Sub-prime Lender Says Problems Are On Scale Of Great Depression

[Jimmy2Times]

We are at the beginnings of an historical paradigm shift.

Someone sent me this a while ago about paradigm, it made me chuckle.

How is a paradigm formed?

*************************

A group of scientists placed 5 monkeys in a cage and in the middle, a ladder with bananas on the top.

Every time a monkey went up the ladder, the scientists soaked the rest of the monkeys with cold water.

After a while, every time a monkey went up the ladder, the others beat up the one on the ladder.

After some time, no monkey dare to go up the ladder regardless of the temptation.

Scientists then decided to substitute one of the monkeys. The 1st thing this new

monkey did was to go up the ladder. Immediately the other monkeys beat

him up.

After several beatings, the new member learned not to climb the ladder even though never knew why.

After sometime,2nd monkey was substituted and the same occurred. The 1st monkey participated on the beating for the 2nd monkey. A 3rd monkey was

changed and the same was repeated (beating). The 4th was substituted

and the beating was repeated and finally the 5th monkey was replaced.

What was left was a group of 5 monkeys that even though never received a cold shower, continued to beat up any monkey who attempted to climb the ladder.

If it was possible to ask the monkeys why they would beat up all those who attempted to go up the ladder.....

I bet you the answer would be....

I don't know - that's how things are done around here"

Does it sounds familiar?

[Timm]

But now that Great Crash 2 seems to have stuck somewhat I am content to stick with it as it does, at least, distinguish it from its mild predecessor which now seems hardly worthy of "Great" in terms of crashes.

I think the Economist / FT have recently used the term "Millennium Bubble", which will presumably be the cause of the "Millennium Crash"

But GC2 is so much easier to spell...

[Guest An Bearin Bui]

I was reading Galbraith's account of the 1929 crash yesterday and it struck me as pertinent that the 1929 crash, according to Galbraith, began on September 3, the day after labour day 1929.

The equivalent day this year is next Tuesday.

I expect equities to have been decimated worldwide by the end of October.

It's a great book btw. Short, not difficult to read, and even funny in places:

http://www.amazon.co.uk/Great-Crash-1929-P...6048&sr=8-1

I read that book too a while ago and it convinced me even more that what we're seeing is history repeating itself (although it will all depend on the policy response). It is quite interesting that we're coming up to Sept / Oct, the traditional stock market crash period and as you point out, JK Galbraith noted that the rumbles in the financial markets began in September initially. My favourite part of that book is where he goes through the various statements of the VIs prior to the crash and points out some of the more idiotically optimistic "experts" e.g. the ones who said that astronomical share prices relatively to earnings were simply down to "lack of supply" as companies weren't issuing enough sharese to meet investor demand

Hmm... now where have I heard that argument before...??

[nowthenagain]

For investment trusts in 1929 read hedge funds today. The parallels apparent between 1929 and today are stunning. The book (Galbraith, The Great Crash) also does a good job of examining the 'boosting' culture and the herding instinct of the masses when they are 'onto a good thing'. As in the monkey post above.

The part about the Fed backing out of any action in early 1929 even when they could see what was happening, for fear of being blamed for the crash, is also very relevant to today.

Edited August 31, 2007 by nowthenagain

[Goldfinger]

Someone sent me this a while ago about paradigm, it made me chuckle.

Brilliant!! I would baptise this story "Why Joe Average does not buy gold yet".

[council dweller]

In the short term the world will enter depression, in the longer term the Eastern world will clamber out of that depression in much better condition than the West and come to dominate.

We are at the beginnings of an historical paradigm shift.

That's right mate,that's the big picture. Anything Bush or Brown does is just deckchair

shuffling.

I never thought I'd live to see the end of the American empire...(that includes us of course!)

[jimmyjazz]

hi strbear,

yes you are right. We have no choice in the matter.

The best result would have been a hpc with a mild recession, but that won't be possible.

For a long time now I have thought that we will have a depression, all the signs are there to see imo.

People laughing at cgnao's threads have no idea what's coming, financial armageddon awaits.

gom

and the inevitable consequence of a depression/recession looming in amercia will be an attack on Iran. Why can no-one here see that these two things (war/markets ) are very closely intertwined.

You can all see the recession/bust coming but refuse to accept that the only way out of it for USA is military keynesianism.

[nowthenagain]

You can all see the recession/bust coming but refuse to accept that the only way out of it for USA is military keynesianism.

That, I fear, is what America is going to do. In a Kondratieff winter there are always major wars.

In America's case the motivation will be more to confuse it's population into placing the blame for the depression at the foot of some external enemy (islamic 'terrorism') rather than the inevitable boom-bust cycle/deficiencies of capitalism.

Edited August 31, 2007 by nowthenagain

[starsign]

Someone sent me this a while ago about paradigm, it made me chuckle.

[starsign]

QUOTE(nigwell @ Aug 31 2007, 08:43 AM)

I agree with this observation.

What I would be interested to hear from all you doomsters is how you think the Fed, BofE and every government in the world is going to (try to if you prefer) screw up your apocolyptic vision. As sure as hell they will try. Why can't they win - even though some serious damage may result? You all seem to think this is a one way bet and I find it hard to swallow that.

