Treasures from the threads - Number fifty-two

To an article about above target UK inflation and another stupid letter to the boy Chancellor Osborne from BoE Governor (shifting goalposts) King, linked here, comes this pithy point:

ultron

3 minutes ago

The continued wilful failure by the BoE to execute its mandate and contain inflation is astonishing. There is only one reason why interest rates are being held artificially low: to support the housing market. Companies do not need these rates--they are not borrowing! They are sitting on cash piles and waiting for better times. Does King want to reinflate the property bubble? Yes. It's a disaster for pensioners and savers, of course, but who cares about them as long as the speculators and the rash are bailed out? I have some advice for you, Mr King: it's going to end in disaster. Long-term rates are going up, whatever you do, and property is coming down.

Fannie Mae 30 year bond yield soars skywards!

Is QEII in the USA about to crash and burn?

The jump in yield of the mortgage rate setting Fannie Mae 30 year bond seems to indicate things are going badly awry. Read the LA Times item from here.

It is the mortgage debt in Ireland that now is the greatest threat to that nation's survival, officially not even being discussed at the Eurozone Ecofin meeting, read what I blogged and linked on that topic last week, from here.

The UK is in the same boat as both Ireland and the USA yet the Coalition Government pretends no such worries or even concerns really exist. Oh Really!

Has Bernanke surrendered to the forces of chaos?

The speech of the Federal Reserve Chairman to a joint conference with the FDIC on the USA mortgage crisis seems to have offered no hope for the watching world that there is anybody leading the nation that owns the US Dollar and is thus the controller of our globe's sole reserve currency who has the first clue of what they are about. Greenspan's whirlwind runs apparently totally outside of the control of his heir.

In the US., the mid-term elections at least provide the electorate with a chance to show their disgust at the two main parties, anger possibly leading some to a vote for a Tea Party candidate others, I hope in greater numbers, may consider the Libertarian Party which seems a better route back towards the original ideals of democracy.

In the UK the housing crisis is also the most obvious symptom of the chaos created by our two main political parties. My posting of yesterday morning hinted at the apparently already decided solution for social housing and 'buy to let' greed, transfer of the assets for practically nothing from the latter to the former is a neat idea, especially after having watched last evening's BBC Panorama Programme (no doubt exactly as was intended by our devious rulers).

Underwater mortgage paying homeowners urgently need help as they are presently unaffected by the new benefit rental cap. To avoid such families becoming entangled in such a government scheme (assuming Lib/Dem backbench opposition allows it to proceed) surely now is the moment to divide equity losses proportionately between borrowers and lenders for mortgages taken out since Brown and King deliberately chose to ramp up the property market?

UK House prices - the crunch draws closer

In response to the just released mortgage figures the FT Alphaville blog has a good summary of the present dire situation, linked here. It is aptly titled "Double trouble for UK House Prices.

Buy to let Rachmanist landlords face toasting

The Daily Mail has a delicious tale of how badly burnt the taxpayer funded buy to let greed merchants could receive their come-uppance from a collapsing property market. This landlord has had one of his thirty three properties valued at only one pound and a mortgage request refused, read it in full from here.

The Independent this morning, in an article titled "Britain stares into the abyss again as household confidence plummets" the newspaper points out that the Chancellor has now capped housing benefit payments at £400 a week for a four-bedroom property, and £250 a week for a two-bedroom home, which should stem the flow of funds to those who have grown wealthy on Rachmanism with zero labour during the years of the inflation of the property bubble.

The refusal by successive governments to address the negative equity situation of hard-working families, to which repeated suggested solutions have been made on this blog, has now continued beyond the eleventh hour.

IMF warned of abrupt UK Housing Crash in 2003!

