View Full Version : Austerity In America
For all the gloom n' doomers out there seeking like-minded companionship...
I certainly don’t know how serious this will become but cities are hurting right now and this as a reflection on how tight things are at the moment. Also, the blog’s author may have vested interests in advancing his viewpoint; it’s just hard to tell someone’s motivations without knowing that person. I'd just bear that in mind if you read the article.
Richard :munchin
Austerity In America: 22 Signs That It Is Already Here And That It Is Going To Be Very Painful
The Economic Collapse
Over the past couple of years, most Americans have shown little concern as austerity measures were imposed on financially troubled nations across Europe. Even as austerity riots erupted in nations such as Greece and Spain, most Americans were still convinced that nothing like that could ever happen here. Well, guess what? Austerity has arrived in America. At this point, it is not a formal, mandated austerity like we have seen in Europe, but the results are just the same. Taxes are going up, services are being slashed dramatically, thousands of state and city employees are being laid off, and politicians seem to be endlessly talking about ways to make even deeper budget cuts. Unfortunately, even with the incredibly severe budget cuts that we have seen already, many state and local governments across the United States are still facing a sea of red ink as far as the eye can see.
Most Americans tend to think of "government debt" as only a problem of the federal government. But that is simply not accurate. The truth is that there are thousands of "government debt problems" from coast to coast. Today, state and local government debt has reached at an all-time high of 22 percent of U.S. GDP. It is a crisis of catastrophic proportions that is not going away any time soon.
A recent article in the New York Times did a good job of summarizing the financial pain that many state governments are feeling right now. Unfortunately, as bad as the budget shortfalls are for this year, they are projected to be even worse in 2012.
While state revenues — shrunken as a result of the recession — are finally starting to improve somewhat, federal stimulus money that had propped up state budgets is vanishing and costs are rising, all of which has left state leaders bracing for what is next. For now, states have budget gaps of $26 billion, by some estimates, and foresee shortfalls of at least $82 billion as they look to next year’s budgets.
While state revenues — shrunken as a result of the recession — are finally starting to improve somewhat, federal stimulus money that had propped up state budgets is vanishing and costs are rising, all of which has left state leaders bracing for what is next. For now, states have budget gaps of $26 billion, by some estimates, and foresee shortfalls of at least $82 billion as they look to next year’s budgets.
So what is the solution? Well, for state and local politicians from coast to coast, the answer to these financial problems is to impose austerity measures. Of course they never, ever use the term "austerity measures", but that is exactly what they are.
The following are 22 signs that austerity has already arrived in America and that it is going to be very, very painful....
#1 The financial manager of the Detroit Public Schools, Robert Bobb, has submitted a proposal to close half of all the schools in the city. His plan envisions class sizes of up to 62 students in the remaining schools.
#2 Detroit Mayor Dave Bing wants to cut off 20 percent of the entire city from police and trash services in order to save money.
#3 Things are so tight in California that Governor Jerry Brown is requiring approximately 48,000 state workers to turn in their government-paid cell phones by June 1st.
#4 New York Governor Andrew Cuomo is proposing to completely eliminate 20 percent of state agencies.
#5 New York City Mayor Michael Bloomberg has closed 20 fire departments at night and is proposing layoffs in every single city agency.
#6 In the state of Illinois, lawmakers recently pushed through a 66 percent increase in the personal income tax rate.
#7 The town of Prichard, Alabama came up with a unique way to battle their budget woes recently. They simply stopped sending out pension checks to retired workers. Of course this is a violation of state law, but town officials insist that they just do not have the money.
#8 New Jersey Governor Chris Christie recently purposely skipped a scheduled 3.1 billion dollar payment to that state's pension system.
#9 The state of New Jersey is in such bad shape that they still are facing a $10 billion budget deficit for this year even after cutting a billion dollars from the education budget and laying off thousands of teachers.
#10 Due to a very serious budget shortfall, the city of Newark, New Jersey recently made very significant cuts to the police force. Subsequently, there has been a very substantial spike in the crime rate.
#11 The city of Camden, New Jersey is "the second most dangerous city in America", but because of a huge budget shortfall they recently felt forced to lay off half of the city police force.
