I have a theory that the current failures in the US sub-prime mortgage market could be the trigger for world wide depression on a par with (or greater than) the depression seen in the 1930s. I realise that this sounds extreme, but ifyou are interested you can read my full article either on my blog at www.articlewheel.com under the title “Could sub-prime failures lead to a Global meltdown worse than 1930’s depression?”
I am of course happy to discuss / debate the article here, in fact would appreciate doing so.
When you say “cash in your chips” are you suggesting selling out of equities and keeping your dough in cash?
The mortage lending rate in Taiwan is about 2-3%. It wil most likely go up in the future. It is VERY easy to buy a house now in Taiwan. Yet when people start having to pay double the rate they pay now, there is going to be a squeeze. Best to pay it off now when rates are so low.
I certainly think it will cause a recession in the US sometime in the later half of this year. It’s something that has been brewing for years, and that some analysts have warned about since the fed rate started rising in the US. Whether this turns into a global depression depends mostly on how the US government reacts to it. Depending on what they decide to do, it very well could turn out for the worse.
The easy thing to do would be to lower rates again, but that just prolongs the problem and will probably lead to either a decline in the dollar, inflation, or both (this one gets the gold bugs all excited). Pumping $$$ into the federally backed mortgage lenders would only indirectly address the problem at best, and at worst then the taxpayers are on the hook for covering the bum loans. How about new legislation to ‘protect’ homeowners from foreclosure? That sounds good, except in and of itself it will do nothing to solve the problem. It’s tempting to just do nothing and let the problem sort itself out in the market, however one of the reputed causes of the Great Depression was that the fed didn’t do enough to stem the failure of commercial lending banks.
I do have a comment about one thing in your article though. Subprime mortgages are packaged and sold mixed together with prime mortgages to reduce the risk, usually with somewhere around 5% at most subprime loans in a packaged investment. If failures are limited to only subprime lenders then it is not a given that there will be huge investment losses. The problem will have to spread to prime mortgages as well, which wouldn’t happen until quite some time into any crisis. (You’d basically have to have unemployment or payroll reductions for this to happen.) It’s quite possible that things won’t get bad enough for that to happen.
Here’s an interesting site that’s making the rounds: lenderimplode.com/ They are tracking subprime mortgage company failures since late 2006. It was at 28 last week, 36 right now. That’s not really very meaningful all by itself, but it’s a kind of capsule summary of what’s going on.
Jlick, well thought out response and exactly what I was looking for. I know my article was a little extreme but then I find taking a one sided view is usually better for stimulating debate.
As for packaging loans, you are correct when a mainstream lender puts together a normal securitisation deal but some of them have been building sub-prime packages which obviously offered a higher return. The sub-prime companies themselves of course have no choice but to securitise pure sub-prime deals. Most packages come with the ability to swap some tranches in and out of the deal dependent on performance criteria but this will only mitigate so far.
[quote=“Edgar Allen”]I have a theory that the current failures in the US sub-prime mortgage market could be the trigger for world wide depression on a par with (or greater than) the depression seen in the 1930s. I realise that this sounds extreme, but ifyou are interested you can read my full article either on my blog at www.articlewheel.com under the title “Could sub-prime failures lead to a Global meltdown worse than 1930’s depression?”
I am of course happy to discuss / debate the article here, in fact would appreciate doing so. [/quote]
I’ll respond in greater depth tomorrow when I’m not so tired, but couldn’t this problem have been prevented by:
Greater regulation in the loans market? Doesn’t the Federal Reserve bank or some kind of overall banking regulator provide controls which prevent the delinquency rating going up (not that you can control that, but perhaps greater regulation of who can get loans?)
Is this all a result of an economic model based on using interest rates as the primary control in turning up or slowing down the speed of the economy? Increase interest rates and curb spending, but risk whats happening in terms of loan defaults and a housing market crash or lower interest rates and see debt go up further.
This raises the question of whether interest rates should have been raised earlier, but why is the situation so different now from the mid 80’s when interest rates were running at 18%?
Sure the debt levels are higher and people are more highly levereaged, but can anyone provide any figures as to the delinquency rate during that time?
Surely regulating who gets loans is against everything we stand for in the free world?
The problem is that the cycle is about 15-20 years long, thus anyone who saw it last time has moved on by the time it hits again. The same mistakes happen every time where marketers force looser lending criteria against the advice of the risk guys. Market share takes priority and then the banks get a spanking. Maybe the Banks themselves ought to implement a policy after the spanking that prevents it happening again, but then again that would stop their prices dropping and we couldn’t buy nice cheap bank stock every 15-20 years.
[quote=“Edgar Allen”]Surely regulating who gets loans is against everything we stand for in the free world?
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Its because its a free world, that high risk individuals should (and are) slapped with higher restrictions on loans. Moving away from corporate, would you lend money to someone who had no money and intermittent cashflows?
[quote]The SA delinquency rate increased during the fourth quarter for all loan types. The delinquency rate increased 13 basis points for prime loans (from 2.44 percent to 2.57 percent), 77 basis points for subprime loans (from 12.56 percent to 13.33 percent), 66 basis points for FHA loans (from 12.80 percent to 13.46 percent), and 24 basis points for VA loans (from 6.58 percent to 6.82 percent).
