Bubble and Crash

2008-09-10T12:41:00.005-07:00

2008-09-10T12:41:00.003-07:00

The unemployment insurance fund, which paid out almost $662 million in checks in July as California's jobless rate reached 7.3 percent, is expected to have a deficit of $1.6 billion at the end of 2009.

That shortage will force it to borrow from the federal government for only the second time since the program was established in the 1930s.

If no steps are taken to increase the fund's revenue or reduce its payouts, its deficit is projected to hit $3.5 billion by the end of 2010.

Interest on the federal loans could reach nearly $91 million by September 2010 and total millions more before the debts are paid off, adding to the state's fiscal problems as lawmakers grapple with a seemingly endless series of budget deficits.

Since 2002, eight other states have had to borrow money from the federal government to shore up their unemployment funds, according to the U.S. Department of Labor. More appear headed for trouble.

The National Employment Law Project, a New York-based advocacy group for the unemployed, said in May that as many as 18 states, including California, could have trouble maintaining the solvency of their unemployment funds in a recession.

2008-09-10T12:41:00.001-07:00

European Shares Fall

Old Mutual Plc decreased 3.5 pence to 97.4. South Africa's biggest insurer will write down $135 million of preferred stock in Fannie Mae and Freddie Mac and increase reserves by $155 million for guarantees on policies in the U.S. Old Mutual said it will also set aside $250 million to support its operation in Bermuda.

2008-09-10T12:40:00.005-07:00

Many in Congress were skeptical they were overextending themselves. So they hired lobbyists. According to a September 9 report by Allan Chernoff, CNN senior correspondent, they spent $174 million in the last ten years lobbying Congress “to ensure the political climate would remain friendly.” That averages out at $297,435 per senator and representative. No wonder Greg Palast titled one of his books, The Best Democracy Money Can Buy.

Under the takeover being engineered by Secretary of the Treasury Henry Paulson, the government will oversee operations through a “conservatorship.” It’s a fancy name for bankruptcy. Taxpayer money will be used to inject new capital into Fannie and Freddie’s operations, since, having lost so much on bad loans, they are broke.

How will it work? According to the Washington Post’s Steven Pearls

2008-09-10T12:40:00.003-07:00

The head of Germany's biggest bank Deutsche Bank, Josef Ackermann, said today he was confident that the credit crunch was nearing its end.

'We think we've reached the end,' Ackermann told a banking conference in Germany. 'Global credit conditions are very posit

2008-09-10T12:40:00.001-07:00

U.K. stocks dropped for a second day, led by banks and mining companies, after Lehman Brothers Holdings Inc. reported a wider-than-estimated loss and metals tumbled.

Barclays Plc, the U.K.'s third-biggest bank, slid 5.3 percent and Alliance & Leicester retreated 4.8 percent after Lehman posted a $3.9 billion third-quarter loss on $5.6 billion of writedowns. Anglo American Plc, the world's fourth-biggest diversified mining company, fell to the lowest level since September 2006 as gold, copper and silver declined.

The FTSE 100 Index retreated 49.40, or 0.9 percent, to 5,366.2. The FTSE All-Share Index lost 1 percent, while Ireland's ISEQ Index decreased 3.5 percent.

2008-09-10T12:38:00.000-07:00

The 15 countries sharing the euro are teetering on the brink of recession but should just escape the worst, the European Commission said on Wednesday, slashing its economic forecasts for this year.

However Germany, the eurozone's largest economy which contracted 0.5 percent in the second quarter, and Spain will not be so lucky, falling into recession as growth falters badly.

Britain, outside the eurozone, will share the same fate, according to estimates from the European Union's executive arm.

The commission cut its eurozone growth estimate for the whole of 2008 to 1.3 percent from a forecast of 1.7 percent given in April, marking an even sharper slowdown from the solid 2.6 percent growth recorded last year.

sustained falling home prices nationally

2008-08-24T04:50:00.001-07:00

I'm not disagreeing with Tyler, but his comments made me think about the possibility of a U.S. real estate bubble, and the possibility that even without a real estate bubble/crash, we could experience sustained falling home prices nationally. But there really is no "national real estate market," since all real estate is local (and even varies within an individual zip code), and what is happening in Florida or Nevada could be much different than what is happening in Texas and Michigan.

bursting real estate bubble

2008-08-24T04:28:00.000-07:00

Tyler Cowen writes in Saturday's NY Times:

A bursting real estate bubble set off the Japanese recession of the 1990s, which deepened as ailing banks languished. It took Japan’s economy more than a decade to resume steady, noticeable growth.