#12 Philadelphia, Baltimore and Sacramento have all instituted "rolling brownouts" during which various city fire stations are shut down on a rotating basis.
#13 In Georgia, the county of Clayton recently eliminated its entire public bus system in order to save 8 million dollars.
#14 Oakland, California Police Chief Anthony Batts has announced that due to severe budget cuts there are a number of crimes that his department will simply not be able to respond to any longer. The crimes that the Oakland police will no longer be responding to include grand theft, burglary, car wrecks, identity theft and vandalism.
#15 In Connecticut, the governor is asking state legislators to approve the biggest tax increase that the state has seen in two decades.
#16 All across the United States, conditions at many state parks, recreation areas and historic sites are deplorable at best. Some states have backlogs of repair projects that are now over a billion dollars long. The following is a quote from a recent MSNBC article about these project backlogs....
More than a dozen states estimate that their backlogs are at least $100 million. Massachusetts and New York's are at least $1 billion. Hawaii officials called park conditions "deplorable" in a December report asking for $50 million per year for five years to tackle a $240 million backlog that covers parks, trails and harbors.
#17 The state of Arizona recently announced that it has decided to stop paying for many types of organ transplants for people enrolled in its Medicaid program.
#18 Not only that, but Arizona is do desperate for money that they have even sold off the state capitol building, the state supreme court building and the legislative chambers.
#19 All over the nation, asphalt roads are actually being ground up and are being replaced with gravel because it is cheaper to maintain. The state of South Dakota has transformed over 100 miles of asphalt road into gravel over the past year, and 38 out of the 83 counties in the state of Michigan have transformed at least some of their asphalt roads into gravel roads.
#20 The state of Illinois is such a financial disaster zone that it is hard to even describe. According to 60 Minutes, the state of Illinois is six months behind on their bill payments. 60 Minutes correspondent Steve Croft asked Illinois state Comptroller Dan Hynes how many people and organizations are waiting to be paid by the state, and this is how Hynes responded....
"It's fair to say that there are tens of thousands if not hundreds of thousands of people waiting to be paid by the state."
#21 The city of Chicago is in such dire straits financially that officials there are actually toying with the idea of setting up a city-owned casino as a way to raise cash.
#22 Michigan Governor Rick Snyder is desperately looking for ways to cut the budget and he says that "hundreds of jurisdictions" in his state could go bankrupt over the next few years.
But everything that you have just read is only the beginning. Budget shortfalls for our state and local governments are projected to be much worse in the years ahead.
So what is the answer? Well, our state and local governments are going to have to spend less money. That means that we are likely to see even more savage budget cutting.
In addition, our state and local politicians are going to feel intense pressure to find ways to "raise revenue". In fact, we are already starting to see this happen.
According to the National Association of State Budget Officers, over the past couple of years a total of 36 out of the 50 U.S. states have raised taxes or fees of some sort.
So hold on to your wallets, because the politicians are going to be coming after them.
We are entering a time of extreme financial stress in America. The federal government is broke. Most of our state and local governments are broke. Record numbers of Americans are going bankrupt. Record numbers of Americans are being kicked out of their homes. Record numbers of Americans are now living in poverty.
The debt-fueled prosperity of the last several decades came at a cost. We literally mortgaged the future. Now nothing will ever be the same again.
http://theeconomiccollapseblog.com/archives/austerity-in-america-22-signs-that-it-is-already-here-and-that-it-is-going-to-be-very-painful
Also, the blog’s author may have vested interests in advancing his viewpoint; it’s just hard to tell someone’s motivations without knowing that person. I'd just bear that in mind if you read the article.
May have vested interests.......your being far too kind. Never let a crisis go to waste:D
dadof18x'er
01-20-2011, 08:55
#11 The city of Camden, New Jersey is "the second most dangerous city in America", but because of a huge budget shortfall they recently felt forced to lay off half of the city police force.
this is the one most alarming to me.........one can only imagine where this will go :confused::(
Team Sergeant
01-20-2011, 09:13
And when the banks foreclose on 5 million homes in 2011 it will destroy what's left of housing market and send prices in a tail spin. In my opinion this will seal the fate of the U.S economy as the loss of revenue from this market collapse will impact on a local, state, national and global level.
