Thursday, January 21, 2010

Real Estate the Tip of the Iceberg (Reprinted)

The following, is a reprint from April of 2008 for those who missed it. Nothing much has changed, except for the guy in charge.

On one side you have the upside down home owner, who is about to walk away and give the bank the keys. But the other side, the bank paid the seller real money for the house and the new owner signed a note to pay the debt. Many suggest that this serves the banks right for loaning the money so carelessly in the first place. Think twice about that, the money paid wasn't the bank's, it belonged to a depositor. Banks don't lose money, people do!
If we can agree that real estate is only the tip of the iceberg, then it becomes apparent that the financial banking system, is in a very precarious position. Throw in hedge funds and the visual aid is no longer to scale, it's not big enough (use your imagination). The Iceberg represents real money borrowed from someone who works for a living or has money in an investment vehicle. It doesn't belong to a hedge fund, bank, IRA or 401k, it belongs to real people.

Industries are downsizing and laying off people. The big auto companies and the airlines have reset their pay scale to be more competitive. The housing industry has [fill in the blank]. More people are looking for work. These major events should raise some alarm, but curiously no one seems to notice. The unemployment numbers are starting to add up.

Look for a major bankruptcy's like the one in 1932 when Ivar Kreuger the famous Swedish Match King committed suicide. The guy was the "Warren Buffet" of his time.

This is a slow but methodical meltdown. Real estate is where all of the castles have been built, and the stock market is our sand box to play in. Maybe Icebergs are a little like our government, most of it is hidden from view.

To a majority of Americans "The Economy" is just a concept, little understood. Most people have never studied basic economics. The "Group Think" is that Congress can fix what is broken. Congressional solutions are a little like trying to use your clothes dryer to dry the kitchen dishes and glassware. When the buzzer goes off, you can rest assured that everything is dry! You end up getting what you were promised, but it's not quite what you had in mind.


Ohio Loan Officer said...

I commented on previous posts on this Blog and others that the Big Banks were not in any better shape now than a year ago.
So why pay back the TARP money?
So they could pay out their billions in bonuses without the Government spoiling the party.

Then yesterday, BoA announces a $2.24 billion loss for 2009. It's looking like they will have to suck from the TARP teat again soon.


Poly said...

Why pay tarp back?

Sure to pay more bonuses, but really it's because these fools, just like most fools in academia/business/media, subscribe (worship)to Keynesian theories and expect a nice strong bounce back, their fancy mathematical models are rigged to expect nothing less.

They all simply didn't see it just before the crises, they certainly don't see it now!

Jim in San Marcos said...

Hi Ohio Loan Officer

I think that people miss understand the TARP fund that is being paid back.

A bank is normally invested at about 90%. So a run on the bank could ruin it. They couldn't raise the cash to stem the run. The Government stepped in and supplied the cash (TARP) that kept them from having to liquidate assets to raise cash. After the run stopped, people had to put their money back in a bank. At that point the crisis is over, the banks no longer need the money.

Another irritating thing is that the banks can borrow from the Federal Reserve discount window at a very low rate and the Fed has been loaning money on very questionable bank securities. This makes it easy to pay back the TARP if the bank is really sick.

The funds from Congress, TARP (a known amount of money) is being paid back. The money borrowed from the Federal Reserve by the banks, using questionable assets is a big question mark.

The other thing to look at is the phrase "Too Big to Fail." What this really means is that ALL deposits are insured no matter how big.

When you put all of this in one pot and bring it to a boil, it just doesn't have that yummy aroma. You're more likely to be checking your shoes to see if it's something you stepped in.

Take care and thank you for your comments.

Jim in San Marcos said...

Hi Poly

I think we are just looking at a cycle that was also a part of the last Great Depression. A lot of people back then were severely overpaid.

Congress in the 1930's even raised their own pay and the outrage from the public made them cancel it. The ridiculous salaries stopped and reality came back into focus.

The neat thing about it this time, we don't have to read it in a history book, we get to watch it happen in real time.

Thank you for your comments.

Sackerson said...

But it started under "Conservative" administrations on both sides of the Atlantic, didn't it? c. 1982 on - I've tried to make the point in an allegedly open-to-ideas magazine but somehow it doesn't fit their agenda:

Tyrone said...

Interactive Map: State Pension Debt Map

Jim in San Marcos said...

Hi Sack

I tend to agree with you that Reagan and Thatcher were in charge and helped to stimulate the mess. But I think that just about everyone was enjoying this party. Most of the laws passed during the 1930's to prevent our current mess from ever reoccurring were done away with by 2003. This same mess will probably play out again in another 90 years, when we are long gone.

I think the trouble you are running up against is one my grandfather advised me on. He said never argue over religion or politics, that's what wars are for.

Jim in San Marcos said...

Hi Tyrone

That's a great link, thank you. If you "read between the pop ups" on that map, the states are doomed.

On the plus side, if you can't read between the pop ups, everything is just doing fine.

It's kind of like two golfers on a putting green. In the background, an atomic bomb is going off in the distance. The one golfer says to the other "go ahead and putt, we still have two minutes before the shock wave hits us."

Take care