Bill Totten's Weblog

Sunday, March 25, 2007

Nausea Rules

by Jim Kunstler (March 12 2007)

Here's an idea: when the securities markets go south along with the rest of the US economy in 2007, maybe the smoothies on Wall Street should receive end-of-year "cash-negative" bonuses, meaning instead of a check for, say, $25 million the day before Christmas, they get an invoice saying "please remit $25 million". Who to? Good question. One might suggest the nearest firefighters' or teachers' pension fund - except the idiots who run those retirement funds bought mortgage-backed paper with their eyes open. Okay then, let's say the Wall Street boys send their checks into Amtrak. Maybe then the cafe car between Albany and New York City will re-open so that in the course of a 2.5 hour trip a person might get a drink of water.

A tsunami of nausea seems to be sweeping across the media now in recognition that the Potemkin edifice of mortgage finance is imploding like a discarded Las Vegas casino. What it comes down to is that several species of newly-engineered financial Frankenproducts have been based on loans for houses that will never be paid back. Not just a few loans. Massive numbers. These, in turn, have been bundled, swapped around, and leveraged into other plays which now depend, for instance, on x-number of unemployed car dealers and underpaid busboys ponying up the "vig" for some piece-of-crap collateral that will soon be a third its previously appraised value. It will be easier for the car dealers and busboys to walk away from these deals than it will be for the smoothies who used all this bundled bullshit to hedge credit default swaps and play the yen-to-Euro carry trade game to wiggle out of their positions. And the unwinding of all this fraud will almost certainly leave the nation economically spavined.

The amazing thing is how standards and norms for lending collapsed as completely as they did the past five years. One day you had bankers who retained a notion that lending per se required some prudent evaluation of the borrower's character and of the thing or enterprise borrowed for - and the next day these protocols vanished. Once again I challenge the punctilious physicists out there by asserting that this astounding transformation is the product of entropy. Basically, you get a given system - for example the US economy - over-stoked on cheap energy (and even at $3 a gallon gasoline is cheap), and the system will throw off gobs of entropy. The more profligate the energy consumption, the more entropy results. It then expresses itself in various kinds of disorder, meaning anything from the immersive ugliness of the American built-up landscape to the behavior of people formerly attuned to such governing principles as moral hazard to retain the functional legitimacy of their livelihoods.

It is really a sort of systemic disease, generating poisons that seep into the far corners of the organism affected, in this case the USA. It will be manifest in the personal ruin of individual families, the collapse of institutions, the rising crime rate, and the rapid physical decay of things built too carelessly to be worth caring for.

I went around some neighboring towns here in upstate New York to look at the real estate yesterday. I was impressed by how uniformly crummy everything was - and not only because it is nearly spring and layers of old dog shit are being revealed in the melting snowbanks. In the old houses priced above $300,000, the rotting sills and delaminating surfaces are plain to see. Of course, the buildings are worth something, but my guess is less than a third of the asking price by any realistic valuation. But at least these things were made of materials generally found in nature. The new houses were all glue and vinyl, and of course they were mostly built in places dissociated from any town itself, meaning the hapless owners will have to own multiple cars to live there and make multiple trips per day - not a good prospect for the years ahead.

The story will be the same all over the nation. The owners of these things will get into terrible personal financial trouble. The property market will re-value the buildings, discounting all the previous wishful thinking about price. And the financial markets will stagger and collapse as the process thunders through the mendacious operations that all this wishful thinking spawned.

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

Bill Totten


  • I love all of this sky is faling crap about the sub-prime markets. Sub-prime loans do not make up a huge percentage or mortgage loans in the US but the media have you convinced it's a massive problem. They have you and everyone else fooled as Wall Street is doing all it can to create panic in the lending world. Why? So they can buy up mortage companies on the cheap which is exactly what they are doing. If the sky is really falling then why would Goldman Sachs be buying up the discounted companies like they are? Wall St doesn't want you to put your money back into real estate where the bargains are now. Historically, the sky is falling crap means a bottom of the market. So while you Blog away about how bad it's going to be, the buying opportunity will pass you by and you will then complain how you missed the bottom. Wake up America.

    By Anonymous Anonymous, at 12:37 AM, March 27, 2007  

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