No one is going to "spend" their way out of this situation, their ain't enough money in America to fix this train wreck and it's already in motion.
http://www.foxnews.com/us/2011/01/13/banks-repossess-million-homes/
For myself, I figured it best to do these:
1. Find a strategically and tactically defensible home to live in, with-
2. a fresh water source,
3. enough arable land for growing greengroceries, and
4. the presence of game animals.
It cost me 76K and will take app. 7K in renovation money over the next 6 months.
Drawbacks:
It's 2.5 to the nearest paved road, 6.7 miles to the nearest General Store, and only 21 miles from the U. of A. football field.
No one is going to "spend" their way out of this situation, their ain't enough money in America to fix this train wreck and it's already in motion.
That is sad, but I believe very true.
And the sad fact in my opinion is for the majority of us no matter how well you planned we are going to get knock down at least a couple notches. And there isn't much you can do about it except keep trudging along and making the best of it.
May have vested interests.......your being far too kind. Never let a crisis go to waste:D
He may have a vested interest, and it may match some of our own.
For me though, gold is not much of an option. For now I value family, friends food and bullets more than gold. We have water, grow some food and preserve or "can" food thereby keeping a fair supply in storage, I also have five cases of LRRPS, a number of cases of MREs. We have means to protect ourselves, and we don't live in a metropolitan or urban area. If it continues to get worse and evolves into anarchy, I think we'll be better off than most. We'll continue to make preperations though and hope for the best....jd
1stindoor
01-21-2011, 08:07
So what is the common thread throughout that entire article?
Nearly every single "example" is tied to government jobs, and increased taxes followed by increased spending.
This was the only item in his "rant" that bears repeating.
So what is the answer? Well, our state and local governments are going to have to spend less money. That means that we are likely to see even more savage budget cutting.
Spend less money...what a novel concept.
And so it goes...
Richard :munchin
Path Is Sought for States to Escape Debt Burdens
NYT, 20 jAN 2011
Policy makers are working behind the scenes to come up with a way to let states declare bankruptcy and get out from under crushing debts, including the pensions they have promised to retired public workers.
Unlike cities, the states are barred from seeking protection in federal bankruptcy court. Any effort to change that status would have to clear high constitutional hurdles because the states are considered sovereign.
But proponents say some states are so burdened that the only feasible way out may be bankruptcy, giving Illinois, for example, the opportunity to do what General Motors did with the federal government’s aid.
Beyond their short-term budget gaps, some states have deep structural problems, like insolvent pension funds, that are diverting money from essential public services like education and health care. Some members of Congress fear that it is just a matter of time before a state seeks a bailout, say bankruptcy lawyers who have been consulted by Congressional aides.
Bankruptcy could permit a state to alter its contractual promises to retirees, which are often protected by state constitutions, and it could provide an alternative to a no-strings bailout. Along with retirees, however, investors in a state’s bonds could suffer, possibly ending up at the back of the line as unsecured creditors.
“All of a sudden, there’s a whole new risk factor,” said Paul S. Maco, a partner at the firm Vinson & Elkins who was head of the Securities and Exchange Commission’s Office of Municipal Securities during the Clinton administration.
For now, the fear of destabilizing the municipal bond market with the words “state bankruptcy” has proponents in Congress going about their work on tiptoe. No draft bill is in circulation yet, and no member of Congress has come forward as a sponsor, although Senator John Cornyn, a Texas Republican, asked the Federal Reserve chairman, Ben S. Bernanke, about the possiblity in a hearing this month.
House Republicans, and Senators from both parties, have taken an interest in the issue, with nudging from bankruptcy lawyers and a former House speaker, Newt Gingrich, who could be a Republican presidential candidate. It would be difficult to get a bill through Congress, not only because of the constitutional questions and the complexities of bankruptcy law, but also because of fears that even talk of such a law could make the states’ problems worse.
