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Who Pays?


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2005 Apr 18, 8:13am   6,376 views  13 comments

by Patrick   ➕follow (55)   💰tip   ignore  

(Note: I've moved my housing crash blog from blogger.com to here, which is my own web site - http://patrick.net/)

When things really fall apart, who is going to pay? "Owners" with negative equity are probably not going to be in any position to pay off the loan. Banks may lose a bit, but Fannie Mae will probably lose more. Suddenly Fannie-backed mortgage debt will not be able to pay the promised interest to investors. Fannie will lose a lot of business.

But ultimately, who put up the cash for all that bad debt? I guess it's a lot of institutional investors, significantly the Japanese and Chinese. And those institutions? Where did they get the cash?

It's pretty hard to untangle.

Patrick

#housing

Comments 1 - 13 of 13        Search these comments

1   Lisa9   2005 Apr 19, 4:44am  

OK, someone tell me why the 10-year is going down?! I don't get it. The stock market went down last week b/c of new worries over indicators of inflation. If inflation becomes more of a problem, then the fed will have to keep increasing the interest rate.

2   Patrick   2005 Apr 19, 9:42am  

Hey, WordPress is asking me to "moderate" comments. I don't want to do that. I just want them to appear, instantly, no matter who comments.

Anyone with WordPress knowledge know how to do that? Thanks.

Patrick

3   golden state bubble   2005 Apr 20, 1:39pm  

I recently started paying attention to China's role in this global economy.
And may shed some light on China's gameplan.

China's determination to become the manufacturing
powerhouse for the West has made the Chinese do some very unnatural
manipulations. China pegs Yuan, artificially suppresses the value of its
own currency ( not sure how they do it) to keep its exports cheaper to the
West. Some experts say Yuan is undervalued by upto 30%.
That is causing Western workers to compete in a very unfair market.
End result, manufacturing jobs are moving to China faster than ever.

Also China is buying dollars at a record rate to keep the value of the dollar higher. Estimated at 300B reserves at present, and it continues to add.
Keeping dollar higher , and Yuan cheaper. Again helping it to acquire more and more manufacturing jobs.

I think they are counting on manipulating the World Market so much, that any loss they could potentially incur due to a weaker dollar, They will have made up for it by having more and more exports to the West. By having permanently moved these manufacturing jobs in China, they are thinking it might be worth to just write off say 50-60B of their USD reserves.

So far China's plan sounds brilliant to me.

But it is not fool proof. They are playing a huge gamble here. In a sense they might have created a bubble for their own good.
If the Chinese have been investing in Fannie Mae, it could backfire on China. Once this Housing Market busts. China could incur heavy losses in its Freddie/Fannie investments. No doubt there.

What will be even worse is when US ends up in recession, US consumer spending drops. Result, imports from China reduce drastically. This will itself create job losses / recession in China.

This could potentially create political unrest in China. Secondly if the Chinese cannot continue to peg Yuan , their imports will become more expensive. China could be in big trouble. Any political unrest could only cause US/West importers to shun away from China.

China's over dependence on the US/West Economy makes it very vulnerable to any downturns in the US/West.

In my opinion, any artificial demand has to correct itself. Any manipulation can only go so far. But when the correction happens, no one can stop it.
Case in point the , artificial demand for Tech stocks in 2000. We all know how it corrected itself.

If China's game plan fails ( I am pretty sure it will ) , it can only be good for the West. The way Chinese are consuming Oil, the way they are importing construction steel from all over the world. When China's economy tanks, all of this artificial demand dies out and prices will come
down for these things.

Secondly, it will only be good news for the US manufacturing sector. It may be able to stop its bleeding, or even gain back some of the jobs lost to China.

4   golden state bubble   2005 Apr 21, 12:18pm  

Clarification:

“If China’s game plan fails, it can only be good for the West.”

What I meant was when it is free trade market, everyone should play by
the same rules. China should/can not be allowed to continue pegging its
currency.
If China wants to be part of the Free Market World, it should also practice
the same. It will be good for the US/West workers, by levelling the playing field. And not their competitor having an unfair advantage.

I think the days of paying 30% less at Walmart, are gonna be over soon.
Be ready to spend what it is worth. And only spend what you have got.
I think the US consumer is about get a lesson in economics the hardest way, in the not so distant future.

"US gov’nt not dumb enough to screw it totally"
What did they do about the 2001 Stock Market Crash?

Karl Marx :
Agree with you that it is ultimately the stupidity of US consumer spending that is the core of the problem.
I was just focussing on the role of China in encouraging that behaviour, in that particular posting.

Had Chinese Policies not helped fuel the housing boom in the US, things would'nt have gotten so out of control. They could have continued pegging and the world would have helplessly just watch the manufacturing trend.

But by supporting this housing boom, China thought it was making a safe gamble, I think they made a huge mistake. The ball is no longer in China's court now, it is with the US consumer.

And he is no position to catch it. Game Over.

5   og   2005 Apr 21, 12:46pm  

"Personally I would hate to pay 30% more than what I do today at Walmart." -- SFLover

Who in San Francisco shops at Walmart? What a bizarre thought. Whole Foods, TJs, Andronico's -- but not Walmart, dahling.

Or maybe you don't live in SF? You just love it. That might explain it.

6   golden state bubble   2005 Apr 21, 1:31pm  

And yes. U might be saving 30% at Walmart.
But in return, it is costing us more and more
to build the Eastern Span of the Bay Bridge because
of the rising cost of steel. China is consuming a lot of it.
Not to mention how much more we are
paying for gas these days.
One unnatural manipulation leads to another
unnatural consequence.

