Amiram Hayardeny's My China Experience

Sub-Prime? Recession? Depression? Credit-Crunch?

You will have to forgive me, but there's so much is going on in the financial markets, the real estate markets.  I'm being asked so many questions about the situation that I feel that once again, I have to try and summarize what I know, and well, add my own 2008 predictions to everyone's.

The root of the current crisis is a combination of the following: the need, the desire, the absolute necessity, to create growth where growth is basically impossible, the need to own, have, be in the possession of (even temporarily) of stuff that one doesn't need and sometimes can't afford and the willingness to pawn ones future in return for present goods and services.  The result is a mess.  Millions of homeowners who will undoubtedly lose their homes (which in my mind is a multiple level demagoguery - I don't believe they ever actually owned their homes, and therefore, that it was ever theirs to lose...

So here is my interpretation to the sequence of events:

Builders and lenders want to show growth.  Housing growth, however, has a lot to do with population growth (people need a place to live) and speculation (people need a place to invest).  Speculative forces and sales to previously unqualified buyers caused the prices to go up (8.5% annual rate between 1996-2005, and 11.4% between 2000-2005).  The high demand caused the lenders to be a little more flexible in loaning money, and builders to build a staggering oversupply of about 3 million units nationwide.

When builders want to sell more to people who want to have more, with the generous help of the lenders who really don't want to be left out, the result is devastating.  (I recently read that even the credit rating companies were off guard, unable to warn the lenders of their customers' inability to pay off their loans).

Feeling confident, hand having made so much money on their wise real estate investments (not too many investments can yield 11% annual rate, or even 8%), people took their homes to the neighborhood pawn shop (no, not literally.  They actually re-financed).  They got as much equity as they possibly could out of their house.  Not the investment house, the house they were living in.  The money was wisely invested in consumer goods: cars, vacations, gadgets, and other "stuff".  But as it happens, the "variable rate" loans started to kick in, and all those who took creative mortgages, with "no money down", "interest only payments", realized that they simply can't keep making the payments.  Defaulting came next.  Eviction second.  Foreclosure third.  Walking away from the American dream house fourth.  As mortgages we being unpaid, the entire (mysterious if I may say so) investment industry backed by mortgage loans went south.  Bankers reported billions in bad loans (not yet over).  What's even more interesting is that nobody has found a way yet to determine how to valuate those investments.  Public companies delayed publishing their financial statements trying to figure out how exposed they are to this disaster.

And then someone woke up and said: we've been giving billions upon billions of dollars to people who can't pay us back.  Lets see how much we can retrieve, and even more important - lets call the party off.  So credit lines were cut viciously, interest rates on loans jumped.  Party is over.  The entire economy is being pulled down.  People are more careful spending their money, sales at the mall and at the car dealer are going down.  Since consumption drives the American economy, a recession is now being mentioned in every other conversation.  Money is becoming expensive.  And then, on a big white horse, wearing a brilliantly shining armor, comes the Federal Reserve and lowers the interest rate.  And he lowers it again, and again.  Until the dollar - which is no longer a good investment - presents significant problems to anyone who's doing business in the US.

And if you think about it, it all started trying to generate wealth.  Create growth.  And as a final sarcastic comment:  The Sarbanes-Oxley was put in place to safeguard the economy and the investors from an Enron-like disaster, which compared to the sub-prime crisis is a bathtub vortex compared to a level five Hurricane...

No savings, conspicuous consumption, bad loans, bad credit, no credit, bad job, big house, no job, no house, imported car, no car...  The market has spoken: brace yourselves.  Times are bad, and are getting worse.

Posted at 12:52PM Mar 24, 2008 by Amiram Hayardeny in Personal  |  Comments[4]