Benjamin Franklin said it’s better to be a pessimist and pleasantly surprised than an optimist and constantly disappointed. Followers of Motown’s meltdown—and the wider malaise affecting the entire auto industry—know it’s going to be a long time before the pleasant surprise part of the equation. Bloomberg reports, “Confidence among U.S. consumers plunged to a record low in February, signaling spending will slump further as unemployment soars. The Conference Board’s index declined more than forecast to 25 this month, the lowest level since data began in 1967, from a January reading of 37.4, the New York-based research group said today.” Lest we forget, the housing bubble begat the auto bubble which begat the collapse which lit up the turbos on Detroit’s decline, as it powered unthinkingly on its Thelma and Louise trajectory. So how’s that housing thing going? Do you really want to know?
Home prices in 20 metropolitan areas fell 18.5 percent in December from a year earlier, the biggest drop since records began in 2001, according to S&P/Case-Shiller. All the regions were down during the period, led by a 34 percent slump in Phoenix and a 33 percent slide in Las Vegas.
Tomorrow, GM and Chrysler will face a presidential task force on autos, trying to pretend that their 10M annual selling rate is their “worst case scenario.” Sorry guys, you ain’t seen nothing yet. Literally.
Meanwhile, residuals values are dropping faster than pants in a porn movie. The dead cat bounce: sales of hugely discounted pre-owned cars are jumping. Dealer’s Edge reports that sales of certified pre-owned (CPO) luxury cars are jumping (relatively speaking).
Toyota’s Lexus brand says its dealers sold 4,348 “certified pre-owned” Lexus vehicles in January, a new January record for the category. Certified pre-owned Lexus sales rose 19.5% in January 2009 compared to a year earlier, even as demand for new Lexus vehicles in January fell.
Mercedes-Benz says its certified pre-owned sales rose nearly 27% in 2008 compared to the year before, and January sales of certified pre-owned vehicles jumped 86% from a weak year-ago.
BMW dealers sold about 10,000 certified pre-owned vehicles in January, and about 12,000 new vehicles. BMW spurred interest in its certified pre-owned cars and sport utilities with a 0.9% financing offer.
One problem: why buy new? Why indeed. February sales number are less than a week away.
On the upside for the auto industry: houses are starting to make cars look like good investments. No property tax. Easy to move if ones job moves (hell it will even drive you there). The depreciate is expected, not an awful surprise. On the downside: “why buy new? Why indeed.”
This, of course, is for people that do not currently have homes. Many people with homes are not going to be buying anything for a long time.
“Sorry guys, you ain’t seen nothing yet. Literally.”
So they’re blind? Or they will be later?
Is anyone else more than a little perturbed that the DIJA is hovering around 7000? Just how miserable do things have to get before the wheels start turning again? Why anyone would want to helm this ship, I’ll never fathom.
In January used luxury car CPO sales were up an average of 31.5% ( http://online.wsj.com/article/SB123516810474136363.html ). That is a pretty significant jump. This is good news for the luxury brand’s finance arms because all of those discounted 3-5 year leases from recent years are maturing. So, while these sales hurt the movement of new metal, they do support the finance end of things in a way which has to be good.
Eventually the supply of good lightly used cars is going to start to dry up. Rental companies have cut way back and cheap lease deals are a thing of the past. It might take a year or more for this to play out, but eventually the soaring used car demand combined with plummeting used car supply will sort itself out. Similarly, reduced new cars sales means fewer top quality used car trade-ins. Nice used 2006 model year cars are still in plentiful supply, but nice used 2009 model year vehicles are likely to be scarce in 2012.
An overall trend which is likely to stay in place is the reduced transaction price all of this implies. ‘mericans are suddenly being much more Germanic in how they spend their money. My friend who swapped her off-lease Audi for a well equipped (and purchased) Mazda-3 hatch is typical of this new reality. The out the door cost of the Mazda was probably $10k less than for the Audi. Whether buying depreciated lightly used cars or simply moving down market, people are being more careful with their money. Long term this is healthy, but short term the industry which had gotten fat and lazy on high profit margin vehicles is now under intense stress. Those high margin Escalade, Grand Cherokee, Navigator and Hummer sales used to wallpaper over a lot of moldy sheetrock.
Interestingly, Toyota’s new boss is also accusing his predecessors of loosing their minds in the good times. The WSJ has an excellent piece on this:
http://online.wsj.com/article/SB123543506243454263.html
The US scrap rate of about 12.5 million vehicles per year sets a good benchmark for the natural annual new vehicle volume. Like it or not, the US is a replacement new vehicle market. Population growth is counterbalanced by a continue move into urban areas, and urban living isn’t as car intensive as suburban or rural living is. It will take some time to soak up the excess vehicles from all of those over 15 million unit years, but we will eventually see more than 10 million units per year. How long until we do? Sometime in Obama’s first term is a good bet.
John Horner: An overall trend which is likely to stay in place is the reduced transaction price all of this implies. ‘mericans are suddenly being much more Germanic in how they spend their money.
