[roccman]

Some could argue the crash began in August...JP Morgan set to write down 200 Billion...consumer (read American citizen) is dead...oil peaked...

Can ya dig it?

Charles Hugh Smith

$this->bbcode_second_pass_quote('', 'H')ere are a few predictions:

1. The Dow Jones Industrials will drop hundreds of points in a day, very soon, losing at least 3,000 points within the next few weeks.

2. The Shanghai stock market will lose half its value, dropping from 5,800 to under 3,000.

3. Major banks will be declared insolvent.

4. Major lay-offs will occur as U.S. retail, auto and house sales plummet.

5. The tech high-fliers (RIMM, GOOG and AAPL) fall will precipitously

[americandream]

The saga of an insatiable system cannabilising itself....and so we find ourselves in the closing days of this absurd dream we wove called limitless growth.

[Armageddon]

Wow, scary stuff. We all knew it was coming, just not the timing. It seems everything is coming home to roost now. Weeks ? Months ? I would say 6-12 months easily at the most.

[venky]

We have heard all of this so many times before. I am not optimistic but I dont give credence to sudden doom scenarios.

[MrBill]

There are actually many who believe we could 'melt-up' from here. Due to many of the same reasons you have listed. This might be seen as the flip-side to inflation (i.e. not real gains, but illusionary). Some like Jim Rogers who actively criticize the Fed and see inflation actually think that the Shanghai stock market might double (again) from current levels. Others see the credit crunch as spuring a move into 'risk free' US treasuries and so keeping long-term yields down. This makes US treasuries expensive and stocks cheaper by comparison. That would mean that US stocks might continue to rally into 2008 despite a weak US economy, especially if the Fed keeps easy (and fuelling inflation). I doubt any of those predictions will come to pass in 2007. But it is only 6-weeks to go so let's wait and see, eh?

How far will short-sighted politicians go to keep this rally going? Here is an example of your lawmakers hard at work to destroy your future. Enjoy.

$this->bbcode_second_pass_quote('', 'C')itigroup Inc. and other big U.S. banks say plans by Congress Democrats to ease lending rules, aimed at avoiding mortgage foreclosures, may weaken bankruptcy laws and curtail lending, the Wall Street Journal reported.

Citigroup, JPMorgan Chase & Co. and Wells Fargo & Co. are opposing draft legislation that would permit bankruptcy judges to change interest rates and mortgage lengths for borrowers in bankruptcy, the Journal reported.

Banks said such changes would curtail lending and increase the borrowing costs, the Journal reported, citing Scott Talbott, the senior vice president of the Financial Services Roundtable, an industry group.

The bill, sponsored by North Carolina Democratic Representative Brad Miller and California Democratic Representative Linda Sanchez, would also allow judges to change parts of loans from secured to unsecured debt if house values dropped below mortgage amounts, making it harder for banks to recover what they'd lent, the newspaper said.

[Bas]

$this->bbcode_second_pass_quote('MrBill', '
')
How far will short-sighted politicians go to keep this rally going? Here is an example of your lawmakers hard at work to destroy your future. Enjoy.

[MrBill]

$this->bbcode_second_pass_quote('Bas', '')$this->bbcode_second_pass_quote('MrBill', '
')
How far will short-sighted politicians go to keep this rally going? Here is an example of your lawmakers hard at work to destroy your future. Enjoy.

[Bas]

well, that's true, but obviously banks were giving out mortgages far too easy as it was; it created this mess in the first place.

Also many of the repossessed houses now fall into disrepair, making them essentially worthless, ultimately costing the banks much more money than a rescheduled mortgage. Either way, stricter lending rules should be instituted by law to supplement it.

Cleveland, Subprime Capital of America.

[yull]

I don't buy these sudden doom predictions either. Nobody knows what is going to happen to the markets in the next year or 2. I'm a pessimist and see severe declines in the economy and markets sometime soon (next 5 years), but nobody knows with such a degree of certainty that they can say this or that will happen in the next few weeks. The markets aren't logical after all.