Seeking an old posting in the archives of my blog Ironies in September 2003 to link from the posting beneath this, I came across this fascinating posting published on 18th September 2003 which I just had to repeat in full here today:
+++++

Thursday, September 18, 2003

UK Housing Crash warns IMF

According to the IMF as reported in The Independent Tony Blair would do better to stay home this weekend and worry about the economy in what is supposed to be 'his country' IMF sounds alert over housing crash

The IMF said soaring housing markets posed a threat in the UK, US, Australia, Ireland and the Netherlands, warning that "the risk of an abrupt unwinding cannot yet be ruled out".

posted by Martin at 9/18/2003 11:09:00 PM
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Well folks seven years, yes that is correct a full seven years on it looks as though "an abrupt unwinding" is what we are about to get.

Treasures from the threads - Number forty-seven

To an article in the Daily Telegraph this morning on the general crisis in Britain's housing market, linked here, comes this:

ikenuma

1 second ago

A three bedroom semi, with one of those bedrooms in reality a half a room, plus garage, on the outskirts of London but without the benefits of London, is in all seriousness NOT worth nearly 400 grand!!

Let's be sensible; this is first time buyer property as my parents were when they bought it for £4000 in the 1955.

Where are these first time buyers that can afford to buy such a house?
How many have 40 grand for a 10% deposit?
Which banks are daft enough or reckless enough to lend that amount?
A couple would need a joint income of £144,000 to buy that.

Are you lot nuts?
Are you living in a dream world?

Living in mainland Europe now, I am just looking at the UK and laughing at your madness. Your productivity and profitability are lagging so far behind you'll never catch up with that kind of thinking.

Ireland's Mortgage Mess - Another warning for the UK

The property price crisis remains the biggest danger§ How many times must we point this out but helplessly look on as the second government in a row does absolutely nothing to address the approaching disaster.

A report in the Irish Independent this morning, linked here, details the numbers of mortgagees within the Irish Republic having their mortgage interest payments met by the state, an incredible 17,500 recipients, such policies are not sustainable and merely serve to maintain house prices at their ludicously high levels to the benefit of nobody while steadily eroding the resources of the state!

In the USA such numbers appear microscopic, in the two years since the US Federal Government assumed responsibility for the mortgage providers Fannie Mae and Freddie Mac the cost to the Treasury in direct government aid was 150 Billion, that is correct 150 Billion dollars, see Reuters from this link if you do not believe me.

Government Ministers who rate their own wealth in the value of their property portfolios, often obtained on the basis of capital gains accrued on mortgages funded by the taxpayer, seem unlikely to be able to grasp this nettle, hence the lack of any plan let alone rational consideration of the true awfulness of the crisis being faced.

Such wealth is illusory, grasp that fact and go from there. Exchange rate depreciation and inflation will not cure the problem that exists up and down the country where professionals necessary for the provisions of community services cannot afford the properties in which their families need to live at the salary levels the local communities can afford to pay.

This blog has tried to suggest sensible solutions which I have now become tired of linking. State payments to subsidise underwater homeowners is like the squillions paid to the failed banks, waste pure and simple.

House Prices Emergency

Reuters reports that in the UK the house price index had its biggest monthly fall in August since May 2009, read it here. The reality of the crisis now re-appearing will be aggravated by the past government's efforts to keep underwater borrowers, as those with negative equity are sometimes known in the USA, in their home even if unable to meet their mortgage repayments.

This category of borrowers will now grow in the UK as the masses of public sector parasites are necessarily shed by a bankrupt state employer. Things are developing faster in the USA where a short term refinancing programme is now being pushed by Fannie Mae, becoming known as an Obama Refi, see this explanatory link which includes the following interesting but alarming fact (with my added emphasis):

One of the biggest dangers facing the housing market is the glut of underwater homeowners who could default if their financial situations or home prices worsen. About 11 million borrowers, or 23% of households with a mortgage, were underwater as of June 30, 2010, according to CoreLogic Inc. That number is expected to double next year.

The constant stream of encouraging forecasts of stronger economic growth, activity and recovery in the near future presently flowing from the European Commission, the ECB and various former national European Governments, all in direct contradiction of the factual information of deteriorating conditions in the real world can, at the end of the day only make matters worse.