Lawmakers might decide to stop short of a full-blown bankruptcy proposal and establish instead some sort of oversight panel for distressed states, akin to the Municipal Assistance Corporation, which helped New York City during its fiscal crisis of 1975.
Still, discussions about something as far-reaching as bankruptcy could give governors and others more leverage in bargaining with unionized public workers.
“They are readying a massive assault on us,” said Charles M. Loveless, legislative director of the American Federation of State, County and Municipal Employees. “We’re taking this very seriously.”
Mr. Loveless said he was meeting with potential allies on Capitol Hill, making the point that certain states might indeed have financial problems, but public employees and their benefits were not the cause. The Center on Budget and Policy Priorities released a report on Thursday warning against a tendency to confuse the states’ immediate budget gaps with their long-term structural deficits.
“States have adequate tools and means to meet their obligations,” the report stated.
No state is known to want to declare bankruptcy, and some question the wisdom of offering them the ability to do so now, given the jitters in the normally staid municipal bond market.
Slightly more than $25 billion has flowed out of mutual funds that invest in muni bonds in the last two months, according to the Investment Company Institute. Many analysts say they consider a bond default by any state extremely unlikely, but they also say that when politicians take an interest in the bond market, surprises are apt to follow.
Mr. Maco said the mere introduction of a state bankruptcy bill could lead to “some kind of market penalty,” even if it never passed. That “penalty” might be higher borrowing costs for a state and downward pressure on the value of its bonds. Individual bondholders would not realize any losses unless they sold.
But institutional investors in municipal bonds, like insurance companies, are required to keep certain levels of capital. And they might retreat from additional investments. A deeply troubled state could eventually be priced out of the capital markets.
“The precipitating event at G.M. was they were out of cash and had no ability to raise the capital they needed,” said Harry J. Wilson, the lone Republican on President Obama’s special auto task force, which led G.M. and Chrysler through an unusual restructuring in bankruptcy, financed by the federal government.
Mr. Wilson, who ran an unsuccessful campaign for New York State comptroller last year, has said he believes that New York and some other states need some type of a financial restructuring.
He noted that G.M. was salvaged only through an administration-led effort that Congress initially resisted, with legislators voting against financial assistance to G.M. in late 2008.
“Now Congress is much more conservative,” he said. “A state shows up and wants cash, Congress says no, and it will probably be at the last minute and it’s a real problem. That’s what I’m concerned about.”
Discussion of a new bankruptcy option for the states appears to have taken off in November, after Mr. Gingrich gave a speech about the country’s big challenges, including government debt and an uncompetitive labor market.
“We just have to be honest and clear about this, and I also hope the House Republicans are going to move a bill in the first month or so of their tenure to create a venue for state bankruptcy,” he said.
A few weeks later, David A. Skeel, a law professor at the University of Pennsylvania, published an article, “Give States a Way to Go Bankrupt,” in The Weekly Standard. It said thorny constitutional questions were “easily addressed” by making sure states could not be forced into bankruptcy or that federal judges could usurp states’ lawmaking powers.
“I have never had anything I’ve written get as much attention as that piece,” said Mr. Skeel, who said he had since been contacted by Republicans and Democrats whom he declined to name.
Mr. Skeel said it was possible to envision how bankruptcy for states might work by looking at the existing law for local governments. Called Chapter 9, it gives distressed municipalities a period of debt-collection relief, which they can use to restructure their obligations with the help of a bankruptcy judge.
Unfunded pensions become unsecured debts in municipal bankruptcy and may be reduced. And the law makes it easier for a bankrupt city to tear up its labor contracts than for a bankrupt company, said James E. Spiotto, head of the bankruptcy practice at Chapman & Cutler in Chicago.
The biggest surprise may await the holders of a state’s general obligation bonds. Though widely considered the strongest credit of any government, they can be treated as unsecured credits, subject to reduction, under Chapter 9.
Mr. Spiotto said he thought bankruptcy court was not a good avenue for troubled states, and he has designed an alternative called the Public Pension Funding Authority. It would have mandatory jurisdiction over states that failed to provide sufficient funding to their workers’ pensions or that were diverting money from essential public services.
