Posts Tagged ‘credit crisis’

The Myth of Pent-Up Demand

January 22, 2009

Over the last two days, I’ve been involved in three conversations where the person I was talking to said that people aren’t spending money because they’re scared and because of how the media is portraying this financial crisis.

Is that what everyone thinks?  That if the media was saying “go spend money” they’d go out and do it again?

I think it’s a bigger problem than that.  The economy has been supported by consumer spending for years, and now, the consumers have finally run out of money.  As the bubble grew, their sources of disposable income grew.  First, it was credit cards, allowing people to buy what they wanted and worry about paying for it later.  The last straw was using their homes as ATMs, allowing them to cash out paper gains to buy big ticket items like flat screen televisions, dirt bikes, quads, and toy haulers.

When two-thirds of your economy relies on consumers to spend money, this was inevitable.  Instead of developing sustaining industries, we shipped all our production overseas so people could buy more stuff.  Now we’re paying the price.

I really don’t see any way of this turning around either.  Things are going to have to change dramatically and our need for instant gratification is going to have to be replaced with thrift and savings.  It’s not like all of a sudden, a switch is going to flip and people are going to start using their credit cards again.  They are probably maxed out to begin with.  They won’t be able to fuel their purchases with their home’s equity either.

All of the fixes the government has tried so far have done nothing to help this problem either.  It’s our fault for making bad decisions, but they’re more than willing to throw billions at the banks for even worse decisions.

Our consumer based economy is failing, and we’re going to have to adjust our economy and our standards of living in order to come out of this ahead.  People aren’t spending money because they are already in too much debt, or they don’t want to go further into debt.  The media and this “pent-up demand” have nothing to do with it.

Obama to the World: Our Dollars are Worthless

January 6, 2009

Someone needs to tell Barack not to tell the world that we are going to be running “trillion dollar deficits for years to come” like he did today.

What kind of message is that sending to the rest of the world?  What kind of message is that sending to American businesses and the rest of the population?

First, how are we going to finance all this spending?  Are we going to keep borrowing money from China and Japan?  What happens when China finally wakes up and realizes that they are getting paid back in dollars that are worth less and less?  The fact that Obama is announcing to the world that we are going to be fiscally irresponsible and are going to keep printing money is going to accelerate the East’s rejection of our dollars.

Second, why would any business spend to hire new employees, give raises and bonuses, or buy new equipment when their leader is telling them that recovery is years away?  Everyone is waiting for government’s next move, hoping it’s the cure all.  News Flash – the government actions are making things worse!  The sooner Obama and the Feds get out of the way and let the markets correct themselves the better.  If we do get out of this by printing money, we will only be setting ourselves up for complete and total collapse a few years down the line.

My industry is tied to real estate development, whether it’s apartments or commercial centers.  Right now, no one wants to lend money because there is too much uncertainty, and because the commercial real estate developers want their own bailout.  There are projects ready to go, that need to start so they are built when the economy recovers, but no one wants to lend money to get them going.  The shoot from the hip fiscal policy of the Federal government is only making the lenders more fearful and more reluctant to lend.

And finally, why is so much of the blame being placed on the reluctant American Consumer?  Do you think something is wrong when two-thirds of our economy is based on consumer spending?  We don’t make anything, we import everything, and buy things we don’t need on credit.  Sounds like an awesome system.  The American consumer is tapped out and is unwilling to go deeper into debt when they are fearful they are going to lose their job.  Obama blabbing about running trillion dollar debts for years is not helping restore confidence.

We need real leadership right now and a government that is willing to make a stand and stick to it.  If they are going to bailout companies, then they need a real plan.  They can’t have one plan then another and then change that one half way through.  That approach has just made things more messed up.  Unfortunately, Obama and his team seem more than willing to throw money around without a clear plan as well.  We can’t keep running these deficits forever and we shouldn’t announce it to the world.  We need to restore faith in our currency and our economic system, and Obama’s comments are leading more fear and an even longer recession.

Like Recessions? Better Get Comfy!