If 23% of homeowners are in negative equity today and that number doubles in the coming year to almost half of all homeowners, how many will then become Walkaways sending back their keys? What effect will that have on the still floundering, and in the UK nationalised, banking (so-called) business?

Property prices - picture a leaking barrage balloon

Property prices have risen faster than inflation for so many decades that modern man seems incapable of contemplating that there is now nothing left to keep them up.

Cartoons often can convey complicated concepts where words fall short. As I cannot draw, let me describe a cartoon picture. Picture Great Britain above which floats a leaking and therefore descending huge barrage balloon, dirigible or whatnot. So high has it been and so large has it become that it virtually covers the entire island. It is called "House prices". As it falls threatening to crush the mass of pygmy like figures below, they manfully grip any stick pole or cane to hand to keep it aloft, yet gravity cannot be defied. Any observer would see that evacuating to areas yet uncovered by the monstrosity provides their sole means of escape.

My view that senior members of the Government must cut themselves free from the fantasy of ever rising home prices is designed to allow them to cut the false bonds that restrict their freedom of movement and as it were with one bound be free! It is their own attitude of mind that prevents them from perceiving the reality.

Last week it was announced that British land development prices for new buildings had fallen to one third of their 2007 peak. That is the extent of the fall that, disregarding inflation on building material costs , now faces the homeowner, that is right a fall of two thirds or 66%! Frightening is it not, yet nobody has done, nor indeed is doing anything about it. The money thrown at the banks and therefore down the drain since 2007 has merely succeeded in deferring the reality, as does the Basel III fiddling of last evening.

The problem is worst in the USA, then Britain and thereafer in the other English speaking nations such as Australia in my view. Trust must return to our means of exchange, namely money, is that possible with patent failures King, Trichet, Bernanke and Geitner working at the solution under political leaders seemingly mainly concerned with the impossibility of maintaining their ill-gotten gains from the property price bubble they themselves created and benefitted from almost entirely at the public's expense. Since Nixon broke the last link of the US dollar to gold, "In God we trust" on the coinage, should have become "In the Fed Chairman we trust" which certainly seemed true through the Greenspan years but must today be farcial when viewing the efforts of Bernanke!

Another aspect of the wider view would reveal that our bust barrage balloon was in fact part of the wider EU supported by other illusory and leaking dirigibles but that as they say is an entirely different kettle of (almost extinct) fish!

Who bails out a bankrupt European Central Bank?

The ECB is not a lender of last resort. Yet according to yesterdays Open Europe press briefing quoted here:

... the FT notes that the ECB has stepped in to shore up the eurozone government bond markets in its biggest such intervention since early July. The ECB has bought between €100 million and €300 million of Greek, Irish and Portuguese bonds so far this week, traders said yesterday.

So who steps up to pay for all this useless paper at the end of the day?

First the commercial banks were effectively belly up and their Governments shrilling they were too big to fail met the consequences of their disastrous investments with tax payer commitments the taxpayers (themselves mostly up to their necks in debts with mortgages on homes about to plunge in value) will never be able to pay. So now the Central Banks step in with yet more commitments, which in the case of the ECB nobody seems obligated to cover. Slovakia who have refused to join the Greek bail out and the Czech Rebublic who sidestepped the EU commitment for a financial levy on banks, must both appear comparatively well positioned compared to the rest of the eurozone let alone the EU as a whole who undoubtedly will be the final soft touch at the end of the day!

On Sunday we are today informed Basel III for the international banks will be finalised, an event that has seen Deutsche Bank this morning scrambling to raise billions more in capital, read here, before the rest of the pack leap in.

Yet what use a well capitalised commercial banking sector in a world of bankrupt sovereign governments and floundering central banks? Let alone hundreds of millions of consumers saddled with debts on their over-valued houses, which, as this blog repeatedly points out, NOTHING absolutely ZERO has been done about. The house price bubble that first sparked this crisis remains ignored while money is everywhere printed out of nothing but thin air to presumably eventually price other worthwhile and essential commodities, such as wheat, to appear reasonable when compared with terraced houses considered near slums in more sensible times, now valued in several hundreds of thousands if not millions of now worthless local currencies.