“I’ve talked to some people from Congress, and I’m going to talk to some more,” he said. “This effort to talk about Chapter 9, I’m worried about it. I don’t want the states to have to pay higher borrowing costs because of a panic that they might go bankrupt. I don’t think it’s the right thing at all. But it’s the beginning of a dialog.”
http://www.nytimes.com/2011/01/21/business/economy/21bankruptcy.html?pagewanted=1&_r=1
"............Beyond their short-term budget gaps, some states have deep structural problems, like insolvent pension funds, that are diverting money from essential public services like education and health care. Some members of Congress fear that it is just a matter of time before a state seeks a bailout, say bankruptcy lawyers who have been consulted by Congressional aides......"
Nobody is talking about fixing the long term problem.
Not everybody can work for the government and not all of them can have a government funded pension.
It is time to cut the number of government workers at all levels - and change over their pensions to a type of 401K program.
Dozer523
01-21-2011, 08:42
In my opinion this will seal the fate of the U.S economy as the loss of revenue from this market collapse will impact on a local, state, national and global level.
No one is going to "spend" their way out of this situation, their ain't enough money in America to fix this train wreck and it's already in motion.
TS we spent our way out of the Depression (and/or we killed our way out of it with WWII). Maybe.
But these senior, elected, folks >>with four year guaranteed, well-paying jobs<< seem to think they can "fire" their way out of this situation.
I think the guy to watch will be Jerry Brown, he's a Jesuit.
"............Beyond their short-term budget gaps, some states have deep structural problems, like insolvent pension funds, that are diverting money from essential public services like education and health care. Some members of Congress fear that it is just a matter of time before a state seeks a bailout, say bankruptcy lawyers who have been consulted by Congressional aides......" Pete I thiink you're right about the insolvent pensions and SS. Maybe we ought to declare them bankrupt, close them, and say "sorry it's a crises." Folks lost everything in the 30's and we survived. Pensions should be eliminated (except for military -- GW established it. Maybe cops) No pink, honest.
Nobody is talking about fixing the long term problem.There may not be a solution. And besided, "But there ain't no point in talking. When there's nobody listening ..." http://www.youtube.com/watch?v=rgczlrYM4eI
As Richard mentioned the net effect is hard to gauge, cities and folks are hurting, on the one hand relative to the unemployment levels and GDP destruction of the Great Depression, we aren't even close, and we survived that.
The thing that strikes me is the mindset of the populace, the legacy of the New Deal, the welfare state, has been part of our culture for decades now. While it's easy to fall in to the "good old days" nostalgia trap, the men standing in those old Depression bread lines were wearing suits, and they had no societal tradition or expectation for the government to take care of them. In contrast, you hear of folks these days turning down jobs because they can make more on unemployment, IMHO this mindset is the bigger threat to American primacy going forward. It might not be the worse thing for the relatively spoiled, lazy components of this generation to learn the lessons of the Depression first hand.
It might not be the worse thing for the relatively spoiled, lazy components of this generation to learn the lessons of the Depression first hand.
I believe they're taking their baby steps right about now.
Our problem may be too many Keynesian posers. :D
Despite the smiley, I'm serious. The mindset is to spend more, thus stimulating the economy. However, a school of thought suggests that increasing debt has a diminishing effect on overall GDP.
LINK (http://seekingalpha.com/article/143089-the-diminishing-impact-of-debt-on-u-s-economic-growth)
At the link, a chart suggests that current trends will lead to a condition where additional debt will produce no increase in GDP along about 2015.
A more formal presentation is available at: LINK (http://docs.google.com/viewer?a=v&q=cache:pVlP3dMIbwoJ:professorfekete.com/articles%255CAEFCritiqueQuantityTheoryOfMoney.pdf+ negative+marginal+productivity+of+debt+palyi&hl=en&gl=us&pid=bl&srcid=ADGEESg7AivjfzV2xaHZ8iz0nng4aevO2j5oB1JuKxOa vjdlpt8CmgKQYdx9fysFDabnlQ0SujlJhOX-SOb11VPTYO8T6VtERJGHg5GJqw9eSrwzR4Yy6qC_HwH9vSdIcr MKi08KzRx5&sig=AHIEtbQpNbkUBy6EVS7cjJHuVmh2SKQZ0A)
Bottom line?
