Bill Totten's Weblog

Tuesday, March 27, 2007

Singing the Vegetable Opera

by Jim Kunstler (March 05 2007)

The jive-finance economy had a few acidic burps last week - or, at least, that's how it may seem in the days ahead as the equity markets finally upchuck the toxic notional junk "money" they have been gorging on in recent years. Has there ever been a financial collapse with brighter or louder warning signals?

I suppose the expectation (or hope) is that the quasi-mythical "plunge protection team" - a "working group" of federal reserve officials and bankers - will jump in and administer some soothing pepto-bismol, but frankly I don't see how that's possible this time. The poison at the bottom is a fetid mass of "non-performing" mortgages, billions upon billions of loans that strapped borrowers are not paying back, loans which, in the meantime, have been rolled over, rebundled into jive "securities" (ha!) and sold, and rolled over again and used as "leverage" for massive exotic bets and bloated arbitrages involving mere abstract figments of electronic digital pulses completely removed from any reality-based productive investment activity.

Among the leaders at the supply end of this racket has been General Motors - that's right, the company that used to manufacture cars, the company about which one plutocrat once remarked what was good for [it] was good for the country. In fact, General Motors' main source of earnings for a long time now has been money-lending, not car-making (which only loses money). They started decades ago with GMAC, their own car-loan operation - which makes sense if you are serious about selling cars - but in the 1990s, with foreigners way out-selling GM's shitty cars, the company's financial wizards decided to venture into home loans and thus Ditech was born.

That's right, Ditech, the outfit that advertised incessantly on TV, promising that house-buyers could sleepwalk their way into mortgage approvals - and thus frustrate all the smarmy, over-fed, punctilious bankers who obstructed such requests with pain-in-the-ass qualifying protocols and burdensome paperwork. Last week GM put off filing regular required financial reports because of disarray in its Ditech operation. Ditech is responsible for as much as $80 billion in mostly sub-prime house loans - that is, given to people with dubious prospects for repayment. But GM's Ditech is but one of scores of entities now choking on non-performing paper (and many of Ditech's rivals are now bankruptcy road kill).

What makes matters far worse is that all this wildly reckless lending has been in the service of a suburban sprawl-building juggernaut that will itself represent another layer of grotesque liability for the United States. The crash of the house-selling bubble, based on absurd asset inflation for things built badly in the wrong places, is coinciding exactly with a permanent oil crisis that will only exacerbate the locational disadvantages of houses built in the newest and furthest suburbs.

Evidence now conclusively shows that Saudi Arabia's oil production was down eight percent in 2006 over 2005 {1}, even while the number of oil rigs went up substantially - indicating that the Kingdom is drilling as fast as it can and still losing ground. (Production slipped from 9.9 to about 8.4 million barrels a day.) Mexico's Cantarell field is crashing (minimum fifteen percent annual decline and possibly much steeper rate, meaning in a year or two the US will cease getting oil imports from its number two foreign supplier). The North Sea is crashing, too. Russia is about show steep decline. Iran is past peak. Iraq, as every six-year-old knows, is the world's clusterfuck poster child. Indonesia (OPEC member) is now a net oil importer. Venezuela is past peak and full of loathing for the US. Nigeria is collapsing politically. No amount of corn is going save the Happy Motoring utopia, and that's really all our economy is now based on.

When the financial markets factor all this in - and they really haven't yet - I think we'll see a lot more of what they like to call "downside action". These things are all connected. The housing bubble was set into motion by $10-a-barrel oil at the turn of the millennium. Perhaps as much as half the jobs created since then have been in house-building, house-selling, house-buyership-enabling, house furnishing, and other things house-related. The whole final suburban blow-out enterprise has been a fantastic blunder. Now it's unraveling and the only "performing" loans will be the ones paid to the accounts receivable department in hell.

It ought to be an interesting week in the markets.




See also "Subprime bust forces families from homes" by Adam Geller, Associated Press (March 25 2007)

Bill Totten


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