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Now That We Have a Problem...



January 29, 2008 – Comments (4)

It looks like regulators are 10-years-after-the-fact getting around to closing a loophole that has most likely destroyed life as we know it.

I think this loophole is what enabled the banks to get the mortgages off their balance sheets and it enormously leveraged the money supply.  Every where you look now you see news about this mess but you see little about how it has grossly increased the money supply.

The end of this article got my attention, "Banks could book profits up front."  Think it through, and those profits weren't real profits.  I think people have this idea about how much money banks should be able to generate in profits and this idea of growth, but it was completely fudged profits and growth.  This is truly milk maid accounting, counting your chickens before they hatch, and boy, did the financial industry spill their milk...

In the comments in my previous blog I put a link to a shocking "new" development.  There is simply no question a homeowner who has zero or negative equity is better off walking away.  Mish did a post, "The Business of Walking Away." 

The ethical issues it raises are enormous, but in a way, it is "pay back."  From my perspective, I have watched a grossly declining lifestyle for the people around me and I don't like to think about how it is for people with less opportunity.  When I was a young adult I had disposible income being a low income employee.  Today low income employees don't make ends meet, indeed, quite a few in professions aren't making ends meet and their lifestyle looks modest.

Corporations have not been considerate of workers, profit simply being more important that any kind of fairness.  This quote is good,

 "Implicit in this segment is that families are not entitled to make "business decisions." But you know who is entitled? Why, businesses of course. When businesses laid off 1.5 million workers in 2007, it was purely a "business decision." When Wall Street banks "wrote down" more than $100 billion in losses in 2007, it was purely a "business decision."

Look for families to become more comfortable making "business decisions" of their own in 2008."

A third one on my reading list, very important, the bank reserves are negative.  The warning to not have more than the FDIC limit in a bank is a good one to heed.  

There is one more, Calculated Risk brought up a post written almost a year ago now about all of the fraud that surrounds bubbles and it is a very good read, full of moral issues around, and ultimately, it seems like many players are in volved in some level of fraud.  This has been referred to in response to the increased investigations with respect to the subprime mess.

4 Comments – Post Your Own

#1) On January 30, 2008 at 12:52 AM, DemonDoug (30.94) wrote:

i think we're channeling the same wavelengths dwot.

i love mish's analysis, but i'm convinced that he does not recognize or chooses not to recognize that history shows that governments put all their might and weight into devaluing the currency (meaning we aren't going to have deflation, it will be continued inflation/stagflation).

MBI, ABK, and pretty much the entire "bond insurance" industry should go the way of the dinosaur.

And complete agreement with the FDIC limits.  I think most smart people do this already - anything over 100k they put in another bank.  There are so many banks out there, all you need to do is go to and find a bank to put your money in, should be no problem for most people nowadays.  (Of course, you can always put it in a Swiss Bank if you have a very large amount of money.)

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#2) On January 30, 2008 at 1:44 AM, Hezakiah (21.58) wrote:

I do not have any personal experience with real estate,, foreclosures, bankruptcy... so maybe someone can explain this business of "walking away" to me.

First of all, I don't see how people are allowed to take out 2nd mortgages while they are planning to let their primary residences slip into foreclosure.  Do they simply convince the bank that they want the 2nd home as an "investment" and hide their true motives?  Are these people allowed to get their new loans using only the second home as collateral?  And when their first homes fall into foreclosure, is that all the banks are allowed to go after?  Can foreclosure not lead to bankruptcy?

 Thanks for helping me understand

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#3) On January 30, 2008 at 8:38 AM, devoish (70.17) wrote:


I believe this post from cubanstockpicker offers some "how to" ideas. And for only $995.00 would be happy to help. For a little less check their FAQ's.

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#4) On January 30, 2008 at 9:43 AM, dwot (29.11) wrote:

Hezakiah, I believe US law does not hold people accountable to their mortgage loans if their home is less than their loans.  Part of me thinks it is a bad law and part of me thinks it is a good law. 

What was allowed to happen in the US was utterly insane and with today's technology, well, you've got the most negligent adminstration in the history of the US.   If you check the facts you find that people were warning about this as much as five years back, when it was a much easier to deal with problem and before a few million more home owners went down the disaster path.  Indeed, this moving the loans off the balance sheet should have been looked at and stopped with two years of it starting.  It removed loans from the reserve requirements, complete skirting the law and the intention of the law.

The law is bad because people ought to be held accountable for their actions, but when you look at the bigger picture everyone people were working with were in it together to line their pockets and to say or do anything to mislead people.  Call it herd behaviour.  People being able to walk away is the only thing holding the business end of it accountable. 

The problem is the business end of it pawned the unsustainable loans on unsuspecting investors -- pension funds, muncipalities, and people in money market funds.  You have governments that put money into money market funds, which aren't supposed to break the buck, that now have to wait years to hopefully get their money back because negative equity crap was included in this AAA rated stuff.  And with the market declining the negative equity has increased, which is how you manage to have some bonds go to zero.

DemonDoug, with my own independent thinking it through I kept coming up with deflation.  But then, right now I don't think prices reflect the current money supply.  The vast increase in money supply has been slow to trickle into consumer goods.  I guess I also go with Mish's definition of inflation and deflation, the money supply.  People tend to call any price increase inflation, but they aren't all inflation.  Inflation is increases due to money supply.  If there is a shortage or an over supply of something you see price adjustments due to supply and demand.

I guess if there isn't deflation, already the money supply is such that consumer goods probably have to at least triple to catch up with the money supply.

Actually, when you consider how many foreigners of sort are holding US dollars, it is a very nasty thing to think of those dollars coming back to the US.  They are out of circulation and artificially giving the appearance of the money supply being smaller than it really is...

Yes, I agree prices are going up, but I also think there will be deflation because the leverage of the money supply due to credit has increased far out of wack to the physical money supply.

I might have another look at the M2 and M3 money supply and see if I can come up with say a 10 year estimate of the increase to the money supply.  I have a graph of money supply in this post.   I bet Vancouver has simply gotten a discrepency in the amount of the increased money supply showing up there.  The M1 money supply has tripled in the past 20 years, but the M2 to M1 has increased more.  Hmmm, when I look at the money supply, Vancouver's housing prices are actually representative of the true money supply, at least the US money supply, and we have so much immigration and it is a world economy.  That's a scary thought...  And yes, consumer prices have to around triple to catch up with the current money supply.

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