[Cloud9]

Aside from the very obvious restrictions on fraud and predatory lending practices, if you really want to destroy the economy, let government come in and bail out those facing foreclosure and bankruptcy. Any such effort will bail out big banks that are already part of the problem. The whole system is out of whack because people have been insulated from the consequences of bad decisions. Let the process work. Let some big banks go broke. Let some loan officers go to jail. Foreclosures will flood the market. Housing prices will drop to rock bottom lows and the market will adjust. I suspect that much of this paper is owned by the Chinese. Devaluing the dollar will make their goods more expensive and our goods cheaper. Who knows, we may scrape some of the rust off of our factories and start making things again.

[jbeckton]

$this->bbcode_second_pass_quote('yull', 'I') don't buy these sudden doom predictions either.

[roccman]

$this->bbcode_second_pass_quote('jbeckton', '')$this->bbcode_second_pass_quote('yull', 'I') don't buy these sudden doom predictions either.

[MrBill]

$this->bbcode_second_pass_quote('Bas', 'w')ell, that's true, but obviously banks were giving out mortgages far too easy as it was; it created this mess in the first place.

Also many of the repossessed houses now fall into disrepair, making them essentially worthless, ultimately costing the banks much more money than a rescheduled mortgage. Either way, stricter lending rules should be instituted by law to supplement it.

Cleveland, Subprime Capital of America.

[Revi]

I think a crash is entirely possible, but it seems like there are ways to avoid going down with the ship. It may be time to change things into tangible assets soon. Meanwhile the ship keeps blundering on.

I just bought 20 shares of FPL, since they're the lowest carbon electricity producers in the US. People will still need to keep the lights on for a few years, whatever happens. I'll sell before 2012, since that's when the Olduvai Gorge starts to open up, and the lights start to go out, according to Duncan.

I'm betting on a long slide starting this winter and accelerating as of the summer of '09, since that's when we start to drop 4% per annum in oil production according to Skrebowski.

I like to have some time to get ready. A crash could happen anytime, but these are my best guesses as to when it gets dicey.

[MrBill]

RE Cleveland, Subprime Capital of America

Thanks for the link, Bas. I don't know. I am not totally unsympathetic, but if you have been building equity in your house for 30-years why should you ordinarily be at risk of losing it? Why did she not sell her house to buy her apartment? Instead she gave it to her (obviously deadbeat) sons.

How to legislate nationwide to protect individuals from their own poor decisions? Or in fact is urban decay not a local condition in the first place and only secondly a national issue?

I do not know, but someone needs to be asking these questions because it was not long ago that community leaders on behalf of, yes you guessed it, black and latino neighborhoods were chastizing banks for not opening up enough branches or lending enough in poorer neighborhoods. That was back when the property market was rising and these community leaders were worried about blacks and latinos being excluded.

Our collective amnesia is truly breathtaking in action! ; - )

[Bas]

I've been against interest deductions for a long time (we have them here too)

And I'm also not for protecting individuals and banks from their mistakes, but I think it would be wise to legislate certain lending standards so that banks(that are central to our economy) don't get into the same kind of trouble or worse in the future and people don't have to lose their homes which are so central to people's lives.

Anyway, I posted the article not so much for the woman's story, but more for this quote:

$this->bbcode_second_pass_quote('', 'a')nd whole neighbourhoods have been blighted by foreclosed, vandalized and boarded-up homes.

[MrBill]

I am beginning to think that something as important as people's lives should not be left up to the individual if they are going to continue to make poor decisions! ; - )

Bas, I think every crisis teaches us lessons. I do not even see this as the biggest crisis that we have been through (up to now), but it certainly could deteriorate further.

However, I think this particular credit crunch teaches us an important lesson about the risks of disintermediation.

Essentially, if I may condense it down considerably, it is the credit creation process that took place OUTSIDE the banking system or away from central bank supervision.

In otherwords contingent liabilities that turned out to be real demands on bank liquidity.

Let me give you one very simple example, although completely ficticious, just to illustrate my point.