December 16, 2008

This is awesome!  Today, the genius Ben Bernanke announced that we will officially be in the longest recession in American history!  As much as I love worrying about my job and scrimping and saving to pay the bills, I can’t wait for it to get worse!  I hope I get to eat Hamburger Helper and Ramen every night!  Better get used to those PB and J’s!

I really can’t believe how bad of job Bernanke is doing.  He is driving this county off a cliff, and instead of applying the brakes, he’s stepping on the gas.  Remember the “financial abyss” Paulson warned us about when Congress didn’t approve the TARP bailout the first time?  We’re there, and Helicopter Ben is taking us all down with him.

I guess I have to cut him a little slack because he was only a professor at Harvard.  He never got any real world experience, so I guess he never really actually got to apply any of his theories until now.  The old saying is “those that can’t, teach.”  I respect elementary, junior, middle and high school teachers.  They believe in what they do and are trying to help make the world better.  However, everyone wants to have a cush job like a college professor.  You get tenured, you can’t get fired, you get fat pay, great benefits, 3 months a year off, paid sabaticals and a great pension.  I’m sure glad we picked such an idiot to run our financial system.

Ben was supposedly an expert on the Great Depression in his research as a professor.  I guess he didn’t study an recent history like the Lost Decade in Japan.  Can the problem be any similar?  Cheap credit, a real estate bubble, a credit crisis, a central bank that cut it’s rate to zero, and then a 15 year recession.  Wow.  Sounds like a blast.  Maybe Ben wanted to relive the Depression first hand!

Here’s a quote from Yahoo! Finance:  “Given how low interest rates are, the central bank said it planned to use a variety of unconventional methods to flood the banking system with credit and drive interest rates lower.”

Sounds like that’s exactly what we need right now.  More and more credit.  Floods of it to be exact.  Isn’t that how we got here in the first place?  How is it going to get us out of it?  It’s like telling someone who’s drunk that what they need is more tequila, not trying to sober up.

The American consumer is being criticized right now for cutting back, being frugal, and not buying big ticket items (with debt) like cars and appliances.  They should be lauded for setting a great example.  Helicopter Ben should realize what everyone, from banks to lenders to consumers, wants is a stable economic policy.  We don’t need more reckless spending and more and more debt.

I wonder what Ben’s personal finances look like.  If he practices what he preaches, he must have 10 maxed out credit cards and no savings.  He probably has all new appliances on the store’s credit card and he has huge car payments each month.  That’s supposedly what is good for the economy because he’s spending.

What we need right now is for Ben to make an early exit, and for Obama to name a new person to run the Fed, not this Geithner clown who shares Ben’s affinity for the printing press.  We need someone who will run our economy like we all have to run our houses.  We need to live within our means and manage our debt.  We can’t rely on printing new money whenever we get in a bind.  Why should the Fed be any different?

All I know is that right now, all the actions of the Fed and Washington have failed miserably.  Ben the Genius keeps thinking that more debt and credit will right the ship.  We have a credit crisis, but the underlying problem is a complete and total lack of confidence in our economic system.  The government also has a huge credibility problem because it has no plan, is running around like a chicken with it’s head cut off, and pumping trillions of dollars into the system.

Until we get a policy that restores confidence in the system and faith in our government, we won’t get out of this.  So grab a chair and a blanket, sit back, and enjoy your Hamburger Helper.

Wall Street Journal – Cheerleader of the Fed

December 14, 2008

Here is an opinion piece from the Wall Street Journal today.  Talk about cheerleading for the government.  I wonder how much Bernanke and Paulson paid this guy to write this?

Well, actually, looking at the author, Frederic Mishkin’s bio at the bottom, he was a former member of the Federal Reserve Board of Governors, so I now know why he would write this kind of garbage.

He says that many have wrongly labled the current Fed policy as “pushing on a string.”  His argument is that the current crisis would be worse if we did not pre-emptively lower rates.

I really don’t understand how a person can teach economics for a living and be this clueless!  No wonder our business school graduates have no idea on how the real world operates!

From what a layman like myself understands, the problem with our economy right now is that no one is lending.  Pretty simple problem.  The media, Bernanke, Paulson, et al make it sound like it is amazingly complicated.  It really isn’t, when you just sit down and think about it for a second.

