30-year bond at 3.3%

[Wild Cobra]

i think unemployment will peak around 13%. (which will be a monster)

I haven't tried at all to verify, but I heard they are almost 20% in Oregon.

[clambake]

I haven't tried at all to verify, but I heard they are almost 20% in Oregon.

i'm talking coast to coast average.

[2centsworth]

There are in fact several quadrillion dollars in outstanding CDS's. Now investors play both sides, so if a trillion dollars of CDS's settle, maybe only $5 billion changes hands. Or maybe $100 billion does. The banks don't know, and that uncertainty freezes them up into total risk aversion.

bets are net zero sum.

[Extra Stout]

bets are net zero sum.

But you don't know if the banker next to you won or lost his bets, so you don't know whether he'll be able to repay that overnight loan tomorrow.

[2centsworth]

But you don't know if the banker next to you won or lost his bets, so you don't know whether he'll be able to repay that overnight loan tomorrow.

correct, so it's a transparency problem more than a money problem. (oversimplified on my part I'm sure)

[Extra Stout]

correct, so it's a transparency problem more than a money problem. (oversimplified on my part I'm sure)

That's part of it, and if you're the banker who lost his bets, opacity is your friend.

[2centsworth]

That's part of it, and if you're the banker who lost his bets, opacity is your friend.

that's what human nature will tell them, but I could argue that opacity isn't there friend. btw, I'm guessing most of the losers are insurers and hedge funds and not banks.

[Extra Stout]

that's what human nature will tell them, but I could argue that opacity isn't there friend. btw, I'm guessing most of the losers are insurers and hedge funds and not banks.

WaMu, Wachovia, Citi were among the big losers.

[2centsworth]

WaMu, Wachovia, Citi were among the big losers.

Citi is a quasi-bank and an abomination of the abolition of glass-steagel.

WaMu originated and serviced most of their sub-prime notes is my understanding.

I'm not clear on Wachovia.

[BradLohaus]

That is not correct. It is 65%.

He must be including all of the unfunded en lements along with the public debt. If you do that then %360 sounds close; that number is about $60 trillion now, and currently about $500,000 per household.

Nobody should count on the government to pay you what they really owe you, in real terms. Great thread.

[PixelPusher]

True. People who live in the favelas in Brazil figure out a way to survive and Americans will too.

[Cant_Be_Faded]

ES, explain to a layman like me how a 3.3% rate on a 30 year treasury bond is an indicator, if you don't mind.

[Extra Stout]

ES, explain to a layman like me how a 3.3% rate on a 30 year treasury bond is an indicator, if you don't mind.

Low bond yields mean high bond prices, which mean that investors are so risk-averse that they are willing to accept a very low interest rate.

This is amidst an environment when the federal fund interest rate is just 1%.

A liquidity trap is when interest rates are close to zero but still fail to stimulate the economy because nobody is willing to lend or make investments with any risk. Once that happens, the central bank no longer can use monetary policy to stimulate the economy. It is likened to "pushing on a string."

[Extra Stout]

Looking at the 30-year-bond, it's been going with a six-month coupon of 4.5%, so if the current yield is 3.3%, investors are paying $135 for every $100 in par value. That's a tremendous premium.

[xrayzebra]

This gets complicated and long.

The U.S. economy technically has been in recession for a year, and unemployment is usually a lagging indicator. That means that people don't start losing their jobs en masse until the economy has been bad for a while.

Usually, recessions are short, and by the time unemployment peaks, the economy has already started recovering.

Not this time.

The United States has been in a bubble economy for six years. There has been essentially no real economic growth under the Bush Presidency. Due to a stagnation and decline in wages for all but the top few percent of Americans, there is not enough income to stimulate real growth. This was made up temporarily by the development of credit, real estate, and financial bubbles.

The credit bubble was simply easy credit with low interest rates that allowed people to borrow large amounts of money to fuel their consumption (think credit cards). The real estate bubble was a credit bubble applied to real estate, that allowed people to secure mortgages for values far exceeding what they could have secured in previous years. The financial bubble was the deregulation of derivatives that basically allowed investors to "bet" on debts like mortgages, so that the money riding on debts was many, many multiples the value of the debt itself.

The reason banks gave these bad loans out is that they convinced themselves real estate prices would never go down again -- they ignored reality.

As home values increased during the bubble, homeowners were allowed to borrow against those increased values, and they poured that money into consumption. But those increased home values were not sustainable, and once the bubble popped and prices fell, their debt was unsecured. Even if they were to lose their homes, the bank still could never get all its money back.

