February 25, 2007

Money supply, liquidity, asset bubbles, consumer spending, and the mother of all crashes to come

Man, next you'll hear Bernanke admit that the Fed pumped up money supply and liquidity in order to create a massive housing bubble, which was used to drive consumer spending so as to placate and confuse an American population who had lost their manufacturing base and world competitive position.

But I wouldn't count on it.

Here's the Bank of England last week though, in a stunning admission on their housing bubble cause and effect. What they didn't touch on (yet) is that all asset bubbles deflate, all financial manias die, and all periods of low risk premiums reverse.

Sometimes harshly.

"Investors are likely to take advantage of this ample liquidity and the associated easy credit to purchase other assets, driving risk premiums down and asset prices up," the BoE told parliament’s Treasury Committee on Feb 20th.

"In due course, those higher asset prices may be expected to feed through into higher demand for goods and prices, putting upward pressure on the general price level," the BoE concluded.


Anonymous said...

It's amazing how the truth comes out overseas yet they're too shy to tell it to the home folk.

Anonymous said...

What should be interesting is the effects of the new foreclosure laws. Remember our brave men and women in congress changed the barnkruptcy laws so as to make it very, very difficult to file for bankruptcy (changed law in 2005--if you are at Median income or greater its virtually impossible to file for bankruptcy). Law now favors banks and creidt card companies. All told the crash will expose the gravity of this and one wonders if people will just slave away to pay the credit cards and other items like the dilligent little hamsters.

Seriously Keith, consider the recent changes of bankruptcy law and combine that with a housing crash and asset bubble bursting and what do you have. This is huge!!!

Anonymous said...

Fixated in Australia....

The recently changed U.S. bankrupcty laws combined with a asset bubble, housing crash and record consumter spending will yield some very interesting results? What say you Keith--no place to duck into for most middle and upper middle class debtors. My bet--its already here and will get worse--a new version sharecropper society. You already see folks in large fancy houses dodging the credit card people, eating noodles and getting rid of the leased SUV. More to come and no Ruptcy cover either. Ohhh the ugliness of it all, 2007-2009 will suck economically and probably socially. You will see more divorce, child neglect, stress related illness, crime and just plain bad stuff. Don;t you wonder what those douchebags who sold condos and brokered mortgages im Miami, Vegas, SoCal will be doing this time next year? Add it the economic multiplier effect and even the stupidist denier will get it........

Anonymous said...


They created the housing bubble so now they're blaming rising consumer prices on the bursting bubble!

I guess a lot of people still for for this.

Round and round we go.

Anonymous said...

I've never seen to many T.V. commericals by realtors before, (like Century 21, etc.) like i'm seeing now.

The desperation is setting in. Here in Mass., it seems like 1 out of every 4 houses have a "For Sale" sign on it.

Anonymous said...

just saw a realtor named "Nash" on Fox Sunday morning news. He called the market "Balanced" and said the key to selling you house is "pricing it right".

The outright lying about the state of this market is pathetic.

Roccman said...

http://www.europe20 20.org/en/ section_global/ 190207.htm

In 2006, US foreclosures increased by 42% , directly affecting an
average of 1 US household out of 92. In states such as Colorado,
California, Ohio, or Texas, 1 household on 35 or 40 falls victim of
foreclosure. In October through December 2006 in Ohio, 3.3% of homes
and apartments were filed in foreclosure . The pace of foreclosures
accelerates as the number of insolvent US households increases (cf.
GEAB N°10 on the issue of insolvency): in 2006, over 1.2 million
foreclosures affected 4 to 5 million US citizens (counting between 3
and 4 persons per household).

According to LEAP/E2020, the year 2007 will register at least a
doubling in the number of foreclosures (3) due to the surge of record
high numbers of mortgage loan refinancing on the market (close to
2,000 billion USD). 2 to 3 million homes will probably be filed in
foreclosure and about 10 million US citizens thrown out of their homes
in the course of this year. All those who doubt whether the US
actually entered a "very great depression" should pay a visit to field
reality and observe the devastating effect of the housing and
financial crisis for millions of Americans (4). Scores of blogs
appeared on the web trying to review the on-going housing disaster and
the stream of human tragedies (5). Taking into account that a US
citizen has three months between initial default on interest repayment
and actual foreclosure, LEAP/E2020 estimates that it is indeed in
April that the second wave of foreclosures will hit the US market.