Will this happen to the United States? Probably not, but we may face a protracted process of recovery, stretching longer than the two or so years usually required to climb out of recession.

Behind every financial crisis there is usually a crisis in the real economy, based in some underlying structural deficiency. Even if the financial crisis is bottoming out, sooner or later the real crisis must be faced.

The fundamental problem in the American economy is that, for years, people treated rising asset prices as a substitute for personal savings. The thinking went something like this: As long as your home’s value rose every year, you didn’t have to set aside so much from your paycheck.

2008-08-10T09:03:00.003-07:00

The need for property loans

2008-08-10T09:03:00.001-07:00

The property market in Vietnam became hot in October 2006. The need for property loans increased rapidly, prompting banks to pump an abundance of money into the market. There appeared many forms of home loan services with repayment by installments spreading over 20 years. When real estate prices went sky-high, a wave of speculation in property, which was swelling up, created a property bubble.

According to the State Bank statistics, by the end of April 2008, loans for real estate projects amounted to VND135 trillion ($7.94 billion), accounting for 10.8 per cent of the entire system’s lending. Property-mortgaged loans, meanwhile, accounted for 27 per cent of the total outstanding loans for individuals and the community, equivalent to nearly VND151.9 trillion ($8.94 billion).

investors in property companies

2008-08-10T09:02:00.000-07:00

Results from several big property companies this week either confirmed expectations that property values have slid considerably since the beginning of the year, or added worries about the level of demand for property from occupiers during the economic downturn.

Hammerson was forced to write off £407m from its properties, leading to a pre-tax loss of £417m. Liberty International lost £458m after £639m was wiped off its portfolio.

Given the discounts even to their new net asset values - Liberty International was trading at 832p yesterday compared with its net asset value of £10.95 and Hammerson at 975½p against £13.92 - it is fair to say these losses were expected. In fact, the market is pricing in much worse to come, showing it does not believe stated Navs. There will be further billions of pounds written off property portfolios in the next few weeks with results due from British Land, Mapeley, Segro and Brixton.

Morgan Stanley's Martin Allen said in a note last month that property shares would only bottom out when NAVs also troughed. Shares could track values down further without any positive news, although there is protection from additional declines by NAV discounts, at an average of 28 per cent for large cap stocks and 25 per cent across the sector.

However, barring any isolated merger activity, there seems little prospect of a sustained rebound. Indeed, Liberty introduced new doubt this week after warning that like-for-like rental income had fallen owing to charges from tenants in administration. JPMorgan, which had expected income to be positive, described it as the "end of the resilience myth". The news shocked the real estate sector, down 5 per cent since Wednesday.

The saving grace for investors in property companies during the slump in property values has been that rental income has generally increased. Now, however, with the economy under pressure, it is possible to see reductions in rents for property companies, exposed as many are to the London offices and retail markets. Outside this, there are concerns about dividends from companies that need to shore up their cash positions. Quintain this week froze its dividend for two years, the first big property developer to do so. The danger is less acute for real estate investment trusts, however, which have to distribute the majority of income to shareholders.

mortgage broker

2008-06-28T22:12:00.001-07:00

Everyone had hoped that rewriting the definition of conforming would make loans this size about half an interest point more than true conforming loans. Instead, the gap is still about a full point and sometimes even more. Brokers mentioned [jumbo conforming] rates hovering around 7 percent. Some borrowers report being quoted even-higher rates, upward of 7.5 percent.

"I have a pipeline filled with people who can't (refinance) because these ... jumbo lights are useless," Marc Savoy, a mortgage broker with San Francisco Pacific Mortgage Consultants, wrote in an e-mail. "The qualifying guidelines are onerous (i.e., income, credit and equity) and the rates are up toward 7 percent. Who's that going to help? Not many people.