Fannie Mae and Freddie Mac Fellatio!

Yesterday was not just the anniversary of the beginning of The Blitz of Britain by the Germans 70 years ago, no doubt being gleefully drooled over on the next morning by German leaders as the aerial reconnaissence photographs revealed the gruesome details of the death and destruction wrought by Germany's might, just as this morning, no doubt, a new generation in Berlin and Frankfurt relish the economic humbling of the City of London brought about by the humiliation of Britain's Chancellor of the Exchequer, George Osborne, in Brussels yesterday in an event that appears to have deliberately taken place on this hugely significant and bloody anniversary, no indeed, for it also marked the second anniversary of Fannie Mae and Freddie Mac being taken into the custody of the US Government.

Does yesterday then perhaps also mark the end of the era of US moral leadership, might and world domination? Fannie and Freddie brought the pride of home ownership to many lower income Americans over many decades. They helped in pulling the country out of the Great Depression of the nineteen-thirties. Has the US Government, Congress, the Federal Reserve or any other body used the past two years to address the underlying problems of these two grossly over indebted mortgage suppliers? It appears not.

In fact the very opposite has been the case. Over the past two years these now government controlled institutions have been the major supplier or underwriters of most of the new mortgages recently issued, therefore merely compounding their underlying problems, read a Bloomberg report from here, tellingly titled "Subprime 2.0 Is Coming Soon to Suburb Near You: by Edward Pinto".

The housing crisis, such as that in the US and in Britain is the main underlying economic crisis on both sides of the Atlantic and it appears for the entire english speaking world, yet neither the US nor the UK Governments will face up to that fact. Solutions have been regulary suggested from this blog. Most recently David Cameron and Nick Clegg have been urged to return their property portfolios to the state from which they have indirectly been drawn. Other Cabinet Ministers would be wise to follow suit so that they can address the economic disaster in which the country now lies with clear eyes and from a sensible starting point.

A man is worth more than the value of his home or the marque of his car. Economic might when misused can be overcome by ordinary people pulling together, that was the lesson of The Blitz.
We can overcome this economic mess by grasping the fact that homes have values because they are secure, situated near schools and jobs priced at a wage which makes them affordable. Bricks and mortar torn down and resold with flat screen TVs or used modern kitchen gadgetry in an environment where no building is taking place have little value at all. Look round your possessions at home today, what are they really worth and if mortgaged to a typical bank, building society, or even Fannie or Freddie ------ what could these failing institutions obtain for their supposed secured assets when society has no hope?

The 'Cloud Cuckoo Land' of the UK Property Market and NHS

The Daily Telegraph's Personal Finance Correspondent writes this week that UK property prices return to 2007 levels until 2014. Read the entirely incredible article from here.

Elsewhere the same paper reports that the IMF predicts Britain's gross debt to GDP ratio will reach 109.7% by 2015 (Le Figaro reports the IMF predicts 115% by the same year for France, our supposed ideal partner for future aircract carriers on which more tomorrow).

The Telegraph this morning quotes a second month of property price falls, read here and concludes:

The average home currently costs £169,347, according to Nationwide.

Yet Myra Butterworth, Personal Finance Correspondent of the Daily Telegraph, informs us that homeowners "will have to wait until 2014 for a recovery, when average prices will reach £226,900"

We recall that Ambrose Evans-Pritchard, astute finance commentator on the same newspaper, last November reported Société Générale advising its clients of potentiel global collapse and suggesting they buy "sovereign bonds (to) "generate turbo-charged returns" mimicking the secular slide in yields seen in Japan as the slump ground on. At one point Japan's 10-year yield dropped to 0.40pc"

What else was forecast in that perceptive report:

"Governments have already shot their fiscal bolts. Even without fresh spending, public debt would explode within two years to 105pc of GDP in the UK, 125pc in the US and the eurozone, and 270pc in Japan. Worldwide state debt would reach $45 trillion, up two-and-a-half times in a decade.

