Rolling US Economy Into The Shitbin Thread

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http://bigpicture.typepad.com/comments/2007/10/more-inflation.html

El Tomboto, Thursday, 18 October 2007 23:44 (twelve years ago) link

personally I'm applying for a civil servant position ASAP

El Tomboto, Thursday, 18 October 2007 23:45 (twelve years ago) link

Just FYI, during the 1930s depression, many civil servants were paid with vouchers rather than cash, because local governments were unable to collect property taxes and their receipts fell into the shitbin.

Aimless, Friday, 19 October 2007 00:12 (twelve years ago) link

Economy's doing poorly enough as it stands, why do we deliberately want to roll it into the shitbin?

Abbott, Friday, 19 October 2007 00:14 (twelve years ago) link

Because that way Hillary can rescue us all.

Dandy Don Weiner, Friday, 19 October 2007 00:17 (twelve years ago) link

lol property taxes

El Tomboto, Friday, 19 October 2007 00:18 (twelve years ago) link

shitbin's a great word, BTW.

Dandy Don Weiner, Friday, 19 October 2007 00:20 (twelve years ago) link

you been loving my thread titles lately

El Tomboto, Friday, 19 October 2007 00:26 (twelve years ago) link

i came to this country some time ago with little more than a crippling debt burden in GB Pounds and the shirt on my back. i used to have to send back $1,200 each month to pay off my UK debt, and now I'm sending back over $1,400 to cover the same amount of debt repayment. that's two and a half thousand dollars disappearing from my tiny disposable income every year, for no explicable reason. i *heart* the decline of the US economy.

Roberto Spiralli, Friday, 19 October 2007 00:27 (twelve years ago) link

anyway why start this thread now because the bit where ritholtz points out that domino's pizza can't print new menus fast enough to keep up with inflation was pretty fucking amazing

I wish rasheed wallace was still around to show us the latest and greatest exploding bubble blogs

El Tomboto, Friday, 19 October 2007 00:28 (twelve years ago) link

wow Roberto that was some shitty timing, that sucks

El Tomboto, Friday, 19 October 2007 00:29 (twelve years ago) link

This was in the paper today:

Mortgage defaults

Hit an annual rate of 1.5 million in September. That compares with 900,000 last year from fewer than 800,000 in 2005. At the current rate, more than one million Americans will lose their homes to foreclosure, making this the worst housing recession since the Second World War.

Housing starts

Sank to a 14-year low of 1.19 million in September. Starts are a vital economic engine, creating jobs and growth as people stuff their homes with sofas and TVs. Starts peaked at 2.3 million in early 2006, and the decline will be a drag on the rest of the economy until the slide stops.

Mortgages

A quarter of the roughly 50 million U.S. home mortgages are subprime. That's seven times the number of high-risk mortgages there were in 2001. That means that many more marginal homeowners have mortgages, making it far more likely they'll wind up in default.

House prices

Fell 3.2 per cent in the second quarter. Prices are falling faster and more broadly than they have in decades, according to the closely watched Case-Shiller index.

http://www.theglobeandmail.com/servlet/story/LAC.20071018.IBUSECONOMY18/TPStory/Business

everything, Friday, 19 October 2007 00:29 (twelve years ago) link

where the hell is rasheed anyway?

economic blogs I read (they're all fairly liberal):

http://calculatedrisk.blogspot.com/
http://angrybear.blogspot.com/
http://delong.typepad.com/sdj/
http://www.marginalrevolution.com/marginalrevolution/
http://bigpicture.typepad.com/
http://www.janegalt.net/

Dandy Don Weiner, Friday, 19 October 2007 00:37 (twelve years ago) link

In regard to inflation, in the USA during the past three years inflation has been soaring - but almost entirely in the housing sector. The fact that people are encouraged to see their houses as investments rather than as expenses doesn't mean that skyrocketing housing costs weren't inflationary. They were.

