The Disappearing Act

[kent nickell]

?The household wealth of Americans has shrunk by $13.9 trillion from its peak in the second quarter of 2007? Wall Street Journal 6/12/09 ((1.3 trillion of that lost was in 1st quarter 2009))

14 thousand billion dollars sounds like a lot of money but it actually ?only? represents a decrease of 22% meaning that Americans actually managed to hold onto 78% of their wealth?.

The interesting thing to me is that that wealth has gone up from 10 trillion in 1980 to 20 trillion in 1990 to 40 trillion in 2000 and now is at 50 trillion.

Another interesting graph was that of home equity vs debt as a percentage of household income. In 1950 avg home equity was 80% and the debt ratio 30%. In a relatively stable period between 1960 and 1980 both numbers were at 70%. In 1990 these numbers started to diverge in the opposite direction with home equity 60% and debt ratio 80%, in 2000 home equity 55% and debt ratio 100%. Today home equity is at an all time low of 41% and the debt ratio is 127%.

These numbers suggest to me that a lot of false wealth (by false wealth I mean debt fueled asset appreciation) was created starting around 1990. This would imply that our net worth could still drop another $30 trillion from $50 trillion back to possibly a more stable $20 trillion?.. This would also be in line with others' suggestions that we are just getting started on the deleveraging curve?.

 

[kent nickell]

Re: The Disappearing Act

hattip Rickk

US cities may have to be bulldozed in order to survive

12 Jun 2009 - Telegraph.co.uk - excerpt

(Flint, Michigan) - "Dozens of US cities may have entire neighbourhoods bulldozed as part of drastic "shrink to survive" proposals being considered by the Obama administration to tackle economic decline.

The government looking at expanding a pioneering scheme in Flint, one of the poorest US cities, which involves razing entire districts and returning the land to nature. Local politicians believe the city must contract by as much as 40 per cent, concentrating the dwindling population and local services into a more viable area. The radical experiment is the brainchild of Dan Kildee, treasurer of Genesee County, which includes Flint. Having outlined his strategy to Barack Obama during the election campaign, Mr Kildee has now been approached by the US government and a group of charities who want him to apply what he has learnt to the rest of the country."

http://tinyurl.com/mpltpo

 

[kent nickell]

Re: The Disappearing Act

I agree with most of what Ann Lee says below except for her solution ""What we need are buyers who will manage these properties with a long-term perspective until real demand returns.""

I think buyers are there if the prices are right, the problem is it will be a huge problem for the banking system. But I think the banking system and others need to take that hit and rebuild on what strength is out there (I don't think the 'real demand' she wants to return was 'real')

Part Deux could be shedding another 15 trillion of this 'false wealth'


http://www.iimagazine.com/InstitutionalInvestor/Article.aspx?ArticleID=2238594

Credit Crisis Part Deux

By Ann Lee, an expert on financial derivatives and the global financial system.
June 2009



Page 1 of 2
June 22, 2009 - Ben Bernanke has announced green shoots, and Tim Geithner has completed the bank stress tests. Unfortunately, all this good news amounts to little more than a public relations stunt pulled by the government, and it remains to be seen how long they can continue to fool the public. If one simply looks at the monthly call reports published by the government reporting the financial health of our nation?s banks, one will see a vastly different picture.

The balance sheet of Colorado?s New Frontier Bank, a bank that was recently shut down by the FDIC due to financial insolvency, is virtually identical to those of thousands of other zombie banks across the country. The problem is that construction lending as a percentage of the banks? loan portfolios is more than 20 percent in many cases, and developers are defaulting left and right at this point in time. Many may have applied for the loans back in 2004 and are just finishing the projects now with no buyers.

There are thousands of acres of developed lots across the country in which no one is living in these properties and no one wants them. These loans are effectively worth zero because no one will take these properties even if the banks gave them away because of the taxes owed on them, but most of the banks have yet to mark them down on their books. If they did, all the equity in the banks would be wiped out. The banks have no negotiating power in most of these cases. The FDIC unfortunately can?t handle all these asset sales from the banks at the same time so they have artificially slowed down the pace of shutting down these banks to a very quiet orderly manner so as to stall the collapse of the banking system.

