Saturday, December 15, 2007

Quick – send a robot back in time

Schwarzenegger Will 'Declare Fiscal Emergency' In Weeks

"California is struggling with shrinking state tax revenue from the meltdown of the subprime housing market and the credit crunch on Wall Street". Schwarzenegger made the announcement Friday after meeting with lawmakers and interest groups this week to tell them California's budget deficit is worse -- far worse -- than economists predicted just a few weeks ago.

Posted by alan @ 07:07 PM (1285 views)
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20 thoughts on “Quick – send a robot back in time

  • voiceofreason says:

    Somebody call International Rescue…
    The problem with this newsblog is that we have spent so long forecasting, that now that the scenario is playing out, we have nothing more to say !

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  • planning4acrash says:

    Yep. And many of us were spot on. Talking Rot was right about interest rate cuts, there I eat my hat. To be honest, the real amazing thing is, this being the most bearish blog, that we are actually being exposed as conservative in many ways, far less the doom mongers others would have us be. Sub-prime BTL mortgages down to 18 products in 5months!! This is a shocking meltdown that possibly few of us foresaw, and there is much more to come.

    I met a poor girl from work who bought 3yrs ago. She’s saying to me last night, oh, buy a flat, its a great time to buy because its a buyers market, repossessions, etc. Turns out I pay far less for my flat (edge of zone 1) in rent (bills/repairs included), than she pays for her flat that is way out in deepest zone 4. I just had to be nice to her and say, oh, I’ll wait and see. I could have told her that I won’t buy coz prices are likely to halve, but that wouldn’t really be good for work relations! I felt super sorry for her, just a worker who wanted a roof over her head. No doubt she’ll be in deep negative equity within 12 months.

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  • voiceofreason says:

    It is also very sad for my friend who runs a mortgage broker. Probably have to make all his staff redundant 2 weeks into Jan if things don’t pick up.

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  • p4c – “just wanted a roof over her head” – then she could have rented. If she’s talking about repossessions then it sounds as though she’s hoping to cash in on other people’s misfortunes. If she loses out then it’s a case of those who live by the sword etc.

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  • planning4acrash says:

    Yup. Lets remember that, whilst we will benefit from a crash, the crash will undershoot and be just as painful for those duped during the boom. Lets hope this cycle serves to result in legislation that avoids moral hazard and stops booms getting out of hand. First off, we need an inflation target that includes avoidance of the RPI/CPI gap that has grown since 2005, that means making inflation targets and BOE policy non-political. Could Brown pull that off? Maybe he could save his reputation that way, or at least the opposition could call for it. And obviously, the mortgage industry needs to be properly regulated, no more miss-selling. These teaser rates are very much like the happy hours at pubs that the government wants to clamp down on, but the mortgage rates are far more damaging!!

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  • japanese uncle says:

    Raison d’etre of this website in the post-HPC era is to provide forum in which people can discuss how to stablize housing market at the minimum level, so that the crooks like Goldman Sachs will never be able to taka advantage of the misery of millions. Total ban of financial derivatives, private equity, hedge funds, heavy taxation on BTL business, massive increase in income tax rate (eg. 95% in xs of one million), deprivatization=renationalization of the BoE/FRB, etc. etc.

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  • converted lurker says:

    Hahahaha fukcin brilliant “quick send a robot back in time”. Lately, when thinking of where we’re headed, I’ve been thinking of Reece and his interview with the cops and pscychiatrist when he goes a bit mentalist

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  • Cristiano Barbaro says:

    You know JU, I used to be a thatcherite free marketeer, until I saw what happened to the electriciry industry in the US and especially in California as a result of deregulation. Now the EU wants to do that here and mess things up for us too. I have come to realize that there are things that absolute free market just doesn’t work for, such as the massively needed long term capital investments in infrastructure projects and power generation around the world. The free market is good for some but not all sectors of the economy. Also watching the mess of the train system when I lived in the UK contributed to this change in attitude for me. I agree with what you say above, not all of it, but mostly yes.

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  • Japanese Unclue – would you ban IR futures, Stock market futures, commodity futures, FOREX? Derivatives are there as a means of hedging not just speculation. A bit like banning insurance? If you do want that you have to ask yourself WHY they are there in the first place. Its the abuse that you want banned – sorry that is like banning booze – booze dont make you drunk its abusing the booze that does!

