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For today’s global financial problems, there are no solutions that are favourable to either incumbent politicians or wannabe leaders (unless they’re extremists, perhaps), let alone to the people they claim to represent. All our herd of leaders can do is to postpone the inevitable outcome of inevitable processes as long as possible.That’s why we see Obama presenting yet another housing plan that won’t work, and Europe setting up the umptieth Save Greece concoction that is doomed to fail before it’s signed – if that happens at all -. Obama knows it, and so do Europe’s leaders.
The disaster they’re seeking to avert, it seems, is not so much economic depression as it is their being voted out of office. And this pattern is not going to change, not as long as they can keep up appearances by seizing ever more of our children’s future wealth, not as long as we let them.
Greece is negotiating a deal with investors to achieve a 70% haircut on existing bonds, up from 21% hardly more than half a year ago, and it still won’t be enough. The 49% increase since last summer should be a huge red flag for everyone.
Why that increase? Well, first of all of course because 21% was always ridiculously low. But something else is happening too: the biggest developing problem for Europe is that a Greek default can increasingly be enormously profitable for certain parties in the market. And why should they then work to “save” Greece?
It has been clear for a long time now that Greek bonds have no value left at all. During that time, the smarter kids in the class have been able to position themselves according to that fact. Therefore the noose around the EU and ECB necks gets pulled in tighter as we go along. And as the ridiculous notion of the 70% haircut being labelled as “voluntary” keeps being touted.
The IMF is pressuring the ECB to also take a haircut. Other central banks and sovereigns are next in line. Hello, Fed! Hey, China! The ECB wants to sell its Greek paper to one of the European emergency funds, which can then take the haircut. Musical chairs is making a come-back as a highly popular game these days.
The smarter kids are laughing all the way to all the banks as they are paid all the money they want by all the bankrupt nations seeking to hide their insolvency from their own citizens, squandering those very citizens’ scarce remaining wealth in the process.
We can only keep our societies alive and running by telling a seemingly neverending series of lies. And if everyone had the same interests, this delusion could last quite a while; we’ve been doing it for 4-5 years already, after all (and arguably for much longer). But not everybody has the same interests, not anymore.
This lying eyes mirage system is almost perfect, but, in the words of Leonard Cohen: “there’s a crack in everything; that’s how the light gets in”. Still, people believe most of the lies, and add their own with impunity, because they don’t want to see things for what they are. So we just keep talking about economic growth, and we’ll make up the numbers we need to prove it as we go along.
The plans discussed for Greece involve interest payments on new bonds of 4-5% or so. It doesn’t matter one bit what percentage they come up with. Greece won’t be able to pay any interest, never mind principal, for many years to come. And everybody with a seat at the table knows it. These are your proverbial exercises in futility. They’re all that’s left us.
Financially bankrupt, politically bankrupt, morally bankrupt. As every additional dollar issued as debt no longer adds to GDP, but instead subtracts from it, there’s no doubt where this is going. But yes, it’s true, we can still choose to look the other way and wait for it to hit us over the head. Matter of preference.
If houses in countries like the US, Britain, Holland, Spain, China are ever to reach a level where they become affordable, we will find they no longer are, no matter how low prices become – receding horizons in reverse, sort of -. Because if they do reach that level, the entire contraption that is our economy will have crumbled.
So governments choose to prop up home prices. Helped in arriving at that decision by the knowledge that homeowners are a formidable political force they don’t want to turn against them. But propping up home prices means supporting price levels that were established by hot air credit in combination with liar loans and other “criminal legalities” in the first decade of the millennium.
The hot air credit is rapidly vanishing because it’s put everyone and their pet hamster neck deep into debt. People can’t afford to borrow anymore, a simple truth that is almost entirely ignored. Hence, to prop up today’s prices at yesterday’s levels, governments themselves need to step in. Can’t have that ole market working its magic. What this does is it lets every single citizen pay for every single underwater homeowner’s debt. And why should people who already have a hard time pay for someone else’s home?
Obama’s State of the Union mortgage plan, provided it doesn’t simmer down and die like all the preceding plans, is based on refinancing at lower interest rates. If nothing else, this will put potentially substantial ($100 billion? $300 billion?) additional pressure on Fannie and Freddie. Which already have negative capitalisation rates. And sit on trillions of dollars “worth” of highly dubious paper, most of which has not been written down to anything like reasonable, realistic levels.