As the bubble market bursts, I predict a recession with an extra added bonus of inflation running close to 10% - before the end of 2008. As it has for the past 30 years, the official CPI will understate the real inflation rate. It was rigged under Reagan so that government entitlement programs indexed to the CPI would not increase at the true pace of inflation.

If Bush continues to shovel shit on the dollar right up to the end of his term in January 2009, the inflation rate could hit 15%-20% by 2010.

Aimless, Friday, 19 October 2007 00:55 (twelve years ago) link

There are some good economics articles put up here as well:
http://www.VoxEU.org

stet, Friday, 19 October 2007 01:02 (twelve years ago) link

Which shit on the dollar are you referring to?

Dandy Don Weiner, Friday, 19 October 2007 01:02 (twelve years ago) link

As the bubble market bursts, I predict a recession with an extra added bonus of inflation running close to 10% - before the end of 2008.

lol

aaaaaaaaaaaaaaaaaaaaaaaaaa, Friday, 19 October 2007 06:11 (twelve years ago) link

this is why i live in canada!

J0rdan S., Friday, 19 October 2007 06:13 (twelve years ago) link

oh wait.

J0rdan S., Friday, 19 October 2007 06:13 (twelve years ago) link

Guys, this is a good time stay in academia right?

Catsupppppppppppppp dude 茄蕃, Friday, 19 October 2007 11:51 (twelve years ago) link

It's a good time to learn a European language.

Nubbelverbrennung, Friday, 19 October 2007 13:33 (twelve years ago) link

Prime shit examples:

When Bush was elected in 2000, the federal budget was in surplus and the national debt was being paid down. Had this state of affairs continued, as projected, it would have led both to lower interest rates and a strong dollar, together. Instead, Bush submitted a series of enormous tax cuts to the Republican-controlled Congress and lobbied them through. Immediately, the CBO's projected budget surpluses turned to projected deficits for the next decade.

Bush also initiated a war of choice, not necessity, in Iraq. This war has already cost well over $700 billion. Yet, Bush insisted on making his tax cuts permanent. Overall, the national debt has increased under Bush by about $2 trillion in seven years. This represents a difference of about $3 trillion of debt from what was projected at the start of his first term.

Because, due to Bush's tax cuts and other policies, the Federal government was in a far weaker position to stimulate the economy when the recession started after 9/11, almost the entire stimulus was delivered via lower interest rates. Because these rate cuts were artificial, and not based on a stronger dollar, this stimulus not only inflated the current housing bubble, but it also undercut the dollar even more than the ballooning national debt did.

Now the dollar is at an all-time low against the euro and the canadian dollar. However, the incomes of the top 10% of American households have increased at a good clip, while the lower 50% of households have seen a decrease in income after inflation. This is largely thanks to Bush's shitty policies. I expect more of the same mismanagement until he is gone.

Aimless, Saturday, 20 October 2007 18:36 (twelve years ago) link

I agree with everything you've just said. You're predictions still seem a tad extreme on the downside though, if I may so.

aaaaaaaaaaaaaaaaaaaaaaaaaa, Saturday, 20 October 2007 18:50 (twelve years ago) link

i wonder if income inequality will ever arrive as a political issue in this country. americans tend to not begrudge the rich - so it'll have to be more of a "for everyone's good" type of angle. no?

jhøshea, Saturday, 20 October 2007 18:54 (twelve years ago) link

I remember the 1970s and early 80s quite well. Back then people couldn't belileve it, either. Bush has done a bangup job of recreating many of the same policy errors under Johnson and Nixon that led to raging stagflation back then, except the underlying economy is now weaker than it was in the 1970s and the oil shocks we are likely to get are not political, as when OPEC was formed, but structural.

