Global Financial Crisis (Was: Subprime Meltdown)

[fivemack]

Who in the five heavens would buy bonds backed by student loans in the first place, and who in the eleven hells would attempt to sell the accursed things? Are there any positive aspects to attaching all the fun of speculative leveraged investment to education in the way that it's been attached to housing, so that the price of a university place goes up to the maximum that an optimist can at the time attempt to afford in annual interest on the cheapest loan available?

[R.D. Silverman]

Originally Posted by xilman

Only 80 bucks to fill up a truck?

I filled up my small car (a Peugot 307 diesel) two days ago. A tank full cost me $125 at the current exchange rate. Fuel here is about $2.40 per litre, which is a whiff over $9 per US gallon.

Fully 2/3 of that price is tax of one form or another. A UK economist has observed that crude oil can reach $300 per barrel without it directly affecting the pump prices, assuming that the government are willing to forego billions in revenue.


Paul

You have a better public-transit system than we do.

I have a 54 mile drive to get to/from work. I live in Boston suburbs
and there is no public transit to get me to work.

It costs me about $55/week in gasoline costs just to commute to work.
And I don't drive an SUV.

The U.S. is a LOT bigger than England. We are more spread out.

[ewmayer]

Originally Posted by xilman

People bitch. Get used to it. You're bitching about economic policy yourself, just from a different perspective.

People over here complained when pump prices hit the equivalent of $4 per gallon, which was not so long ago.

Admittedly a lot of it surely just typical higher-price-related whining, but Americans have gotten so addicted to the lure of easy credit and living beyond their means in the past several decades that I sense there is more to it this time around. The fact that so many folks said they will be spending their government bribe, erm I mean, stimulus, checks on necessities like food and gas, and are resorting to high-interest credit card debt runups to pay for same supports that:

Barely surviving on credit cards: No longer able to turn their homes for cash, Americans are increasingly using plastic to meet their basic living expenses. But many can't afford to pay the bills.

Like I said, an economy built on the dual rotten fundamentals of growth-via-ever-increasing-debt and perpetually low fuel prices can't shift to a more rational sustainable model overnight.

Disclosure: I live within 10 miles of work [not for lack of offers involving much-longer commutes] and take public transit to work. But 50-mile-or-more daily commutes are the norm here in the SF Bay area, and 100 or more miles a day is not at all unusual. And based on bus ridership, folks like me appear to be the exception.

[xilman]

Originally Posted by R.D. Silverman

You have a better public-transit system than we do.

Are you sure about that?

Where I live, there's about 2 buses a day, neither of which travel at time suitable for commuting.

Consequently, I commute by motorbike each day. Cambridge (UK) has traffic levels comparable with Cambridge (Mass.) as far as I can tell (having experienced both cities) but has poorer roads and much poorer parking provision. Riding a bike allows me to bypass the traffic jams and to park pretty much anywhere I want.

Anyway, Cambridge/Boston (Mass.) has the T, which I've used on a number of occasions. Cambridge (UK) has no such equivalent. I've no idea how the bus provision compares between the two Cambridges, having never tried to use the Mass. bus service.

Paul

[xilman]

Originally Posted by ewmayer

Disclosure: I live within 10 miles of work [not for lack of offers involving much-longer commutes] and take public transit to work. But 50-mile-or-more daily commutes are the norm here in the SF Bay area, and 100 or more miles a day is not at all unusual. And based on bus ridership, folks like me appear to be the exception.

I live precisely five miles due south from Cambridge city center in a direct line, and about 4.95 miles from where I now work. By road it's closer to 7 miles.

The bus provision is completely useless for commuting purposes (as noted in my reply to Bob's post) and although I could drive 2 miles to the nearest bus stop (the Trumpington Park and Ride if anyone's sufficiently interested) there doesn't seem much point. Consequently, I commute by motor bike directly to where I work.

Disclosure: I ride a gas-guzzler which does 45-55mpg (Imperial gallon, of course) depending on riding conditions. It's a Honda 1100cc Pan-European which I usually describe as being a touring machine. You'd be shocked at how many well-educated people fail to spot that one.