Right now, no one wants to lend money because they are scared they won’t get paid back.  Even the most creditworthy companies can’t get loans.  Normally, what would happen if the banks were scared to lend?  They would raise interest rates to take into account the extra risk.  If you have a bad credit history, the bank might charge you a higher rate than someone with perfect credit.

This practice encourages lenders because they will be making a return that is adequate to offset the risk.

What is the Fed doing right now, lowering rates?  They are encouraging borrowing and spending.  The are not encouraging LENDING.  That is the big problem.  You can have people lined up around the block to borrow money, but if the bank doesn’t feel safe lending it out, they won’t.

Also, right now, people are already be in debt to their eyeballs.  You can’t force them to spend or go into more debt.  Just because their credit card rate goes from 15% to 14% is not going to make them go out and buy a new plasma TV.  It’s not going to make my company go out and buy 10 new computers or me buy a new car.

What would make me or my company start spending again?  Having more work, expanding our business, and making more money.  How does that happen?  Our clients need to be able to get loans to fund their projects?  How does that happen?  The LENDERS NEED TO GET AN ADEQUATE RETURN FOR LENDING MONEY!

What’s wrong with high interest rates anyway?  It was very bad in the late 1970’s and early 1980’s but the situation is not the same now.  In this country, once something is associated with bad financial times, it is viewed as one of the worst things ever.  You hear all the talking heads on TV saying “We can’t have high rates because rates were high in the early 1980’s.”  How does that make any sense?  They don’t give any reasons why they were bad and why they were like that in the first place.

We have a lending crisis right now, and we need to figure out how to get financial institutions lending again.  It was caused by massive defaults on lines of credit like mortgages and home equity lines, but it isn’t a “credit” crisis.  The sooner the Fed and economists realize this the better.  It shouldn’t take someone like me to figure this out, but our leaders and experts are all concerned with easing the monetary policy and not fixing the macro-economic problems we are facing.

Calling a Bottom

December 3, 2008

I work in the architecture industry and we are feeling the credit crisis probably a little harder than everyone else.  My firm steered clear of condos and single family homes, mainly sticking with apartments, retail, and student housing.  We avoided the end of the housing bubble, but we are stuck in the middle of the lack of lending.  Right now, nothing is being built and nothing is on the boards.  This is because developers, from the most aggressive to the most conservative, cannot get funding for their projects.  They have the land and they have the vision, but they can’t get the funds to even start the process.

Today, my boss went to a presentation on the emerging trends for 2009, and the story was that the economy would not get better until 2011 at the earliest.  According to the presenters, 2009 would just keep getting worse, 2010 would be volatile, but more on the down side.  Then in 2011, we would start to bottom out and maybe by the end of that year we would start to see building again.

Talk about gloom and doom!  To me, this is just as crazy as the NASDAQ 20,000 calls during the dot-com boom, the ‘15% a year forever’ real estate pumpers, and the $500 oil predictions from earlier this year.  Those signs told those who were really paying attention that things had gotten out of hand.  The rise of the stocks during dot-com days and the rise of commodities (especially oil) earlier this year did not follow any fundamentals.

It was the result of everyone piling on, trying to make a buck.  And with that piling on came all the cheerleaders.  I think Peter Lynch said that when the checker at the grocery store is giving you stock tips, you know it’s time to get out.  On the other hand, when all of the experts in the industry are calling for three more years of pain, it’s probably time to get in.

There is a lot of money to be made right now out there.  Not just in construction and architecture and engineering either, but that’s where I’m focusing.  We have clients trying to build retail centers in areas that have only old, run-down malls.  Others are trying to build boutique hotels.  Some want to build senior housing or low income apartments.  These are projects that people will use, no matter what.  It is not the viability of the project that is driving decisions right now.  It is fear and a loss of confidence in the system.

All it’s going to take though, is one firm or lender to realize that if they lend out money and just sit back and take the returns on it, they are going to make a killing.  In the current state, no one is going to buy a loan that is packaged and resold.  But there has to be some lenders out there that will just sit back and collect interest for the next 10 years.