Oil will exceed $100/barrel some time this winter. The ever-weakening dollar will lead to smaller profit margins and rising retail prices on all imported goods (which means almost everything we buy in the USA). Transport costs will rise with pil prices. Stock prices will erode along with profits. With so many savings tied up in stocks and home equity, consumer spending will be crunched, and personal debt and bancruptcies will rise like a tide. Businesses will retrench and unemployment will rise. No end in sight.

I hope I am wrong.

Aimless, Saturday, 20 October 2007 19:07 (twelve years ago) link

Anyone want to join my modern-day James Gang? We shall ride across the lower Midwest, robbing and pillaging.

milo z, Saturday, 20 October 2007 19:09 (twelve years ago) link

sounds fun

jhøshea, Saturday, 20 October 2007 19:13 (twelve years ago) link

Sorry, I don't want to relocate. But this scheme sounds ripe for franchising.

Aimless, Saturday, 20 October 2007 19:14 (twelve years ago) link

Oil will exceed $100/barrel some time this winter. The ever-weakening dollar will lead to smaller profit margins and rising retail prices on all imported goods (which means almost everything we buy in the USA). Transport costs will rise with pil prices. Stock prices will erode along with profits. With so many savings tied up in stocks and home equity, consumer spending will be crunched, and personal debt and bancruptcies will rise like a tide. Businesses will retrench and unemployment will rise. No end in sight.

I hope I am wrong.

-- Aimless, Saturday, 20 October 2007 19:07 (14 minutes ago) Link

The coming of $100/barrel oil is not Bush's fault. It's yours and mine and everyone else's for using too damned much energy. I agree Bush could and should have done a lot more with policy to encourage energy efficiency, but there's little he could have done to stop oil's eventual rise to that price level.

Hurting 2, Saturday, 20 October 2007 19:26 (twelve years ago) link

Part of the pricing of oil represents the weakness of the dollar. This hurts the USA more than it does other countries. US citizens are paid in dollars and the US government collects revenue in dollars, so they are stuck. EU countries can use euros to buy increasingly cheap dollars, so they don't see the same rise in prices as we do. The weakness of the dollar is mainly Bush's fault.

Aimless, Saturday, 20 October 2007 19:31 (twelve years ago) link

The US also uses way more oil than other countries.

Hurting 2, Saturday, 20 October 2007 19:33 (twelve years ago) link

he could have done to stop oil's eventual rise to that price level.
Not starting a war in Iraq would definitely have helped here.

stet, Saturday, 20 October 2007 19:57 (twelve years ago) link

arrgh, if that won't work then
http://calculatedrisk.blogspot.com/2007/10/imf-mortgage-reset-chart.html

El Tomboto, Monday, 22 October 2007 17:47 (twelve years ago) link

tombot u r freakin me out

gff, Monday, 22 October 2007 17:50 (twelve years ago) link

i hope my small apartment + modest savings plan + job in "information services" is enough to weather the shitstorm, if it comes. i got myself out of credit card debt a few months ago, at least

gff, Monday, 22 October 2007 17:53 (twelve years ago) link

well if you can hold down a job and don't have to worry about an ARM reset you should be okay, it's the homeowner with kids and a subprime loan and two cars who ought to be shitting themselves

El Tomboto, Monday, 22 October 2007 17:58 (twelve years ago) link

apart from some student loans and binging on credit cards over a few years, i'm kind of debt phobic.

which has actually made me lose out over the past several years, i realize, since i pay for EVERYTHING with a debit/check card... i could have just paid that balance on a credit card with some rewards scheme and has some air miles or something

gff, Monday, 22 October 2007 18:00 (twelve years ago) link

rolling gff personal finances into the shitbin thread, ha

gff, Monday, 22 October 2007 18:01 (twelve years ago) link

This will give you a boner Tombot

http://nymag.com/guides/money/2007/39952/

Dandy Don Weiner, Wednesday, 31 October 2007 11:30 (twelve years ago) link

the economy increased by 3.9% this quarter! bull market forever, baby. economy's better than ever. golden age.

yet me and so many people I know are getting laid off next month. granted we're all in the writing/design field, but urhhhhh. gggg.

burt_stanton, Wednesday, 31 October 2007 14:58 (twelve years ago) link

http://nymag.com/guides/money/2007/catastrophist071105_560.jpg
http://nymag.com/guides/money/2007/catastrophist071105_2_560.jpg

^^^ lol

most of that guy's scenario is not really news to regular bigpicture/CR readers I don't think. But #5, the "we don't pay attention" thing, yeah, well, evidently the awareness campaign is underway, but hell if the big players are paying attention.