I'd love to answer your question, but I never mastered in Economics. Hopefully some one will offer you an answer to your question.

A question, I'd like to know the answer too as well!

agree, this is a good comment and one that does not get answered on here...I can't help but think that somehow things will be managed to avoid the worst of what people think on here.

[@contradevian]

I read that book too a while ago and it convinced me even more that what we're seeing is history repeating itself (although it will all depend on the policy response). It is quite interesting that we're coming up to Sept / Oct, the traditional stock market crash period and as you point out, JK Galbraith noted that the rumbles in the financial markets began in September initially. My favourite part of that book is where he goes through the various statements of the VIs prior to the crash and points out some of the more idiotically optimistic "experts" e.g. the ones who said that astronomical share prices relatively to earnings were simply down to "lack of supply" as companies weren't issuing enough sharese to meet investor demand

Hmm... now where have I heard that argument before...??

Galbraith had a good TV series on the BBC a while back (perhaps the 70's). Its was when the BBC ran worthy series such as "The Ascent of Man" and "Civilisation" before it dumbed down and got into celebrity culture and property porn. I dare say the Beeb has destroyed the tapes.

I think the TV series was based on Galbraiths other book "The Affluent Society." Also worth a read and very entertaining, though the idea's "went out of fashion" with the advancement of moneterism in the late 70's. Galbraiths was essentially Keynsian and supported government intervention and I think would have been scathing about the "bonus" and "can't fail" culture of modern corporate management.

[Sour Mash]

they have become more clever BUT also the people have been dumbed down over the last decade, bought off with hpi providing their shiny new things.....they deserve everything they get imo.

Sure - but all of us get pulled in regardless of how prudent we were. And if the bust is inflationary then the prudent see their savings and investments eroded or even decimated whilst the feckless fools see their debts eroded by inflation and artificially low interest rates, engineered to bail them out.

I think a major bust is now inevitable. The question is will it be inflationary or deflationary. I'm keeping my fingers crossed for the 'deflationary' camp.

[bomberbrown]

Ditto; I think this scenario needs a sticky thread!

..........regarding going down the inflation route and eroding savings to bail out people with huge debts.

In the meantime, here are a good few reasons why we simply can't inflate our way out of this mess. Credit to Kuma:

http://www.housepricecrash.co.uk/forum/ind...st&p=747980

[sossij]

But now that Great Crash 2 seems to have stuck somewhat I am content to stick with it as it does, at least, distinguish it from its mild predecessor which now seems hardly worthy of "Great" in terms of crashes.

Stuck? Don't flatter yourself.

[Guest grumpy-old-man]

gom

and the inevitable consequence of a depression/recession looming in amercia will be an attack on Iran. Why can no-one here see that these two things (war/markets ) are very closely intertwined.

You can all see the recession/bust coming but refuse to accept that the only way out of it for USA is military keynesianism.

yes, I have discussed this before.

I have read a book on the link between economic recessions/depressions & war, it was very interesting.

We will find out very soon.

[Guest grumpy-old-man]

Sure - but all of us get pulled in regardless of how prudent we were. And if the bust is inflationary then the prudent see their savings and investments eroded or even decimated whilst the feckless fools see their debts eroded by inflation and artificially low interest rates, engineered to bail them out.

I think a major bust is now inevitable. The question is will it be inflationary or deflationary. I'm keeping my fingers crossed for the 'deflationary' camp.

I am going for deflationary as well.

edited - although cgnao seems to be saying hyper-inflation. I'm just guessing though, he isn't

Edited August 31, 2007 by grumpy-old-man

[Guest]

I guess it must be that time of year again. Or is it the month? When this comes up again.

Mine too. I know there are plenty of reasoned economic arguments against that route being taken, but reason seems to have been missing from the economic landscape for years, and given the choice between p!ssing off savers and p!ssing off indebted home 'owners', I think I know which would be chosen.

Time to buy a house?

agree, this is a good comment and one that does not get answered on here...I can't help but think that somehow things will be managed to avoid the worst of what people think on here.

I have to say I'm surprised in the faith some people have in government even still.

What in the hell makes you guys think that things are, or ever were managed?

Would we be in this mess if it was "managed"?

What makes you think that home owners are so important all of a sudden? They were just a means to an end for the city boys to make some money. If what home owners wanted mattered, then they would have seem +100% salaries over the past seven years, with tightening lending standards and/or a nice recession taking out everyone except home-owning Daily Mail readers, in order to keep house prices in check. Wipe away your mid 1990s mortgage debt and MOVE UP HOUSE. Pay off your debts and become genuinely wealthy.

But what have we actually seen? Yes-- we've seen 2nd (second, yes SECOND) time buyers totally priced out of having a better house without an insane mortgage! We've seen to the *death* of the property ladder. Plus rampant speculation with borrowed money that must be paid back if things go wrong.