Of course all the negative aspects of this were dealt with a few years back through the brilliant move to let everyone decide their own accounting standards. A move that is as dangerous as it is brilliant, however. Because nobody knows what anything is truly worth anymore. You can have lender A having a home loan on its books for $200,000, while bank B has issued securities for a strikingly similar home next door “worth” $400,000, and the just as similar home next to that one has been sold for $50,000 just last week.
Now if the “owners” of either the first or the second home default, what happens to the value of those loans and/or securities written on them? At some point, someone will demand to know the truth. But neither the government, nor the lenders, nor the borrowers want that truth to be known. Small wonder that banks would rather let homes sit empty or let borrowers stay put for years without paying. Price discovery is a bitch, and never more so than after a long period of lying about that price.
There’s only one thing a government can reasonably do when faced with a conundrum such as this: nothing. Unfortunately, that’s not what governments think they’re for, doing nothing, and – luckily for them – neither does the majority of people they represent. In this particular case, all those homeowners want action. They demand that the government protect the value of – what they see as- their property. And so we have another plan.
America likes to tout its status of a free market country. But that’s just nuts. Delusional nuts. And no, it’s not that all of a sudden we see socialism or communism, popular as those accusations may be; that just comes from people who don’t understand what those words mean.
What has happened is that America is electing a Liar-in-Chief every four years. His/her job is to keep the herd in the faith, to let them buy stuff all the time, preferably with borrowed money. To keep all noses pointing in the same direction, namely perpetual growth, especially when there isn’t any.
The Liar-in-Chief is far more a religious leader than a political one. You can’t have the herd disperse and separate and all its members running off in different direction to go and do their own thing. Nothing to do with Obama specifically either, it’s simply in the job description. Taking the job, though, is indeed his own responsibility.
If Obama were a political instead of a faith-based leader, he would take his hands off the US real estate market, and let the market do what it does best: price discovery. Shut down Fannie and Freddie and their ilk, the biggest economic disaster in US history, and sell off their “assets” to the highest bidder. Write down all the losses, let holders of loans and securities take the haircuts they are entitled to, and go on with life. Look at the future instead of being stuck in the past.
There is zero chance that US home prices will ever reach their recent peak again, unless some sort of huge inflation were to take place, and that is obviously not in the cards for many years (if it were, it would have been here already) . So before that happens, other factors will have made sure that home prices are driven down relentlessly. Like, for instance, most Americans, or the ones that have jobs at least, a select group, making the kinds of wages that are current today among burgerflippers in China or Vietnam.
Fannie and Freddie are to a significant extent responsible for the fact that the financial sector has been able to take over and govern US society, including its political sphere. Whenever I say things like this, there are always people that point to all the good the GSEs have done: allowed ordinary people to afford a home etc. But in fact, from the get-go, they have driven up prices by “raising affordability”, and that has allowed for the banking sector to get a stranglehold on the US population.
Today this has culminated in a situation where personal debt levels and federal debt levels have reached ridiculous levels. Debts which will never ever be serviced. All that’s left is trying to let people continue to believe that they will, until creditors bring down the guillotine. Which they will, simply because there’s a profit to be made.
Releasing Fannie and Freddie from their misery would amount to certain election defeat, or so goes the perceived wisdom. So that’s not going to happen. We’re going to have to wait for the markets to judge that the time has come when profits from wagers are more attractive than hand-outs and bail-outs. At that point, governments and central banks will be exposed as being absolutely powerless to influence anything at all, and least of all interest rates or home prices.
And that is a sad reality. For all of us who don’t have seats at the big casino tables in Washington and Brussels and Davos.
It’s not like I’m alone in my judgment of Fannie and Freddie, even if that’s a small consolation in view of the enormity of the consequences of the decision to let an election victory prevail over the health of an economy. If you ever wonder what kind of person wants a job like POTUS anyway, keep that in mind.
I have long-stated the best thing to do is nothing. Indeed if nothing is done, home prices will drop low enough that investors will want to buy them. Delays in foreclosures only serve to delay the housing recovery.