This is the more important long-term trend. The market will eventually rebound. But many more people will be buying Civics, Focuses, Fusions and Accords instead of $35,000+ SUVs, crossovers and entry-level luxury sedans.
The key to success will be building attractive, stylish cars that sell for less than $30,000.
The market will be crying out for a new Mustang-type vehicle. Not another pony car, but a car that offers unexpected style and “personality” at a very low price and in a handy size, much like the original Mustang did.
You ain`t seen nothing yet. The worst is yet to come. How on earth the smartassed economists expect the economy to recover in 2010/ last year 2.6 million fired. this year about 2 million will be laid off. Whom do you expect to lead the recovery? Wake up in a new reality! While you thought that exact sciences don`t matter, for they account not most of the domestic economy, yet it accounts for the majority of well paid jobs, whether technicians at Gm or engineers at Whirlpool. if you think that all the schools need is this freaking communicative approach where you can communicate your kids to death, while the natural sciences go south because of offshoring all engineering, you might be wrong after all. To counterweigh import, US must borrow, which in order is serviced from budget. Thus servicing the debt makes allotment for education more and more meager. Having no reason to pay a big salary for a nose picking salesclerk( as opposed to , say, chassis engineer)Us is being starved of well paid jobs. Ditto the car industry. Whom do you expect to buy G8 and z06 and sts-v? Us market will eventually shrink to 7 million vehicles annually.If the population of US is growing, but car sales shrinking, what does it say about middle class of America? And what part of population is growing? maybe you can find the answers there…….
John Horner:
Where do you get the scrap rate figures? I wouldn’t be surprised if 2008 stayed consistent with past years since car sales did not fall off a cliff until the end of the year, since, at the beginning of the year, commodity prices for things that can be scrapped from cars were very high (people were stealing manhole covers), and since gas prices probably caused untimely deaths for some trucks and SUVs. But I think 2009 might be much different.
Dead in the water now, at top speed over a cliff tomorrow…. as in the photo (which is worse than dead in the water – at least with dead in the water, you have some chance of getting the engine started… doesn’t much matter if the engine is running or not once you’re horizontal-soon-vertical over air way above the canyon floor).
Remember, the 1929-1932 drop in new car sales in the United States during the great depression meant a 75% drop-off. From 2007 to 2012, will this mean 4.25 million new car sales in 2012? That’d be the approximate equivalent.
Now, from great depression, fast forward to WWII, when from early 1942 to mid-1945, the US saw NO new car or truck production for civilian use; after 36 months or so, the US car and truck situation was getting so desperate that the military allowed some trucks to be sold before the end of the war, for civilian use.
But then, back in the day, the value of a car (and therefore it’s useable lifespan) was only about 6 to 8 years. Now, the AVERAGE American vehicle on the road, is 9 years old (some 2 years OLDER than the cars currently in what was communist Eastern Europe – which is rather telling, isn’t it?)
So what’s the likely scenario if our economy continues to crater like a cake in an oven after having the oven door slammed?
I’m going to “WAG” (wild-@ss-guess)
9 million new cars for the US in 2009 (scrappage rate slowed to 11 million, 2 million deficit)
7 million new cars for the US in 2010 (scrappage rate steady at 11 million, a 4 million deficit)
6 million new cars for the US in 2011 (scrappage rate back up to 12 million, a 6 million deficit)
4 million new cars for the US in 2012 (scrappage rate at 13 million, a 9 million deficit)
Can you see how this means that 21 million fewer cars will be on the road by 2012? And it won’t stop there. Can you see how gas prices will be soaring to pay for government sanctioned busses? More and more people will have the massive inconvenience of living in suburbs and near-suburb rural areas, yet have a need to commute. There will be a reversal of the moves out of the cities which followed WWII, to deal with some of the inconvenience. Think ugly communist era cheap high-rises owned by the government, or the “projects” of the late 1960’s….
I suspect that by 2013, things might start to turn around, especially if a new non-communistic administration comes in (this would preclude virtually all of the Democrats and most of the Republicans now in positions of power) and we’d see 8 million new cars (many imported, since the remaining US factories could not ramp up nor could any remaining US or US transplant auto makers build or restart mothballed facilities in a timely manner – plus a lack of money to do so)
I’ll guess that by 2014, we’ll see 10 million cars again, with US sourced product again perhaps 50% of the market.
Not a pretty site, is it? But then, driving the economic train at maximum speed over a cliff-face rarely is pretty.
Just think that this all started with President Carter (D) worst president in history, “demanding” that banks give loans to folks whether they can really pay them off or not, and having Clinton (D) really accelerate the same program onto a far bigger level and having Reagan, Bush I and II (R) not kill these programs, and also having these same folks continually encourage the monied classes to increase profits in a trickle-down plan (when in fact, the monied classes were actually moving jobs out of the US, instead of being patriots and thinking of their country and the folks in it). Of course, the buyers (“consumers”) of goods kept on clamoring for “cheaper prices” and the unions kept clamoring for “more freebies, less work and retirement plans worthy of a potentate”.