Paul

[ewmayer]

U.S. Economy: Trade Deficit Narrows as Imports Fall

May 9 (Bloomberg) -- U.S. demand for imported goods slumped in March, overwhelming the impact of the first export decline in more than a year and causing the American trade deficit to shrink more than forecast.

``Consumers have cut back significantly in just about every area but necessities, and we're seeing clear evidence of this'' in imports, said Russell Price, senior economist at H&R Block Financial Advisors in Detroit. ``Weakness in our economy also seems to be affecting growth in other areas of the globe, thus slowing demand for our exports as well.''

The gap narrowed to $58.2 billion, the lowest this year, from $61.7 billion in February, the Commerce Department said today in Washington. The shortfall with China was the smallest since 2006.

Imports dropped the most in six years as purchases of furniture, cars and telecommunications gear fell, reflecting the weakest growth since 2001 and a falling dollar that makes overseas goods more costly. Economists anticipate the U.S. expansion will stall this quarter as households struggle to cope with soaring food and fuel bills, a monthly survey by Bloomberg News published today showed.

China Inc. not going to like this at all...

[garo]

Originally Posted by ewmayer

U.S. Economy: Trade Deficit Narrows as Imports Fall

China Inc. not going to like this at all...

FXP Baby!

[cheesehead]

Ernst,

This afternoon's All Things Considered (NPR) has an interesting piece titled "Global Pool of Money Got Too Hungry" explaining something I'd been wondering about: Just what started the chain of events that led to our current subprime crisis?

There wasn't anything in the NPR account that I hadn't heard before (or wasn't posted in this thread!) except for one factor. It's not especially profound, but I hadn't seen it connected with the other facts before, and to me it completes the connection I'd been seeking.

(My own conclusion, not part of the NPR broadcast: It could be said that the current subprime crisis is an unintended consequence of the successful extension of free-market principles into China and other developing countries ... or, if one prefers, an unintended consequence of the end of the Cold War and fall of communism.)

Scanning back through this thread, I find that something you posted last December 18, #36 in this thread, has most of the facts (except that one factor) scattered through an article whose main emphasis (justifiable negativity about Alan Greenspan) was elsewhere.

Originally Posted by ewmayer

< snip >

Alan Shrugged: Fed Did Nothing as Subprime Crisis Spread

< snip >

On that article's second page was the paragraph:

, with which you erroneously contended:

Another lie - in particular Americans` saving rates have been dropping steadily for decades, and last year finally went in negative territory for the first time since data had been collected - how does "negative savings rate" equate to "global surplus in savings"?

It doesn't, and nothing in the article makes that equation -- the word "negative" never appears in the article, and neither does the phrase "savings rate". The article doesn't refer to Americans' savings rates.

One of your rare strawmen, Ernst. Tsk, tsk.

That's getting off my subject, but there is a reason I mention this: "a global surplus in savings that drove down interest rates and pushed up housing prices in countries around the world." That part is real.

The "global pool of money" to which the NPR story refers, or the "global surplus in savings" as it is termed in the NYT article, largely comes from the collective savings by the newly-wealthy citizens of all those recently-surging economies in China, India, Brazil, Russia, and so on.

It was about $35 trillion in 2000, but by 2006 had doubled to $70 trillion.

(For comparison, the total money spent by every person, business and government in the world in a year is less than $70 trillion, according to NPR.)

So, during the past few years there was an enormous amount of money looking for safe places to be invested.

Here's the connection I hadn't seen before:

To the global investors, one of the best places, safe with high return, was the U.S. housing market -- not buying the houses, but investing in the mortgages.

But there weren't enough U.S. mortgages available for that enormous amount of money. Answer: create (or greatly enlarge) a new category of U.S. mortgage: subprime.

Thus began the tumble, fueled, as usual, by greed.

Sure, other countries with positive savings rates were also buying lots of subprime-backed paper,

... of course. They had inspired that paper!

but

and then you continued with the parts of the story, Greenspan's sins and all, with which I was familiar.