1."Home foreclosures are highest in Ohio", Beacon Journal, 11/01/2007

2. "More than 1,2 million foreclosures reported in 2006", Yahoo
Finance, 25/01/2007

3. "Foreclosures increase 19% in January", United Business Media, 12/02/2007

4. "Texas riddled by foreclosures" , Austin Business Journal, 26/01/2007

5. For instance,My Real Estate Money or Foreclosure Pulse.

blogger said...

Gee isn't it funny the Fed stopped publishing M3 about a year ago?

Gee, that doesn't smell, does it?

Americans and frankly the world are dumber than even the Fed thinks they are.

FlyingMonkeyWarrior said...

The Credit Bubbles newest market, illegals and children. Gotta Keep the music playing.

Don't worry, Mom. I'll pick up the check

Vicki Lee Parker | the (Raleigh) News & Observer
Posted February 25, 2007

During a recent trip to the grocery store, I was fumbling in my pocket for some cash when my 2-year-old said, "Here's your money, Mommy." She was holding my debit card.

I didn't think much of the incident until I got an e-mail pitching the Payjr credit card.

Payjr is a prepaid MasterCard that allows children to shop using their own credit card. It also allows parents to go online to track their child's spending and deposit money into the account as needed.

The company is marketing two types of cards: One for teens, the other for children 12 and under.

This, of course, is not new. The credit-card companies discovered that teens were a lucrative market a few years ago. Their pitch to parents has always been that credit cards can help teach kids about budgeting and responsible spending.

Payjr tries to distinguish itself from other prepaid cards by including a feature that blocks the purchase of such things as alcohol, firearms, pornography and online gambling.

It also lets parents manage allowances online.

A parent simply sets up a list of household chores and assigns a dollar amount to each. When the child completes the chore, the parent can deposit the money into the account.

Parents pay a one-time enrollment fee of $4.95, a monthly fee of $2.95 and 50 cents each time they put money into the account.

There are a number of prepaid programs with online tracking ability, including Allow Card, MyPlash, and Payoneer. Like Payjr, all have enrollment fees, monthly fees and load fees. But some will let the child charge beyond the set limit. Payjr doesn't.

If there is only $15 remaining on the card and the dinner costs $20, the transaction will not go through, which saves on over-the-limit fees.

Is putting plastic into a child's hand, especially one younger than 12, really going to teach the child how to manage money?

I've heard too many horror stories from parents whose children racked up hundreds of dollars in charges and over-the-limit fees for everything from ringtones and video-game downloads.

James Kniffen, a certified financial planner in Cary, N.C., has his own concerns.

"By encouraging children to use credit cards, we are encouraging them to overspend without consequences," Kniffen said.

"Kids need to understand that there are limited resources and unlimited opportunities to spend."

David Jones, the founder and chief executive of Payjr, has a counterargument.

"Kids are going to have a credit card eventually," Jones said. "The earlier the better, because it gives them the opportunity to learn that they can't overspend before they go off to college and get a real credit card and have mounting debt."

Paige Turner said...

Phony appraisals and 100 percent financing on speculative property and "stated income" loans -- OH MY!

I thought I totally understood the basic fundamentals of the current real estate collapse. However, this is the first article that has put all of the crash elements together so that even I can understand them. For example, fraudulent loans are being kicked back to the lenders who originally
approved them:

"For a few glorious years, rising property prices allowed a borrower to avoid default by rolling a loan (headed to default) into a new larger loan. Now, as subprime defaults are picking up, the lenders are taking a closer look and sending all kinds of bad loans back to the mortgage companies that originally made the reps and warranties, but failed to weed out the fraudulent applications. So, while a lot of subprime lenders made a bundle writing bad loans, now they are being asked to give the money back! This tsunami of fraud is enough to crush the lenders. Market reports show that at least 21 sizable subprime lenders have already shut down or filed bankruptcy, and the head of Countrywide Financial estimates that as many as 20 to 30 small mortgage originators are failing every day!"