(UK figures look low because debt started from a low base. Mr Ferman said the UK would converge with Europe at 130pc of GDP by 2015 under the bear case).

The underlying debt burden is greater than it was after the Second World War, when nominal levels looked similar. Ageing populations will make it harder to erode debt through growth. "High public debt looks entirely unsustainable in the long run. We have almost reached a point of no return for government debt," it said."

And the crowning UK National disaster that is the NHS, read this gob-smacking nonsense from the Daily Mail this morning:

£130,000 to quit now for NHS bosses facing axe as plans are drawn up to sack up to 20,000 managers

Does Lansley not know the nation is bust. Cash from public employees and those sitting on large unearned house equity are the only future source for repaying the debts if private enterprise is to be allowed to play its historical role of wealth creation.

Cap public pensions at three times the OAP as a maximum, recoup the wealth with a five year reducing property tax as earlier proposed on this blog (read the Brown Levy from here). In reality there are no other choices!

The "End Game" Approaches

"This has been one of the most interesting days in finance ever," said Andrew Roberts, head of credit at RBS. "We are right at the tipping point. Yields are about to collapse even further, equities are about to turn over. The end game approaches, probably in next few weeks."

In the US, the 27pc collapse in existing homes sales in July leaves no doubt that America's property market cannot stand on its own feet without the prop of homebuyer tax credits. "Home sales are in free-fall. These are truly dismal numbers," said Teunis Brosens from ING.

The article from which this quote came may be read in full from here. Readers of this blog will be unsurprised that the western world has reached this point, just as we warned at the start of this summer when JC Trichet pompously departed on his holiday in St Malo claiming that all was incredibly well, indeed with all our warnings down the years, that corrupt self-serving politicians would inevitably land the world in the mess in which we now find ourselves, bankrupt and with no economic weapons left to mitigate the consequences.

Sound money or means of trusted international exchange will be required before recovery can begin. Restoring value to the property market, will be a priority alongside finding as yet unidentified honest and decent leaders. In September 2008 I put forward one idea to achieve the former objective, do Clegg and/or Cameron now have the courage to take on such an approach, and perhaps simultaneously convert to decency? A quote from that old posting:

Mortgages have always assumed the equity provided by the mortgagee is the first at risk. In this crisis that has to be changed. I suggest that for houses purchased since Gordon Brown, in the words of incoming BoE Governor King, to paraphrase 'moved the Goal Posts and excluded house prices from the CPI' any loss of value on the resale of such houses be directly proportioned between the first mortgage holder and the mortgagee. This is potentially expensive, but less so if it halts further slides in house prices. As the country is effectively bankrupt such a move will need financing and as a further step to somewhat also put the cost of the greed at the door where it lies I would further suggest the exemption of the first home from capital gains tax be withdrawn.Decency for Clegg and Cameron could be guaged as a distant possibility by an immediate large cut to UK contributions to the EU pending a halt to their ongoing and grandoise plans for ever more vainglorious enterprises and aggrandisement.

Bankrupt USA now faces an army revolt!

It is now three years since the world realised that the credit crunch had arrived, although the general public generally only twigged somewhat later as Northern Rock faced collapse. Yet today our ruling elites clearly remain blissfully unaware of the depths of the disaster they have wrought. An economics Professor from Boston University has now spelt out the facts in the starkest terms for Bloomberg, as may be read in full from here, while the following quote carries the essence:

Herb Stein, chairman of the Council of Economic Advisers under U.S. President Richard Nixon, coined an oft-repeated phrase: “Something that can’t go on, will stop.” True enough. Uncle Sam’s Ponzi scheme will stop. But it will stop too late.

And it will stop in a very nasty manner. The first possibility is massive benefit cuts visited on the baby boomers in retirement. The second is astronomical tax increases that leave the young with little incentive to work and save. And the third is the government simply printing vast quantities of money to cover its bills.

