patrick.net

I've actually thought of that ponzi scheme and am surprised it was never tried here. Technically a bank could just say, no payments and just accrue the interest. On paper it would look great until time for the balloon payment at the end, but hey that's what extension fees are for ;)

I'll admit that I'm a bit confused by the term DESTROYED in this context.

Perhaps our friends Neutron and Brand can each define exactly what they mean by that word?
I think that might help, at least on my understanding.

I'm not trying to be smartass, here. Really. To me, destroyed would mean something like "removed from circulation", perhaps. But I'm just guessing. Any good wikipedia articles?

"How does the FRB (Federeal Reserve Bank) expect banks to attract deposits and thereby liquidity to banking system with rates heading to zero???"

Pretty much all money is deposited with one bank or another, unless you keep it in a cash in a matress. If you've got $100 in savings in a bank earning 1%, but you're sick of that return so, you buy some lemons to make lemonade (investment), where did the money go? Into the bank account of the lemon salesman. Same overall liquidity in the system as before.

If interest rates were 10% and you didn't think you could get that kind of return on your lemonade, and left your $100 in the bank, you've still got the same liquidity in the banking system.

But the fed though can inject cash (liquidity) into the system by buying bonds. They've then got the bond, and the banking system has the cash. The effect of buying bonds is to increase demand for bonds, which raises prices for bonds, which is the same thing as lowering it's effective interest rate. And that's why 'lowering interest rates' increases liquidity.

Way oversimplifying here, but that's the general idea.

we need to get all the illegal immigrants back that fled this country. We need them to buy more homes to bring the prices back up. Also, when these illegal immigrants are hired by the builders again, the illegal immigrants will spend money and prop up our economy again. This is one way to get taxes from the illegal immigrants, ie., we get property tax revenue. This will make the county supervisors smile with glee.

Also, I like the idea of freezing prices on homes because the builders aren't making enough money. Selling a house for a million bucks that is built with cheap illegal immigrant labor doesn't have enough profit for the builders.

We also need to keep the prices fixed because the city councilmen and county supervisors still need to tack on extras in order for the developer to proceed, for example, a fire truck here, some public art there, etc. Our buyers don't really care about the extra cost these uncaring politicians tack on to the cost of a house.

yippee eye ah, yippee eye oh, it's a wonderful idea to freeze prices, else they could drop another 20-50%.

@OO

Thanks for the stuff on Japan, it cleared a few things up for me.

So to my very unclear question, the banks ultimately will not be shuttered, at least in the context of too big to fail. The sky will not fall. All will appear well in the empire.

What would have happened in Japan if their central bankers did not go zirp, and actually pursed an interest rate policy which more suitably aligned with the laws of nature. An accelerated asset deflation is the tradeoff, but maybe benefits of a healthier capital market.

What are our guys going to do different than Japan did, so we don't end up in an extended zero growth environment? An interest rate bounce off of ZIRP?

Neutron: if you were trying to prove that money was destroyed within the fractional reserve system, then that was a poor example. All that happened was the seller took 100% of the sales price, the buyer paid 5% and the bank gave the seller 95% (in return for future cash flow from the buyer). If the house value declined 10%, the asset value lost will directly affect the buyer from his personal net worth perspective. He now owns an asset worth X*90%, but still has a liability of X in addition to his monthly cash flow obligation.

But let us indeed consider the situation of foreclosure.

Pre-sale state: Seller (0K+house), Buyer (50K), Bank (950K+capital)
Post-sale state: Seller (1000K), Buyer (0K+house), Bank (0K+capital)
Foreclosure @ -10%: Seller (1000K), Buyer (0K), Bank (0K+asset@90%, capital - (asset*10%))

That is still a zero-sum system.

If you want to talk about fractional reserve "destroying" money, then you need to provide some specific mathematical examples. You've got a loose collection of concepts that are sometimes true on their own, but they need to be tied into a particular coherent situation. There are conditions in your original scenario in which money would be increased, notably if the seller deposits the full 1000K into a bank account, thus allowing a different bank to offer far more loans compared with the first bank's small loss of 50K.

NVR,

I don't think Japan, or US have a choice. They (we) have to go ZIRP.

When the bubble popped, nobody wanted to take on any loans because the only reason why you took on loans was that you expected the asset for which the loan was committed to go up. The only lever to sweeten the deal for the retail lender was to drop the rate to 0. Also, no country in the world can afford to have a systematic banking failure, so any government that faces the same situation as we do today and Japan did 18 years ago would opt for slow asset deflation rather than a fast one. That in itself is the law of nature.

