Going Bust

Florida contains several of the parts of the country that are worst-hit by the housing bubble, so Peter Goodman's New York Times article on Cape Coral shouldn't be taken as typical. What it is, as Jared Bernstein says, is illustrative of the broader situation. The extreme locations highlight the general sorts of things that go wrong in affected areas. It isn't this bad in most place, but it shows the direction of change. And since there's a good chance things will get worse, more places will wind up like Cape Coral in the months to come.

Incidentally, the Jan/Feb issue of The Atlantic will have a brief piece by yours truly looking at some of these foreclosure issues, though my Florida exemplar was a suburb of Miami.

Comments

1) When a specific location gets hit by a disaster -- Cape Coral in the above article, New Orleans from Hurricane Katrina, etc -- people can at least move to another part of the USA. When the economy is prosperous, one can find a job, and life is safe.

2) But when thing REALLY turn to crap, then there are no safe refuges left in the country. Because every place is in trouble.

3)Doesn't ANYONE remember this prediction I posted here a year ago? From
http://matthewyglesias.theatlantic.com/archives/2006/12/the_sweet_sweet_fed.php#comment-119132
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" Ah, Matthew. You don't realize the evil genius of Karl Rove.

When the bill for 6 years of corruption, venality, and economic incompetence comes due, someone has to be the designated scapegoat. And if Nancy Pelosi doesn't make sure that it's the Republicans, then it's going to be her.

The Republicans are handing the incoming giddy Democrats a big brown bag of cat manure called an "inverted yield curve."

It's the Fed's job to now make sure that bag bursts.

The MOST reliable predictor of a recession is the yield curve. Normally, long term Treasuries sell at interest rates well above rates paid on short term bills. When the yield curve inverts -- i.e. interest on short term bills rises above
that on long term bond -- then a recession follows in 8-12 months. The likelihood of recession increases as the inversion gets steeper.

The latest yield curve model --developed by Fed researcher Jonathan Wright -- indicates a probability of recession within 12 months to be around 47% --very high by historical standards.
An earlier model by Fed Researcher Estrella puts the probability at around 41%. If the Fed raises the federal funds rate yet again, recession will become a certainty.

Just in time for the 2008 campaign.

See http://www.econbrowser.com/archives/2006/04/the_yield_curve.html --note that this article dates from April 2006 and that the yield curve is now much worst and the federal funds rate much higher. You can compute today's odds --using today's interest rates -- here: http://politicalcalculations.blogspot.com/2006/04/reckoning-odds-of-recession.html

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Hee hee hee. I fucking told you so.

Posted by Don Williams | December 27, 2007 12:36 PM

1) Some people aren't using the R word -- they're using the D word. See http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2007/12/11/cnusa111.xml

and http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2007/12/23/cccrisis123.xml&CMP=ILC-mostviewedbox

2) For a REAL preview of coming attractions, read this account of life in Argentina when it's economy crashed and burned a few years ago because of debt:

http://www.frugalsquirrels.com/cgi-bin/ubb/ultimatebb.cgi?ubb=get_topic;f=1;t=044387;p=1

Posted by Don Williams | December 27, 2007 1:09 PM

Don Williams, I opened the link to this post from my reader to post the exact same story from the Telegraph. Wow. I first saw the link on theoildrum.com.

"Crisis may make 1929 look a 'walk in the park'"
http://www.telegraph.co.uk/money/main.jhtml;jsessionid=T4A4I5EA3YQG5QFIQMGSFFOAVCBQWIV0?xml=/money/2007/12/23/cccrisis123.xml&page=1

Britain is, if anything, in worse financial shape than the US. I had already known that the average British family has more credit card debt than the average US family. What I didn’t know is that Britain’s trade deficit is around the same level as ours; theirs is 5.7%, our is about 6.2%. Also, there federal deficit on an annualized percentage basis is currently higher than the US deficit. Wow.

Other noteworthy items from the article:
Things are getting so bad some people are calling to get rid of the Euro and bring back their old currency.

People are looking at the Federal Reserve Act so they’ll know what it can legally do if all its normal tools fail. Basically it can loan money to whomever it wants and assume the risk itself. That’s crazy. If that happens, is it possible for US Treasury bonds to lose their AAA rating?

Gordon Brown is a financial idiot (maybe that’s why Britain is in such bad shape) and banks there have been loaning out money at a reserve ratio of virtually zero.

Scary stuff. The Great Unraveling indeed.

Posted by blah2 | December 27, 2007 2:02 PM

Is it just me, or did anyone else notice a slight moralizing tone in the Cape Coral article? Two of the three people whose plights are described at some length are somewhat unsympathetic characters. There's Joe Carey, who greatly expanded his business affairs thinking the boom would never end, and Kevin Jarrett, with quite the taste for conspicuous consumption. Only Elaine Pellegrino, whose husband recently died, seems completely blameless, and that's assuming that she legitimately is disabled. One would think that the Times could have chosen three fully "innocent" people as examples.