At all had to end ugly, didn’t it?
Final rhetorical question: will future history books indicate that the Multi-National Corporation (as opposed to the local and regional, nationally oriented company) and massive Unions (as opposed to voluntary decent treatment of workers) killed western civilization?
Nothing in US history compares to the housing price bubble that was allowed to occur during the Bush “ownership society” years.
http://www.speculativebubble.com/images/homevalues1.gif
The government did not demand that banks sell bad loans, the banks and mortgage brokers saw the profit in that all by themselves.
Subprime mortgage queens Countrywide and IndyMac (a Countrywide spinoff)(both private) have much more blood on their hands than Fannie Mae and Freddie Mac, which only bought prime or almost prime (Alt-A) loans, and only failed because of the domino effect that troubled private subprime loans had on the cost of capital for their prime loans.
“Falling home prices and rising foreclosure rates in the United States that began with troubles in the subprime market are now having an impact on loans made by borrowers with better credit profiles. Fannie Mae and the other government-backed mortgage player, Freddie Mac (nyse: FRE – news – people ), which insure and buy only prime loans, are now seeing their portfolios hit by mortgage market deterioration. The company reported that 42.0% of its’ write-downs involved Alt-A loans which are considered between prime and subprime in credit quality.”
http://www.forbes.com/2008/05/06/fannie-mae-closer-markets-equity-cx_md_lal_0506markets43.html
The mortgage crisis was caused by private subprime lenders than went unregulated, and by the Fed not raising interest rates. Not by Fannie and Freddie, which only function to make the prime mortgage market more efficient.
Well, no_slushbox, there are so damn many people who could stand in a line-up of blame and shame for this whole debacle, that we haven’t time or room to name them all, not even by group. Some of the blame falls on the general public for being foolish and irresponsible enough to buy into the idea that they can get something for nothing (huge McMansions for super cheap teaser temporarily low interest rates, for example).
You could even say (if you were a libertarian and/or knew something about Austrian economics) that the whole sorry story began in 1913 when the idiots in Congress usurped their own Constitutional authority by handing over the responsibility for money to private banking interests, commonly now known as the “Federal Reserve”. Which is neither Federal, nor a Reserve.
The ultimate question being that when a government of men disobey the rules, laws and Constitution that they agree and solomnly swear to uphold, and act outside of their authority, are they a legitimate government?
Taking that a step farther, have we had a legitimate government since 1860, when the express intent of the founders was quashed by President Lincoln, by forcing the nation to stay as one, when each state was supposed to have the right to stay or not stay in the union?
Certainly, it’s crystal clear to a lot of us that we have not had many administrations which have been authentic and legitimate since the new-deal.
At what point do the American people say “enough” and take back the power given to us by the United States Constitution?
We may be finding out soon….
@Menno,
Loved your post, an interesting read, can’t say I don’t at least 75%-85% agree with you.
Just think of all the postives that come from your scenario though; with 21M fewer cars on the road, “Gorbal Warming” should be reversed, oil resources would be preserved and the lowered demand would tend to keep prices down, our highways and bridges won’t get torn up as fast meaning less repair and less tax money for repairs, fewer auto/truck accidents resulting in fewer repairs, injuries and deaths resulting in lower insurance rates, lower volume traffic resulting in reduced commuting time resulting in more quality time with your family or more time on TTAC and lower traffic volume would also increase the productivity of millions of Americans.
The “stimulus” plan will only make things worse. What it will stimulate is inflation. Massive government debt has a way of doing that. Pile that on top of unemployment and you have one heck of a mess.
no_slushbox: The government did not demand that banks sell bad loans, the banks and mortgage brokers saw the profit in that all by themselves.
Initially the government did require banks to revise (read – weaken) their lending criteria…and the banks soon discovered that it was a way to make more money. It was a government action, however, that got the ball rolling.
Regarding Freddie Mac and Fannie Mae – concerns had been voiced about their viability and business practices in the early 2000s. They were dismissed by…Rep. Barney Frank and Rep. Maxine Waters.
If you look back to the roots of this crisis, you will discover that both major parties have dirty hands.
mennno wrote:
Can you see how this means that 21 million fewer cars will be on the road by 2012? And it won’t stop there. Can you see how gas prices will be soaring to pay for government sanctioned busses? More and more people will have the massive inconvenience of living in suburbs and near-suburb rural areas, yet have a need to commute. There will be a reversal of the moves out of the cities which followed WWII, to deal with some of the inconvenience. Think ugly communist era cheap high-rises owned by the government, or the “projects” of the late 1960’s….
Not going to happen. There would be a civil war if the “Blue States” seriously attempt to use taxes to force the “Red States” to give up the car and low population density living. I could also see lots of heating fuel like natural gas, propane, and fuel oil being diverted to transportation use to avoid increased excise taxes. Individuals may chose more cost efficient vehicles, but they’re not giving up the freedom to go where they want when they want.