Adding debt, when there is very little outstanding debt, produces big positive effects in GDP. But as the outstanding debt increases, the gains decline to - eventually - nothing.
So, ultimately debt and other obligations will be liquidated en masse. Pension payments will not be made. Social safety nets will be shredded or eliminated. Basic services will decline a lot - and that means police and fire, health care, whatever.
Ah, but how to prepare? Keep in mind that during the previous depression in 1929, those in cities fared better than those in rural areas - the government at the time made an effort to keep peace in the cities. Will that change?
Rural areas are appealing - and I have no doubt a QP would be safe. For those of us who lack such skills, I keep wondering if we would be just another isolated target of opportunity for looters.
In any event, I suspect that those who have a month worth of food, some guns and ammo, and a low-profile place to stay will be better off than those without. I also suspect that our society will face the challenge of how to deal with a lot of angry, and maybe hungry, people.
Our problem may be too many Keynesian posers. :D
Despite the smiley, I'm serious. The mindset is to spend more, thus stimulating the economy. However, a school of thought suggests that increasing debt has a diminishing effect on overall GDP.
LINK (http://seekingalpha.com/article/143089-the-diminishing-impact-of-debt-on-u-s-economic-growth)
At the link, a chart suggests that current trends will lead to a condition where additional debt will produce no increase in GDP along about 2015.
A more formal presentation is available at: LINK (http://docs.google.com/viewer?a=v&q=cache:pVlP3dMIbwoJ:professorfekete.com/articles%255CAEFCritiqueQuantityTheoryOfMoney.pdf+ negative+marginal+productivity+of+debt+palyi&hl=en&gl=us&pid=bl&srcid=ADGEESg7AivjfzV2xaHZ8iz0nng4aevO2j5oB1JuKxOa vjdlpt8CmgKQYdx9fysFDabnlQ0SujlJhOX-SOb11VPTYO8T6VtERJGHg5GJqw9eSrwzR4Yy6qC_HwH9vSdIcr MKi08KzRx5&sig=AHIEtbQpNbkUBy6EVS7cjJHuVmh2SKQZ0A)
Bottom line?
Adding debt, when there is very little outstanding debt, produces big positive effects in GDP. But as the outstanding debt increases, the gains decline to - eventually - nothing.
So, ultimately debt and other obligations will be liquidated en masse. Pension payments will not be made. Social safety nets will be shredded or eliminated. Basic services will decline a lot - and that means police and fire, health care, whatever.
Ah, but how to prepare? Keep in mind that during the previous depression in 1929, those in cities fared better than those in rural areas - the government at the time made an effort to keep peace in the cities. Will that change?
Rural areas are appealing - and I have no doubt a QP would be safe. For those of us who lack such skills, I keep wondering if we would be just another isolated target of opportunity for looters.
In any event, I suspect that those who have a month worth of food, some guns and ammo, and a low-profile place to stay will be better off than those without. I also suspect that our society will face the challenge of how to deal with a lot of angry, and maybe hungry, people.
Or maybe we'll vote out the "Keynseian posers" and vote in some "supply-sideian" realists just in the nick of time to cut taxes, free up hoarded venture capital and start building houses, cars and whatever else.
Keynes' theories suck and fail; Reagan's work.
What we face right now is an economy hit by a real-estate bubble bursting, which is a huge drain on an economy (a real estate bubble bursting is a much harder blow than say a stock market bubble bursting), along with a high and increasing level of debt and a huge deficit, so the problem is more complex.
You seem to be up to snuff on this situation.
If we slash spending and taxes, do we not have a better chance than if we spend even more money (we have to print)?
Michael Milken's figuring out how to utilize high-yield debt so that businesses that normally would not qualify for financing from the big financial institutions were able to get it.
Sounds similar to someone figuring out how individuals who normally shouldn't qualify for financing on a house found a way were they could qualify.
