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Methodius

Death Of The Mortgage Backed Security

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In an act of deep and abiding irony, the Catholics of New York City attended the Ash Wednesday service at Saint Patrick's cathedral in Mid-Town Manhattan last week, many of them before going to work at the many investment banks, hedge funds and other financial services companies in that area. I followed a small group of them up Madison Avenue for two blocks before they arrived at their work-place at number 383. The two dollar bill, always a rare item, had been removed from the door but no-one had replaced it with the Ash Wednesday liturgy of "Remember that you are dust, and to dust you shall return." That was a missed opportunity.

Bear Stearns is dead and the market in which they were such a great participant is dying. As I have already predicted and, as the media have now begun to report, the Federal Reserve know this and, in desperation, are preparing to buy mortgage backed securities in a futile attempt to repair the breach in the dam. However, the sums of money are too great; the only way they can possibly afford to do this is to print the money needed, the result of which will be the destruction of the dollar and, with it, the economy of the whole country and much of the western world. They are caught between two terrible alternatives, the only choice they have is to do something so, at least, they can say they tried.

The nature of the credit beast is better understood on this forum than elsewhere, but some of the technical details have not been much described so it is worth considering how the mortgage backed security industry, and the leveraged funds parasites, operate in some more detail. At its heart, a mortgage backed security is a very simple thing: the interest and capital repayments from a pool of ordinary residential mortgages are used to pay the interest and return of capital on a bond. In the case that one of the mortgages going into default, the house of the mortgagee is taken and sold to pay off the remaining loan. It is not hard to see how such an arrangement has proved to be a safe investment over the last 50 years - house prices have not often fallen in monetary terms and the last thing that people want is to lose their home. This is why MBSs made up from packages of loans to good quality borrowers are AAA rated. Now, since these securities have been so safe but, at the same time, paid slightly more interest than bonds issued by some governments - which are, foolishly, considered the safest investment of all - leveraged funds have seen what they consider to be an arbitrage opportunity. A leveraged fund can borrow money at a slightly lower rate of interest than that returned by an MBS. It can then use that money, along with a small amount of its own, to buy those MBSs. The result is a small profit which, when magnified thirty times by the leveraged supplied by the credit beast, becomes a large, apparently risk free, profit. As they are now discovering, it is nor, by any definition, risk free. It is, as we are all now finding out, an enormous, high risk, one way bet on the direction of a market riddled with fraud.

You might ask what is different this time from previous down turns? This time houses across the whole of the United States, and shortly much of the economically developed world, are falling without sign of slowing. And this time, the effects will be amplified by leverage, which, whilst not a new phenomenon, has never before been applied in such a systematic and fraudulent way to the entire economy.

There are ten trillion dollars of US mortgage backed securities in issuance, much of them held with three to five percent margin. A market devaluation of even one percent will, in time, cause many of these bonds to be sold to meet margin calls. Even ignoring the effects of trying to sell at the same time, that is a colossal amount of debt hitting the market all at once. The thought that the Federal Reserve could have any hope of buying up enough of this flood of unwanted misery without destroying the system it seeks to protect is laughable. Congress too is, to be vulgar for one moment, spitting in the wind. Allowing Fanny Mae and Freddie Mac to buy residential mortgages is pointless since no-one wants to, or indeed can afford to, buy any more of their bonds.

The usurers have achieved their, almost Benthamesque, nirvana of maximum debt for the maximum number of people. Unlike the utilitarian dream, however, the result will be greatest misery for the greatest number.

The situation in the United Kingdom is, superficially, not as catastrophic. There is a belief that since only 40% of the mortgage lending in that country is funded by securitization and money market instruments, the damage can't be a bad as in the United States. This is just fantasy however. The debt burden in the United Kingdom is proportionally the greatest in the world - the unraveling may follow a different path but it will lead to the same destination.

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The debt burden in the United Kingdom is proportionally the greatest in the world - the unraveling may follow a different path but it will lead to the same destination.

Very true -- and the idea that we don't have "Sub-Prime" here is just laughable...

For "Sub-Prime" -- Just read LIAR LOANS/"Self-Cert"/IO Mortgages etc etc....

The UK is in an absolutely DIRE state - and those who try and pretend otherwise are either mad, or dumb, or delusional.....

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The situation in the United Kingdom is, superficially, not as catastrophic. There is a belief that since only 40% of the mortgage lending in that country is funded by securitization and money market instruments, the damage can't be a bad as in the United States. This is just fantasy however. The debt burden in the United Kingdom is proportionally the greatest in the world - the unraveling may follow a different path but it will lead to the same destination.