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  • dohousescrashinthewoods says:

    I feel much the same – now that it’s happening and we’re no longer the Cassandra club it’s almost a case of “what more can I add” to what the articles are saying, except perhaps to point out that the hopeful ones are short-sighted.

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  • dohousescrashinthewoods says:

    JU, however bad this gets, I don’t think there will ever be enough vested interest to enact real legislation. There may be rhetoric and press-releases, but anything that truly stands in the way of bubbles will be quietly neutered when the dust settles. Bubbles are just too profitable for those who understand them, who are generally also those in power, who can create the conditions required to inflate them. Many here have asked how many BTL properties key members of the government (by which I include the BBC) own. I think that question sums up the situation beautifully. I guess the trick is to spot them and use them if you can do so without injuring others.

    I can see this blog will be a place to chart probably the greatest bust in history, provide some support for those caught out, work out ideas for making the best of a bad situation and thinking out how ordinary people can profit from a situation they can’t control. By this I don’t mean profit through engineering the demise of others (as it seems incompetent govenment and cynical banks have done) but by collectively peeling back the spin and understanding what’s really happening so we can make a go of it even when it gets really tough.

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  • Good points JU. Maybe we should start a thread on the forum on this subject. After all, if we do not learn from history we are condemned to repeat it.
    A total ban on self certification mortgages would be a good start.
    People & the financial industry can’t be trusted to do what is best for themselves.
    Also, for BTL, do not allow mortgage interest deduction from taxable (rental) earnings.

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  • japanese uncle says:

    techieman

    Insurance is fine, while hedging can be a sheer betting. Hedging as far as genuine business interests (eg exporters hedging exchange risk to the extent that his export is at risk), not speculation is at stake, can be allowed. At the moment derivative transaction is way above the acceptable range as it has become a venue for gynormous betting, hence this crisis.

    dohouseinthewoods–

    I agree. Bubbles have become almost the normal state of economy these days, because as you say, it’s too profitable for certain element of our society that are often the most powerfu. Yet we cannot help appealing such blindingly obisous truth to the world ie any economic bubble will burst sooner or later, can we? .

    voiceofreason

    Exactly. But self-certification mortgage may well be an actionable breach of fiduciary duty on the side of the lenders whose lending fund is financed by millions of bona fide savers. Banks shareholders can think about class actiona can’t they?

    My whole point is, one of the HPC bloggers may be able to buy a house at a overshooted cheap price in say 3-4 years after the HPC, but then he/she must not expect the house price to soar yet again. Average house price must be stablized at the level say 3 times average annual income for ever. Those money-hungry-nuts can play with their own money in jewellery or precious metal market. Never in the housing market where basic human right to live under decent roof should never be undermine in whatever circumstance.

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  • planning4crash said “….this being the most bearish blog, that we are actually being exposed as conservative in many ways….”. Agreed, though I can recall the odd post mentioning the fact we’re “going to go back to the stone age”.

    I think the majority of posters here had the right idea, knew the market and fundamentals were all plain wrong, knew it could only end in tears for the majority of people and knew the longer it went on the worse it was going to get. What was hard to predict was how all consuming HPI would become and how many would be sucked into the ‘system’. I think many realised that the game was up after that interest rate drop in August 2005 (and god knows how much damage that will cause in the end cos that must have inflated the HPI/debt bubble considerably) but again HPI proved to be incredibly stubborn.

    Sadly, it now seems we’re going to see a downturn of utterly historic magnitude. People must not allow the establishment to benefit further from it. They need to legislate to protect the public not the banks. They won’t of course but they cannot be let off too lightly.

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  • JU “Banks shareholders can think about class actions can’t they?”.
    I wonder if any NR shareholders are reading this ?
    Soon to be joined by B&B, A&L, Paragon shareholders. When the numbers are large enough, then I wonder if some high flying chambers on a no win no fee will have a pop at it. Now that would be nice.

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  • Japanese Uncle – I generally agree with your sentiments, but not on your examples. Someone that hedges an exchange rate risk needs someone else to take the other side of that, whether thats a “hedger” the other way or a speculator is of no consequenc to our initial hedger. Infact the existance of speculators enhance the liquidity of the market. You really cant have it both ways. Now if you are talking about CDOs etc. then that may fall into the category of “abuse”. I’m not sure if you mean the instruments themselves or the use of those instruments in shall we say investment strategies. I’ll give you another example if your pension is invested in the stock market – and you therefore get dividend gain is it not right for your provider to hedge against the risk of stock market falls, or does that amount to speculaation?