Ilargi: Mish then quotes his friend BC, who provides a very astute observation:
The only long-term durable solution to the unreal estate mess is to cease further securitization by agencies and shut them down.
It’s time to concede that “homeownership” is a fraud.
When there is $16 trillion in mortgage and consumer debt outstanding and an estimated $16 trillion in residential unreal estate value, with the risk of another 20% decline in prices, there is no “ownership”.
Rather, virtually everyone with a mortgage is renting debt-money from a lender and leasing the land from a local taxing authority. The mortgagees have a “dead pledge” in the value of the debt owed, not an “asset”. The lenders and taxing authorities are the “owners” of a lien (a bond or constraint on the real property), which entitles them to income in the form of compounding interest and tax receipts in perpetuity.
Ilargi: Well, it’s not going to happen on a voluntary basis, this admission of fraud. We’re going to see the financial markets having to tear the delusion of ownership and economic recovery from the cold dead hands of all those implicated in that fraud, from lenders to investors to borrowers and governments. And that will be a pleasant. sight to behold.
George Soros is in his eighties. He seems to now feel free to speak out on what he sees coming, to hold his cards a little less close to his chest. Soros is dead on, and, if anything, holding back in this Daily Beast piece.
“We are facing an extremely difficult time, comparable in many ways to the 1930s, the Great Depression. We are facing now a general retrenchment in the developed world, which threatens to put us in a decade of more stagnation, or worse. The best-case scenario is a deflationary environment. The worst-case scenario is a collapse of the financial system.”
Soros draws on his past to argue that the global economic crisis is as significant, and unpredictable, as the end of communism. “The collapse of the Soviet system was a pretty extraordinary event, and we are currently experiencing something similar in the developed world, without fully realising what’s happening.”
To Soros, the spectacular debunking of the credo of efficient markets—the notion that markets are rational and can regulate themselves to avert disaster—”is comparable to the collapse of Marxism as a political system. The prevailing interpretation has turned out to be very misleading. It assumes perfect knowledge, which is very far removed from reality. We need to move from the Age of Reason to the Age of Fallibility in order to have a proper understanding of the problems.”
Take Europe. He’s now convinced that “if you have a disorderly collapse of the euro, you have the danger of a revival of the political conflicts that have torn Europe apart over the centuries—an extreme form of nationalism, which manifests itself in xenophobia, the exclusion of foreigners and ethnic groups. In Hitler’s time, that was focused on the Jews. Today, you have that with the Gypsies, the Roma, which is a small minority, and also, of course, Muslim immigrants.”
As anger rises, riots on the streets of American cities are inevitable. “Yes, yes, yes,” he says, almost gleefully. The response to the unrest could be more damaging than the violence itself. “It will be an excuse for cracking down and using strong-arm tactics to maintain law and order, which, carried to an extreme, could bring about a repressive political system, a society where individual liberty is much more constrained, which would be a break with the tradition of the United States.”
Ilargi: Ironically and unfortunately, the economic growth faith delusion is too strong to make people, even if they acknowledge that harder times lie ahead, understand that they need to focus some place other than how much their gold is worth today, or their pension. That things other than monetary items will be much more important to their survival and well-being.
That land and community and practical skills will in the future trump all the things they’ve ever seen as valuable. And, to be honest, how can you be expected to change your myopic points of view when everyone around you holds on to them in the exact same way that you do? You look around, and everything seems alright, nothing a spoonful of austerity and hard work can’t cure.
But, just as the only good thing to do for Obama right now is to abolish Fannie and Freddie and Sallie Mae and the FHA and FHFA, to get out, which he won’t, there’s an equivalent for Jill and Jack on Main Street. And that is also to get out. Get out and cut, to the extent possible, all dependence on the government that makes its decisions for all the wrong reasons, and on all other top-down systems that rely on it.
Because those systems are going to crash, and there’s no doubt that they will bring all the Jack and Jills that depend on them, down with them. Obama and Merkel won’t get out of the way, and that increases the urgency for Jack and Jill to do so.
There are people whose role in this unfolding tragedy will be to Occupy Wall Street or Tahrir Square. And there are people whose role it will be to find and occupy their own space. Those are the only main roles that will be available for this movie. The extras will all be cast as cannon fodder.