The derivative bubble is really the death blow to the economy. There were hundreds of billions of dollars of bad mortgages given to people who couldn't afford them, but that alone could not kill the economy. There were tens of billions of dollars of bad home equity after the bubble popped. These could not kill the economy. But the derivatives against these loans are in the quadrillions of dollars, i.e. thousands of trillions. This is several hundred times the size of the entire U.S. economy.

How could this be? Well, as these markets became deregulated, Wall Street came up with ever more complex financial instruments for packaging together securities and derivatives. Take the subprime mortgages, for example, which were the bad loans given to bad credit risks where the bank was counting on a foreclosure so it could get the house back after it had appreciated in price (except the price collapsed instead). These are very risky loans, and if you were to assemble a security based upon them, a buyer would demand a very high interest rate on it, since it is a "junk bond," so the issuer of those mortgages would not get paid much for selling off a bunch of bad mortgages. But what these firms did is set up a complex hierarchy of securities based upon these bad mortgages. The first set would be like "preferred stock," that is, if anything happened, whoever held them would be first in line to get paid. Then the second set would pay off, then the third set, and so forth. The trick is that the first set would get a very high bond rating, like AA/AAA, so those firms could package up bad loans, basically launder them into high-grade bonds, and get a very high price for them.

The problem was that once real estate prices fell, all those bonds, regardless of rating, were utterly worthless.

And since they were high-rated bonds, big banks and pension funds had snapped them up, and were left holding the bag.

But even that would not have been enough to kill the economy.

No, the Wall Street guys had to come up with yet another layer of derivatives, called credit default swaps. Once upon a time, these were like insurance against bad debts. You, the creditor, would pay a third party for a CDS, and if your debtor defaulted, the third party would pay you some sum of money. Then they were deregulated early this decade, so that anybody could get a CDS on any loan, regardless of whether they were a party to it. This sparked a free-for-all of investors making bets back and forth on whether a particular debtor would pay back his debts. Then there would be on CDS's on CDS's. This escalated to the point where there are now quadrillions of dollars of outstanding CDS's, and a relatively small default, like on a subprime mortgage, for example, can result in billions of dollars of losses.

And the banks and ins utions are so deeply wrapped up in CDS's, that for any given default, billions of dollars change hands back and forth, and they have no idea who is solvent and who isn't anymore. So, they are deathly afraid to lend to anybody that is even remotely a risk, even fellow banks, much money. Banks that were too heavily tied to bad mortgages and bad credit default swaps quickly went under, and their bankruptcies trigger other defaults that threaten to put other banks under the next day.

In order to have a prayer of surviving, the leftover banks need to increase their cash reserves, and that means they stop lending. But since we've gotten to the point where nobody has any savings anymore, and the whole consumption-based economy was based on shaky credit, it's like Wiley E. Coyote running off the cliff.

Or, it's an eerie reprisal of what happened to the economy in 1929. After the stock market crashed, people didn't end up in soup lines the next day. It was well into 1930 before suffering hit ordinary folks.

So credit is drying up like the Mojave Desert, and we're tumbling headlong towards another Great Depression. The federal government has desperately been trying to stem the tide by throwing hundreds of billions of dollars at banks to buy their bad loans. That didn't work. So they stopped that and instead threw hundreds of billions of dollars to buy stock in the banks so they'd be recapitalized and start lending again. That didn't work. At this point, all they could really do is just take over the banks outright and force them to lend.

With a sharp reduction in lending, far fewer people can get loans to buy cars. So, car buying is down 25% and all 3 U.S. automakers are about to go bankrupt. With a sharp reduction in lending, businesses can't make capital investments and don't create new jobs.

If the economy is the car, the financial sector is the engine, and credit is the gasoline. The upshot of that right now is that inventories are building, and lots of businesses are cutting production. What's coming next is a massive round of layoffs throughout the manufacturing and retail sectors.

Those crises are in full swing, and coming up next is the credit card crisis. People who have no savings and have been living off their credit cards will start losing their jobs and will default on those credit card debts. Those losses are in the billions of dollars, which is still relatively small, but it will kick off a whole new round of derivative losses. Consumer credit is set to dry up by 45% early next year. The mortgage crisis is going to continue for at least another year, and there is probably another 20% left to squeeze out of home values before they hit their floor.

There simply is no place left to turn to keep consumption going at the artificially high levels of the past six years. All credit is tapped out. Consumption will track down towards real income, and real income will be in sharp decline due to job losses. It adds up to a massive reduction in the size of the U.S. economy.