However, things may work slightly differently here. First, Japanese individuals were very conservative. There was no 0-down, Neg-Am, Ninja mortgage loans in Japan in 1990, they had 100-year mortgage instead but you still need to commit your son's income. Most of the aggressive borrowing happened on the business level. Second, it has a culture of "shame". It was considered a social disgrace to file for bankruptcy, and Japanese are more risk averse when it comes to taking up loans.

I personally believe that ZIRP may stir things up a bit faster in the US because Americans are less risk averse. Also, when US consumer machine shuts down, the whole world will be impacted so the leakage of dollar carry-trade will be smaller (not to say there won't be any dollar carry-trade opportunity), making reflation a bit easier.

OO, that's an excellent post and I take no issue with any of it.

I'm curious as to what you think we are facing here. Do you see any de-coupling from EU or Asia coming? You feel we will not stagnate ala Japan, what are the timeframes you are thinking?

@Peter P

Way OT. Very good read on Michelins recent and unprecendented ratings of restaurants in Tokyo, they have been granted double the number of star worthy restaurants as Paris, astounding the French. Interesting the devotion of chefs towards the preparation and care of fresh seafood. Probably all old news to you. Todays washington post.

http://tinyurl.com/2dll2x

Yeah. I guess wealth is what's destroyed.

No Costa Rica for me. That place is one invasion from all those ex-pats ending up in the stewpot. No, thanks.

Europe or "internal exile" which in Solzenityn-istic terms means I stay in the areas within the US where the Empire is weak. Boondocky places, you know?

Some very good discussions of how things are likely to go here. "Neither a borrower nor a lender be" Ben Franklin advised us, we'll finally be taking his advice seriously.

Thanks NVR! :)

Food is never OT.

This is getting very comical

Due to budgetary constraints, the Economic Indicators service (http://www.economicindicators.gov) will be discontinued effective March 1, 2008.

Economic Indicators.gov is brought to you by the Economics and Statistics Administration at the U.S. Department of Commerce. Our mission is to provide timely access to the daily releases of key economic indicators from the Bureau of Economic Analysis and the U.S. Census Bureau.

http://www.economicindicators.gov/

Hmm, after M3, economic indicators, what other statistics will start to go...move long move along, your American sheeple, nothing to see here, enjoy your life.

oops, got moderated again. What are the trigger words again please?

http://tonto.eia.doe.gov/dnav/pet/hist/a103600001m.htm

Based on the last recession of 1990, it looks like gasoline consumption is indeed quite inelastic, it took 4 years last time for the US drivers to adjust their usage down 5-10% depending on seasonality. It is showing the same inelasticity this time.

Jim Rogers is not entirely crazy when he predicts $200 oil, US drivers are energy traders' best friends.

I went to the Fed Reserve website in the video posted by nuttyneutron, and it's not getting any better. As of 2/13, non-borrowed reserves deteriorated another 10,000 million. In a week. Total non-borrowed is now at -18009 million.

HopeNow turns to Project Lifeline turns to Project WTF turns to Project FB turns to Project OMFG!

I guess Ben will be cutting rates pretty soon.

http://www.pbs.org/wgbh/pages/frontline/shows/wallstreet/weill/demise.html

This will give a bit of history on how we got here. The Glass-Steagall Act was passed back in the days after the huge losses of the depression. This act was created to prevent the stuf we see now. Had we not taken apart bit by bit, we may not have even gotten to the point where we are at.

I am only 27 years old and was in way way shape or form responsible for the lack of regulation or this mess. I rent and owe money only for my student loans which are only $8,000. I will be held accountable however. This type of crap drives people like myself to put off having kids. This is the biggest tradgedy of all. Society needs young adults like myself to make kids for the future of the country.

The loopholes exploited by the banks in this law back in the 80s occured just about the time I started learning about the concept of money.

http://en.wikipedia.org/wiki/Basel_II

The banks as a whole are in trouble. Now the big question, which ones are ok?

http://www.mercurynews.com/ci_8269028

From bad to 'worst' for Santa Clara County home sales
NUMBER OF DEALS AT 20-YEAR LOW; MEDIAN PRICE FALLS FROM JAN. '07

Due to budgetary constraints, the Economic Indicators service (http://www.economicindicators.gov) will be discontinued effective March 1, 2008.

When the data stops responding to torture, simply make it go away.

Someone seeking to buy a median-price home in Santa Clara County, for example, would need a household income of $170,352, presuming the buyer made a 5 percent down payment and had a 30-year loan at 6.63 percent, the study said.

And a renter of the county's average one-bedroom apartment would need to work full time making $20.69 an hour to afford the $1,076 monthly rent.

The study, titled "Locked Out 2008," assumes buyers and renters would spend just 30 percent of their incomes on housing costs - the amount housing experts and the mortgage industry have traditionally considered appropriate.