Worse Than Greece

Most likely we will see a combination of all three responses with dramatic increases in poverty, tax, interest rates and consumer prices. This is an awful, downhill road to follow, but it’s the one we are on. And bond traders will kick us miles down our road once they wake up and realize the U.S. is in worse fiscal shape than Greece.

The scenario for the UK remains almost identical to that which the Professor cites for the USA, yet no action is forthcoming from the Coalition Government and none is proposed bar an announcement in October of reported severe spending cuts. Meantime the next downward plunge in the property price collapse looms in the wings. On 30th August 2007 in this blog in a posting titled "Britain's economic abyss" I concluded with the following:

.... An Australian hedge fund went under yesterday and even the usually cheerful local SW news 'Spotlight' had a gloomy item on the looming house price bust.

Not much of any of this in the morning press, but Camilla Cavendish in The Times has a good column, , from which comes this quote:

Which just goes to show, I suppose, that idiocy is no more a bar to promotion in the City than anywhere else. People who complimented themselves on their brilliance at inventing ever more complex financial instruments with which to spread risk had started to act as though risk had been abolished.

The problem is that the actions of the US Federal Reserve and Britain's Treasury under Gordon Brown, effectively achieved just that- indicating they would always underpin the fantasy world which they themselves had created. Until some major casualties are allowed to reap the consequences of their profligacy the final crunch will just be that much worse.

A recent gushing report on the record price of 222 million dollars for a flat in London, also reported in the US as the most expensive real estate deal ever, indicates the opposite to that being reported, namely as a sign of house price strength; rather I would suggest it is a sign of amazing dollar weakness, and as goes the dollar so too will follow the pound, the euro, the yen and even the RMB!

If 222 million dollars today, why not 222 billion in three years time, everything else seems to be going that way. Surely the fact that an individual can spend such a sum on a six bedroomed flat in the middle of a city bodes ill for the value of the dollar in the ordinary worker's billfold? What price a loaf of bread in Mayfair or within a stone's throw of Central Park in New York in such a world? Indeed will there then be loaves of bread in our cities for such individuals to buy and will these elites still retain the connection between mouth and stomach to make such consumption even necessary let alone worthwhile?

This blog has frequently put forward suggestions (eg here and here) as to one way to avoid the continuing house price collapse where all the misplaced wealth of the nation now rests. As ever such advice is ignored and the crazyiness continues. In March 2009 this blog suggested to avoid the depression Bernanke be dropped from a helicopter, last week he unnerved the markets where junior traders with their bosses presumably on vacation sensed the looming chaos, by dedicating virtually non-existing mortgage assets assumed from Fannie Mae and Freddie Mac to purchase long term US Treasury debt thus further depleting interest yields. Is worthless money worth paying interest on at all? Perhaps as long as fools exist to barter flats for hundreds of millions of dollars I guess the answer to that still remains (but IMO not for very much longer) yes!

One small exception to this refusal to face up to facts and realities, I choose to presume, came from Britain's Defence Minister last week when he reportedly insisted that the battle over who will pay for Trident was an ongoing discussion. He said: "Ultimately, all our defence capabilities have to be paid for. Which bits are paid, over what timescale, is part of the discussions we are having and I'm not going to entertain them in public. I have enough time entertaining them in private."

I will take that as all the reply I am likely to get to my open letter to Dr. Liam Fox posted on this blog last week. The complete silence on any matter of significance to the future security of the nation from the co-addressee of that latter, Foreign Secretary William Hague, can be assumed to continue to be the case unless I post to the contrary on this blog.

While the economic disaster in the USA and Britain seem very similar on Defence and Afghanistan at least Cameron's stand-in mannequin Nick Clegg will not have an army revolt to face over the next couple of weeks. The gauntlet thrown down by General Petraeus to his Commander in Chief on the influential Meet the Press TV programme yesterday, portends a deeper crisis to come. Britain's depleted, under-resourced and ongoingly uselessly sacrificed service personnel regrettably seem in no state to challenge the utter dross who for so long have been negligently governing what was once the United Kingdom.