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Subprime Crisis Just Beginning



March 21, 2008 – Comments (14)

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.

14 Comments – Post Your Own

#1) On March 21, 2008 at 11:32 AM, dwot (28.88) wrote:

The graph I mentioned on Alt-A is on the link from Alstry.

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#2) On March 21, 2008 at 12:14 PM, mandrake66 (73.65) wrote:

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.

Government pension systems are usually only a problem in countries with declining populations and a growing percentage of elderly. This is not a problem in the U.S., or at least not a big one. The problem is not in the concept of Social Security itself, which has worked fine for decades, but with the fact that it is continually used as a rainy-day fund to meet other budget shortfalls.

The main problem by far is that the U.S. is funding a military that, in terms of expenditures, is equal to or greater than the military expenditures of every other country in the world combined. And this is not even counting the costs of the Iraq/Afghanistan wars, or many other military expenditures that don't get credited to the Pentagon. If the U.S. were not trying to maintain this overbearing military and a de facto overseas empire, Social Security would not be an issue, nor would many  other domestic priorities. The current state of U.S. finances will probably make it necessary to choose between guns and butter before long. And if it is forced to choose, I am not confident in the outcome. 

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#3) On March 21, 2008 at 2:28 PM, QualityPicks (79.49) wrote:

What I find really odd is that home inventory in my zipcode went down about 17% in one month and a half. That is a lot for such a short time. I don't know if that is a minor/insignificant numer or some "knife catchers", spring selling season, or whatever. I just found it odd, because I was expecting it to go up :)

Banks, government and the Fed are doing anything they can to reversee the problems. It seems at least in my zipcode, we are seeing some impact. We'll see if this is just temporary or what.

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#4) On March 21, 2008 at 4:30 PM, XMFSinchiruna (26.52) wrote:

Another great post dwot... here's a link to my latest discussion of the housing issue as well.  :) 


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#5) On March 21, 2008 at 4:53 PM, Lagunis (< 20) wrote:

dwot - Clearly we have something to learn from our 3rd World counterparts.  We need to start encouraging each family to have several children (probably at least 4-5).  If we start soon then these new citizens will enter the workforce in time to help with social security and medicare funding.  In fact, I think the government should start giving parents a $10k - $20k tax rebate bonus for each child born.  This extra money will also help stimulate the economy.  Last, but definitely not least, the great influx of fresh newborns will invariably lead to loads of new athletic talent which we can utilize to dominate the olympics for decades to come.

mandrake66 - What good is choosing butter if you will not be alive to eat it.  The terrorists clearly want us to give up and choose "butter."  If we do not dedicate every ounce of our collective effort towards confronting the terrorists right now, then the entire world will be engulfed in a choking cloud of "evil."  Bush also knows that the world is running out of oil and so he is ensuring our future by fighting to secure the middle east.  He also has the deftness to disguise his true plans so that Americans do not foolishly rebuke his great master plan.  Do not worry though, McCain shares Bush's great insight and will soon take the torch and continue to lead us down the glorious path towards eternal victory.

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#6) On March 21, 2008 at 6:46 PM, Harold71 (< 20) wrote:

I hope that is extreme sarcasm Lagunis.

Obviously the war in Iraq has been a huge mistake.  We have spent an obscene amount of money there.  For what... oil prices haven't gone down.  We're not getting free oil.  What we are doing is spending money on jobs programs in Iraq, while completing ignoring our own people.

We could have built up this country's infrastructure and given away free college educations with money spent in Iraq.  You know, such things that actually lead to a better economic future.  The great and powerful USA is on the path to complete financial failure, in no small part because of the worst president of all time -- George W. Bush.  And there is definitely no sarcasm here.


Yes, the US could go bankrupt.  Ignorance is bliss, but not for long.

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#7) On March 21, 2008 at 8:14 PM, lquadland10 (< 20) wrote:

Sorry  dwot's I had a panic attack. Please forgive me.

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#8) On March 21, 2008 at 9:01 PM, dwot (28.88) wrote:

Mandrake, I think the average age has been increasing.

Hopefully this link works... 

If it works you should see the age pyramid  for the US as it changes every five years, so you have historical and then projected.

 Interesting how the housing data in your area Qualitypicks.

Thanks Sinchiruna.

Sure Laqunis...  I personally think we are past what the planet can support in terms of population now, lakes are getting more shallow, the entire land mass in Florida is sinking because the under ground water is being used faster than it is being replaced...  The list of serious and critical environmental problems is amazing and we very little leadership on turning it around.

 Hmmm Laqunis...  You have zero accuracy...  It looks like you have the ultimate in sucky timing for your picks...

Harold, I've never disliked any of the presidents more than Bush. 

lquadland10, it is fair enough to do some pumping of what you want people to read, but I think you got a little over board there and that tends to have the opposite effect of what you hope to achieve.  You've got some great contributions in your posts.

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#9) On March 21, 2008 at 9:14 PM, StockSpreadsheet (67.85) wrote:

Third world countries tend to have more children because children of various reasons. 

1)  The infant mortality rate in Third World countries is high.  Due to high infant mortality rates, life expectancy in Rwanda is 46 years old.  To insure that at least some of your kids survive long enough to support you in your old age, you will have many kids, so you can stack the odds in your favor.

