Reply #21: The Automatic Earth: Stoneleigh - Welcome to the Gingerbread Hotel [View All]

[DemReadingDU]

1/9/09 Stoneleigh: Welcome to the Gingerbread Hotel

Bailouts are NEVER for the little guy no matter what spin their proponents use to sell them to the public (who will be paying for them through their taxes). The role of the little guy in a Ponzi scheme is to be the empty-bag holder. This is the tragedy of our times, and there's nothing anyone can do to prevent it, whether or not they might want to. The losses have already occurred, but as yet still lie out of sight in illiquid 'asset' accounts supposedly worth hundreds of trillions of dollars, but actually worth close to nothing.

A predatory lending structure has been sucking the wealth out of ordinary people through debt enslavement for a long time, by encouraging them to buy far more than they could actually afford on margin (ie with borrowed money). That is a recipe for paying far over the odds for everything, while the financiers collect the excess - an excess collected preferentially from those near the bottom of the income scale, who were most likely to carry a perpetual credit balance at a predatory rate. This is how credit bubbles form - a combination of predators and all-too-willing prey that doesn't understand the nature of the trap. Hansel and Gretel and the witch's Gingerbread House comes to mind, minus the escape at the end.

Unfortunately, it was easy to entice people into debt slavery, as the offer of access to material goods is always hard to resist, particularly when it seems like everyone else is enjoying new-found wealth. It doesn't take long to convince people that they deserve to have a large home, multiple cars and all manner of consumer goods, or to convince them that they are somehow inadequate and that their children will suffer if they don't participate in the consumer culture. The relentless marketing barrage played on our insecurities, conveying a message that happiness and social status could, and should, be bought.

A situation where ordinary people are able to buy anything on margin is historically very rare, as credit is normally only extended to those who do not need it. The last several decades have been an aberration, largely due to an increasingly reckless attitude towards risk. For ordinary people, low interest rates led them to believe that huge debt burdens could be sustained so long as the budget could be stretched to cover the monthly payment. For those higher up the financial food chain, the process of securitization created the appearance that risk could be passed on ad infinitum, until it ceased to exist. Unfortunately, low interest rates are a trap, and securitization, instead of minimizing or eliminating risk, actually magnified it into a systemic threat.

In terms of mortgages, even those that seemed conservative in recent years were not. In the latter stages of a credit bubble, even a deposit of over 50% and a monthly payment that could be covered by one of two salaries is a recipe for deep trouble. We are looking at a collapse of property prices and a huge rise in unemployment, which will combine to cause an unprecedented amount of negative equity, defaults and foreclosure, and, thanks to leverage, the resulting loses will snowball, further undercutting the supposed value of financial assets. The 'conservative' mortgagees are mostly just as trapped as those who over-extended themselves further.

Even those who own homes free and clear will find that, in a frozen property market, they can not move to where the jobs are, or to a more suitable property with some self-sufficiency potential. If they lose their jobs, they may lose their homes through being unable to pay the sky-rocketing property taxes that municipalities will introduce in a desperate attempt to fill the gaping holes in their own budgets. This is why we suggest that people generally rent rather than own (unless they own a homestead free and clear). Renting amounts to paying someone else a fee to take the property price risk for you, and that is a very good bet under today's circumstances. Rents will fall a long way in a deflation, and although landlord default is always a possibility (perhaps meaning more than one move), that risk is preferable to losing the bulk of one's assets in a property price collapse.

The middle class has been comprehensively fleeced by the debt trap, and the consequences for social stability will be extremely unpleasant once the chickens come home to roost. Except for a few of the super-rich, we will all share in the misery to come, and none of us can expect a bailout. Whether we've been gorging ourselves on the Gingerbread House or merely nibbling at it, we now find ourselves in a cage.


and from the comments section
kkallem509 said...

I can't help but question the legitimacy of the following statement by Stoneleigh:

"Even those who own homes free and clear will find that, in a frozen property market, they can not move to where the jobs are, or to a more suitable property with some self-sufficiency potential. If they lose their jobs, they may lose their homes through being unable to pay the sky-rocketing property taxes that municipalities will introduce in a desperate attempt to fill the gaping holes in their own budgets. This is why we suggest that people generally rent rather than own (unless they own a homestead free and clear). Renting amounts to paying someone else a fee to take the property price risk for you, and that is a very good bet under today's circumstances. Rents will fall a long way in a deflation, and although landlord default is always a possibility (perhaps meaning more than one move), that risk is preferable to losing the bulk of one's assets in a property price collapse."