A more realistic but bad scenerio would be car consumers buying much lower profit practical replacement cars in the next few years. The volume stays in the 10 million to maybe 12 million replacement range AND prices drop to basic car levels. 2010 would probably be a good year to launch the new Civic or possibly the Cruze, but sales of higher profit per unit vehicles are likely to dry up.
Well, menno, you put into words my worst fears.
All my reading suggests that economists in the 1960s started this tommy-rot by advocating free trade as the cure-all. Field day for the IMF to give credit to 3rd world countries to produce cheap things for sale in the West.
They completely forgot that there were low wage workers in Western sweat shops (un)happily turning out cheap garments. These folks wanted to keep their jobs, not surprisingly, so clothing imports were at first highly tariffed. And the 3rd world couldn’t meet their loan payments, remember that?
Finally, in a feeding frenzy of expansion, Western companies started to get poor foreigners to make our sneakers, etc., ending thousands of jobs in the West.
Having become globalized, trans-nationalized, multi-nationalized and outsourced, the West fed on itself by giving credit to any person who could walk. All the while there was a general grumpiness from the population who saw their “productive” jobs disappear overseas, exactly as the economists had wanted, the so-called leveling of the playing field.
But emotion is not an economic term, so by the time Lou Dobbs woke up, ’twas a done deal. And this crash had to happen.
So now the West has “knowledge” economies, which produce SFA of much use in survival, and reinvented the term GDP to include the “work” performed by office drones making nothing physical, i.e. the public service.
You only create wealth by changing a physical condition: growing food, mining ore, machining metal, selling a manufactured product. Economics 101, 1964. Banks can create money, but you cannot eat that stuff.
Once this truth dawns on the masses, large government, offices full of “knowledge” workers, and the truly horrendous parasitic financial types who prey on the rest of us to fill their pockets at our expense while producing nothing of any consequence whatsoever, will diminish in number.
Because we cannot afford them in a productive society. Dunno how we’ll get there, but it’ll be an interesting ride. And yes, there’ll be a lot of yelling and screaming.
geeber:
Charging high interest rates to risky borrowers was not recently invented by the government. It was invented by profiteers and is covered in things like the bible.
Financial instruments, like mortgage backed securities, invented by the market, allowed banks and mortgage brokers to write bad loans and pass the buck. That was all it took for the bad loans to start.
Credit default swaps magnified the problem. Banks sold them to the owners of mortgage backed securities to insure their investment. However, they also sold them to hedge funds, which, with no insurable interest, bought them to short the market. These CDS sales are what have ruined the major banks. While the government failed to regulate CDS it did nothing to create them.
The Community Reinvestment Act, which you are referring to, is just a scapegoat, it had nothing to do with this crisis.
Republican analysis of CRA: http://www.usnews.com/blogs/the-home-front/2008/12/17/sheila-bair-stop-blaming-the-community-reinvestment-act.html
The major subprime offenders, like Countrywide, weren’t even banks that had to comply with the CRA.
I spent 6 months working at Countrywide, so I know it from the inside. If a person tried to sell someone a fixed rate loan the Countrywide manager would scream at them, if the person sold someone something that would inevitably go into foreclosure like a pay option ARM the manager took them out to lunch. I never went out to lunch.
Both parties failed to regulate the mortgage industry enough in the early 2000s, but Fannie and Freddie efficiently provided middle class prime loans for decades before this bubble.
Allowing people to get adjustable rate mortgages and interest only mortgages caused this mess, not lending to poor people. Unregulated credit default swaps are making the financial crisis multiple times worse.
If ARMs were illegal for residential properties we would not have this mess. It is that simple.
Ask the guy with the $780,000 house across the street from me that went into foreclosure, or the guy next to me with the $400,000 house that went into foreclosure. (luckily, even in foreclosure, the $400K house sold for the same price, and the $780K house only went down to $760K). They did not have CRA loans.
Ah, the usual dreadful rewrite of history that absolves George W. Bush of any role in our national collapse. Yawn. Far more interesting to me than all that is this:
Polls show that the large majority of Americans revile Bush, recognize the pivotal role of the GOP/multinational axis in gutting the nation’s wealth on behalf of the rich, and want a move toward more socialism even at the expense of continued deficit spending. (Yes, count me among them.) Yet, from here to C/D’s staff to the Edmunds boards, right-wing views dominate overwhelmingly.
What is it about car fans that they tend to be much more right-wing than the nation at large? Are liberal car nuts too busy driving and having deviant sex to type dyspeptic posts? I don’t fit the enthusiasts-must-be-conservatives paradigm. Why do so many others?
Ah, the usual dreadful rewrite of history that absolves the Democratic Congress of the last 3 years of any role in our national collapse. Yawn. Far more interesting to me than all that is this:
Polls show that the large majority of Americans revile Congress, recognize the pivotal role of the GOP/Dem/multinational axis in gutting the nation’s wealth on behalf of the rich, and want a move toward more socialism even at the expense of continued deficit spending
Zillions to fat cats in the banks? Why not! Zillions to fat cats in the car companies? Come on down! Zillions to pork projects everywhere? We must be nuts, come on down today!