However, the study said, 46 percent of Santa Clara County's renters and 42 percent of its homeowners spend more than that on housing expenses. The trend is similar in other Bay Area counties.

http://www.mercurynews.com/business/ci_8258524

"This type of crap drives people like myself to put off having kids. This is the biggest tradgedy of all. "

Being from the same camp as nutty, I would like to extend an official "thank you" to the previous generation for having left us such a swell legacy. Now instead of worrying about what we are leaving for our children to take care of, we are at the point of not even being able to justify having them.

Anyhow, every generation has it's crooks. I truly hope our generation will treat the gifts they were given with more respect, but we probably won't.

I'm no economist, but I am shocked at everything I am hearing and reading. How are the banks actions NOT considered fraud? Sure, the market will correct them eventually, and they'll take a big hit. But everyone is going to.

It seems like if the government wants to conserve the trust of it's own consumer machines (people) and the rest of the world, that it would expose what happened in a very clear manner, and take appropriate action. From there we could take the hit, and our lessons, and move on. But it appears they are going to keep repackaging the BS and shoving it in our face.

"I am principally against the idea of 'child support.' If the parents care about the kids at all they should not have gotten into a divorce."

huh? marraige is an agreement between adults, not the adults and kids. I know many happily divorced couples who enjoy raising their kids together while, at the same time, "not being married."

the sad thing about divorce is that it's a quick route to poverty so, pragmatically, most couples should probably learn how to live together under a different set of assumptions.

And that’s why ‘lowering interest rates’ increases liquidity.

Way oversimplifying here, but that’s the general idea.

"lowing interest rates" also, I'd imagine, drives up the multiplier rate so the same money is desposited and reloaned more times. and, if the same money is deposited and reloaned more often, the bank doesn't have to pay as much interest to attract money;

"It’s really unfortunate that it seems our government enforcement folks don’t have the resources to go after all those who falsified mortgage applications."

IMO, the government doesn't want to enforce the rules since their job is to sell credit crack to new junkies.

Divorce is certainly the sure road to poverty, that's why I want to see it made illegal.

I have always said that we need to make deadbeat dads (and moms) live in a military style boot camp and not let them out until they can prove that they are paying child support and spending time with their kids.

the biggest problem I have with "child support" is that, after the divorce, "economy of scale" is lost since it's more expensive to live apart than together. I've also talked to fathers who pay huge amounts for "child support" simply because the court ruled that their children should live in the upscale lifestyle they had before the divorce. of course, if the mother bad mouths the father, life begins to suck if you feel like you're going all out!

Neutron,

well, I think it is a sweet justice for those idiots who voted for Bush the second term. These people typically have no assets, no money, lowly educated and they will bear the most of the disastrous consequences. Their god will deliver them exactly what they deserve.

We the Bush opposers typically have started taking pre-cautionary move since 2004 to distance ourselves from such an ending, or even come up with ways to profit from the mess. We won't be around to help out the Bush supporters, they deserve what they will face.

As for you, since you are below 30, you can always consider emigration. Anybody who is educated and below 30 will be welcome by many countries in the world.

OO,

You're justifiably angry, but at the wrong demographic. Honestly, do you expect Joe the machinist in Kansas to be able to keep up with the growing convolusion of the finance world?

After reading some of your posts, you appear to be quite knowledgable on economy and finance. Perhaps you even have a job in a related area. This doesn't mean you know everything, nor does it mean you could do the job of Joe the machinist in Kansas. So why expect them to know how to do yours?

The choice in the last election was all about Iraq, plain and simple. Thats what people were told. They had no idea about the "fraud" going on in the financial world at the time, and they still don't... and won't until somebody tells them.

This is why we need truth from our government, and from the financial institutions that affect all of us. People are not as dumb as you think. If the truth was available to them they would make the right decision.

We actually need Pat Buchanan in the WH, fat chance esp. since he's not running. But that's the kind of leader we need. Basically I always vote for the biggest right-wing mofo, lol.

Fuzzymath,

>This is why we need truth from our government, and from the financial institutions that >affect all of us.

Waterboarding, anyone? ;-)

>People are not as dumb as you think. If the truth was available to them they would make >the right decision.

One important aspect of not being dumb is to know when you are being lied to.

Some people are not very good at recognizing lies and propaganda. That's why it is important that the news media do not all contain the same propaganda, which is what happened in 1996-2006.

@ Ex-sunnyvale-renter,

I hate right wingers with a passion. They are the @ssholes who got us in this place to begin with. I am from Texas, a state that is still doing well, and many people there hate right wingers too. It is the fact that we hate left winger liberals more that they vote for people like Bush.

Last election for president, I voted for Bugs Bunny after seeing what that SOB carpet bagger was doing in the Whitehouse. I was not going to give him my vote with all the illegal crap he had pulled. Bush is a fascist and not a true conservative like me.