And Milken did time, he indicted on 98 counts of racketeering and securities fraud in 1989 as the result of an insider trading investigation. He is chairman of the the Milken Institute is a nonpartisan, independent think tank which is a 501(c)(3) public charity.
Another glorified white collar scam artist who got off easy.
GratefulCitizen
01-21-2011, 19:23
I would think slashing spending and taxes would help better than our current situation of spend money and the uncertainty from the drive to increase regulations (Obamacare, EPA, carbon cap-and-trade, financial reform, etc...).
We need low taxes and high interest rates.
Tax cuts and low interest rates just lead to more bubbles.
Low taxes and high interest rates force government spending lower.
It also rewards business models which are designed to produce real goods and services.
High interest rates would reward thrift and make debt more onerous.
Sounds like a good idea.
Also what are "fake" goods and services
Possibly the difference between being a producer with a store front, inventory and staff compared to a mere one man order taker, with no infrastructure, no investment, who direct ships everything from China.
High interest rates would reward thrift and make debt more onerous.
Sounds like a good idea.
In the late '80's, some mortgage rates were as high as 18%. Institutions such as First Union Home Equitiy Corporations, Associates, Equicredit and others made billions refinancing those loans through the 90's. Some first mortgages were as low as 7.99, and they would tack on a second mortgage of up to 125% of a value, normally based on comparative values (easy to skew) of up to 125%. Then, to make it worse, some sub-prime lenders eased B,C and D lending criteria to such an extent that, with a high enough beacon score, you could by a house with literally no documentation, and I believe this was a major cause for the current economic effect. Would that cycle repeat?
Would that cycle repeat?
Probably. Keep in mind that housing was moving up back then. In addition, high rates can more easily cover the risk. So if we have a 10% nominal rate, and a 3% default rate, we can still come out with a favorable return.
The real solution is consistent careful underwriting - which I suspect implies that we go back to the days when a banking (or savings) institution retained the loans they wrote. That's not going to happen. In addition, as Pete pointed out, government policy and subsidies that artificially inflate the rate of home ownership contribute to the cycle. Finally, tax law changes - for example, the change in depreciation treatment on rental properties (circa the 1980's ?) make a further contribution.
All of that said, the present low rates provide little to reward savers - so thrift is not well rewarded, at least in the short term.
GratefulCitizen
01-22-2011, 12:32
High interest rates could hurt the economy though and also make it where a lot more of the Federal budget must go towards servicing the debt. Also what are "fake" goods and services? :munchin
Why bother producing actual goods and services when leverage + volatility gets excellent returns.
When the rate of change in the nominal value of something exceeds the rate of interest, people will seek leveraged capital gains on market swings.
Suppose there is a small crash in some market for X.
The inherent value of X is such that it should recover 5% of its value within 4 months.
Someone can borrow money at 8% annual interest and make a killing. **
Cheap money makes it so many people can borrow at low rates.
Higher interest rates make these games ineffective, because market swings can't produce a rate of change high enough.
Higher interest rates also reduce government discretionary spending, freeing up resources for the private sector.
**
This is just one of many ways people make money off of leverage and market swings, all the while producing nothing.
It may or may not result in more efficient allocation of capital.
Someone borrows $100,000 at 8% annual interest and buys $100,000 worth of X.
X increases in value by 5% in four months, sell for $105,000.
The service costs of $100,000 at 8% annual interest is ~$667 per month.
Four months x $667 = $2668
$2668 was invested for a return of $5000 in four months.
This person's $2668 grew by 87% in four months (that's a 261% annual rate of return).
At lower interest rates, the effects are greatly accelerated.
Lower interest rates also require smaller market swings.
Meanwhile, people are being convinced that getting their money to grow at 7-8% per year is a good investment.
All of their capital gets tied up, and used by others.
$2668 was invested for a return of $5000 in four months.
This person's $2668 grew by 87% in four months (that's a 261% annual rate of return).
At lower interest rates, the effects are greatly accelerated.
Lower interest rates also require smaller market swings.
Meanwhile, people are being convinced that getting their money to grow at 7-8% per year is a good investment.
All of their capital gets tied up, and used by others.