He also leaves out the approaching demographic catastrophe as millions of inexperienced thirtysomethings and even some late-twenties kids are forced to move into arguably tougher jobs that the boomers have been holding for two decades. Beyond the social security and healthcare costs associated with mass retirement, I don't really know if this generation has the work ethic and definitely not the rolodex to just start filling in and not fuck up royally. too busy updating their linkedin pages.

El Tomboto, Wednesday, 31 October 2007 15:11 (twelve years ago) link

can someone explain what "being upside down on your mortgage" means, in plain English?

Tracer Hand, Wednesday, 31 October 2007 16:14 (twelve years ago) link

essentially, owing more than your home is worth.

Dandy Don Weiner, Wednesday, 31 October 2007 17:10 (twelve years ago) link

also Tombot I'm not going to blame this generation as much as I blame their parents.

Dandy Don Weiner, Wednesday, 31 October 2007 17:11 (twelve years ago) link

isn't that the way people buy homes? by paying for the privilege of a loan?

Tracer Hand, Wednesday, 31 October 2007 17:12 (twelve years ago) link

When you enter into a contract with a bank for a mortgage, both you and the bank assume that the property value will not plummet. The bank doesn't want you to default any more than you want to default. But if for whatever reason you need to sell your home, and you can't get what you owe on it, then you will owe the difference to the bank. And the bank knows that when that happens, you probably will not have enough assets to cover the difference.

Predatory-type loans (which seems like a nebulous description to me) typically compound the problem because they have higher transaction rates (points, etc.)

Dandy Don Weiner, Wednesday, 31 October 2007 17:17 (twelve years ago) link

oh certainly! well played baby boom letting healthcare slide for the 20 years you've owned the electorate

El Tomboto, Wednesday, 31 October 2007 17:18 (twelve years ago) link

yeah Tracer it's also called "negative equity"

El Tomboto, Wednesday, 31 October 2007 17:19 (twelve years ago) link

see that's why we need a change in consciousness. it doesn't need to be "radical," but it does need to be a revolution, as bernie said.

treeship., Monday, 11 May 2020 13:13 (two weeks ago) link

one thing about this description too -- and i am no economist -- but won't it destroy the tech monopolies too? their products depend on the american consumer.

treeship., Monday, 11 May 2020 13:17 (two weeks ago) link

I'm angry about it too to the point where I'm glad I'm already middle aged and don't plan to have kids.

(There's nothing wrong with having kids at any time, even in times of strife, but I just can't do it with my hyperanxious brain. the moment they became an adult, I'd be consumed with fear for how they'd make it)

genital giant (Neanderthal), Monday, 11 May 2020 13:18 (two weeks ago) link

i mean, there are always doomsday scenarios. that is flippant, but i think it's true. there is no reason the US can't get on a sane path. break up the banks, break up the tech giants, forgive student debt, raise the minimum wage to a living wage even for gig workers, make healthcare and education accessible, invest in green infrastructure—this isn't "free stuff" but a way to put the country on a path where people feel they have some opportunity and a stake in the health of the society.

treeship., Monday, 11 May 2020 13:29 (two weeks ago) link

the US is in a unique position in that it can, if it wants to, move heaven and earth to transform the society. greece, for instance, couldn't due to their limited means.

treeship., Monday, 11 May 2020 13:32 (two weeks ago) link

America was already becoming too poor a society to have functioning public goods, like healthcare or retirement for all. Coronavirus is going to seal that fate. America will be poor now — far too poor to ever really make the transition to having decent public goods.

what does this mean - should already poor countries give up on having anything better bc once you're "too poor a society" nothing can ever get better? we already don't have healthcare or retirement for all.

