value of the collateral.
It doesn't stop anyone from paying anything they want for a house, if they have the cash.
Or do you believe that the government should not provide deposit or mortgage insurance or otherwise support financial institutions? That's a form of price fixing for deposits and loans, you know. Oh while we're at it, do you think we should get rid of the Bank of Canada, which tries to fix interest rates? Well if we did that there would be no more housing bubbles either.
The idea that banks should be able to loan money on any terms they want and at the same time be backstopped by the government is exactly what is responsible for the housing bubble and the current financial crisis.