[ewmayer]

Good call, cheesehead - I was so busy ragging on Greenspan that I sloppily substituted U.S. savings rates [negative] with global ones. Greenspan was right about the glut in global savings and that money having to go somewhere, but was disingenuous in that fact in and of itself having anything to do with the U.S. housing bubble. As you point out, without insanely easy credit and lax lending policies here in the U.S. [both direct results of Greenspan's policies of low interest and laissez faire lending oversight at the Fed] there never would have been a rapidly ballooning pool of [supposedly] high-yielding mortgage-backed bonds to attract all that foreign money.

Which leads me to wonder 2 things:

1) To what extent was that global savings glut responsible for the earlier bubble in U.S. technology and dotcom stocks in the late 90s and 2000?

2) If Greenspan hadn't in essence blown a second bubble [housing] in the wake of the collapse of the first [dotcom], would that foreign money have started chasing commodities [e.g. oil, gold, etc] much sooner, i.e. might we have seen a runup in oil prices already in the early part of the decade?

[cheesehead]

Originally Posted by ewmayer

1) To what extent was that global savings glut responsible for the earlier bubble in U.S. technology and dotcom stocks in the late 90s and 2000?

Don't know. I can only speculate:

Note that the global money was looking for safe places to be invested. I can't recall whether the NPR piece specifically stated that, or whether "safe" was my own synthesis from what was said. Weren't there several currency collapses and other economic upheavals in Asia during the late 90s? That would have led investors (especially Asia) to be looking for more safety as time went on. So it would be the supply of safe investment avenues that was insufficient, and the U.S. housing market was viewed, from overseas, as relatively safe compared to what was happening over there.

So, it may be that the global savings glut (GSG), AKA global pool of money (GPoM), was not especially interested in the U.S. stock market because it was not viewed as safe enough, despite having (AFIAK, without checking) considerably higher capacity to absorb new money than the mortgage market had. Thus, I'm inclined to say the GSG/GPoM was not the principal player in the dotcom bubble (especially since the dotcoms would not have looked as safe as other stocks in general).

2) If Greenspan hadn't in essence blown a second bubble [housing] in the wake of the collapse of the first [dotcom], would that foreign money have started chasing commodities [e.g. oil, gold, etc] much sooner, i.e. might we have seen a runup in oil prices already in the early part of the decade?

Dunno, but I do have an opinion.

First, a background digression:

As a former oil industry worker who thinks the Hubbert Peak theory is basically sound, I've been advising folks for years to prepare for a runup in oil price, telling them it wouldn't manifest itself as one single sudden dramatic event, but instead as a sucession of higher highs, separated by lows that show a long-term upward trend themselves.

U.S. domestic oil production peaked in the early 1970s. That was the Hubbert Peak for U.S. domestic oil production -- such production has steadily declined since then. This would not have manifested itself as a dramatic event if it had not been for the additional influence of the 1973-74 Arab oil embargo, which crimped U.S. imports precisely at the time when they would otherwise have compensated for the decline in domestic production.

It's true that U.S. oil demand was increasing throughout this period, but there was no sudden surge. If there had been no political factor like the Arab oil embargo to sharply alter the supply/demand balance, the U.S. would simply have imported more oil to meet demand as domestic production declined, without dramatic fluctuation.

Now, with that background, my opinion:

The global Hubbert Peak will be played out on a grander scale than the U.S. Hubbert Peak was. There will be multiple crises such as the recent runup in oil price.

I don't know whether the GSG/GPoM is playing a major role in the current runup, or whether it would have played a role in your scenario.

But there will be more oil crises in the future. Public opinion may attach a particular cause to each crisis (perhaps later blaming GSG/GPoM for the current one?), but only one will be the most fundamental cause -- that the oil is running out.