Mordy, Monday, 11 May 2020 14:31 (two weeks ago) link

i mean, there are always doomsday scenarios. that is flippant, but i think it's true. there is no reason the US can't get on a sane path. break up the banks, break up the tech giants, forgive student debt, raise the minimum wage to a living wage even for gig workers, make healthcare and education accessible, invest in green infrastructure—this isn't "free stuff" but a way to put the country on a path where people feel they have some opportunity and a stake in the health of the society.

― treeship., Monday, May 11, 2020 9:29 AM bookmarkflaglink

you're not wrong. we won gay marriage and a form of universal health care not even that long ago. we just need to be free of the grip of Republicans and Trump and also Libertarians and also a pandemic that is being subverted for political purposes.

genital giant (Neanderthal), Monday, 11 May 2020 14:33 (two weeks ago) link

the US will continue to be wealthier than many countries and someday in the future maybe 10 years from now coronavirus will be over and the depression will be over. we already know the US is willing to spend huge amounts of money to get the economy rolling again. making the case otherwise requires a much more sophisticated and evidenced argument than the author includes.

Mordy, Monday, 11 May 2020 14:34 (two weeks ago) link

yeah, i don't understand the fact that america was "too poor a society" for basic public services. that was never the reason we lacked free healthcare and college.

treeship., Monday, 11 May 2020 14:37 (two weeks ago) link

yeah. it's this devotion to meritocracy from some voters, asking classist questions like "what money do burger flippers/retail employees DESERVE", which really means "what level of comfort and quality of life do these peons deserve", often uttered not just by the haves, but also have-nots who are working equally menial jobs and making little money (ie, the temporary inconvenienced millionaire syndrome).

we focus on the 0.1% that refuse to work and assume all unemployed people are lazy people, all people on food stamps are eating Ruth's Chris quality meals, and all welfare recipients use drugs AND any recreational drug use means these are subhuman people who deserve no aid.

the mindset has to be eroded, which will be helped by millions of boomers dying, but also if these talking points aren't validated by the President and/or Majority Senators. but we're years away from any of this eroding.

genital giant (Neanderthal), Monday, 11 May 2020 14:42 (two weeks ago) link

80% of Americans lived paycheck to paycheck before Coronavirus. Who can afford to pay an extra 5% or 10% in taxes for decent social systems?

vs

the top 3 richest americans have more wealth than the bottom 50% of the country

porlockian solicitor (Karl Malone), Monday, 11 May 2020 14:42 (two weeks ago) link

it's impossible! there's nothing that can be done to fix it! and whatever you do, do NOT look over there at those three old guys

porlockian solicitor (Karl Malone), Monday, 11 May 2020 14:42 (two weeks ago) link

it's "funny", I was watching New Jack City yesterday and in 1991, it was talking about the deepening gulf between rich and poor and wage inequality, and I just screamed at the screen "OH, IF U ONLY KNEW!"

weirdly the tv answered me back with "SHUT UP BITCH", so I decided I needed sleep

genital giant (Neanderthal), Monday, 11 May 2020 14:43 (two weeks ago) link

it's not even about direct aid, it's about structuring the economy so people aren't ground into the dirt. that makes them better workers, better consumers, more likely to take risks and be entrepreneurial, and better citizens as they feel like they have a stake in american society.

treeship., Monday, 11 May 2020 14:49 (two weeks ago) link

a large middle class is just better

treeship., Monday, 11 May 2020 14:50 (two weeks ago) link

America will be poor now — far too poor to ever really make the transition to having decent public goods. Think of that full half of the American population who’s now not employed. How exactly are they going to afford the higher taxes it takes to have a European or Canadian style social contract? They struggled to before — and after Coronavirus, it’s going to be flatly impossible.