Great post. The process of UK unraveling will be protracted IMO. The Gov seems more and more willing to monetise the debt of the big 5. This will send us down the road of stagflation and probably several winters of discontent.

In the short term confidence will rise, the pound may well rally as banks replace risky ECB loans with BoE ones. The FT100 will rally further until dire news of the consumer spending drop-off hits the markets....and down down we go. IRs may well have to rise to support a crippled pound late 2008 early 2009 as import led inflation takes hold.

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Great post. The process of UK unraveling will be protracted IMO. The Gov seems more and more willing to monetise the debt of the big 5. This will send us down the road of stagflation and probably several winters of discontent.

In the short term confidence will rise, the pound may well rally as banks replace risky ECB loans with BoE ones. The FT100 will rally further until dire news of the consumer spending drop-off hits the markets....and down down we go. IRs may well have to rise to support a crippled pound late 2008 early 2009 as import led inflation takes hold.

It's all about Winging it now.... [old expression]...

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The situation in the United Kingdom is, superficially, not as catastrophic. There is a belief that since only 40% of the mortgage lending in that country is funded by securitization and money market instruments, the damage can't be a bad as in the United States. This is just fantasy however. The debt burden in the United Kingdom is proportionally the greatest in the world - the unraveling may follow a different path but it will lead to the same destination.

Methodius, good post, no its a flunkin great post, thanks very much!

What are your thoughts on the Australian situation, i feel worse than ours, but know very little, any thoughts?

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Methodius, good post, no its a flunkin great post, thanks very much!

What are your thoughts on the Australian situation, i feel worse than ours, but know very little, any thoughts?

2nd that....

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Quality post.

And shows how we are getting deflation, not inflation as so many believe... credit is being destroyed. Any inflationary attempts by central govts amounts just to peeing on a massive fire.

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Quality post.

And shows how we are getting deflation, not inflation as so many believe... credit is being destroyed. Any inflationary attempts by central govts amounts just to peeing on a massive fire.

We could make a film of Firefighters dousing huge flames with their urine...... :P:blink:

Edited by eric pebble

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Quality post.

And shows how we are getting deflation, not inflation as so many believe... credit is being destroyed. Any inflationary attempts by central govts amounts just to peeing on a massive fire.

I do hope so - having waited this long the thought of our hard earned savings becoming worthless is just too depressing to contemplate.

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Like most deflationists you are confusing money/credit with capital.

Bank Capital is lost, and the money- the lifeblood of the economy, is being absorbed by the banksters to make up.

Flowing money turned into capital.

Deflation

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Like most deflationists you are confusing money/credit with capital.

Deflationists tend to misunderstand the difference between:

1) A promise to pay.

2) The actual payment.

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What are your thoughts on the Australian situation, i feel worse than ours, but know very little, any thoughts?

The Australian economy has been inflated by the relentless demand for commodities that has been driven by the debt fuelled binge in the United States and Europe. Consider it as a child’s balloon attached to the end of a high pressure fire hose. Superficially, as for the UK economy, it may appear to be in better condition than some others but, on closer inspection, it can been seen for the pending disaster that it is. The impending collapse of demand from both speculators and consumers in all its main export markets along with the implosion of its own mortgage debt bubble – personal debt has doubled in less than five years and now stands at over 1 trillion Australian dollars – will shake the country to its bone dry core.

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The Australian economy has been inflated by the relentless demand for commodities that has been driven by the debt fuelled binge in the United States and Europe. Consider it as a child’s balloon attached to the end of a high pressure fire hose. Superficially, as for the UK economy, it may appear to be in better condition than some others but, on closer inspection, it can been seen for the pending disaster that it is. The impending collapse of demand from both speculators and consumers in all its main export markets along with the implosion of its own mortgage debt bubble – personal debt has doubled in less than five years and now stands at over 1 trillion Australian dollars – will shake the country to its bone dry core.

Thanks Methodius,

Cheers for the reply to my question, top form again.

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The impending collapse of demand from both speculators and consumers in all its main export markets along with the implosion of its own mortgage debt bubble – personal debt has doubled in less than five years and now stands at over 1 trillion Australian dollars – will shake the country to its bone dry core.

