By Ilargi on The Automatic Earth.
There are times when you read things that can only make you want to be silent and still, wondering what on earth people are thinking. This is one of those times; Emma Rowley reports in the UK Telegraph:
The world’s expected economic growth will have to be supported by an extra $100 trillion (£63 trillion) in credit over the next decade, according to the World Economic Forum. This doubling of existing credit levels could be achieved without increasing the risk of a major crisis, said the report from the WEF ahead of its high-profile annual meeting in Davos.
But researchers warned that leaders must be wary of new credit “hotspots”, where too much lending takes place, as the world emerges from a financial catastrophe blamed in large part “to the failure of the financial system to detect and constrain” these areas of unsustainable debt.
“Pockets of credit grew rapidly to excess – and brought the entire financial system to the brink of collapse,” said the report, written in conjunction with consulting firm McKinsey. “Yet, credit is the lifeblood of the economy, and much more of it will be needed to sustain the recovery and enable the developing world to achieve its growth potential.”
The global credit stock has already doubled in recent years, from $57 trillion to $109 trillion between 2000 and 2009, according to the report. The WEF said the continued demand for credit could be met “responsibly, sustainably – and with fewer crises”. However, it cautioned that to achieve this goal, financial institutions, regulators, and policy makers need more robust indicators of unsustainable lending, risk, and credit shortages
Oooh boy! Where to start? Let’s try some back of the envelope first glance ruminations (don’t pin me on details or exact numbers, I’m going for the general gist here). The “global credit stock” rose by $52 trillion in the past 10 10 years (2010 not included). That is about an entire one year’s worth of global GDP. Now, let’s see: the world will soon count 7 billion inhabitants. Which means that, since 2000, credit rose by about $7000 per person, including children, pensioners and the many hundreds of millions who have to live on $1 a day or thereabouts. And that was on top of some $8000 pre-existing credit per capita.
And now, say the World Economic Forum and McKinsey, we need to play double or nothing (again), everything on either red or black. In the next decade, we must raise global credit to the tune of over $14,000 per capita. But not to worry:
The WEF said the continued demand for credit could be met “responsibly, sustainably – and with fewer crises”.
Well, you must admit, it worked great in the past 10 years, we’re doing just spiffy. After all, there were only three million foreclosure filings last year in the US, where real unemployment is only 16% or so, and most of all, only a handful of people set themselves on fire so far in northern Africa in 2011. In other words: steady as she goes?!
Don’t think so, WEF.
We already have an unmitigated debt disaster on our hands because of what has happened in the past, and that disaster will become much worse yet because clown schools like the WEF have a say in how to go forward. And what they say is: we need more debt. Much more. Twice as much, on top of what’s already there. If you add $14,000 in debt for every person on the planet, on top of the $15,000 already in place, and you realise that most westerners are already in the hole for tens if not hundreds of thousands of dollars in personal and national debt, you end up with an insane picture.
Moreover, where has all the credit of the past decade gone anyway, and why do we “need” so much more of it? Well, for one thing, the US housing, mortgage and finance sector ate a huge chunk of it. As did those in Ireland, Spain, Britain and others (China?!).
These days, US home builders can’t get much of any credit anymore, and neither can wannabe home buyers. So home starts are falling fast, and the fact that permits were up in December needs to be taken with an ocean full of salt; a permit means zilch without available credit.
Here are a few numbers from Martin Crutsinger at the Associated Press:
The Commerce Department says builders started work at a seasonally adjusted annual rate of 529,000 new homes and apartments last month, a drop of 4.3% from November. Builders broke ground on a total of 587,600 homes in 2010, just barely better than the 554,000 started in 2009. Those are the two worst years on records dating back to 1959. In a healthy economy, builders start about one million units a year. They built twice as many in 2005, at the height of the housing boom. Since then the market has been in decline.
And even that might still be too rosy a picture, say Jeffrey Sparshott and Jamila Trindle in the Wall Street Journal:
[..] Actual housing starts, without seasonal adjustments, fell to 34,300 in December.
Let’s see. Home starts are down from 2 million in 2005 to half a million today, annualized. A “normal, healthy” year would see 1 million starts.