is this guy a Republican speechwriter? what taxes is he even talking about? Like, "taxes" aren't monolothic. There isn't just "one" type of tax, assessed in one way ... Maybe if he is talking about property taxes, which are often not contingent on the owner's income ... but then not everyone pays property taxes.

sarahell, Monday, 11 May 2020 16:39 (two weeks ago) link

yeah. my belief is that there is enough wealth in the economy to invest in a better future.

treeship., Monday, 11 May 2020 16:42 (two weeks ago) link

it's impossible! there's nothing that can be done to fix it! and whatever you do, do NOT look over there at those three old guys

― porlockian solicitor (Karl Malone), Monday, May 11, 2020 7:42 AM (one hour ago)

also DO NOT LOOK AT THE DEFENSE BUDGET; do not think about how much more the US spends on the military and weapons than countries that make sure people have housing and food and healthcare ... nope, don't do it, Bill, just don't! It's the fucking destroyed statue of liberty out there in the forbidden zone

sarahell, Monday, 11 May 2020 16:42 (two weeks ago) link

i'm not an economist but you don't have to be. it's not like we made a good-faith effort at securing "decent public goods" and failed due to lack of money. we've never acquired the political power to really enact this stuff.

treeship., Monday, 11 May 2020 16:44 (two weeks ago) link

you're not wrong. we won gay marriage and a form of universal health care not even that long ago. we just need to be free of the grip of Republicans and Trump and also Libertarians and also a pandemic that is being subverted for political purposes.

Notable that gay rights/marriage was the one thing that didn't challenge the economic status quo and Obamacare is a permanent subsidy for all the interests that make healthcare awful.

Better things are going to require way more than breaking "free of the grip of Republicans [etc.]."

Greta Van Show Feets BB (milo z), Monday, 11 May 2020 19:52 (two weeks ago) link

The real death grip is the plutocracy.

A is for (Aimless), Monday, 11 May 2020 19:54 (two weeks ago) link

gay rights/marriage was the one thing that didn't challenge the economic status quo

Gay marriage is a net economic plus.

but also fuck you (unperson), Monday, 11 May 2020 20:07 (two weeks ago) link

I think this is a good thing?

https://www.engadget.com/tsmc-12-billion-chip-plant-arizona-083518143.html

DJI, Friday, 15 May 2020 16:45 (one week ago) link

Do economists not know how much things cost pic.twitter.com/dMdSoaL3tA

— Keezy Young 🌸👻 (a ghost) (@KeezyBees) May 17, 2020

𝔠𝔞𝔢𝔨 (caek), Sunday, 17 May 2020 17:49 (one week ago) link

it's one banana michael

silby, Sunday, 17 May 2020 18:04 (one week ago) link

(of course that was in the twitter replies, my referential humor is so feeble!)

silby, Sunday, 17 May 2020 18:05 (one week ago) link

"might not have a reason to buy a new car with fewer places to visit"

uh huh uh huh, tell me more

Fuck the NRA (ulysses), Sunday, 17 May 2020 18:12 (one week ago) link

I'm close to paying mine off (for the first time in my life, I'll have a pink slip", and I hope to not buy another one for 27 years

I am a free. I am not man. A number. (Neanderthal), Sunday, 17 May 2020 18:31 (one week ago) link

In case you’ve been wondering “I wonder what fucked up shit lurking under the surface is going to be brought up by this crisis” here’s a good candidate.

https://www.propublica.org/article/whistleblower-wall-street-has-engaged-in-widespread-manipulation-of-mortgage-funds

longtime caller, first time listener (man alive), Sunday, 17 May 2020 20:11 (one week ago) link

ProPublica closely examined six loans that were part of CMBS in recent years to see if their data resembles the pattern described by the whistleblower. What we found matched the allegations: The historical profits reported for some buildings were listed as much as 30% higher than the profits previously reported for the same buildings and same years when the property was part of an earlier CMBS. As a rough analogy, imagine a homeowner having stated in a mortgage application that his 2017 income was $100,000 only to claim during a later refinancing that his 2017 income was $130,000 — without acknowledging or explaining the change.