If it gets that bad, mobility away from familiar surroundings and micro-cultures where one has some distinct advantages not to mention friends or family to lean on, to an unfamiliar environment for the sake of landing a better job would not only be an unwise idea, it might be logisitically impossible.

And if property taxes were to get so high that those with the good fortune or financial sense of being able to own their homes outright were unable to hold onto their property after basic neccessities, then to quote a friend of mine "we'd all be at the point of shanking each other in the streets."

The city of Spokane (WA) Valley near where I live was paying $70,000/day for snow removal over a two week span around christmas. I'm guessing they could trim quite a bit of fat before they would be forced to raise property taxes to a level that would oust a majority of property owners.

We wouldn't be communicating to each other via computer right now if we were anywhere close to that point.

Try growing a vegetable garden or raising a pig in your apartment complex. January 10, 2009 12:11 AM



and Stoneleigh responds
Stoneleigh said...

kkallem509 (with regard to renting),

If it gets that bad, mobility away from familiar surroundings and micro-cultures where one has some distinct advantages not to mention friends or family to lean on, to an unfamiliar environment for the sake of landing a better job would not only be an unwise idea, it might be logisitically impossible.

That will certainly be true for some. When you own free and clear the choices are harder and it will very much depend on your own individual circumstances. I wouldn't suggest that people automatically sell, even though selling would give them a great deal of liquidity (at a time when liquidity matters most), avoid a large loss on the property (my guess is 90% on average over perhaps 5-10 years), and give them mobility.

There are advantages and disadvantages to being settled where you are. If what you own is a homestead with self-sufficiency potential in an area where you have a good social network, then staying makes a great deal of sense. If it's a place where you might be very dependent on car travel, know relatively few people and have little potential to provide for the essentials of your own existence, then selling you probably be advisable.

We own a homestead free and clear and will not be selling, but then we have invested in a great deal of self-sufficiency here over the years since I saw this coming. We left the UK in 2000 because we felt it's prospects were awful. A 40 acre farm over here cost half what my house in town in England sold for, so I don't feel bad about what I will lose in value on this place. And here I can look after my family with much less need for money than I would have had over there.

And if property taxes were to get so high that those with the good fortune or financial sense of being able to own their homes outright were unable to hold onto their property after basic necessities, then to quote a friend of mine "we'd all be at the point of shanking each other in the streets."

Property taxes will go through the roof in real terms, against a backdrop of a collapsing money supply. Municipalities will be trying to squeeze blood from stones in a vain attempt to keep themselves going in their current form. In a liquidity crunch, money is VERY scarce. Being able to pay for necessities and property taxes is by no means a given in the future.

One of the attractive features about selling now is that you lock in today's property price in cash - cash that will then go ten times as far as you ever imagined it would in a few years (provided you don't manage to lose it in a bank run). You would then be able to afford a great property - perhaps large enough for yourself and your extended family - and still have money left over for taxes and necessities.

The city of Spokane (WA) Valley near where I live was paying $70,000/day for snow removal over a two week span around christmas. I'm guessing they could trim quite a bit of fat before they would be forced to raise property taxes to a level that would oust a majority of property owners.

They will cut back, and the services you receive will shrink to next to nothing over the next few years. That means you will have to do far more at your own expense, or by your own sweat, and you may be vulnerable to all manner of disruptions that you wouldn't experience now. You could be snowed in, you may not be able to travel to purchase supplies, your garbage may not be collected (assuming you were generating any at that point), the quality of your water supply could deteriorate significantly, you may lose power and/or heat. Think through what your dependencies are and who you are dependent on for them. Think about how secure your income really is and how much of a secure cash cushion you have. Think how you might provide necessities for yourself in the case of disruption, and then decide if you want to be tied to where you live now.

We wouldn't be communicating to each other via computer right now if we were anywhere close to that point.

Very true.

Try growing a vegetable garden or raising a pig in your apartment complex.

You can rent many other properties besides apartments, and in any case, renting would be a temporary phase if you look after the equity you extract at today's prices. If you already own a property with the potential for farming, that would be a good reason not to sell (depending on a full assessment of other relevant factors of course). January 10, 2009 9:09 AM


lots more...
and also check out the primers located in the upper right section
http://theautomaticearth.blogspot.com/2009/01/january-9-2009-dr-doomlittle.html


Edit: You can also read Stoneleigh's intro over at DailyKos
http://www.dailykos.com/story/2009/1/9/16546/13287/235/682182