Here's an idea: when the securities markets go south along with the rest of the US economy in 2007, maybe the smoothies on Wall Street should receive end-of-year "cash-negative" bonuses, meaning instead of a check for, say, $25 million the day before Christmas, they get an invoice saying "please remit $25 million." Who to? Good question. One might suggest the nearest firefighters' or teachers' pension fund except the idiots who run those retirement funds bought mortgage-backed paper with their eyes open. Okay then, let's say the Wall Street boys send their checks into Amtrak. Maybe then the cafe car between Albany and New York City will re-open so that in the course of a 2.5 hour trip a person might get a drink of water.
A tsunami of nausea seems to be sweeping across the media now in recognition that the Potemkin edifice of mortgage finance is imploding like a discarded Las Vegas casino. What it comes down to is that several species of newly-engineered financial Frankenproducts have been based on loans for houses that will never be paid back. Not just a few loans. Massive numbers. These, in turn, have been bundled, swapped around, and leveraged into other plays which now depend, for instance, on x-number of unemployed car dealers and underpaid busboys ponying up the "vig" for some piece-of-crap collateral that will soon be a third its previously appraised value. It will be easier for the car dealers and busboys to walk away from these deals then it will be for the smoothies who used all this bundled bullshit to hedge credit default swaps and play the yen-to-Euro carry trade game to wiggle out of their positions. And the unwinding of all this fraud will almost certainly leave the nation economically spavined.
The amazing thing is how standards and norms for lending collapsed as completely as they did the past five years. One day you had bankers who retained a notion that lending per se required some prudent evaluation of the borrower's character and of the thing or enterprise borrowed for and the next day these protocols vanished. Once again I challenge the punctilious physicists out there by asserting that this astounding transformation is the product of entropy. Basically, you get a given system e.g. the US economy over-stoked on cheap energy (and even at $3 a gallon gasoline is cheap), and the system will throw off gobs of entropy. The more profligate the energy consumption, the more entropy results. It then expresses itself in various kinds of disorder, meaning anything from the immersive ugliness of the American built-up landscape to the behavior of people formerly attuned to such governing principles as moral hazard to retain the functional legitimacy of their livelihoods.
It is really a sort of systemic disease, generating poisons that seep
into the far corners of the organism affected, in this case the USA. It
will be manifest in the personal ruin of individual families, the
collapse of institutions, the rising crime rate, and the rapid physical
decay of things built too carelessly to be worth caring for.
I went around some neighboring towns here in upstate New York to look
at the real estate yesterday. I was impressed by how uniformly crummy
everything was and not only because it is nearly spring and layers
of old dog shit are being revealed in the melting snowbanks. In the old
houses priced above $300-K, the rotting sills and delaminating surfaces
are plain to see. Of course, the buildings are worth something, but my
guess is less than a third of the asking price by any realistic
valuation. But at least these things were made of materials generally
found in nature. The new houses were all glue and vinyl, and of course
they were mostly built in places dissociated from any town itself,
meaning the hapless owners will have to own multiple cars to live there
and make multiple trips per day not a good prospect for the years
ahead.
The story will be the same all over the nation. The owners of these
things will get into terrible personal financial trouble. The property
market will re-value the buildings, discounting all the previous
wishful thinking about price. And the financial markets will stagger
and collapse as the process thunders through the mendacious operations
that all this wishful thinking spawned.
Once all the good-credit prospects are tied to their mortgages, where else would you look not only for sustained sales, but growth? The sub-prime lenders took a gamble, and it looks like they're going bust, but what alternative did they have to stay in business? (putting aside the question of whether they should have been in business in the first place)
As far as your trip upstate goes: I can't imagine anyone paying 300K for a fixer-upper, unless the going price for similar nearby houses was 450K or better. Have people forgotten that the best way to sell a house is to make it look its best first? Fix those rotting sills and replace that warped siding, and they might get 300K. Or they might decide the house is now too nice to sell, and take it off the market.
1
March 14, 2007
a guest: Slash and Burn
It is the practice in some locations to burn a forest down and farm the cleared land until the nutrients are exhausted. When this happens, one can always move a short distance away and start again. If enough forest land is involved, the first plot of land will have recovered by the time it is put to torch again.
The practice is not sustainable if the cycle is accelerated, and so Malthusian forces will check the local population with famine. If the incentive to burn forest for farm is disconnected with survival in the forest, then forest can be burned in its entirety and converted to portable assets. These assets can then be carried away, leaving a burned wasteland behind.
This is the key to a Ponzi scheme's payoff. By extracting assets and leaving, one can be insulated from the crash while making a good profit. Similarly, a deregulated financial industry can extract portable assets from high-risk loans before they burn out. The profits can be converted to some other form and absconded. When the industry begins to crash from its unsustainable practices, it will be bailed out by the taxpayers or simply leave behind the ashes and stumps of its losers.
Whether slash and burn is practiced in a tropical forest, home loans, Ponzi pyramid or power politics, the ones who escape have no real incentive to show restraint and long-term thinking. It is this insulation from the ultimate consequences that makes such practices appealing. The question then is how to circumvent this insulation and make long-term sustainable thinking important.
2
March 14, 2007
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Here's an idea: when the securities markets go south along with the rest of the US economy in 2007, maybe the smoothies on Wall Street should receive end-of-year "cash-negative" bonuses, meaning instead of a check for, say, $25 million the day before Christmas, they get an invoice saying "please remit $25 million." Who to? Good question. One might suggest the nearest firefighters' or teachers' pension fund except the idiots who run those retirement funds bought mortgage-backed paper with their eyes open. Okay then, let's say the Wall Street boys send their checks into Amtrak. Maybe then the cafe car between Albany and New York City will re-open so that in the course of a 2.5 hour trip a person might get a drink of water.
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