Say I am the biggest broker in the world and I have the majority of market share to underwrite all equity options. So I earn a fortune during quiet periods of time when volatility is very low. I collect nickels, but if you collect enough nickels they add up.

So for years I collect premium from selling puts that expire (mostly) worthless. It is good business for me, so I not only increase my size, but I increase my risk as well. I take a dominant market share. Say 80% of all put options. Happy days. I return those profits to my shareholders in the form of dividends and share buy backs. Everyone is satisfied.

But because my customers - banks, brokers, hedge funds, individual investors, etc. - have all bought insurance they think they are protected against a move lower in stocks by buying puts. So some go out and increase their long bets because they believe they have a stop loss of sorts in place.

Okay, now you have an external credit event like Avian Bird Flu, for example, markets wobble and eventually careen. How are those contingent liabilities transmitted from Wall Street to Main Street?

Quite simply actually. As I have used my premium that I earned as Big Broker by selling puts to do share buybacks and pay dividends I now find myself physically short cash to meet those margin calls triggered by falling share prices. I earned nickels, but now I need to pay out fifty cent pieces.

If I try to borrow that money from other banks and brokers or even the central bank I create a 'new' demand for 'real' money that the central bank and other banks were unaware of right up to the point when I made that call on interbank liquidity.

If I default on my credit obligations because I am insolvent then all those customers of mine - banks, brokers, hedge funds, individual investors, etc. - that bought insurance from me now find themselves exposed to a falling market because the puts they bought are no longer backed by my 'good' credit.

So they will have to borrow money to fund those positions or make margin calls. The other option being that they are forced to sell into a falling market that makes everyone else's shares suddenly worth less as well.

And again unlike traditional money supply growth through the banks as supervised by the central bank those contingent liabilities were intransparent. Especially if they had been done off balance sheet through conduits. No one would know the size of my exposure. Only that up to the start of the crisis that I appeared very profitable and credit worthy because I have been booking profits up front without hedging out all my downside risks.

Now that is just a ficticious example, but it does illustrate how off-balance sheet instruments and credit disintermediation can result in a call on money markets. That is our current credit crunch in a nutshell.

But it is not much different than borrowers and lenders using sub-prime CDOs and other synthetic financial instruments as collateral to increase their leverage to make new investments. Sooner or later someone gets holding the bag if markets fall and spreading risk around does not eliminate it. And it can even increase those risks if they lead to larger and larger trades. Those in turn can cause money markets to tighten up if the perception of risk increases while the value of that collateral falls in value.

It is a lesson in risk management for the future as well. That is why I am not confident markets will recover as soon as some assume. I think each crisis permanently changes the way we look at and price risk. Now the risk of credit disintermediation has been exposed. It will never be the same. Then again never say never as I am sure we have other lessons to be learned next time as well! ; - )

[NTBKtrader]

The biggest problem is that the RE market is in collusion with each other via affiliated business arrangements, offering inflated appraisals for other ancillary services, banks don't take risks themselves when originating loans but pawn them off in the secondary market. Banks can now own insurance and brokerage thanks to the Gramm, Leach-Bliely Act. There is no independence, there are few checks and balances, fiduciary duty is out the window. My family has been in the re business for ages and I can tell you the market is changed forever, corruption is embedded.....legislators, state and federal regulators might as well be employees of these companies.

[Pops]

I’m kinda thinking the Texas Railroad Commission unveiled the unraveling way back.

Everything since has been an airball.

[threadbear]

I love it. The credit markets HAVE seized, it's not even a prediction, and some of you still just don't think a sudden doom scenario is likely. It's happened, Dudes. You're just not seeing the repercussions. In the U.S, even those with great credit ratings are having trouble getting jumbo loans--anything over 400,000. People requiring jumbo loans to buy at present prices, in L.A, together with the sub prime client, must represent a good 50% of the market, if not more.

How is this not a worst case scenario. It's also not one that can be easily remedied, as the smoke and mirrors veiling the majic of home loans is clearing.