All adjustable rate (ARM) as well as fixed rate (FRM) loans had higher SA delinquency rates compared to the third quarter of 2006. Delinquency rates in the fourth quarter increased 33 basis points for prime ARM loans (from 3.06 percent to 3.39 percent) and increased 122 basis points for subprime ARMs (from 13.22 percent to 14.44 percent). The SA delinquency rate for prime fixed loans increased 17 basis points (from 2.10 to 2.27 percent), while the rate increased 50 basis points for subprime fixed loans (from 9.59 percent to 10.09 percent).
During the fourth quarter of 2006, the foreclosure inventory rate increased for prime loans and subprime loans and decreased for FHA loans and VA loans. The foreclosure inventory rate increased six basis points for prime loans (from 0.44 percent to 0.5 percent) and 67 basis points for subprime loans (from 3.86 percent to 4.53 percent). The foreclosure inventory rate decreased nine basis points for FHA loans (from 2.28 percent to 2.19 percent) and eleven basis points for VA loans (from 1.12 percent to 1.01 percent).
By loan type, the foreclosure start rate increased five basis points for prime loans (from 0.19 percent to 0.24 percent), 18 basis points for subprime loans (from 1.82 percent to 2 percent), 14 basis points for FHA loans (from 0.79 percent to 0.93 percent), and two basis points for VA loans (from 0.32 percent to 0.34 percent).[/quote]
The scary thing is that delinquency rates are somewhat high for prime loans as well, which would kinda throw a wrench in my earlier theory that prime loans would be fine unless there was an increase in unemployment or if payrolls fall. The good thing is that prime foreclosures are still fairly low.
I was pointing this out to Mrs Poe last night. The non-prime mortgage industry has been moving ever further down the acceptable FICO score range. Naturally this means that as interest rates start to squeeze there is more likely to be defaults from main stream lenders as well as the sub prime portfolio.
What part of having a central bank that can print and distribute money at their whim is part of a free market? You said it yourself in the earlier post that certainly this is caused by interest rate adjustments:
The flip side of this coin is that when a central bank makes money extremely cheap (as they did to fight the dotcom crash and later the terrorism scares) that it causes instabilities. This time around it manifested itself in the form of loans being tossed to anyone and everyone.
Austrian economic theory states that inflating the monetary base (which is essentially how they generate low interest rates) will always cause instability. They would argue for a completely private banking system using gold and silver backed money. They call the business cycle normal and not something that can be fought against.
Keynesian economic theory states that you can go right ahead and battle the business cycle by diddling with interest rates to stamp out unemployment. They don’t seem to have achieved either one.
Chicago economic theory is that a gold standard is no longer practicable, but if you insist on having a central bank that the central bank be highly restricted in how it sets rates and prints money.
Bottom line though is that an unregulated central bank does not result in a free market. If you want to regulate anything, start there.
I’ve read some interesting articles recently which argue that the Japanese Yen would be a good place to invest. The theory is that the carry trade, where people borrow Yen at cheap rates and then exchange it for dollars or euros, will start to unwind as the Japanese central bank starts raising interest rates. The theory is that loan repayment will put upward pressure on the Yen which will cause other Yen borrowers to want to pay down the loans which means they’ll have to buy Yen to pay back, and the whole thing will cause the Yen to skyrocket.
It’s another interesting example of the unintended effects of central banks. The low Japanese rates have done more to benefit foreigners than their own economy. About the only thing they got out of it was a lower exchange rate, though many Japanese companies manufacturer primarily in other countries now, so it’s debatable how much a low exchange rate helps them.
I’ve read some interesting articles recently which argue that the Japanese Yen would be a good place to invest. The theory is that the carry trade, where people borrow Yen at cheap rates and then exchange it for dollars or euros, will start to unwind as the Japanese central bank starts raising interest rates. The theory is that loan repayment will put upward pressure on the Yen which will cause other Yen borrowers to want to pay down the loans which means they’ll have to buy Yen to pay back, and the whole thing will cause the Yen to skyrocket.
It’s another interesting example of the unintended effects of central banks. The low Japanese rates have done more to benefit foreigners than their own economy. About the only thing they got out of it was a lower exchange rate, though many Japanese companies manufacturer primarily in other countries now, so it’s debatable how much a low exchange rate helps them
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You think that enough Yen has been borrowed to warrant a rise in interest rates??? I think its the last thing their economics department will want to do. Japan does have a very large internal economy now, but their export economy is still one of the largest in the world (even if they do manufacture in other countries, this will still affect profit margins).
That said, how is it exactly that they do manage to keep interest rates continually low?
[quote=“Tyc00n”]Of course in real terms doesn’t that wages (if steady) are actually going down, as is the value of property etc?
So given your long term view, wouldn’t it be better to buy property in Japan, rather than the Yen, since that gives far better leverage?[/quote]
Monetary inflation (increasing the money supply) should always result in price inflation. When and where it shows up can vary a lot. I don’t know much about property in Japan though.