Congress holds the purse strings. The executive branch can spend nothing that congress does not give them first.
It is not that the majority of car fans are right wingers. It is that the majority of Americans are not left wingers.
Interesting as noted by Bertel Schmidt elsewhere on this site that Japan’s new cars sold number may reach a low of 3 million cars per year. If I recall correctly, that number has been decreasing since a peak in 1992. Then the decrease steepened with the credit crisis.
We may see a similar shift in American car-buying habits. Myself, I don’t see the number going under 10 million for a full year. On the other hand, I’m certainly not a prophet.
Ah, the gloom-and-doom crowd is out in full force. Yes, things are tough, tougher than they have been in a while. And, yes, we’re likely to have a radically revised auto landscape in coming years. So what? Stuff, as they say, happens.
I’ll make a prediction: things will stop deteriorating sooner than people think. And then things will start to recover, again, sooner than people think. A very large part of this mess is psychological. When people get sick of worrying (and they will, believe me!), things will get better.
When my wife divorced me, I thought it was the end of the world. But a funny thing happened: I decided that dwelling on the gloom was counterproductive. Just as this country will do, I picked myself up, got to work and made a better future which, I might add, includes the present.
4 million annual car sales? Is that the current closet monster? Sure didn’t take us long to despose the $10/gallon monster to make room for him.
tonycd: C’mon, neither side is completely right about any issue. Anything taken to extremes will eventually turn into farce. I just hope the people demand decent nationalized healthcare, and an end to torture.
Well, 63CorvairSpyder, I’m glad to see that someone is taking the likely outcome of what is coming down the pike, and looking at the glass as half full.
I have to fully agree and hope that we can come out of this a better people.
One of the things which will help us get there is, paradoxically, hard times.
People left with no alternatives will lend each other a hand to learn how to cope. Then they’ll realize that they’ve become human beings again.
I truly enjoy visiting with Mennonite friends of mine. They are so much more SANE than 99% of the rest of the population.
They don’t completely eschew debt, to my knowledge; but they are exceedingly careful with it. They don’t escew “fun” but they keep a rein on their behavior so as not not discredit themselves in the eyes of others, because they consider themselves Ambassadors for Jesus Christ. They don’t drink alcohol, because drunken behavior is not conducive to showing others The Way. They don’t watch television in the group that I visit with, because they don’t wish to jump into the cultural cesspool and throw their children in, too. They help others when needed and consider it a privilege to do so.
They work hard within their cultural boundaries, play hard within their cultural boundaries, do a phenomenal job of raising the next generation, and are admirable in every way.
If our United States is to survive and flourish again, we could do a lot worse than emulating what they do right.
I know that this is a pinko-liberal program, but this is an amazing piece of award winning journalism. The “Giant Pool of Money” episode of This American Life is one of the clearest explanations of the mortgage crisis any of us will run across.
http://www.thislife.org/radio_episode.aspx?episode=355
@ John Horner
Your analysis brightened my day.
I’ve been trolling around a new for 6 passenger vehicle and have found that there are many ’08 units that have been sitting on the lots for ~ 1 year. Toyota, Ford, Mazda, GM, Honda, Acura, etc all seem to be in the same boat. BMW, Lexus and MB not so much. ’08s on the lot and ’09 production is merely a trickle. The pipeline of larger units may be even more constricted if the carbon tax cabal marauds unmolested for the next couple of years. IF your forecast holds true I can now look forward to selling my soon to be purchased ’08 in 4 years for a relative premium in real dollars. I wonder what options will be most valued in four years?
@geeber
Point taken on the transaction price. I think many of the 6 passenger units (XYZ-UVs) can get below $30K. Reduce the mfgs outrageous SUV gross margins and then remove the $2K Nav unit, $1K moon roof, $1K audiophile radio, $1K DVD Entertainment units and assorted bling. Most of it is overpriced, superfluous crap anyway.
Are liberal car nuts too busy driving and having deviant sex to type dyspeptic posts?
In my case, sadly not.
Are liberal car nuts too busy driving and having deviant sex to type dyspeptic posts?
Whenever possible. I prefer to think in terms of “hot,” but you’re welcome to call it deviant if you must.
Are liberal car nuts too busy driving and having deviant sex to type dyspeptic posts?
Damn, I knew I was forgetting something.
no_slushbox asked: “Where do you get the scrap rate figures?”
Bloomberg had a piece which calculated last year’s scrap rate at 13 million units:
http://www.bloomberg.com/apps/news?sid=a2QClB8nSs.c&pid=20601103
Various sources I’ve read in recent months generally put it in the 12-13 million units range as recent averages.
“The government did not demand that banks sell bad loans, the banks and mortgage brokers saw the profit in that all by themselves.”