Investors are getting a little finicky

2008-06-28T22:10:00.001-07:00

This was one of the worst weeks for banks and the market that I've ever seen. First-quarter earnings were terrible, and few people are optimistic about next quarter. It looks as though the credit crisis still has a long way to go. Oil is more than $140 a barrel, and parts of the market are reaching new lows. Either this is the low point, or we should prepare to endure a crisis of greater magnitude than we expected. Here's what's going on.

Investors are getting a little finicky about throwing additional billions at subprime-infested banks. While capital-raising efforts appear to be continuing, big banks are facing increasing difficulty finding willing investors, who are losing money on past offerings and are far less eager to continue throwing good money after bad. To give banks more access to more capital, the Federal Reserve is thinking about easing restrictions on private-equity firms in regard to their investments in banks. Large investments in banks from private-equity firms typically result in accompanying regulatory scrutiny, which private-equity firms hate. So the Fed has hinted that it's willing to find ways around some of the restrictions.

fundamental financial deficiency

2008-06-28T21:50:00.000-07:00

can tell the minute I drive into Toronto. My car starts rattling and banging resulting from the incredibly poor shape of the roads upon which I must drive. I think the state of our infrastructure exemplifies a fundamental financial deficiency of the city. It has an inability to maintain a sound infrastructure. I have lived in or around this city all my life and have never noticed this before. So I might have to agree that, yes indeed times are tough.

I completely disagree. I moved to the Queen and Dufferin area 10 years ago and still live nearby. In those 10 years, the neighbourhod has become one of the best parts of the country in my opinion. I raise a 5 year old here and couldn't imagine raising her anywhere else. Take Trinity Bellwoods Park, as an example. When I moved to the city, the park was a place to be avoided, nobody went there unless it was to drink or conduct nefarious business. Now, on a Friday night, it's filled with people having picnics, kids running around, people throwing Frisbees, walking dogs and generally being very neighbourly. I'm sure people in other parts of the city haven't had the same experience but in my opinion, Toronto keeps becoming a better place to live.

downturn in the world economy

2008-06-28T21:48:00.000-07:00

Wilhelm Bender also said he remained optimistic about growth despite the potential impact of inflation on consumers' ability to pay for trips.

"The trend in air transport is not signalling a downturn in the world economy. We are growing," Bender told Reuters on the sidelines of an event to mark construction of the Lufthansa Cargo service centre at Frankfurt airport.

The oil price was the biggest worry for the air travel industry, but there was growth in both passenger travel and air freight transport, Bender said.

"I have a fundamental optimism when it comes to further development, but I am seeing the clouds of energy prices," he added.

2008-06-28T21:47:00.000-07:00

Thank you for joining me here today. I just returned from a trip overseas that included assessing the state of affairs in Iraq, the Middle East, and Europe. I will have more to say on those important issues in the days and weeks to come.

While I was traveling overseas, our financial markets experienced another round of upheaval. This market turmoil leaves many Americans feeling both concerned and angry. People see the value of their homes fall at the same time that the price of gasoline and food is rising. Already tight household budgets are getting tighter. A lot of Americans read the headlines about credit crunches and liquidity crises and ask: "How did we get here?" In the end, the motivation and behaviors that caused the current crisis are not terribly complicated, even though the alphabet soup of financial instruments is complex. The past decade witnessed the largest increase in home ownership in the past 50 years. Home ownership is part of the American dream, and we want as many Americans as possible to be able to afford their own home. But in the process of a huge, and largely positive, upturn in home construction and ownership, a housing bubble was created.

A bubble occurs when prices are driven up too quickly, speculators move into markets, and these players begin to suspend the normal rules of risk and assume that prices can only move up - but never down. We've seen this kind of bubble before -- in the late 1990s, we had the technology bubble, when money poured into technology stocks and people assumed that those stock values would rise indefinitely. Between 2001 and 2006, housing prices rose by nearly 15 percent every year. The normal market forces of people buying and selling their homes were overwhelmed by rampant speculation. Our system of market checks and balances did not correct this until the bubble burst.