That is the big shift that is coming.  Lenders are going to have to hold the loans they make.  They won’t be able to resell it before the ink is dry, and they will have to really pay attention to their standards to make sure they are making loans to the right people.  During the last few years of easy and cheap credit, banks were just making loans and selling them to Wall Street right away.  They didn’t have to follow any standards because speculators were buying them up, no questions asked.

So, right here, right now, on December 3, 2008, I am calling the bottom in the architecture industry.  We’ve gone way past fundamentals and pro-formas and are being driven by fear right now.  I might be off by a few months, but I believe that someone is going to take that first step and start lending again.  And once someone tests the water and doesn’t get eaten by sharks, more and more will jump in.

Another Treasury Department Patch Job

November 25, 2008

This one will cost us $800 billion to buy troubled assets from banks to free up consumer lending.  Wasn’t this what the original TARP was supposed to do? 

Let me get this straight, Congress first rejected and then approved $750 billion to buy troubled assets and toxic paper, but the Treasury went their own way and just gave money to big banks, whether they wanted it or not.  Now they are coming back with a new $800 billion bailout to do what the first one was supposed to do, except this time it’s bigger and doesn’t need any Congressional approval.

This is just another hack job by the two guys who are supposed to be running our economy.  Instead, they are ruining it.  They both admitted that they have no idea what they’re doing and just keep going with the flow, printing money left and right, changing their minds, and not even having a plan to stick with.

People right now are not borrowing because they can not meet their existing debt service or they want to save money.  Pumping hundreds of billions of dollars into the system might encourage some companies to lend money, but who is going to borrow money right now?  Also, why would these institutions lend when they have no confidence in the borrower?  Forced lending and borrowing by the government is just going to lead to more malinvestment and an even longer recession.

Our economy is driven by spending and racking up huge debts, by everyone from the government to big busness to individual families.  Rather than pumping more money into the system and encouraging more debt, we should be seizing this opportunity as a nation to return to a culture of thrift, savings, and production.  The system as we know it is broken, and now is the perfect time to fix it.

More Deflation Propaganda

November 24, 2008

Here’s a link to a video I received in an email from TheStreet.com.

This is a perfect example of how misinformation spreads throughout the public.  People will take what is said in videos like these and accept it as the truth because “TheStreet.com (or other media outlet) said so.”

Basically, all it says is “deflation is bad because it occured during the Great Depression.”

Notice though, that deflation is reported in falling consumer prices, or the CPI.  This number includes the costs of food and energy, which are falling right now.  Normally, when the Government reports inflation, they use core inflation, which excludes food and energy prices.

This is very convenient, isn’t it?  They pick and choose what numbers they want to report.  The government always tries to show inflation as low as possible, and now is showing big, bad deflation as high as they can.

Why does the government do this?  Because they need inflation to operate.  Inflation broken down to the simplest term is “adding to the overall supply of money.”  Rather than taxing the population, they just print the money they need instead.  This is why inflation is sometimes referred to as the “hidden tax.”

As you add more money to the overall supply, each dollar is worth less, which means our dollars buy less goods.  They need to report inflation as low as possible so we don’t realize how much the purchasing power of our dollar is declining.  Also, many foreign governments hold billions of dollars in reserve.  The last thing they want to hear is that their holdings are declining in value.

The only entity that does not benefit from the deflation we are experiencing is the government.  That is why we are conditioned to think it is bad.  Under normal circumstances, they need inflation to fund their programs.  Currently, we are in a special situation, where the government is just printing trillions of dollars right and left.  We might have short term deflation due to the decline in food and energy prices, but we are going to have massive inflation because of the massive amounts of new dollars entering our system.

The lesson of this video is that we always can’t take things for face value.  We need to learn about our financial system and what the numbers and stats the government and financial institutions use mean.  If we really understood, we would see through the lies and propaganda, and see how the actions of our government are going to destroy our standard of living.  As Henry Ford said,

“It is well enough that the people of this nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution tomorrow morning.”