A big part of the current economic story is the repeal of the Glass-Steagall Act’s wall between investment banks and commercial banks. Similar rules which had long kept insurance and banking companies separate also fell to deregulation fever. Another related big factor was the move to securitization of just about all debt, including auto and home loans. The bankers needed fodder to package into bonds to sell in the booming bond markets. Suddenly the banks were not the ones taking the long-term risks, instead it was unwarry investors buying pieces off piles of loans they knew nothing about. For profit rating agencies stepped in under the pretense that they were telling the investors how risky these bonds were, but the rating agencies were really MARKETING companies, not risk managers. Said rating agencies didn’t have any of their cash at risk. While all this was going on, the big Wall Street firms went from being private partnerships which put the partner’s money at risk to being public companies which paid the partner handsome fees, but didn’t put the partners in any financial risk. Meanwhile, Ayn Rand acolyte and fed chairman Alan Greenspan put unlimited faith in the magic of markets and self-interest to keep decision makers from being stupid with other people’s money. Ol’ Alan recently admitted that his was a horrific mistake. Similarly, longtime Citibank CEO John Reed has said that the mega-merger of Citbank and Travelers he engineering was a mistake.
Government was complicit and enabling of this collapse, but the vast majority of the actual really bad actions were taken by private citizens and private companies. Market forces failed to reasonably balance risk and reward because the people making the decisions shared primarily in the rewards and not in the risks.
“The “stimulus” plan will only make things worse. What it will stimulate is inflation. ”
Inflation happens when too much money is chasing too few goods and services. Recent market collapses have obliterated many more trillions of dollars than is being replaced by the stimulus action. The real economy has a capacity to provide far more goods and services than their is money available to buy the stuff, hence inflation is the least of our worries.
menno said:
At what point do the American people say “enough” and take back the power given to us by the United States Constitution?
menno, I totally agree with you. And I have the answer for your question: that power cannot be taken back from the elites without a bloodshed.
This may be new to the Americans, but as a Chinese, I have witnessed this far too many time in the history.
China was quite a strong and advanced nation at around 1 AD. And it didn’t get any better for the next 2000 years. Every time when the government became too unbearable for the people, there is an violent change of power. The new regime would be relatively liberal and fair initially and then deteriorate. A fully cycle typically takes 300 years.
It’s sad to see the US going the same direction. No one acted when their constitution is violated. When president Bush violated the constitution by spying on citizens without court permission, Americans forgot to pressure their congressmen and senators to impeach the president. If they did, and these supposed democratic representatives choose not to act. Then the citizens do have a reason to overthrow the current regime, with force if needed. There is a reason Americans are allowed to possess firearms (no, not shoot your neighbor).
Unfortunately, when Bush made the snow ball, no one acted. So the snow ball will roll and roll and become an avalanche.
America is China. The difference are that one is over-populated and they are at different phases of the vicous cycle.
no_slushbox: Charging high interest rates to risky borrowers was not recently invented by the government. It was invented by profiteers and is covered in things like the bible.
High interest rates for mortgages or home equity loans are not the core problem here. Too many people could not afford the houses they bought, even with LOW interest rates.
no_slushbox: The Community Reinvestment Act, which you are referring to, is just a scapegoat, it had nothing to do with this crisis.
Sheila Bair has consistently tried to get banks to rewrite mortgages for struggling homeowners, which only prolongs the problem. (Between 50-60 percent of all homeowners who receive a modified mortgage end up losing their homes anyway – the measures she advocates only postpone the inevitable.)
She ignores that what we are witnessing is a much-needed correction to high housing prices. Too many people bought houses they cannot afford. Higher prices magnified the problem. The solution is for housing prices to fall.
So, I can’t take her too seriously.
Is the Community Reinvestment Act completely to blame? No. But should it be absolved completely? No.
no_slushbox: The major subprime offenders, like Countrywide, weren’t even banks that had to comply with the CRA.
Even many organizations weren’t covered by the Community Reinvestment Act agreed to follow its guidelines (or were pressured to do so).
It’s similar to CARB emissions regulations – even if a state doesn’t enact them, many car makers decide to sell vehicles in all 50 states that meet the CARB standards. So CARB had an effect on what customers in a particular area could buy, even when its standards weren’t officially adopted by that particular jurisdiction.
And note that Countrywide was recognized about three years ago by low-income housing advocates for its efforts to expand lending opportunities to lower-income people.
no_slushbox: Both parties failed to regulate the mortgage industry enough in the early 2000s, but Fannie and Freddie efficiently provided middle class prime loans for decades before this bubble.
So did many banks and mortgage companies. The problem began within the last 10-15 years, and Fannie Mae and Freddie Mac got in on it, too.
The simple fact is that it took Freddie Mac and Fannie Mae over three decades to acquire $2 trillion in mortgages and mortgage-backed securities. They increased their holdings by 92 percent in five years (from 2000 to 2005). As much as $1 trillion of this debt was catagorized as subprime.
And please note that Freddie Mac and Fannie Mae joined lenders such as Countrywide in opposing more stringent standards proposed in the early 2000s by…George W. Bush. And among the Democrats who scoffed at Bush’s proposal were Representatives Barney Frank and Maxine Waters, along with Senators Chris Dodd, Charles Schumer and Thomas Carper.
no_slushbox: Allowing people to get adjustable rate mortgages and interest only mortgages caused this mess, not lending to poor people.
