Subprime Crisis Just Beginning
Seeing how lquadland10 completely spammed and polluted the entire MF blogsphere with the video from my last post and other videos there not much point in continuing leaving as my last post as it is now everywhere...
Safehaven had an exceptional, simplified, piece with the above title, Subprime Crisis Just Beginning. My brain has a natural number sense for the kind of numbers he lays out in the tables, and seeing laid out so explicitly is very scary.
Someone had a post that gave some numbers on the Alt-A resets. I thought it was EverydayInvestor, but I didn't see it, and it might have been in comments on a post so I'm not likely to find it. I actually saw the reset numbers as giving a break to the financial crisis for 2008. The number of resets for this year are less than last year. 2009 is a disaster for the resets, and they continue into 2010. I doubt if there can't possibly be a bottom until this stuff has been dealt with.
Further, this stuff is going to redefine all the numbers on the health of pension plans and all levels of government debt.
Alstry has a post on Alt-A deliquencies. It shows what is happening with these things (arrears), although it doesn't show when they are due to reset. There is some evidence that perhaps some of the later resets are already in arrears.
I think the root cause of the problem is fairy tale beliefs we've adopted that we can have financial security through government and pension plans. As the government burden to pay for this has increased, rather than fix the plans to what is affordable, we've had increased manipulation of the numbers.
The spin-off downside has been that rather than have reasonable inflation numbers out there, which probably would result in higher wage increase expectations instead of sheepish acceptance of cost-of-living that matches the down rigged numbers, so it has contributed to an enormous loss of buying power at the same time we get these bogus reports that real income has increased because they use the false inflation numbers.
They also fail to account for the difference in the nature of low interest debt, which I break down with examples in The Six Degrees Of Leverage. It is an incredibly long post, but because people are not outspoken about how low interest debt is far more burdensome, I don't think that is understood. People only tend to see the benefit of refinancing existing debt at a lower rate, not that if you follow the debt servicing guidelines for percent of income you are grossly disadvantaged to ever gain control of that debt.
When I was in elementary school the indocturnation of these fantasy beliefs started. Why do people in developing countries have so many children compared to developed countries? We were guided to see the advantages of the magic box called government. In developing countries they have so many children so they will be looked after in their old age, but here we have pension and social program. Well, if you have 2 children per family, you essentially are expected to be paying for someone's pension for the average 15-20 years they collect. That is simply an enormous burden and the magic box called government doesn't change that. The only reason it was working was because we had a population pyramid that looked something like a family with many children.
We have further fanned these insane beliefs with our proof through compounding interest. You can get higher returns and beat inflation. Well, probably a strong contributing reason for this working is that so many governments are debtors. They create abnormally high demand for borrowing. They aren't on the receiving end of this miracle, but on the sinking end of it. You simply can not have something as big as government work like Jesus and break a loaf of bread forever to feed the people. If government was not such a debtor the best you could expect is to get back what you put in calculated in fixed dollars. Compounding interest works for the minority and that is an undisputable truth.
So, in Canada we have 4.95% of income for Canada Pension Plan from both the employee and the employer, or roughly 10% per year. Take an average 35 years working, that's 3.5 years of wages. With life expectancy meaning you have to spread that over 20 or so years on average, well, that means for it to be sustainable it can only pay 17.5% of pensionable income. In Canada our plan was only increased to this level of contributions in the last 10 years. I remember seeing perhaps 1% of my income coming off when I entered the work force. If you assume everyone paid for the pension at the 10% now collected, well, that would put it at somewhere between $600-650/month. I think it is closer to $900/month and then we have Old Age Security and Guaranteed Income Supplement which if you collect the max on all of them work out to about $2,000/month.
I keep hearing people saying the US government pension isn't a problem, it is the medical. Well, I'm inclined to disagree. They are likely both a problem.
I firmly believe that all of these fantasy beliefs are going to be identified for what they are, fantasies and if there was recognition of the non-sense of them we'd actually have a chance to fix the model to something realistic.