Following is a typical example of how the market is turning really ugly:

"A mortgage company just funded $100,000,000 of subprime loans. Suddenly, the value of the loans drop when the credit spreads on the risky mortgage collateral moves wider before the mortgage company has an opportunity to sell the securities. Now, that package of mortgages that they paid $100 million for (and intended to turn into bonds and sell for a $5,000,000 profit) can only be sold for $90,000,000. Whoa! A $10 million loss! "

The entire article can be found HERE.

Anonymous said...

Wow, you guys are so negative!

Everything will turn out fine.

What you don't know is that Frodo will make it to Mount Crumpet and throw in the ring, and everything will be as it was before.

Be of good cheer. Elves and Hobbits are already waiting to rescue us.

Anonymous said...

Is there no end to the depth of people's ignorance?

Anonymous said...

Looks like my Credit Cards debt, we'll I'll just get a third job, I guess. Who needs sleep anyway.

Anonymous said...

Watching tube last night and up pops an ad for Dietech (a division of GMAC financing, something I didn't know).

"Don't let that equity on your home go to waste, apply now for a 125% home equity loan."

I got so mad I went verbally ballistic at the screen. Looks like the big fish will go down swinging and 'shoveling it'!

God, this is going to be bad!

Shakster said...

Double Wide Bubble Trouble in Arkansas?Could it be true?It's true in California,believe it or not.

Bill said...


* The Fed is now hoping that subprime blowups do not filter through into higher grades.
* The Fed is now hoping that jobs do not collapse.
* The Fed is now hoping that the inverted yield curve does not mean what it used to.
* The Fed is now hoping that financial speculation stops before things blow up.
* The Fed is now hoping that it has found the "magic interest rates" for a soft landing.

Any action the Fed might take right now risks imploding the real economy or further inflating financial speculation. The situation, however, is now so far out of Bernanke's control that the Fed's economic policy has now been reduced to misguided hope.

Prepare yourself for Rampant Inflation IE: 1980'S.

Doom and Gloom? yup!..we have been here before..but this time with houising so over inflated...we have no other bubble to prop up this economy and keep it moving..not when folks are leveraged to the bone...cash is king...and metal is long term....even a war will not keep this thing from heading to the toilet.


Anonymous said...

gold and silver

Anonymous said...

Lost another toxic loan to Ditech.

Anonymous said...

Credit cards for children? As a way to teach them about money?

And here's the bad news: I bet there are parents who actually believe that makes sense. Lordy Americans are stupid.

Here's how I learned about the value of money- and it worked like a charm!:

Got a savings account in the second grade. Made me feel like a real hotshot. Opened it up with about 2 bucks. Began going to the bank a couple times a month , making small, tiny, deposits and watching it grow.

When I graduated from high school I took out 400 bucks and traveled around Europe for 3 months. Came back to the States with 200 dollars left over. By then I was a fierce saver! I knew what the value of money was and how not to blow it on useless stupid stuff.

That trip to Europe changed me forever. Much better spent than on a stereo or gadgets, clothes, etc.

At 25 I bought a house after a couple years of teaching, had a huge downpayment and made a ton of $$ when I sold it because by then I owned it outright.

Americans have got to change. There is no pleasure in being a debtor. And conversely, much joy in being debt free.

And here's the other thing that's got to change in order for Americans to get straight with money again: The price of houses has got to come down- drastically!

They've got to come down to where it is POSSIBLE to save a 20% downpayment and get off on the right foot with it.

This past cycle has sorely penalized savers. THere was NO POINT in "saving for a downpayment" when the prices were inflating so quickly. It was a hopeless situation. All you could do is jump in feet first and hope for a soft landing (appreciation). Bullsh#t. Total Bullsh#t.

The War on Savers has got to stop in this country.

And the price of houses has got to come down by, I hate to say it, but about 80%. Drastic times call for drastic measures.

Bill said...

Agreed 100% saving money!!..