7   golden state bubble   2005 Apr 22, 1:01pm  

SFLover:
I agree in the free market who ever produces the cheapest goods will be selling the goods. I am all for it. I just dont think any body should have an unfair advantage. I did'nt think Bush's tariff on steel imports was a good idea.
I dont think EU should give any subsidy to Airbus, which puts Boeing at a
disadvantage. Put it this way, " Free Market is good, Free & Fair Market is even better". I am not saying floating the yuan will stop job migration to China, at best it may slow it down. But what it will do is make the US/Western worker more competitive in the global market.

Chinese:
I think you said it best yourself. I already said pegging Yuan was a great/brilliant idea, and has been very successful. The rest of the world
may cry foul, but if you have the power to do it , do it as long as you can keep it under your control. They should have started slowly floating it by now, giving it say 5% increase year over year.

But instead, they created a bubble like situation by supporting low interest rates in the US. It's just a bad idea to loan money to customers/US consumers who are unlikely to pay you back. U just said it right.
But they have gone so far ahead in this game, that the situation is
out of their control now.

Bottom line : Pegging Yuan for a 10 years was a great idea.
Floating the Housing Bubble , BAD move.

8   golden state bubble   2005 Apr 22, 1:37pm  

" Why not focus on better service, newer technologies, or whatever that we are more competitive in this world market? I think that’s our future…"

You are confusing between invention and production. I strongly believe the West will continue to be the inventor. New inventions , New technologies, I dont think are gonna be coming from China or India anytime soon.

But when comes to manufacturing the product for mass consumption, China and India are gonna be the place where it can be mass produced at a low price, not in the US/West.

For example, my camping tent was invented in US , but it is being mass
manufactured in China at a low price for US MArket.

Secondly, American kids are not interested in technology education which can help them participate in the mass production effort.

I have seen a software development team here in the Valley. Of the six four are Indian born, one is Asian, the lone white guy is Italian born. No Americans in technology, though the management is all American born.

Sure computers and software were invented in the US. But even in US the
majority programmers are not American born. My guess is less than 10% programmers in the US are US born.

There are still lots of software jobs in the US, but Americans are not interested in training for these jobs, or at least that is my observation.
And those who are interested, face a strong competition from the presence of better trained, more motivated foreign workers.

9   golden state bubble   2005 Apr 23, 12:47am  

Chinese
I have already made all the points you are making.
You are saying nothing new.
The only thing I can see is that, it's ok for you to say the
same things about China/Chinese Policies, but if someone
else says the same thing, you dont like it.
And also , I never took away the blame from US Consumer
spending and Fed in creating this bubble. This particular
thread's subject was on if/how China contributed to
this housing bubble.

10   Patrick   2005 Apr 24, 3:07pm  

One point I still don't see is how exactly the money flows from Chinese and Japanese trade surpluses back to US mortgages. Are the Chinese depositing their money in US banks that lend to US house buyers? I don't think so, but maybe I'm wrong.

Patrick

11   golden state bubble   2005 Apr 26, 11:39am  

It works most likely the way Venture Capital funding works in the
Silicon Valley. Financial Institutions want their money to work
for them. Say BoFa or Wells Fargo or other Investment Firm will invest a portion of their money in a VC Firm, and other portions in Stocks or so, diversifying their risks.

In late 90's investing in VC's/Startup's was the craze. Now is the craze
to invest into real estate by loaning this money to those Institutions Freddie/Fannie etc, that in turn loan it to home buyers.

Chinese govt. with it's surplus Billions of Dollars invests/loans in these instiutition, and becomes a huge player in this game. OF course part of the surplus goes into buying US treasuries to keep US long term interests low.
Hence the CHinese export surplus ends up back with the US consumer.
ANd the cycle continues. Thats why in my earleir post I said China may have created a bubble.
But when the housing crashes, US consumer cannot spend to buy imported Chinese goods, the cycle begins to unwind.

"The Yuan is not convertible– Chinese investors cannot directly trade Yuan for Dollars"

Thats true pretty much for all developing countries. Dollars are really really precious to these countries, as it is the only way for them to buy Oil from the International Market. All developing countries practice strict control on using their USD's.
That alone does not explain pegging.

As far as I understand, CHina has only one Govt Controlled National Bank. And since it is the only place to trade USD / Yuan. The price set by The Bank /Chinese Govt Mammoth , pretty much controls exchange rate at any smaller trading places outside China as well.

Does anybody else have a better explanation.

12   golden state bubble   2005 Apr 27, 1:30pm  

Thanks to the above poster for breaking it down to the MBS level.
And also these MBS are backed by Fed Govt.
I understand that if Freddie/Fannie borrowers fail to pay back
Federal Govt will pay for it by Tax Dollars ( or just printing more?)
How bad can it get? Your thoughts.

Also on China's currency peg?

And so it turns out it is not just China playing the "Keep the USD strong" game. How bad does it get for all these countries when this phenomenon starts unwinding? (Do u think it will unwind?)

13   golden state bubble   2005 Apr 28, 12:19pm  

Thanks Ghost Writer.

Federal Guarantee for GSE's did sound too good to be true.
But thats what every body seemed to be saying.
So I thought it might be true.

Yep, anybody who has tried to use their homes as an ATM, or purchased
a house in 2001 and later ( For SF Bay Area, 95 and later), is just a pig
being fattenned before the slaughter.

So The Asian Govts who have been manipulating, will soon get a lesson that a Free Market is inherently a Free & Fair Market as well.

And so will the US consumer, who has been spending easy money, made just by living in a house. And not providing any service or manufacturing a product to make money.

Thanks Again.

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