[ewmayer]

While I also buy the fundamental peak oil hypothesis, I disagree with the doomsayers - after all, there is plenty of oil still there which could be extracted, but can only be profitably extracted if oil prices stay above $100 or even more. I see a decades-long trend where oil production gradually falls [on the order of 1% a year], and prices continue to trend higher, though actually at a slower rate than the past few years. There may be some short-term speculative runups to close to $200 per barrel in the next year or two, but long-term, the reduction in demand that will result - and which we're already starting to see - will bring prices more back in line with supply/demand fundamentals. But no way do we see $50 a barrel again, unless the dollar magically triples its value relative to other world currencies. Will be especially interesting to see how this plays out in the red-hot "road warrior" economies like China - signs are [see e.g. article below] that it's really starting to bite there, because it's not so much fatassed citizens driving SUVs that need the oil as it is their entire industrialization paradigm.

Also, forgot to ask rhetorical question #3 last Friday:

3) To what extent is the "global savings glut" simply the U.S.' own long-term and massive trade imbalance coming back to the U.S. in the form of foreign investment?

Now, on to today's news:

Inflation Surges in China

Consumer inflation in China rebounded to the highest level in 11 years in April, as food prices continued to surge, official statistics showed on Monday.

The Consumer Price Index (CPI), a barometer of inflation, jumped 8.5 percent from a year earlier, according to a statement on the website of the National Bureau of Statistics (NBS).

The CPI surge is in part due to the relatively small base in April of 2007 and the commodity price jumps in the global market, especially foodstuffs, the NBS said in the statement.

"Currently, we need to closely monitor the trend of future price movement and give a prominent role to the fight against inflation and the prevention of the further price rises," it added.

The CPI surged to a 12-year high of 8.7 percent in February year-on-year before easing a little bit to 8.3 percent in March.

Food continued to be the biggest driver in consumer inflation, rising 22.1 percent from a year earlier, while non-food items saw an increase of 1.8 percent year-on-year.

However, analysts fear the inflation may gradually spread to non-food sectors, as the Producer Price Index (PPI), a measure of price levels as finished goods leave the factory gate, skyrocketed to 8.1 percent year-on-year last month, the highest level in four years.

The jump in wholesale prices was largely fuelled by crude oil, coal and other raw materials. Analysts say it usually takes about six months for price hikes at factory gates to finally be felt by consumers.

Top Candidate for Government Housing Bailout Found

LOS ANGELES (Reuters) - A California man who has defaulted on nine homes and expects banks to foreclose on all of them, forcing him into bankruptcy, says he now considers it a mistake to have invested in the real estate market.

This script is sounding all-too familiar of late:

MBIA Posts huge loss on credit derivatives: Stock surges nesrly 10%!

SAN FRANCISCO (MarketWatch) -- MBIA Inc. reported Monday a loss of more than $2 billion for the first quarter after taking a $3.6 billion charge for losses on derivatives, but shares of the embattled bond insurer traded as much as 10% higher.
Posting its third straight quarterly loss, MBIA continues to struggle with business difficulties in the face of falling house prices and a global credit crisis, but Chief Executive Jay Brown sounded an optimistic note.
"MBIA continues to be a sound financial institution," Brown said in a statement. "We have ample liquidity, our balance sheet is built to withstand credit stress levels many multiples of what we're experiencing now, and our business model is proving that we are adequately capitalized to satisfy any potential claims on our insured portfolio."

Wow. If losing $13 per share - nearly 10 times what analysts had been expecting and in fact more than the shares are selling for! - makes one a "sound financial institution", I would dearly love to see the standard for "outstanding financial institution." Bear Stearns, perhaps?

Interestingly, despite this horrendous 8-quarter losing streak, Moody's and S&P *still* have MBIA rated AAA - and we know how stingy they are with their coveted AAA ratings. [Sorry, no eye-roll emoticon can do justice here].

Now, if this follows the same script as Fannie Mae did last week, the stock will stay up most of the day as the big-money managers keep it propped up to give themselves a golden parachute and squeeze out a bunch of short sellers. Then, late today or starting tomorrow the big selloff will come, leaving the herd of "greater fools" buying this today holding the bag.