Bernanke Admits He’s an Idiot

November 23, 2008

From Bloomberg.com:

Bernanke Tells New York Times He Underestimated Housing Meltdown

by Daniel Whitten

Nov. 23 (Bloomberg) — Federal Reserve Chairman Ben S. Bernanke said he underestimated the impact subprime mortgages would have on the economy, according to an interview to appear in the New Yorker magazine’s Dec. 1 edition.

“I and others were mistaken early on in saying that the subprime crisis would be contained,” Bernanke said. “The causal relationship between the housing problem and the broad financial system was very complex and difficult to predict.”

Widespread failures of U.S. subprime mortgages, home loans to borrowers with poor credit records, started in 2007, touching off a financial crisis that has spread to other sectors of the world economy.

The article, entitled “Anatomy of a Meltdown,” said Bernanke and Treasury Secretary Henry Paulson tried what Bernanke and his Fed colleagues called a “finger-in-the-dike” strategy to keep the financial sector operating long enough so that it could repair itself. As recently as this Sept. 1, the article said, Bernanke thought that strategy would work.

Can someone tell me how Helicopter Ben Bernanke was qualified to be in charge of the money supply of the United States?  Obviously, his college professor background made him a great choice because of all the real world experience he had.

He knew exactly what was going on with the housing bubble and all of the mortgage backed securities and he chose to let it happen.  His interests are aligned with big banks and the government, not the economy of the United States.

What a joke!  How do we get rid of this idiot?

So Much for Change: Obama Names Next Treasury Secretary

November 23, 2008

Tomorrow, President-elect Barack Obama will announc his choice for the next Treasury Secretary of the United States.  His name is Timothy Geithner and he’s the New York Federal Reserve Bank President.

The financial cartel in Washington will continue.  Now you have two members of the Federal Reserve in Ben Bernanke and Geithner running the finances of our country.

So much for CHANGE.  If Obama really wanted “change,” he would have gone with someone who is
an economist or accountant by trade, not a banker who works for the
Federal Reserve and served in the Clinton White House.  That’s just
four more years of the same failed policies of the past 16 years.

Think about what a Treasurer normally does in any other organization.  Their job is to keep track of the expenditures and income of the organization.  You would think the Treasurer of the United States would be some sort of straight-shooting accountant, right?

Instead, we get a crooked banker, who is responsible for getting us into the same financial crisis he is being brought in to try and tackle.  The Fed’s actions brought on years easy credit and malinvestment that brought our entire financial system to a grinding halt.  Geithner will just continue the inflationary monetary policy that benefits the banks and government, while it screws the average person.

Until we get a Treasury and a Federal Reserve that supports a sound monetary policy and has a plan and sticks to it, we will continue to keep trying to fight a fire with gasoline.  Haven’t they learned that they can not inflate their way out of this mess?  That’s how we got to this point in the first place.  They might be able to get the house of cards stablized for the time being, but it will be built higher than ever before.

Sooner or later, we’re going to have to rebuild our economy from the ground up with a solid foundation of savings and production.  I thought that Obama would be able to bring in sweeping reforms on the tails of his “change” campaign message.  I guess I was wrong.

An Excellent Essay on Inflation and Deflation

November 19, 2008

Today, the big headline was that consumer prices dropped by the largest amount in 61 years.  I’m not sure what measurement they were comparing but that is a pretty significant event.  The funny thing though, is that when we talk inflation, the headlines are always for “core” inflation which subtracts food and energy.  However, these deflation headlines used the CPI number, which includes food and energy.  So it’s definitely selecting the statistic that better suits your argument.

This made me ask myself, “What is so bad about deflation anyway?”  Why is it bad that the price we pay for something goes down?  This lead me to a search on google and I came across this very informative essay entitled “Why So Much Concern About Price Deflation” by Richard E. Wagner, Ph.D, who is Holbert Harris Professor of Economics at George Mason University.  This was written in 2002 during out last economic downturn.