    I dont think you can blame derivatives for this “crisis” – the crisis is caused by loose credit for years, people being convinced oif being able to sell an asset on for an increased price (the bigger fool therory) and affordability. Yes – as i have said before the credit crunch may well be the pin that burst he balloon, but the balloon would have eventually burst in any case. I think actually the fact that there was this credit crunch will give the politicians the old excuse that they can pass on to the electorate. “not our fault its the worldwide conditions thats to blame” – ignoring the fact the the cause of these conditions were brought about by the policiticians.

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  • Market derivatives are fine, just as long as they serve a legitimate purpose – such as an airline wanting to guarantee the price it pays for fuel in six months time, so it can accurately set ticket prices. When these derivatives amount to nothing more than gambling – or ingenious schemes that have no other purpose than to separate fools from their money, then they have no legitimacy, and should be outlawed.

    The derivatives market has become a massive bubble with very little legitimacy, trading a lot of paper of doubtful real value – ‘sub-prime’ is probably only the opening chapter..

    ~~~

    As to the sense of ‘we were right – now what..?’ I would say that we now have a very interesting time ahead – calculating how to make the best of what is going to be a very difficut time for the western economies.

    Looking back over the year, it is interesting to note how the City knew about the sub-prime problem several months before it became a serious issue – but deluded themselves into believing it wasn’t really a problem at all.

    Now we have a mortgage industry that knows – if it does some quite simple sums – that the UK housing market has the characteristics of a classic bubble, and that prices have reached a level that cannot be sustained in the long term. Indeed, it has been clear for five years now that if the market was not cooled, a damaging correction would eventually be inevitable.

    Did the mortgage lenders ring alarm bells five years ago? – No. Did Brown honour his pledge for no more ‘boom and bust’? – No. Have we had the boom? – Yes.

    And now the bust is starting, they are all pretending it isn’t really happening…

    We all now have to navigate the cascade of consequences – the work of this site is far from over!

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  • I’m not trying to pick a fight but…uncle Tom – yes i agree but my point is you cant say “The derivatives market has become a massive bubble with very little legitimacy, trading a lot of paper of doubtful real value “. The derivative market includers a whole spectrum of instruments – some fit your definition, others (as in your first Air Fuel example) clearly dont. Also to an extent new instuments are added in response to perceived demand for a liquid market. For example there may well be a correlation between light crude and air fuel prices but since the correlation wont be exact you could in theory have a new derivative for air fuel, so that there is a perfect hedge. I dont really see what sub-prime has to do with the derivatives market – except of course for the CDOs etc.

    To support what you say you would have to include all derivatives whatever the underlying commodity / currency etc, they relate to. A bit of a sweeping statement Unc Tom!I think you should have stopped before that last scentence “The derivatives…”

    Also i think its naive in the extreme to say the City deluded itself….. there will always be the smart money that realised this game couldnt go on forever, i was talking to some pretty impressive people about a year ago and they were expressing grave doubts at that time.

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  • Techie,

    I think I can say that – look at the scale of the derivatives market, and then try to make some estimates of the scale of legitimate activity.

    The market has lost sight of it’s legitimate origins, with ever more abstract instruments being traded – while legitimate activity exists, it is certainly fair to describe it as ‘very little’ in relation to the overall size of the market.

    The ethos of the casino has enveloped this market, and the question now is: ‘when people want to leave, is there any money in the till to cash the chips?’

    ~~~

    Some ‘smart money’ did see the sub prime problem for what it was – (myself included) – but the market as a whole, as judged by their actions, did not.

    If your ‘pretty impressive’ friends had grave doubts – but failed to act – then they are not that impressive, are they??

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  • hey uncle Tom,

    i cant say much more than ive already said re the derivatives. I dont really understand what you mean by the scale of THE derivatives market. My point is there are derivatives all over the place, so which “derivatives market” do you mean. If its derivative non soverign debt you are talking about then i would be the first to agree but sugar/crude oil/pork bellies/ soyabeans/ live hogs etc etc etc etc??

    Clearly if you are talking about more exotic financial stuff then again i would – to an extent – go along. Looks like we cant reach an overall consensus although there is common ground. Re the impressive people what makes you think they didnt act?, of course they did.

    Perhaps i just dont understand this “market as a whole” thing.

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