2)  Most Third World countries have most of their population engaged in agriculture, (subsistence or otherwise).  When living on a farm, kids can become cheap farm labor, (tending to the flocks, picking the produce, etc.).  Even in the cities, children can be put to work in textile mills or factories working 12 hours a day, 6 days a week and bring home the money to mom and dad.  Children can be a big benefit in these situations.  In First World countries, where 75% or more of the population tends to be urban, children tend to be an economic liability.  You have to pay to clothe them, send them to school, etc., and there are usually laws preventing them from getting a job until fairly late, (like 16 or older), and the jobs generally have to be part-time and low wage, (paper routes, etc.).   Thus, the income potential to be derived from kids in First World countries tend to be a lot lower in comparison to total family income than in Third World countries.  Since the kids tend to be more of an economic liability in First World countries as opposed to Third World countries, parents tend to have fewer kids in First World countries than they do in Third World countries.  

3)  People in First World countries tend to have much better access to birth control methods than in Third World countries, meaning, in general, more control over pregnancies in First World countries as opposed to Third World countries.  Once the child is born, most parents, whether in First or Third World countries, will try to care for and nurture the baby unless some outside influence comes to play, (such as China's "One Child" policy, which has lead to a lot of infant mortality as parents frequently/often/sometimes abandon sickly or female babies to die in preference to trying to get a healthy male child).   

Also, you can get more money out of a pension plan than you put into it, depending on how that money is invested.  If the money is loaned to a software company, (either through loans or purchase of secondary offerings), and the software company uses the money to buy a new CD/DVD stamping press for $1 billion, which can be used to stamp out CD/DVD's with annual sales of $600 billion, then you can get a very good return on your investment.  If the money is loaned to the government to fund some study on the mating habits of the fruit fly, then your return on investment is likely to be much lower, if not a total loss, (the later being the most likely).  

The biggest problem with Social Security is that it was set up as a pay-as-you-go system, (money currently being paid in is paid out to existing retirees), and was never set up as a true pension plan in the first place, (where the money contributed is invested for future returns).  As long as the number of people paying in was 20 times the amount of people collecting benefits, then the system worked well.  Now, we have 3 people paying in for every person collecting benefits, and the system is approaching insolvency.  With the aging of America, it is expected that by 2020 we will have 2 people or less paying in for every person collecting benefits, and such a scheme cannot be supported, as it is almost impossible to tax 2 people enough, (or worse, one person), to pay any decent retirement benefit to a retiree.  Add in the fact that the Federal Government has been raiding the Social Security Trust Fund for years, (had to find some place to get the money to fund the study on the mating habits of the fruit fly), then the insolvency that might have been pushed back to 2100 is now due in 2030 or sooner.  

Medicare is in the same boat.  Current health premiums do not cover existing medical benefits payouts, and the trust fund for Medicare has been raided at least as thoroughly as the trust fund for Social Security.  Another consideration is that Medicare benefits payouts are increasing much faster than Social Security benefit increases, and that adds more strain onto an already wobbly system.  Add in that Medicare was never set up to pay for itself, (the premiums have never covered expenses in the history of the program), and you have another recipe for disaster, and one that is probably going to hit a lot sooner.  

Lots of problems ahead.  Hopefully, some politician will get off their lazy, lying butt and work to help solve it, (instead of doing like the Democrats have usually done, and the Republicans have recently done, and just deny that there is a problem until, like the collapse of Bear Stearns, it all comes home to roost in one big collapse).  This is why I have worked to save my money so that I have an investment portfolio to fall back on in the event Social Security declares bankruptcy.  (Of course, with the current mindset evidenced by the politicians' rush to bail out all the subprime borrowers that took out loans that they should have known they couldn't afford, then the government will probably want to come in a take huge chunks of my savings to pay benefits to those who never bothered saving a dime and now approach a retirement of poverty and deprivation and crying to the government that it wasn't their fault that they didn't save and so shouldn't have to have to live like a pauper due to their irresponsibility and should be bailed out by the government at the expense of those who were responsible and did save for retirement.)


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#10) On March 21, 2008 at 10:07 PM, QualityPicks (79.49) wrote:

Craig, Third world countries tend to have more children mainly because they just "don't think" that much, they don't know about all the "responsibilities" of bringing a kid to the world. They just have sex and have kids :) it is as simple as that I think.

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#11) On March 21, 2008 at 10:24 PM, floridabuilder2 (97.59) wrote:

dwot... you need to have more paragraphs like your first... that one had me rolling.... 

in any event, i have never been one on conspiracy theories, but the more i read on blogs and the more i find the opposite on mainstream media, the more I get scared about what else I don't know........

boy I stopped at 2 kids, now I am thinking since the US will become a developing nation again, I may need a few more

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#12) On March 21, 2008 at 10:53 PM, abitare (29.54) wrote:


Good post and discussion. If I became dictator, all immigration would stop and illegal immigration would be penalized severly. There would be limited Visas for extreme circumstances.

Overpopulation is the road to poverty, war and declining quality of life. People require limited resources and space, the competition for resources can cause violence and ruin. Most of Asia and Africa is overcrowded with people. There are just to many people and not enough ag/productive land to support them in the CURRENT American lifestyle the world is CURRENTLY pursuing. 



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#13) On March 21, 2008 at 11:46 PM, dwot (28.88) wrote:

Lol Craig, I said the explanation came from elementary school, but I think most of the reasons you give are economic...

FB, glad I could be so entertaining... 

Anyone not given mylast one a recommend yet? 

Abit, I agree resources are getting more and more stretched... 

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#14) On March 22, 2008 at 6:54 PM, alstry (< 20) wrote:

Aren't we all subprime.

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