The credit crunch is in it’s early stages. The ponzi system that was the “credit orgy” has been exposed.
By Daniel at 21 February, 2009, 2:07 am
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What a system it was. You have the American consumer, wanting, willing and undisciplined-wanting all the things they see on TV. 3,000 sf house with 3 car garage. 2 SUVs and a sports car to put in them. Vacations, big screens and a boat. And a bad credit history. He just needed someone foolish enough to loan him money.
Enter the subprime lenders (Homes, cars, credit cards). Salesman, yes, loan officers, no. Fees, fees, and more fees. Slick. But how could making loans to the American consumer overleveraged and/or with poor credit history work?
Enter the Wall Street Bankers. Buy all these assets off of the subprime lenders and package them together. But how can packaging them together work if you have to hold them for repayment, when you know they won’t be repaid?
Enter our friends at S&P and Fitch. Supposed educated analysts. But here in lies the conflict of interest. Wall Street banks decide who they pay to rate their securities. Good rating means rehired. Bad rating means no work. So it’s AAA AAA AAA AAA across the board.
Enter the investors across the world with money to invest in safe assets with a good return. Nothing is better than investing in AAA rated assets out of the United States of America.
Money pours in. Everyone gets their home and lifestyle. All the subprime lenders get their fees. All the Wall Street banks roll them together and sale them as great assets for fees to investors all over the world. Then housing explodes. Car sales skyrocket. Big screens can’t be kept on the shelves. Airlines are packed for weekend trips to the Bahamas. Everyone has employment in the explosion. As house prices have risen because of demand by anyone that can fog a mirror, people refinance when they can’t make their payments because they have “equity”. Rinse and repeat.
But finally things seem to far out of whack. Kind of like in baseball when people start hitting 75 home runs a year and shattering records that stood for 40 years. How could this be? Something wrong. We better think about this. And with that - we reached the top of the rollercoaster and started down.
This isn’t a credit crunch. It’s the end of the credit orgy.
If you have an good credit score, money down and reasonable debt to income ratio, you can still get a loan. Bad part is that only applies to about 30% of Americans and our economy was built on anyone getting whatever they wanted even if they couldn’t repay, because those making the loans were not stuck with the paper after it was consumated. Then even people with good credit and money down who bought at the wrong time got hurt.
Then the car sales go down and don’t need to be made, big screens go down. Credit cards become delinquent when they can’t be rolled into a home mortgage. Vacations aren’t taken. People go back to what they can pay for and people start losing their jobs.
Banks who bought the AAAs become insolvent. Investors and governments all over the world starting taking losses. Government spending run amuck with ficticious income and property tax revenue hits the skids and states and cities go broke. Everything unravels.
China and Japan don’t need to make the junk for us anymore. They tank. In the future they won’t be able to fund our deficits.
Global economic collapse.
House prices still have atleast 15% to drop. No government intervention is going to stop, will at best slow it down. Until home prices get to 3-4 times household income levels they won’t stop going down. And on top of that household income is falling.
Commercial real estate is the next shoe to drop. Excess square footage all over the place. Retail shrinking. Developments in process not needed. Office space shrinking as jobs are being lost and jobs built on a ficticious economy no longer needed.
Jobs in the oil and gas fields dropping like flies as oil and gas plummet. People not consuming.
Ag real estate is 20% higher than the inflation adjusted highs of the 80s. Land bought expecting wheat at $8, cotton at .75 and cattle at $1.10, but we’re going to see wheat at $3-$4, cotton at .35 and cattle at $.75.
This isn’t over and no government efforts are going to stop it. That’s why we see jaws dropped on TV like what is going on. We still don’t know what has hit us.
Of course banks aren’t lending. They’re hunkering down and praying that they are one of the ones that survive.
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