Is this the right analogy though? Wouldn't it be more like inflating the property value of the house by saying it was purchased for more than it actually was? Or are these loans not made based on LTV but other criteria? idk

sarahell, Monday, 18 May 2020 04:29 (one week ago) link

I think commercial mortgages are a lot more tied to the amount of income a property is supposed to produce rather than a static "value."

longtime caller, first time listener (man alive), Monday, 18 May 2020 04:31 (one week ago) link

In the case of a commercial mortgage, the lender is willing to lend based on whether the property produces enough income to service the mortgage. In a residential mortgage, the lender is willing to lend based on whether the owner earns enough income to service the mortgage. In both cases the question is whether the mortgage can be paid, not what the property is "worth."

longtime caller, first time listener (man alive), Monday, 18 May 2020 04:33 (one week ago) link

In the case of a commercial mortgage, the lender is willing to lend based on whether the property produces enough income to service the mortgage

yeah, and that income (or projected income if the property is "underutilized") is what comprises the "value" right? It's investment property. It's value -- what it's worth -- is how much income it can generate (also factoring in expenses and other debt), yeah? Like isn't it the standard thing that a commercial lender won't do more than 80% of the "value" of the property? ...value doesn't equal "assessed value" of the building, as opposed to a residential loan which is based both on the assessed value of the building (e.g. the underwater issue) AND the borrower's ability to pay.

sarahell, Monday, 18 May 2020 04:42 (one week ago) link

a lender for a residential mortgage generally isn't going to loan the borrower more than they believe the house can be re-sold for, because the house is the collateral securing the loan.

sarahell, Monday, 18 May 2020 04:59 (one week ago) link

Yeah, the "value" of commercial property is basically the present value of the future cash flows as I understand it.

longtime caller, first time listener (man alive), Monday, 18 May 2020 05:03 (one week ago) link

yeah ... I like a lot of propublica's coverage, but it has a tendency to oversimplify and/or make not-so-good analogies to explain things to readers (which, some of these topics are complex, and it is really good that they are covering them in an accessible way). I think there was an article a few weeks back about taxes/tax policy (something like that) that was like 90% right, but 10% misleading/inaccurate but I don't recall the exact article.

eh ... i might be being too negative ... maybe it was more like 95% right/5% misleading/inaccurate

sarahell, Monday, 18 May 2020 05:19 (one week ago) link

Not sure I understand what the problem is with the analogy

longtime caller, first time listener (man alive), Monday, 18 May 2020 06:30 (one week ago) link

the analogy equates the income value of the commercial property with the income of the homeowner -- which is fine, if you are looking at it from an "ability to repay" standpoint, but the income value of the commercial property determines the maximum loan value (regardless of the borrower's ability to repay / their credit / etc), which is more accurately equated with the assessed value of the house -- the underlying property that secures the loan.

sarahell, Monday, 18 May 2020 07:18 (one week ago) link

the subprime crisis was partly loans being made to people who couldn't afford them, but also partly the overinflated values of the properties because of the lax lending standards, such that the actual re-sale value of the houses securing the loans wasn't nearly enough to pay off the outstanding debt -- it's like student loans and college tuitions which are partly so high because it is easy to get loans for that much. If they regulated student loans like they did residential mortgage loans (well, like since 2008), tuitions would not be/have gotten that high.

sarahell, Monday, 18 May 2020 07:22 (one week ago) link

the analogy is about lying, not the underlying value of assets

Greta Van Show Feets BB (milo z), Monday, 18 May 2020 07:41 (one week ago) link

the distinction isn't meaningful from the perspective of commercial properties, which is what the argument is about The value of the property and its income-producing ability are one and the same.

longtime caller, first time listener (man alive), Monday, 18 May 2020 15:17 (one week ago) link

The distinction is meaningful wrt a residential property because you could have a loan secured by a correctly valued property and a buyer who lied about his income, meaning that the buyer can't pay but the bank still has sufficient collateral.