There is the issue of risk. For example, one could go long a contract for 100 ounces of gold and put up a mere $6,800. If gold went up $10 in a day , one makes ($1,000/$6,800)*365 - 14% in a day, or better than 5,000% as an annual rate of return. But I suspect that most would not consider this a cautious choice.
GratefulCitizen
01-22-2011, 20:11
There is the issue of risk. For example, one could go long a contract for 100 ounces of gold and put up a mere $6,800. If gold went up $10 in a day , one makes ($1,000/$6,800)*365 - 14% in a day, or better than 5,000% as an annual rate of return. But I suspect that most would not consider this a cautious choice.
The risk issue is kinda the point.
Low interest means you can service a higher level of debt.
People with larger levels of discretionary income can afford to take larger risks.
Someone who plays this game carrying debt which they cannot sustain indefinitely is just gambling.
The point I was trying to make is that money borrowed at 20% per year only results in yearly leverage of 5 to 1, whereas money borrowed at 5% per year gets a yearly leverage of 20 to 1.
The ratios keep getting steeper as you approach zero.
Let's follow this to its logical conclusion. Let us suppose you can get 0.1% financing. That means 1000:1 leverage, right?
Is this prudent?
Likewise, 20:1 is a lot of leverage. Just because a borrower can service the debt does not erase the risk of a loss of value in the underlying investment.
This is the heart of the home mortgage crisis. People assumed that houses wouldn't go down - the banks did too. It turned out rather badly, didn't it?
dr. mabuse
01-22-2011, 21:10
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Concealed carry business and hypnotherapy practice is way up. Abnormally so.
Interesting you should say that. Some people I know here have just gotten CCH permits - and they're getting serious about practice and keeping the weapon with them. And, just as you've mentioned, they aren't the sort.
Everyone is worried about money - from top 1% to those in the bottom quintile.
I think there is a perception that the party is over.
GratefulCitizen
01-24-2011, 14:58
Let's follow this to its logical conclusion. Let us suppose you can get 0.1% financing. That means 1000:1 leverage, right?
Is this prudent?
Likewise, 20:1 is a lot of leverage. Just because a borrower can service the debt does not erase the risk of a loss of value in the underlying investment.
This is the heart of the home mortgage crisis. People assumed that houses wouldn't go down - the banks did too. It turned out rather badly, didn't it?
People do this all the time.
The same results come from deferring funds away from paying extra principal on a home mortgage.
Suppose someone owes well north of $100k @ 5% on their home, and they have a spare $10k from whatever source.
If they invest that $10k, they're investing on leverage.
Suppose they make 8% on the year for their $10k.
The opportunity cost of not paying down the mortgage was $500 (in interest), their investment return was $800 (really a 60% return on the year).
Effectively, they were leveraging that $500 into $10k.
My previous example was just an difference of scale, and some people can afford to take such risks.
When something starts climbing at a rate faster than interest rates, lots of little investments are attracted and their aggregate amounts to something bigger.
Low interest rates cause speculative bubbles.
High interest rates and low taxes are needed for stable growth.
Wisconsin National Guard Preps For Worker Unrest After Governor Unveils Emergency Budget
Grace Wyler | Feb. 14, 2011, 9:49 AM
Wisconsin Gov. Scott Walker, a Republican, unveiled an emergency budget proposal Friday to deal with the state's growing budget woes. Wisconsin has a $137 million deficit this year, and faces a projected $2.9 billion budget shortfall for 2012 and 2013.
Under Walker's plan, public employees would lose all of their collective bargain rights, except a limited negotiation of wages. State workers would also have to contribute more to their pension and health care benefit plans.
Unions erupted in outrage as they learned about Walker's proposal. The Governor told Milwaukee Public Radio that he has briefed the Wisconsin National Guard to prepare them for any worker unrest today.
Read more: http://www.businessinsider.com/national-guard-is-prepared-for-state-worker-unrest-in-wisconsin-after-gov-unveils-emergency-budget-plan-2011-2#ixzz1E2KNI5xT
http://www.businessinsider.com/national-guard-is-prepared-for-state-worker-unrest-in-wisconsin-after-gov-unveils-emergency-budget-plan-2011-2