So far, the fire hose of debt has been limited to a trickle by the Fed and the government since they know there is no market for all the debt outstanding. The Fed has absorbed much of it on its balance sheet, and they have yet to explain to the public how they plan to unwind them. But in addition to all the defaulting subprime loans, these commercial loans will have to be recognized as non-performing at some point in the near future which will cause a second avalanche of loan defaults around the corner. Will the government also bailout all the commercial developers? It will be extremely difficult given the dollar amount, nor should they from a moral and fairness perspective.

The only way out of this problem is to create a huge demand for all the real estate inventory. Unfortunately, as the government keeps printing money to stop deflation, the rising interest rates will keep buyers from stepping into the real estate market. Other buyers like hedge funds cannot help the market because they have a trading mentality. They may buy something at ten cents on the dollar and try to flip it at forty cents on the dollar. In the meantime, these properties will deteriorate in value as they sit languishing without owners. What we need are buyers who will manage these properties with a long-term perspective until real demand returns.

 

[peter m]

Re: The Disappearing Act

"Dozens of US cities may have entire neighbourhoods bulldozed as part of drastic "shrink to survive" proposals being considered by the Obama administration to tackle economic decline."

The banks have already started to demolish properties located out in the way overdeveloped counties of San bernardino and riverside counties, Scal,(called the IE-inland empire for short)., There, back in the heydey of IE housing boom of 2003-2007, developers were putting up 1000's of homes and tracts in mass assembly line constructions in such barren, baked bone dry areas as hemet. perris. lake elsinore. hesperia victorville, banning, beaumont barstow. sun city. san jacinto, romoland, rialto , fontana, norco, ontario,ect.

The farthest regions out in the high deserts such as victorville, adelanto, barstow, palm desert, victor valley, cathedral city, and even way out to CA City and environs are the regions where homes are being demolished. Why? Because developers put these homes in desolate scrub brush locales located 100-150 miles from LA/Oc coastal areas and they were bound to become unihabitable in a sour economy or gas spike. These home may be spankin new but no one would buy because there are no jobs out there and the desert is 120 % in shade in summer and has 50-70 mph wind gusts in winter.

 

[kent nickell]

Re: The Disappearing Act

$24 trillion is a lot to try and backstop.... At some point those losses may need to be realized...

http://www.foxnews.com/politics/200...ilout-support-reach-trillion/?test=latestnews

Watchdog: Financial Bailout Support Could Reach $23.7 Trillion

The total price tag for federal support stemming from the financial crisis could reach $23.7 trillion in the long run, the government's top bailout watchdog says in a new report to Congress.

FOXNews.com

Monday, July 20, 2009

The total price tag for federal support stemming from the financial crisis could reach $23.7 trillion in the long run, the government's top bailout watchdog says in a new report to Congress.

Neil Barofsky, the inspector general for the Troubled Asset Relief Program, plans to deliver his report Tuesday to the House Oversight and Government Reform Committee.

The $23.7 trillion figure is admittedly a high-ball number and reflects the total potential gross exposure, but Barofsky in his prepared testimony notes that the TARP -- which started as a $700 billion bailout -- has expanded well beyond that.

"TARP has evolved into a program of unprecedented scope, scale and complexity. Moreover, TARP does not function in a vacuum but is rather part of the broader government efforts to stabilize the financial system," the report says.

"The total potential federal government support could reach up to $23.7 trillion," the report estimates, factoring in commitments from "dozens of programs" implemented throughout the federal government since 2007.

In supporting documentation obtained by FOXNews.com, the inspector general's office explains that the $23.7 trillion spans about 50 "initiatives or programs" created by federal agencies in the wake of the economic crisis.

The estimate covers commitments that could come from programs at the Federal Reserve, Treasury Department, Federal Deposit Insurance Corporation, the Federal Housing Finance Agency, the Federal Housing Administration, the Department of Veterans Affairs and other agencies.

It notes that the total "financial exposure" of TARP and related programs alone could reach $3 trillion.

While not a firm or official figure, the estimate has the potential to send lawmakers into sticker shock.

"The potential financial commitment the American taxpayers could be responsible for is of a size and scope that isn't even imaginable," Rep. Darrell Issa, ranking Republican on the oversight committee, said in a written statement. "If you spent a million dollars a day going back to the birth of Christ, that wouldn't even come close to just $1 trillion -- $23.7 trillion is a staggering figure."

In the report, Barofsky also says that the Treasury Department has "repeatedly failed" to adopt recommendations that his office believes will bring more transparency and accountability to the execution of the bailout.