“We recently have been hearing a lot about the threat of deflation, doubtlessly inspired by recent falls in indexes of consumer and producer prices. The Great Depression of the 1930s comes to mind when people speak of deflation. No one wants another Great Depression. Nearly everyone would prefer the double-digit inflation of twenty years ago. This preference is reasonable, but it does not follow that deflation is bad. Whether deflation is bad or good depends on why prices fall.

The Great Depression of the 1930s is the prime example of the bad kind of deflation. The Federal Reserve allowed the supply of money to shrink by thirty-five percent between 1930 and 1933. This gigantic destruction in the supply of money sabotaged markets throughout the land. Consumers could not afford to buy products, businesses could not sell their output, and workers could not find jobs. All of this happened because the Federal Reserve failed in its fundamental task of keeping the stock of money intact. This kind of demand-side deflation is clearly an economic scourge of major proportions.

Deflation can also result for supply-side reasons. This type of deflation is a radically different type of animal, and is a good one to have around. It is the kind of deflation that occurred in our economy after the Civil War and existed pretty much continually until the creation of the Federal Reserve in 1913. As productivity increased, consumer prices fell. Workers did not receive the continual wage increases that they have received during our recent inflationary times. Their well-being increased nonetheless. Steady wages with falling prices is a fine recipe for progress. This is, moreover, a recipe that works to the advantage of retired people on fixed incomes. With moderate deflation, a fixed sum for retirement goes ever farther because deflation allows retirees to share in the gains from rising productivity.

There is all the reason in the world to avoid a demand-side deflation. There is no reason at all, however, to oppose a supply-side deflation. No reason, at least, for ordinary citizens to oppose a supply-side deflation. It may be different for politicians and government officials. They are in a different situation with respect to deflation than are ordinary citizens. Inflation allows for increases in government budgets that would never be possible under deflation. Sustained inflation entered the American economy only with the creation of the Federal Reserve in 1913. Until then, the federal government claimed less than ten percent of the output of the American economy. It was only after steady inflation became a way of life that government’s share in the economy grew and now approaches fifty percent.

There are many reasons why inflation promotes growth in government. One of them is that inflation increases the share of total income that is collected through ordinary taxes. A ten percent increase in income increases collections of income tax on the order of twelve percent. This ability of tax rates to rise with inflation is referred to as “bracket creep.” Inflation pushes people into higher rate brackets, where they pay larger shares of their income in taxes.

Besides bracket creep, inflation is also a type of tax in its own right. The inflation tax is a form of public counterfeiting that goes by the technical name “seigniorage.” Seigniorage is the difference between the value of the money the government creates and the cost of creating that money. It is the government’s profit from creating money, and it is of the same character as the profit that a private counterfeiter makes. It costs almost nothing for the government to print another $100 bill, but this new bill is as valuable as all other $100 bills.

To be sure, the collection of this seigniorage tax works differently in different nations. In some nations, the Treasury and the central bank are joined. In those places, the government can finance its activities directly by creating money. It is different in America because the Treasury and the central bank are distinct. The government can still finance its activities by creating money, only this happens indirectly in two stages. In the first stage the government runs a deficit; in the second stage the Federal Reserve buys government bonds. The end result is indistinguishable from the Treasury directly creating money to finance its activities.

Supply-side deflation would put an end to the government’s ability to finance its activities through monetary expansion as well as through bracket creep. It would also eliminate the need for all of the various forms of indexing that have arisen to deal with inflation. The only losers from deflation would be those who live off the tax revenues that inflation generates.”

From reading this, I think we are experiencing a combination of the two types of deflation.  We have demand side deflation problems with the current credit crisis and the lack of lending.  However, I really do not believe that goods are so unaffordable that it is dragging prices down.  It is more a lack of confidence and uncertainty that is driving the lack of consumer spending.

We currently have more supply side deflation, where people are cutting back and there is an over-abundance of goods and an unwinding in the commodities bubble.  In order to move goods and equalize supply and demand, prices are dropping.

We have just been convinced to think deflation is a bad thing associated with the Great Depression.  However, currently, deflation in consumer prices is great.  We need lower prices for gas, food and our overall living expenses.  As you read above, the main benefactor of inflation is the government, who has us convinced deflation is bad.  They also experience no benefits from deflation.