Still, no worries, eh? ;)

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Methodius, what is the safest investment at the moment? Genuine question. I'm torn between holdalls of cash (can't help but see them as "to-be-worthless" zero interest government bonds though) and precious metals (can't help but see them as more commodities with shrinking leveraged demand in a collapse).

Alan Greenspan might be able to answer this one for you.

"Gold still represents the ultimate form of payment in the world. Fiat money, in extremis, is accepted by nobody. Gold is always accepted."

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I suppose my fear is that we don't get all the way to extremis this time, and my holdall (well tesco's bag :lol:) of cash could buy Mayfair at the bottom.

How about Winston Churchill then? ;)

"All previous attempts to base money solely on intangibles such as credit or government edict or fiat have ended in inflationary panic and disaster."

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I've read somewhere that fiat has been attempted 13 times throughout history, and failed 12. This is attempt number 13.

(I'm still not sure on the timing though. Sometimes (in slower times than nowadays, admittedly) fiat has lasted hundreds of years.)

Fiat currency will fail and fail again, every single time. Think about the 35k bank deposits guarantee. Imagine we have mass banking failures... The government will print the money, making it worthless. No matter what scenario, fiat currency goes quickly to zero.

Put your money into tangible assets that have value and always will have value.

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Whenever I think of a particular country's fiat being valuable - like GBP (the Gordon Brown Pound) - well, then it just seems risible. You're right, but it's timing. Not sure there won't be a nominal deflation first - just like's happening with house prices. Maybe a huge one. (But then am I going to be able to time it? No, because I'm not even sure it's going to happen. Back and forth, in my head.)

This is good reading material.

http://www.financialsense.com/series4/part1.html

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Methodius, what is the safest investment at the moment? Genuine question. I'm torn between holdalls of cash (can't help but see them as "to-be-worthless" zero interest government bonds though) and precious metals (can't help but see them as more commodities with shrinking leveraged demand in a collapse).

This is a most difficult question to answer. Precious metals are sound in that their values are mostly uncorrelated with other financial instruments but they are not, generally, an investment, rather a store of value. Their prices are also highly volatile. Thus, whilst it is true that an ounce of gold would have bought you a suit of clothes in 1450 just as it would still do now, the quality of that suit would have varied greatly in between. A basket of fiat currencies also has some merit in that it is, at least, highly liquid but, in every other respect, is an extremely risky proposition under current circumstances. Sovereign debt is similarly problematic and prone to sudden and extreme devaluation. Ultimately, given the debasement of the entire global financial system, it is hard to recommend any single investment as being one that will be the last to collapse so the only sensible advice is to suggest diversification across many regions and many classes of assets eschewing those that employ leverage of any sort.

The best piece of advice is to heed Adam Smith’s well reasoned view that the value of temporaries can only truly be measured by the amount of labor required to create them. Equip yourself for the coming economic singularity by learning to do those things things that are needed to sustain life and remember that you cannot eat any financial instrument, gold included, only what food you can persuade someone to exchange for it.

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The Australian economy has been inflated by the relentless demand for commodities that has been driven by the debt fuelled binge in the United States and Europe. Consider it as a child’s balloon attached to the end of a high pressure fire hose. Superficially, as for the UK economy, it may appear to be in better condition than some others but, on closer inspection, it can been seen for the pending disaster that it is. The impending collapse of demand from both speculators and consumers in all its main export markets along with the implosion of its own mortgage debt bubble – personal debt has doubled in less than five years and now stands at over 1 trillion Australian dollars – will shake the country to its bone dry core.

Methodius, thanks for the information. I live in Oz. <_< What time frame would you put on this?

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Thus, whilst it is true that an ounce of gold would have bought you a suit of clothes in 1450 just as it would still do now, the quality of that suit would have varied greatly in between.

The quality of the suit may have changed over this timeframe but any given fiat currency from that time would now buy no suit.

No matter how bad the economic collapse becomes, the planet will always provide the ability to farm and grow food. Food producers will not be asking for food in exchange for their produce. They will demand some form of payment (medium of exchange).

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The quality of the suit may have changed over this timeframe but any given fiat currency from that time would now buy no suit.

No matter how bad the economic collapse becomes, the planet will always provide the ability to farm and grow food. Food producers will not be asking for food in exchange for their produce. They will demand some form of payment (medium of exchange).

Many currencies are revalued or indeed replaced- for example many euro currencies were replaced by the Euro.

I dont recall people complaining theyd actually lost any wealth in the process, replacing a 1bn Lira note for 5 cents, or whatever, the value was the same.

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  • 298 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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