Saturday, Feb 03, 2007
Foreclosures kill the dream
Workers Organisation: Original News Article Title
Looks like the US HPC is upon them - will the UK follow?
Posted by orwell @ 07:01 PM (122 views) Add Comment
8 Comments
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1. paul said...
"Housing is a multiplier industry. It impacts on banks and financial institutions, construction corporations and a myriad of related industries. The housing market—a $10 trillion bubble that represents almost 80 percent of the $13 trillion gross domestic product—is weakening fast. A hard landing—code word for a crash—could be in sight."
"Caught in this maelstrom are a wide array of banks, private equity funds, real-estate investors and speculators who wheel and deal in the bond market that sets long-term interest rates"
And this is exactly what worries me about the UK. The city as we see it now - 16% of the country's wealth - is built on debt. When a bank secures your future earnings, they then use that money as a guarantee to borrow more money to invest in hedge funds and private equity funds and so on. The whole model is built on a deeply flawed assumption however - that the original asset won't lose any value - EVER.
The 1933 depression in the US was triggered by the recession in 1930 triggered by the stalling of the financial system due to personal debts becoming unservicable.
2. dohousescrashinthewoods said...
I agree - I find this "incestuous recycling" of debt in the system, creating ever more phantom money/asset supply *deeply* disturbing. The best the financial market bulls seem to manage is "investment banks acting as counterparties have an interest to make sure it's clean". but they can't get visibility, any better than the rest of us, as to how many times the same piece of risk has been "virtualised".
If the whole thing is layer upon layer of the same Joe public house being resold (and each time "multiplying" the apparent money) then if Joe defaults on his mortgage (because Mervyn raises rates, because inflation is rising, driven by money supply, which is driven by Joe's mortgage being sold and re-sold) then it is game over for everyone who is holding part of the trail.
To put it bluntly, if someone takes a cut each time money is re-sold, it stands to reason that pretty soon there's not much left to sell. However, the opposite seems to be true, it just keeps rinsing and repeating. QED someone is inventing nonexistent money. QED the longer it goes on and the longer the resell chains are, the more funny money is circulating. QED the massive amounts of cash floating around don't exist. Since the City has paid much of it out in bonuses, there is even less "real" money left in the system. Conclusion: it looks like a staggering proportion of the global financial markets could simply evaporate.
Someone once said that the global property bubble alone can be shown to be the biggest bubble in history. If this is really just a part of the liquidity bubble (lots of funny money, so mortgages, credit, debt and bonuses being handed out left right and centre) then the liquidity bubble is bigger than the property bubble.
If there is any truth in this (my knowledge is limited) then the 1930s would be small fry by comparison. We could be on the brink of catastrophe - and ultimately it's real people and real lifetimes of debt and devastating misery. Is anyone taking these risks seriously? Does anyone who knows care? Am I completely misguided? Will I end up driking special brew and yelling incomprehensibly at strangers that the end is nigh? Time for bed I think.
3. Retired Banker said...
dohousescrashinthewoods;
All done with smoke and mirrors. The derivatives market originally started in the City of London by way of back-to-back loans, this being a way of circumventing UK exchange-control regulations which were in force at that time.
It has since experienced phenomenal growth to a world-wide market of more than $7trillion, and although a means of hedging against
currency and interest rate movements, has also evolved to the point where virtually anything that is market driven can be used as the
underlying mechanism controlling the transaction (read gambling).
The market is completely unregulated and running out of control. Having met socially some of the "city types" involved with these
transactions ( "yeh mate I'm well pleased with my new Porsche 911 Carrera"), I thought at first that I was talking to some electricians
or plumbers who had infiltrated the gathering. The spirit of Nick Leeson is obviously still alive and well in the City of London. No wonder the Bank of England, The Federal Reserve and Alan Greenspan are allworried about the whole convoluted system coming
unstitched in a hurry.
I don't see how it can end well.
4. Milly Weeble said...
If you get the opportunity to watch 'The Money Masters' (all three parts) please do...what is happening at the moment will make much more sense. Indeed, it goes into possible reasons for the 1930's depression.
Part one > http://video.google.co.uk/videoplay?docid=-8753934454816686947&q=money+masters.
For those of you who are skeptical and think that these people are 'conspiracy theorists', aren't governments 'conspiratorial' in nature? I'm not a conspiracy theorist in any way and prefer empirical evidence to support any argument. However, I cannot help but notice that power and accountability for any ills in society no longer rest with the state, but with profit driven multi-national corporations. The gap between rich and poor has widened out of all proportion and we are living in a debt ridden society. Anyway, watch it if you wish...
5. cyril said...
dohousescrashinthewoods has it right. The capital that people have invested in houses has already been spent one way or another - either as professional fees, taxes etc. (or as cars and holidays etc. for the people who have cashed in). When the crash comes, the equity will all seem to just disappear, but in fact the money has been draining away throughout the boom.
6. Ticktock said...
Do houses... is spot on here, and unfortunately is right to suggest that this IS the biggest bubble in history, and that it WILL burst.
The financial hardship that this will bring to decent people is bad enough, but what hasn't been mentioned much is the war that will inevitably accompany such a collapse. Surely most of us Brits. have now realised that one or two 'truths' abourt our history regarding the other big wars that we have fought, don't quite add up?
All this has happened several times before has it not?
The last abrupt end to 'globalisation' was 1914.
Why do we never learn?
7. sirgoogle said...
Cyril.
Agree whole heartedly. The key to speculative investment is not to be to one holding the baby when the crash comes. Knowing when to cash in is the key. You cannot be sentimental about this - problem is that property is a highly emotional investment (most investors live in their investment - which also adds a practical problem to this).
The bubble in Stocks and Bonds has already started - thats where the clever money has already gone. Even Standard Life made a profit of over 12% last year on their with-profits bond (which has climbed out from the disaster of selling low in 2002/2003 to strong growth - such that most customers no longer have a Unit Price Adjustment applied). I expect the flock of sheeple investors (BTL) will try to follow very shortly - and try and sell up their enmasse to catch this rise and before the additional costs of HIPs hit them in July. .
Should be a very interesting few months.
8. Blindleadtheblind said...
a hot topic in Davos was the dramatic rise in derivatives and how stable/unstable they make the world economy, mid 2006 there were over 260 TRILLION worth which was a 24% rise from the end of 2005, these figures from the BIS (the bankers bank). These 'bets' are essentially being used to drive the maket in interest rates in the ponzi scheme that is modern economics...and when the next crisis unfolds as it surely must, who will be left holding the baby?