Posted by Peter | December 27, 2007 2:39 PM

1) Yep. Someone pointed out --it may be in one of the above articles -- that the dirty secret of the EU financial markets is that there is NO EU central bank which can issue "sovereign debt" in order to drop bundles of currency into depressed regions.

If push comes to shove, for example, German voters (and the German central bank ) are unlikely to want to bail out Italian financiers. Whereas the people of Pennsylvania aren't given a choice when it comes to bailing out crooked financiers on Wall Street or in Florida.

2) As far as investments go, it might be best to stick to the fundamentals:

Guns.

Lots of Guns.

Posted by Don Williams | December 27, 2007 2:42 PM

As someone who actually reads the papers, I'm also pretty surprised at the severity of the apparent fiscal problems in the UK (though certainly expected the ones in the US).

Maybe the British can offer to sell those nasty Oligarchs back to Vladimir I of Russia for a little quick cash...

Posted by RKU | December 27, 2007 2:50 PM

From the other Telegraph article:
http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2007/12/11/cnusa111.xml
Morgan Stanley has issued a full recession alert for the US economy, warning of a sharp slowdown in business investment and a "perfect storm" for consumers as the housing slump spreads.

That's funny in a kicked-in-the-nuts kind of way. I used the term "perfect storm" to describe the American financial system 2 weeks ago. Why? 1) Housing problems, 2) oil prices --> inflation and high gasoline prices, 3) trade deficit --> falling dollar and, to a lesser extent, the federal deficit. Between those 3 things, we're looking at one doozy of a recession. This is why I keep saying the Democrats will win easily. 2008 is going to suck and people will blame Bush, who is in fact partially responsible.

But when I consider the future, I put it in more general, psychosocial terms than that Frugal Squirrels post. The next 2-3 years are a real test for this country. I wrote this in an email today:

There are 2 responses to tough economic times. 1) Take a communitarian, “we’re all in it together” attitude and enact policies that spread the sacrifice/pain and harness the group power of the populace, or 2) Lash out at minorities and become increasingly fascistic. Given that the corporatization of America has become near-total, libertarians and Randites have successfully convinced America that a radical individualism is the proper way to be a member of a country in the modern world, and that we’re already starting to lash out at minorities in a way we didn’t in the go-go 1990s (the border fence and the Minutemen, Tom Tancredo), it’s obvious which course this country will take.

Posted by blah2 | December 27, 2007 3:08 PM

1) The US Fed is in bind similar to the one it had in 1929: It needs to cut interest rates to stimulate a declining economy but it can't because such cuts will cause the dollar to continue it's downward collapse in value --which will provoke capital flight (by both US and foreign investors.)

2) Yet if the economy isn't stimulated, then more and more subprime mortages will be shown to be worthless, financial firms will be forced to declare $Billions more in losses, people with money will be afraid to lend it, and the economy will seize up. The US economy needs $1 TRILLION in investment every year just to maintain the status quo.

3) Plus that $4 Trillion in BUSH debt (as well the $4 TRILLION in Reagan/Bush I debt ) will need constant rollover and hundreds of $Billions in interest payments every year -- which will further starve the productive sectors of the US economy of needed capital.

4) Wonder if Bush has figured out that "fuzzy math" that Al Gore tried to explain to Bush during the 2000 Presidential debates.

Posted by Don Williams | December 27, 2007 3:26 PM

There's no one more innocent they could have found to profile. For anyone they could have interviewed, there's someone out there who would cheerfully blame them for behaving however they did, whether it was assuming their good job would hold out or not planning their finances as though they would drop dead tomorrow and need to provide for their families.

Posted by Dragonfly | December 27, 2007 5:12 PM

Re: But when thing REALLY turn to crap, then there are no safe refuges left in the country. Because every place is in trouble.

Has that ever happened? I moved from the Great Lakes to Florida because the economy in Michigan and Ohio was a disaster while Florida as booming. Seems to me that there are always some areas where it's better than others. One of the advantages of having alarge and diverse country. Even in the Great Depression some places (e.g., California) were rather lightly affected and not even the Civil war devastated the entire nation (far from it in fact).

Re: As someone who actually reads the papers, I'm also pretty surprised at the severity of the apparent fiscal problems in the UK

Why? Margaret Thatcher thoroughly Reaganized Britain (which not doing all that great before her reign). And Tony Blair undid very little of the damage. Moreover Europe as a whole isn't doing as well the Europhilic Left likes to proclaim (nor as badly as the Europhobic Right trumpets). The woes of a post-industrial, globalizing economy are pretty much the same all over the First World. Europe's better scoial programs help cushion the shock and spread the pain and as such they are to be admired and, I hope, imitated. But they aren't a solution to the underlying problems. We are all in the same boat here.

Posted by Jonf | December 27, 2007 5:50 PM