We get into the inflation vs deflation debate here, since mortgage loans are a major contributor to credit creation, or were, I should say. The way it works – or used to – is you go to a bank, ask for a mortgage loan, they press some keys, et voilà, there’s another, let’s say, $250,000 that just entered the economy that never existed before.
In the 2005 good days, this would have expanded “available” credit in the US by $500 billion a year (at $250,000 per mortgage). In a normal year, $250 billion. Today, maybe $125 billion. Those amounts may not mean all that much to you, what’s a billion more or less. But remember that the bank could take these new debt obligations, and slice and dice them, turn them into mortgage backed securities, pocket the profits and use them to move on to more sophisticated derivative instruments like credit default swaps, CDO’s etc.
Partly because of the vanishing reserve requirements in our fractional banking systems, they could then leverage themselves up to their eyeballs. Let’s be real conservative and say that the prevalent leverage ratio was 20:1 (I’m seriously lowballing it here). That would have turned 2005’s 2 million housing starts into a $10 trillion credit-based bonanza. In a “normal” year the result would be $5 trillion. And that’s just housing starts, that’s not even counting existing home sales. There was over $3 trillion in mortgage originations in 2005. There are other aspects, like for instance the fact that most people pay 3-4 times the actual amount of their loans before their homes are paid off, which greatly increased the amount of available gambling tokens for the banks.
And now a large part of that is gone. It’s not just the 75% loss that got us from the 2 million 2005 starts to the 500,000 now, but the securitization model has changed drastically as well; Fannie and Freddie (and FHA/Ginnie Mae) buy close to 100% of new loans today, vs less than 40% in 2005. And they issue the MBS now, along with Ginnie Mae. So the banks didn’t just suffer huge losses on their toxic paper, they’ve also seen their ‘housing tap’ largely shut down to a trickle. Of course they’ve found ways to involve themselves again through the backdoor, but provided the market has shrunk 75%, they would have to up their leverage ratio by 300%, to 80:1, just to play even.
So is it any wonder that Geithner and Bernanke throw trillions into the system, without inducing any growth? A blacker hole than this has never been spotted even by the Hubble telescope. And to date, fuzzy accounting may delay the day of reckoning process somewhat, but that only works to hide losses incurred in the past. No amount of accounting fraud can make up for the effects going forward of losing 75% of a market, in this case housing.
US housing inventories are at crazy levels, and nobody even knows any more how much shadow inventory there is. Is it 5 million, units, or 10, or 15 million? On top of that, robo-signing and other forms of fraudclosure are set to cause huge additional problems in the housing finance sector, forcing lenders to buy back large amounts of loans. How will they pay for this? Nobody knows that either. And what then happens to the securities that are supposedly backed by these limbo loans? Will they be forced to be marked to market? Totally unclear.
How many people will end up living for free in their homes in a suspended Wile E. limbo, waiting to see if their lenders can produce the legally required papers to foreclose on them? It could be hundreds of thousands. It could be millions. The infamous Ibanez case in Massachusetts was just a start. In Maryland, 10,000 foreclosures were halted in one fell swoop the other day. There’s no doubt that we’ll see much more of this in 2011-2012.
Then there’s the resets of ARM mortgages, set to peak in 2011. That will push tons of additional homeowners over the edge, and tons more properties on the market, provided the paperwork isn’t all shoddy.
And all these factors combined will lead to one inevitable outcome: prices will keep falling. Which will further exacerbate all of the above developments. Which will cause prices to fall further. And so on and so forth. There is no economic recovery, there are only trillions of dollars in additional credit. Which have led to only a 16% unemployment rate, only 3 million foreclosure filings in 2010, and only a close to 30% drop in home prices (according to Case/Shiller).
And now the WEF calls for $100 trillion in extra credit until 2020:
“This doubling of existing credit levels could be achieved without increasing the risk of a major crisis…”
Come to think of it, maybe they’re right. That major crisis is cast in stone as it is, so there is already a 100% risk. And you can’t increase that. Then again, the WEF plan will greatly worsen the effects of that crisis on Main Street. Still, incumbent politicians don’t want to let the present zombie model go, no matter how dead it is. Because it’s this model that ensures Wall Street keeps paying for election campaigns. Main Street’s already too poor to do so. Main Street’s debt deleveraging.