Who took the adjustable rate mortgages? Usually low-income people.
If they had the money, they would have gone with a fixed rate, 30-year mortgage and brought a nice downpayment to the closing.
By abandoning that standard, we opened up the opportunity to buy a house to lower-income people. We also fueled a rise in housing prices, which, in turn, put housing prices out of the reach of more people, which encouraged the use of riskier mortgages by people higher up the income scale.
You are also ignoring the repeal of the federal capital gains tax on the sale of residences, which occurred under President Clinton (and a Republican Congress). That encouraged speculation in houses, especially after the stock market sputtered in the wake of the bursting of the dotcom bubble.
no_slushbox: If ARMs were illegal for residential properties we would not have this mess. It is that simple.
And lots of low-income people, many of them minorities, would not have been able to buy a house. And that would have made both Republicans and Democrats unhappy.
tonycd: Polls show that the large majority of Americans revile Bush, recognize the pivotal role of the GOP/multinational axis in gutting the nation’s wealth on behalf of the rich, and want a move toward more socialism even at the expense of continued deficit spending. (Yes, count me among them.) Yet, from here to C/D’s staff to the Edmunds boards, right-wing views dominate overwhelmingly.
Except that that many European countries have experienced their own housing bubbles. Iceland’s economy collapsed, and Great Britain’s economy is near collapse. Just recently, many European countries have been praised as offering a social democracy alternative to America’s free-wheeling, cowboy capitalism.
Now, of course, with several of their economies in the crapper, it’s all George W. Bush’s fault. I didn’t realize George W. Bush was also the leader of Iceland…
@ bunkie: I fully agree. Things aren’t going to be pretty for the next year or so, and car sales may never recover to the inflated 17mil/year level, but things will get better sooner rather than later. Some of these apocalyptic doom-and-gloom predictions are amusing.
@ wsn: Look up the Alien and Sedition Acts from 1798, the McCarthyism Red Scare, Japenese internments…the Constitution has been violated throughout America’s history. Doesn’t make it right, I’m just sayin’.
Ron Paul ’12
Why buy new, indeed!
Funny how minorities are to blame for this problem but the lion’s share of the profits ended up in the pockets of WASP and WASJ Wall Streeters. How convenient.
Those po’ colored folk are so dumb that they cannot even rob someone right.
geeber: “both major parties have dirty hands.”
That’s right, but how are you gonna convince people who live in a manichaean universe?
menno, I’m convinced that if our mass media spent more time reporting on the decent and productive lives of people such as your Mennonite friends, and less time celebrating airhead celebrities, this country would be a lot better off.
To msn and others: it appears you’ve heard those accusations of “unconstitutional wiretapping” and “torture” so often from biased sources, you’ve concluded the charges must be true. Not so. The legality of wiretaps of conversation between terrorists abroad and people in the US has been upheld in court. Even a Democratic Congress has refused to proscribe waterboarding, a technique so non-injurious (the effect is pyschological) it’s used in training our military personnel. You may have noticed that since the election much of the Pecksniffian rhetoric has been tossed aside.
To all tempted to prognosticate: if you will draw a straight line through two data points, and extend that line to infinity, you will be amazed to see what the future looks like. But then, as Herbert Stein (I think) said, “if things can’t keep going on this way, they won’t.”
First the governments forced the banks to loan money to people that couldn’t afford the loan and now the government blames the banks for making loans to victims that couldn’t afford them.
Normal government action. The real problem is the government is too big.
The government did force banks to make the bad loans.
http://www.usdoj.gov/opa/pr/2004/July/04_crt_478.htm
Count me in on the liberal pinko deviant sex crowd. After years building highways, driving trucks, racing motocross bikes, and high speed weekend fun on road via two wheels or four, while getting grease under my fingernails more weekends than not, I finally completed my arc of development by picking up a Volvo so I could fulfill my symbolic destiny as a liberal. Of course the Volvo is a ratty 1989 760 Turbo, which sits in the garage alongside the 51 Olds Delta 88 with original 303. The F150 Supercrew, ZX5 and Jetta hog the driveway on one side of the house. The homemade steel deck utility trailer with the Barack Obama sticker is on the other.
An appreciation of the art and science that mankind exhibits in the endeavor to build and improve cars, bikes, trains, bicycles, computers; name your poison, is what make us enthusiasts. A slavish devotion to right wing cultural and economic concepts is not required.
As for the deviant sex, I often let my wife get on top.
In my lifetime:
The 1958 recession was billed as the beginning of the Depression that was stalking us since the end of WWII.
The Cuban Missle Crisis was going to ignite an inevitable nuclear war leaving 80 – 100mm Americans dead.
The ML King assassination would lead to civil war.
Our war in Viet Nam would irreversibly damage America’s ability to defend its interest.
By the 1970s, we were in “The Era of Limits” wherein life would never be as comfortable again.
By 1980, high inflation was here to stay.
