Posts
![[Most Recent Quotes from www.kitco.com]](http://kitconet.com/charts/metals/gold/t24_au_en_usoz_2.gif)
![[Most Recent Quotes from www.kitco.com]](http://kitconet.com/charts/metals/silver/t24_ag_en_usoz_2.gif)
![[Most Recent USD from www.kitco.com]](http://www.weblinks247.com/indexes/idx24_usd_en_2.gif)
Nouriel's twelve-step program for an economic meltdown
Friday, February 22, 2008
Writing in the Financial Times the other day, Martin Wolf recalls former Fed chief Alan Greenspan's "froth" characterization of the housing bubble before getting on to Nouriel Roubini's twelve-step program for an economic meltdown."I would tell audiences that we were facing not a bubble but a froth - lots of small, local bubbles that never grew to a scale that could threaten the health of the overall economy." Alan Greenspan, The Age of Turbulence.
If it weren't so sad, it would be funny - no national housing bubble, just froth!
Nouriel's twelve steps:Step one is the worst housing recession in US history. House prices will, he says, fall by 20 to 30 per cent from their peak, which would wipe out between $4,000bn and $6,000bn in household wealth. Ten million households will end up with negative equity and so with a huge incentive to put the house keys in the post and depart for greener fields. Many more home-builders will be bankrupted.
The good professor went on to list eight reasons why the process can not be stopped.
Step two would be further losses, beyond the $250bn-$300bn now estimated, for subprime mortgages. About 60 per cent of all mortgage origination between 2005 and 2007 had "reckless or toxic features", argues Prof Roubini. Goldman Sachs estimates mortgage losses at $400bn. But if home prices fell by more than 20 per cent, losses would be bigger. That would further impair the banks' ability to offer credit.
Step three would be big losses on unsecured consumer debt: credit cards, auto loans, student loans and so forth. The "credit crunch" would then spread from mortgages to a wide range of consumer credit.
Step four would be the downgrading of the monoline insurers, which do not deserve the AAA rating on which their business depends. A further $150bn writedown of asset-backed securities would then ensue.
Step five would be the meltdown of the commercial property market, while step six would be bankruptcy of a large regional or national bank.
Step seven would be big losses on reckless leveraged buy-outs. Hundreds of billions of dollars of such loans are now stuck on the balance sheets of financial institutions.
Step eight would be a wave of corporate defaults. On average, US companies are in decent shape, but a "fat tail" of companies has low profitability and heavy debt. Such defaults would spread losses in "credit default swaps", which insure such debt. The losses could be $250bn. Some insurers might go bankrupt.
Step nine would be a meltdown in the "shadow financial system". Dealing with the distress of hedge funds, special investment vehicles and so forth will be made more difficult by the fact that they have no direct access to lending from central banks.
Step 10 would be a further collapse in stock prices. Failures of hedge funds, margin calls and shorting could lead to cascading falls in prices.
Step 11 would be a drying-up of liquidity in a range of financial markets, including interbank and money markets. Behind this would be a jump in concerns about solvency.
Step 12 would be "a vicious circle of losses, capital reduction, credit contraction, forced liquidation and fire sales of assets at below fundamental prices".
Last summer, prior to the onset of the credit market mess in August, lists like theses would have elicited cat-calls from fellow economists - not any more.
2 comments:
Tim,
What is froth? Bubbles.......millions and millions of bubbles!
He's Easy Al your easy money pal!
When buying a home, be wary of `creampuffs’
A perfectly groomed home could be irresistible — but acting on emotion might be risky.
They were a couple in their early 30s, out for a day of house-hunting when they happened upon a ranch-style place they found irresistible — first for its lovely gardens and later for its exquisite interior furnishings.
”Coming up the walkway, they bought that house before setting foot inside,” recalls Sid Davis, the real estate broker who listed the property.
After more than 25 years of selling homes, Davis knows which upgrades most enhance the salability of a place. And in this case the owners, following his advice, used all the hot buttons that excite buyer interest.
”The man of the house was an electrician who was exceptionally handy and could make a house look really sharp. He did a superb job of painting inside and out. His wife, a nursery school teacher, used her amazing green thumb to nurture the flower beds and lawn. When they were ready to sell, the place oozed with curb appeal,” says Davis, author of Home Makeovers That Sell.
LOOK CHANGED
But the property proved a disappointing choice for the purchasers, a civil engineer and his homemaker wife.
”Like most people, they had neither the skills nor inclination to maintain the gorgeous gardens and perfect lawn,” Davis says. ‘Also, the worn furniture they hauled in from their apartment didn’t look nearly as good as the sellers’ furniture. After moving in, they were shocked that the house had lost a lot of its ‘wow’ feeling.”
Realtors refer to a home that’s perfectly groomed for sale as a ”creampuff.” They caution buyers against making a snap decision on such a property without further analysis. The risks of buying solely on emotion are that you’ll buy the wrong home, overpay or both.
Here are three tips for prospective homebuyers:
• Look for signs of ‘’staging.” In recent years, an increasing number of home sellers have begun hiring a ”home stager,” someone with a flair for making a property look enticing to potential buyers.
Staging, which typically includes the removal of excess furniture and the rearrangement of remaining items, is widely recommended as a savvy step for home sellers. But advocates for purchasers say they should be careful not to let good staging lure them into buying an unsuitable home.
TELLTALE SIGNS
Merrill Ottwein, a past president of the National Association of Exclusive Buyer Agents, says there are several telltale signs buyers can use to determine if a property has been staged to evoke positive emotional reactions.
”Many times stagers move out much of the kind of furniture real families use — just to make the rooms seem larger than they really are,” he says. “For example, they’ll take out a sofa or loveseat from the living room and replace it with a small armchair.”
• Realize that many ”For Sale” properties are presented free of clutter.
Listing agents are at war with the kind of clutter people routinely accumulate — whether this involves mountains of shoes in a bedroom closet, dozens of bowling trophies in the den, or countertops crowded with gadgets. They know a cluttered home usually sells more slowly and for less money.
There’s nothing wrong with buying a home that’s been de-cluttered. But don’t let the clean, sleek quality of such a property dissuade you from your larger purpose of selecting a property that meets your family’s needs.
• Be realistic about your ability to maintain lush landscaping. First-time buyers, like the civil engineer and his homemaker wife, are the ones most easily swayed by blooming flower beds, carefully clipped bushes and well-pruned trees. That’s because most first-timers live in apartments with little greenery of their own. Novice buyers are also the least likely to appreciate the time demands that yard maintenance can make, according to Davis.
”Beautiful curb appeal is a high-effort endeavor, and few are willing or skilled enough to do all the work involved,” he says.
Of course, those who can’t uphold the standards of the property’s former owners can hire a landscaping firm to do the work. Still, he says anyone expecting to rely on a landscaping service should make sure they can afford it before buying a property with elaborate upkeep requirements.
”Call in a couple of landscapers for estimates on what they’d charge,” Davis says. “Then just assume this cost would be tacked on to your regular monthly house payment. If you can’t manage the upkeep costs on the property, you should back away.”
Post a Comment