If Bernanke can "do" something magic to fix the current emerging mess, then what the hell is he waiting for? We've got HOW MANY mortgage resets coming up over the next 18 months??? How many more defaulted loans do we have to see before helicopter Ben gets in his helicopter? Why start so late? Why not start in 2005 (we all knew what the situation was back then) and do a bit then. Then do a bit more in 2006, then a bit more in 2007? But no! Instead, we've all seen this coming, and we're here standing on a ton of bad news, with ten tons more to come, and Bush making proposals to "help" struggling debtors keep up their massive payments to the banks as their house prices fall.

Why should Bernanke / Bush do an about turn and bail out home owners at the expense of his banker buddies who have tried hand over fist (and succeded) in making money out of the home owners all this time? This never was about home owning voters, and I'm surprised people can't see that. But they will learn soon.

Furthermore, the FED can't create jobs for people.

As for hyperinflation, bread going up 5% in a year isn't hyperinflation. Bread going up 50% a month is.

What matters is the level of interest rates and salary rises versus all of these price rises. A plausible scenario going forwards might be:

1. Credit tightening from defaults = higher interest rates = scuppers the house market and makes a load of people unemployed = re-inforcing wheel as people losing jobs default on their home loans.

2. Lax interest rate policy trying to prop this up causes currency slippage and prices of stuff in shops to rise a bit, just at the worst possible time (possibly).

3. Unless the Son of the Internet Boom comes along to create demand for Western labour and a load of real wealth creating jobs (not government jobs) to do something or other, and to mop up expected layoffs from property, we should see a situation where things get squeezed from both ends at once: Rising prices (but not 50% a month guys!), no salary rises because a Chinese and Indian man can do your job instead, all at the same time as credit destruction, as defaults rack up = collapsing house prices.

It's a see-saw with house prices at the high end and shop prices at the low end. It's moving to re-balance.

FWIW.

MF.

[dogbox]

Great depressions have been predicted by pessimists for decades

You'all need to keep an eye on ALL the evidence;

Namely the developing world will still require much from the developed world so the engine chuggs on.

[REP013]

megaflop Posted Today, 02:03 PM

Nice post ..... Thanks.

[bearORbullENIGMA]

Anybody got any good tips on how to stop your savings from being eaten away by inflation?

Tips that don't involve buying gold.

[Goldfinger]

Tips that don't involve buying gold.

Buy some silver.

[Flat Bear]

That, I fear, is what America is going to do. In a Kondratieff winter there are always major wars.

In America's case the motivation will be more to confuse it's population into placing the blame for the depression at the foot of some external enemy (islamic 'terrorism') rather than the inevitable boom-bust cycle/deficiencies of capitalism.

If this stratagy is not successful civil war, which I believe has its seeds already sown in the UK, will be the order of the day.

[nigwell]

Nice post ..... Thanks.

Seconded.

Can you exclude the possibility that this USA originated credit crunch can be surmounted and that the UK property market slows and declines rather than collapses? As I understand it, there are 14m USA sub prime mortgages and only 20% on the default list. A relatively small number, surely? Once tha panic and hysteria goes the markets may well will settle down again. A fed cut by .5%, changes to the USA mortgage terms, and it all might soldier on with a long, slow, reduction of UK housing bubble prices. Unpopular as it may be to say this, but Armageddon does not seem to be guarranteed.

[Guest]

Seconded.

Can you exclude the possibility that this USA originated credit crunch can be surmounted and that the UK property market slows and declines rather than collapses? As I understand it, there are 14m USA sub prime mortgages and only 20% on the default list. A relatively small number, surely? Once tha panic and hysteria goes the markets may well will settle down again. A fed cut by .5%, changes to the USA mortgage terms, and it all might soldier on with a long, slow, reduction of UK housing bubble prices. Unpopular as it may be to say this, but Armageddon does not seem to be guarranteed.

Armageddon is spoken of too freely on here.

In the event that people stop seeing rises in prices, they no longer rush out to spend money. Who wants to borrow money for something that is going down in price, no matter how slowly?

Once it hits the buffers, there really is no way out for property. In Japan, they stopped messing about with houses and managed to get going with some exporting and doing a day's work, rather than a day's speculation for a change. We would need to do the same.

More perspective is also needed on here. If property fell from here at -5% a year for the next 20 years, would you be so worried about a loaf of bread rising by 5% in one year? Maybe because of a crop failure, or because the richer Chinese want nice bread too? There can be all sorts of causes for price rises that aren't to do with Bernanke suddenly deciding to monetize the debt of home owners to gain support for a political party in the next election.

Everyone is watching Bernanke, and he knows it.

[nigwell]

Armageddon is spoken of too freely on here.

In the event that people stop seeing rises in prices, they no longer rush out to spend money. Who wants to borrow money for something that is going down in price, no matter how slowly?

Once it hits the buffers, there really is no way out for property.

Surely, one cannot discount the return to utilitarian as opposed to speculative reasons for moving house? In other worrds, a return to housing as it should be. The MOVING HOUSE TAX (Stamp Duty at 4%) is of course a big problem as it acts like sand in the market. Also, consider that when I buy or move I do NOT KNOW that houses will fall over time so that consideration requires hindsight - a wonderful thing!