Vertigo

(Interesting stuff 10 pm – promoted by ek hornbeck)

That graph was posted alongside this article in the NYT, and it pretty much captures the unprecedented nature of the credit crisis we’re going through this autumn. In several sectors of the financial world, lending quite simply stopped. Leveraged buy-outs, the big story of the past 18 months, no longer exist. Asset-backed paper is seen as “toxic waste”, and no longer provided – it continues to exist in so far as banks would rather roll over paper that cannot be repaid rather than make all the underlying losses appear in plain sight.

As lending prior to that had been extravagantly exuberant, this is not having an immediate impact for many companies, which have sound balance sheets and advantageous existing credit lines, but as it drags on, the real economy will start to feel the pinch as it needs to finance or refinance its normal activities, let alone investment.

Meanwhile, in the sector at the heart of the whole crisis, US real estate, things are getting steadily worse. Prices are now dropping all across the board, sales volumes are dropping, and, logically, available stocks of houses for sales are reaching unprecedented highs, as the graph shows (via Financial Sense). That overhang of houses for sale points to further drops in prices, which means that pain is only beginning.

In practice, growth of the past 5 years has been based exclusively on the debt buildup, with no actual increase in real incomes. As the credit crunch wipes out that unsustainable debt bubble, we’ll have to fall back to what can be sustained with existing levels of income, ie somewhere in the vicinity of the GDP of the year 2000. This may not sound so bad, but, as we know, such changes are not straightforward, and the movement towards an increasingly unequal sharing of income will not be reversed easily; pain will not be spread equally across the economy, and it’s highly likely that the weak will bear the brunt of it, unless solidarity, equality and fairness become dominant political principles once again.

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  1. but NOT posted on DailyKos! This is just for you guys – great news, right?!

  2. that first graph is crazy.  Who let that happen?

    • RiaD on December 2, 2007 at 4:13 pm

    I’m not quite sure what you just said, but I’m trying to learn. I’m rushing out the door (well, shortly) & have much to attend this day, but I’ll return later to reread and ask for explanations.

    I’m really, really glad to see you here! I never felt comfortable asking you stuff in orange…

    • Slugbug on December 2, 2007 at 4:25 pm

    Any insights about what you think will happen in the long-term with the value of the dollar would be appreciated.

    I have not been reading the infighting stuff.

  3. I was actually thinking last night that yours is a regular posting I never missed at Daily Kos, and that I was going to have to check you out at the European Tribune…

    I’m moving to Europe as soon as I can get my business off the ground, and shall be following your future postings quite closely, both here and at ET…

    Cheers.

    TMWAP

  4. is the deep, deep despair that must have been coming out of Chinese quarters, for the Chinese to start letting go of their $1 trillion in dollar-denominated assets.  As the dollar sinks, the reserves of the Bank of China lose hundreds of billions of dollars in exchange-value each year — and to think the Bank of China would rather suck up this loss merely for the sake of getting something for their dollars…

    Oh, yeah, and meanwhile the overwhelming majority of the world’s people scrape by on next to nothing as their world is steadily being destroyed by capitalists.  But that’s always a story.

  5. I also follow your posts at Orange but this community feels much friendlier to me.

    There was an interesting front page piece in today’s NY Times on how this is affecting things as far away from the U.S. as the finances of small towns in Norway. It’s not on the front page of the electronic edition, but here’s the link.

    It amazes me that so many people would invest in these kinds of financial instruments. If subprime means that these are more risky mortgages, either people were being incredibly stupid, or they thought that they weren’t actually more risky but just bigger rip-offs for a class of people, which they thought they’d get a chunk of. That many of these mortgages turned out to be the result of intentional rip offs, and that that rip-off just rippled upstream as well as down, well that screams to me for more regulation of the mortgage industry. Did I just make any sense at all?

  6. I get when I look at those graphs, that’s not going away anytime soon, is it?  

    But this is really disturbing:

    pain will not be spread equally across the economy, and it’s highly likely that the weak will bear the brunt of it, unless solidarity, equality and fairness become dominant political principles once again.

    Just yesterday, there was a story in the NY Times about how the bulk of child support payments in many states are not going to the mothers and children they are intended for, but to repay the state welfare funds — http://tinyurl.com/36jfcu — exactly what you are talking about. Every time it seems this administration has hit a new low, they outdo themselves. I don’t even want to imagine what they might do next.  

  7. Asset-backed paper is seen as “toxic waste”, and no longer provided – it continues to exist in so far as banks would rather roll over paper that cannot be repaid rather than make all the underlying losses appear in plain sight.

    It’s like living in a video game or maybe the neopets website.

  8. is the most distressing of all. Maybe because the others are little less comprehensible to me. Why was there none of the gains in productivity over the past 5 years for the workers? I can’t understand this. This is the fundamental immorality in the system. This is what is going to bite us in the butt. Well, it already has, obviously. Somehow I’d like to think that someone who deserves it will pay the price at some point. But then again I’d like to believe in Santa Clause too.

    • documel on December 3, 2007 at 12:19 am

    Paulson is talking to lenders to ease “their” pain, which is similar to the rapist telling us to roll over.

  9. ever admit that a recession is occurring or will they continue to  tout the success of their economic policies despite their obvious failure?

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