I equate the oppressive desires of both the god squad and the peter puffers to accept "their correct" way of living with equal disgust. If I wanted to be in a theocracy, I would move to Afghanistan. If I wanted a bunch a peter puffers around me, I would move to France.

I am a moderate with fiscal conservative values, unlike what is now in the Whitehouse, and I have progressive ideas for economic and social development.

"Some people are not very good at recognizing lies and propaganda. That’s why it is important that the news media do not all contain the same propaganda, which is what happened in 1996-2006."

I get sick to my stomach watching the nightly news. It perhaps has gotten slightly better recently, but a couple years ago it was mindblowing. The media has turned into a massive borglike Michael Moore.

The thing that confuses me is why they do it? It's not like some evil man at the top of large media corporations okays everything that gets published to match with his own personal agenda. It goes all the way down through the media food chain.

Fuzzymath,

I'm just an amateur financial analyst and picked it up by necessity. One needs to know how money comes and goes, or he will be taken advantage of. Of course the fact that my wife is an MBA helps.

I am baffled by these "Kansas mechanics" not because of their lack of education, but because of their lack of independent thinking compared to their peers in the world. I traveled internationally often and talk to people from all walks of life. People without college degrees in UK, or Australia, or China, Japan etc. can see through Bush. Bush was widely seen as the worst President ever back in 2004, by people from all kinds of background outside of this country. We went from a country being revered and loved to a country despised and hated.

What I have concluded is, a significant portion of Americans (well, those hardcore 30% who still give a thumb up to Bush's approval rating) who are just plain idiots. They lack the basic understanding of good and bad, and can only follow whatever their church told them to do. Their cognitive ability is simply on another different level.

No, nutty, you just think you hate right-wingers. What you hate is neocons, and trust me, you do not hate them more than I do.

Real right-wingers, real Conservatives, are Nationalist, Protectionist, Isolationist. Our last Presidential candidates were Charles Lindburgh and maybe Goldwater.

Conservatives with a capital C are further from Neocons than Liberals are. Much further.

I voted for Bush in 2004. I'm proud I did, because the bigger threat was the uber-Neocon of all time, Kerry/Kohn and that harridan of a wife of his. That pair were truly scary.

Now, as I've said, we need a real Conservative by Pat Buchanan in the WH. Fat chance though. We'll end up with some neocon puppet, Obama, Hitlery, someone.

The only thing real Conservatives can do is ..... if you don't like what someone is doing, STOP PAYING THEM.

Tune in, turn on, drop out. As Ran Prieur advises, stay out of the Empire's way as it falls, and for God's sake stop feeding it.

If you don’t have debt, then go buy yourself a nice car.

It seems that both houses and US built cars (like Toyota, Nissan, or BMW) will be coming down in price. Thus, the money in the bank is "growing," even at 2-3% interest.

OO,

Bravo.

FuzzyMath,

So I think that the news was all propaganda from 1996-2006, and you think it was all propaganda from 2006-2008.

Some things just never add up.

http://money.cnn.com/2008/02/14/news/companies/privatestudentloans/index.htm?postversion=2008021512

People who are wondering where the next shoe will drop should look at student loans. The money is drying up fast, and it is student loan money that enabled outrageous tuition inflation for the last twenty years. The parents can't refi to send their kids to school anymore. That leaves student loans. If the kids can't borrow then they can't go. The schools will be suffering starting this fall, as qualified applicants fail to take their seats because the student loan companies are insolvent.

These schools prop up local economies the way overseas military bases do. Layoffs and halted construction projects will put the hurt on everyone. The government won't have the money to prop up the schools, and the bond market has collapsed so the schools won't be able to borrow directly.

The next big bailout is coming, right in time for the general election.

Ahh, student loans. I tool 'em out in the 80s, got eh, a bit over half of an engineering degree, and paid 'em back working as a repair tech. I think I was in about the last period of at least somewhat beneficial student loans. They were something like 3% to 6%. Banks were loaning at 8%, and looking back I wish I'd taken those and worked less, studied more, and got the degree. But the loans I had were about 10 grand, paid them off steadily then when I got a windfall paid off the last bit.

Now they're run for profit, students are encouraged to get into tons of debt, and they're using them for not very renumerative degrees like Art History.

There's a saying, "A degree in BS is better than no degree" and even an Art History degree holder can go to some 6-month school and get some skills that will enable them to make more than most non degreed people. So I'm of the school of thinking that any degree is good, and you ought to get one if you can.....

But we've had too many people in college, not enough Vo-Tech type training, and not enough recognition of skilled blue-collar careers so that there's been a huge push to go to college even for those whom it's not right for.

And all to the tune of huge profits for the student loan issuers, of course!

This is yet another area where the bubble's popping and people will have to go back to 1950s ways of doing things.