By 1981, 10% unemployment was the new “structural” unemployment figure.
Pundits on the Left surmised that Ronald Reagan’s election would bring us nuclear war.
Circa 1980, the US went from world’s #1 creditor to #1 debtor in less than three years. This was supposed to collapse our economy within five years.
The period 1975 – 1985 was the end of manufacturing in America.
Economists promised The Reagan deficits would spark unrelenting high inflation and dry up consumer credit.
Virtually every recession was claimed by someone erudite to be “The Worst Downturn Since The Great Depression.”
What actually happened in all cases was quite different. Today our unemployment rate remains lower than it was in 1979/80 and 1982, when interest rates were high and mortgages ran 14%. So far, even pessimistic projections don’t have unemployment reaching the figures of those years in this recession.
When I moved to the Boston area in 1979, the unemployment rate in Massachusetts was knocking on the door of 11%. By 1985 we had nearly a negative-unemployment economy pulling in people from Texas who were sideswiped by the oil bust. In 1974, mile after mile of the Monongahela River shoreline into Pittsburge was lined with steel mills lighting the night sky orange. By 1980 most of those mills were dark and abandoned. Pundits said Pittsburgh wouldn’t see prosperity again for more than 50 years. By 1985, Pittsburgh was clean, seeing rising per-capita income and on the mend.
The Nixon Presidency was supposed to be the end of Constitutional integrity in the US, but we rebounded. The 1980 failed hostage rescue proved America had lost its ability to project force even for limited objectives. By 2005 the EU and the BRICs had finally broken free of dependency on US economic performance, for their own. Wrong, wrong, and wrong.
There are not going to be any 7mm, 6mm or 4mm new car sales years in the US. We will see 14mm+ by 2014 and further growth from there. My house, purchased in 2004, may be worth considerably less than market value in 2007 and possibly less than I paid in 2009, but it will be worth considerably more in 2014 and so will yours.
We are, for all practical purposes, in a “balance sheet recession.” Too many entities, from individuals to businesses and many governments, are trying simultaneously to retire debt and cover risk. We need a sequencing. Government can reflate GDP while the private sector corrects. Then a robust private sector can pump up circulation while governments correct. Meanwhile, putting a floor of confidence under group psychology can reduce panic and free up some spending. Restoration of credit will rebalance accumulating needs and the capacity to act.
No crisis in my lifetime has turned out to be anywhere close to as severe, dangerous or terminal as claimed by the alarmist intelligensia, aka People Who Should Know Better. Among the Wrong Way Corrigans, let’s also include ideologues of the Right and the Left whom have proclaimed The End of America for wildly disparate reasons, too many times to have any credibility left. And let’s throw in every stripe of religious fundamentalist that saw personal or collective doom just over our horizon.
The debt we’re collectively taking on as taxpayers will not be inflationary if it is paid for from economic growth or taxation, preferably the former. As a percentage of our annual gross economic value, Federal deficit spending does and will remain lower than emergency peaks during WWII. Have confidence. This is not a moribund country. It is on a path for continued population growth and will continue to attract talent from all over the globe. The investments being made now to bridge manufacturing, reflate banks and temper needless foreclosures are affordable by the US if we don’t panic and sit on our hands.
It’s a recession, folks. A serious one. People are getting hurt and the damage is made worse by fearmongers piling on. But most of the country is working and the roads are jammed by people driving to and from work.
I was speaking at a conference a few weeks back and another speaker — an investor — said to an audience of 250, “…if you had a thousand dollars in your pocket right now, would you go out and spend it? I don’t think so…” Heads swiveled in agreement.
Yet nearly everyone in that room had the ability to spend $1,000 that day, and the economy would have been better off if that group had pumped $250,000 into the SoCal economy without delay.
I finished and left, then made it a point to spend a Kilobuck I hadn’t planned to spend, that same afternoon. From the Israeli immigrant saving for Med school back through the supply chain, I could see the benefits of my little shove before the transaction was completed.
Phil
@ Phil Ressler
Excellent post.
The USA has a great opportunity to rid itself of gambling money changers who contribute zip. Their goal in life is to take money from those “less informed” and maneuver it to those “more informed” or corrupt or “inside”.
Quality goods. Quality services. Quality assets (property, companies). That will see investment return for growth, but somehow that “bad” debt has to be shaken out with the least amount of damage to people (and no, they won’t get to keep all their things).
Qwerty: Funny how minorities are to blame for this problem but the lion’s share of the profits ended up in the pockets of WASP and WASJ Wall Streeters. How convenient.
Nice bait and switch there, but no dice.
First, no one is blaming minorities.
Second, the people who bought houses they couldn’t afford didn’t want “profits.” They wanted a house. Which they sort of got…until they couldn’t make the payments. The fact that someone else made money from the sale of the house and re-sale of the mortgage doesn’t mean that this isn’t part of the puzzle.
50merc: Instead of using waterboard techniques, I suggest we force the prisoners to watch The View nonstop – especially the episodes with Rosie O’Donnell. If that doesn’t break them, nothing will….