Ransome

Case-Shiller Still Predicts Massive 45% Fall from Today’s Values

Zero Hedge collected some excellent material on balance sheet recessions presented by Richard Koo. He had a slide that compared rents to housing prices from 1975. The presentation was prepared in March and the predicted intercept was equivalent to housing prices around the fourth quarter of 2003, which I estimate to be approximately $100 to $125 a square foot.

Property Values Set to Fall 43% from Current Depressed Levels

I am not so sure we haven't hit the bottom. I bought a house for 165k in 1987. In 1997, my neighbor in real estate said it was worth 140k. I am one that refuses to take a loss. Back in the '80's mortgage interest rates were up at 8 or 9%. It depressed the market. When banks started giving money away my house increased in value overnight by about 50% based on a monthly payment without any loan gimmicks. The drop in value over 10 years created a latent demand that was overstimulated by cheap money. Over the entire period from '87, replacement value increased.

We went from a depressed market to an overstimulated market to a restrained market. Taking into account the cost of money and the latent demand, prices seem about right Location still exerts a positive pull on value. The '87 house is on a cul de sac where kids can play in the street and the houses have big lots in a good school district. It has twice the value to a young family than a town house, which sells for 170k. If I increase the value of the house with no appreciation, based on money cost and latent demand it is about 280k (50% + 20%) . Adjust for real inflation at 2% per year (50% + 20% + 40%) * 165K = 345k. The real price is between 280k and 345k which is in the range predicted by the town house price.

I also heard that Dodd may propose opening up the 8k bonus to all comers to help move inventory. The timing would be especially good for local banks who are deposit rich but cautious as they lose more money on development and new construction loans. This could open lending for them, generating badly needed revenue and establish the housing value floor if money is lent prudently. It may unfreeze the ABS market with asset values stabilizing at a low point and lending being prudent. Now we need jobs to support all this.

The Coming Consequences of Banking Fraud

I will take a contrary opinion. I don't think they know what they are doing. It is simply crisis management. My views have changed since reading the recent articles at Bloomberg about the Lehman collapse.

In other words, if you call GS and ask for a crisis solution, they will give a GS solution. They are not geared towards saving the economy, they are geared toward succeeding at financial capitalism. If Paulson called a distressed homeowner, he would have been given different advice. The main thrust of the crisis solution was focused on the middlemen. The middlemen have little effect on the economy. The faulty or toxic products they created had an enormous effect on the national and global economy but that was not the focus, it was propping up, writing down securities, moving securities, a bookkeeping exercise with respect to the real economy. All the "secret" movement of money and securities are bookkeeping exercises to manage the colossal leverage and interconnectedness that would burn down the house if rules were followed and activities transparent.

It's the millions of people being displaced or losing jobs that is wrecking the economy. It is the investors and borrowers that got creamed and ignored. The fact that GS can now make money algo trading has not helped the economy one bit.

This is simply crisis management with attendant information control. Folks are nervous that a AAA plan will go bankrupt tomorrow mostly because the "problem" has spread in so many directions and into so many sectors that can not be controlled as simply as giving a bunch of money to AIG. The complexity and interconnectedness has been stunning. Every player has been fined tuned in the art of financial capitalism and not remotely geared to undo or fix problems. In financial capitalism you never look back, you look for new opportunities, whereas forest firemen are always looking back. These crises are not planned, it is the result of recklessness and a gross lack of foresight while living in the moment. Once you and the herd are swept up and can hear the roaring of the falls around the bend, it is too late.

Besides, gold gave us a lot of problems during the Long Depression. Stability comes from a Real Bills Doctrine but folks at SA don't want stability. Financial capitalism withers away and Industrial capitalism requires folks to make money the hard way, where value is exchanged for value and those adding the most value are rewarded. Financial capitalism appears to be adding value but moving money from pocket to pocket for a fee is not.

What I really think is going on is the monetarists, and there are plenty, are trying to salvage their relevancy while in crisis management mode. It turns out that if folks have the freedom to make the best choice, it is often results in following the herd over the falls.

The $1.7 Billion Payday: How Bill Gross Made a Killing on the Bailout

During the Long Depression, when money became scarce, it was said stocks were for Rubes. Different economic times, perhaps.