So the job losses will hit just as the economic downturn gets worse, and by worse, I mean the steepest downturn since World War II. It won't look quite like the Great Depression, since there is a social safety net now, but if you're in your seventies, you've probably already lived through the best economic times of your life.

Thanks ES, appreciate the patience to take the time to explain a complicated subject. George will had an article this morning about the problem. His contention is that Obama is trying FDR II, New Deal and that it didn't work then and wont work now. He (Will) contends that the Market did not regain before depression status until the 50's. Which surprised me. I wished Washington would step back and let the business people straighten things out without their interferrence. One thing that you said rang a bell big time with me, if I was in my 70's, I had seen my best days. Well I am well into my 70's and hopefully you are wrong.

There are in fact several quadrillion dollars in outstanding CDS's. Now investors play both sides, so if a trillion dollars of CDS's settle, maybe only $5 billion changes hands. Or maybe $100 billion does. The banks don't know, and that uncertainty freezes them up into total risk aversion.

Yeah ES, I have heard that the schemes "built" could very well equal the worlds total economy or maybe even exceed it. One of the experts said, like you. No one knows how much is really out there.

Oh, there is a small chance that the financial sector's losses due to the credit default derivatives crisis are in fact larger than the GNP of the United States of America, and that we are all in fact bankrupt.

See my comment above.

WaMu, Wachovia, Citi were among the big losers.

Wachovia bought out World Savings, which specialized in the
sub-prime market, if I am not mistaken.

All of you talking unemployment. I was born at the tail-end of the Depression. And I can still remember the very end of it. Everyone was poor in Texas. But my Dad and most of my family all had jobs. Not big paying jobs, but jobs. And my Uncle Lawrence who was a hardest working guy I ever knew, said there was always work here in Texas for those that wanted it. Like I said it may not have paid a lot but it was available. Now I am talking about a guy who would go to the cedar breaks with a double bit axe and cut fence post when he couldn't find other work or got pissed at his boss.

Anyhow, ES thanks again. I hope you keep this thread going. It is
informative. Better than the damn papers who want to slant everything.

[Cry Havoc]

This gets complicated and long

....

So the job losses will hit just as the economic downturn gets worse, and by worse, I mean the steepest downturn since World War II. It won't look quite like the Great Depression, since there is a social safety net now, but if you're in your seventies, you've probably already lived through the best economic times of your life.

You deserve a Spur under your avatar or something for that. That was absolutely brilliant and very easy to understand. You might have just typed a summary of what happened, but I feel much more informed about the situation now. It might be the best post I've read on this website, and that's saying something. Major props to you for that. I read the whole post. Feel free to share more, because I've yet to see this laid out so well and clearly anywhere else.

[ChumpDumper]

Pfft. All he had to say was "It's Carter's fault."

[Wild Cobra]

Pfft. All he had to say was "It's Carter's fault."

I just hope that president Obama isn't the second coming of president Carter.

[ChumpDumper]

I'm sure Republicans will try to blame Obama for the recession in 2042.

[xrayzebra]

I'm sure Republicans will try to blame Obama for the recession in 2042.

Ah yes, leave it to Chump to screw up a decent thread. He is like that
little kid, me, me, me, I have something to say.....whaaaaaaaaa.
And like that little kid, he actually has nothing to say. And does it well.

[ChumpDumper]

Ah yes, leave it to Chump to screw up a decent thread. He is like that
little kid, me, me, me, I have something to say.....whaaaaaaaaa.
And like that little kid, he actually has nothing to say. And does it well.

You mad?

ES actually brought up the Republicans' Carter canard in another thread. It was a little joke echoing that.

I never expected you to be smart enough to understand.

[xrayzebra]

Ahhhh, I am so sorry. I must have missed it. I take it all back.

[Extra Stout]

You mad?

ES actually brought up the Republicans' Carter canard in another thread. It was a little joke echoing that.

I never expected you to be smart enough to understand.

I said that back when I was a Republican; you can't hold it against me.

[ChumpDumper]

All is forgiven.

[2centsworth]

I said that back when I was a Republican; you can't hold it against me.

im with you on the problems of deregulation
. However, you described two bubbles that had little to do with deregulation. Also, you went on to agree that cds are more a transparency issue than a money issue. Yes, the system is clogged, but the national wealth was inflated and deflated because of fannie freddies 2 percent capital reserve requirements.

Am i wrong, and if so, why?