In a commercial mortgage, the only value the property has is as income-producing property, so if the income is overstated the value is per se overstated. People buy houses to live in. People only buy commercial properties for income. Therefore the analogy to overstating a residential buyer's income is more apt.

longtime caller, first time listener (man alive), Monday, 18 May 2020 15:20 (one week ago) link

People only buy commercial properties for income.

nope -- there are people who buy commercial property to live in (this is something i deal with on a daily basis for work); there are people who buy commercial property to run their business(es) out of -- active vs passive income. Different things are required on the loan docs

sarahell, Monday, 18 May 2020 17:16 (one week ago) link

In a commercial mortgage, the only value the property has is as income-producing property, so if the income is overstated the value is per se overstated. People buy houses to live in. People only buy commercial properties for income. Therefore the analogy to overstating a residential buyer's income is more apt.

I get that, but, I would argue that overstating the income (bu under-reporting expenses) is closer to not disclosing some physical flaw in the house or misrepresenting the size of the lot -- as in, "Yes, this house is worth $600k but it needs a new sewer lateral and foundation that will cost $50k, but we hid that fact from people."

sarahell, Monday, 18 May 2020 17:24 (one week ago) link

ugh -- typos -- (by under-reporting expenses) like, the house is only worth $550k because in order to get that $600k value, you would have to spend $50k on foundation work and the new sewer lateral.

sarahell, Monday, 18 May 2020 17:27 (one week ago) link

I think this is kind of point-missing. These are commercial mortgages that get bundled and sold as mortgage-backed securities. Mortgage backed securities provide a stream of payments. The ability to provide that stream of payments depends on the ability of the property owners to service the mortages, which in turn depends (in nearly all cases) on income produced by the properties. No one buys a mortgage backed security with the hope that the underlying properties will be foreclosed. In the same sense, RMBS are also a stream of payments based on the ability of the property owners to pay, except from their own income instead of income from the property. So in that sense it is a very good analogy. Using the underlying asset value instead would make no sense. The point is that the payment generation ability of the property in each case is overstated.

longtime caller, first time listener (man alive), Monday, 18 May 2020 17:31 (one week ago) link

Using the underlying asset value instead would make no sense. The point is that the payment generation ability of the property in each case is overstated.

I can see that, if you are only looking at it from the perspective of the CMBS investor, which is ostensibly what the article is about, though the issue of fraud in commercial mortgage lending is also discussed quite a bit in the article, and is perhaps more interesting/relevant to a general audience, and the underlying asset value definitely plays a part in that. Also, comparing it to more regulated disclosures and valuations of residential properties w/r/t underwriting.

sarahell, Monday, 18 May 2020 17:47 (one week ago) link

That is 100% what the article is about, and it is 100% relevant to a general audience, because this is the commercial mortgage equivalent of what caused the last financial crisis. That's the whole point.

longtime caller, first time listener (man alive), Tuesday, 19 May 2020 03:16 (six days ago) link

the resale value of the properties was a secondary consideration at best in the subprime crisis -- mass foreclosures are bad news for banks even if they get collateral of value.

longtime caller, first time listener (man alive), Tuesday, 19 May 2020 03:34 (six days ago) link

I wasn't saying that it wasn't relevant. I was saying, in addition to the parallels with the subprime crisis, it also reveals a disparity in regulation and valuation of real estate owned by more affluent/powerful people/business interests vs. low and middle income individuals, which is also relevant, and the article talks about as well.

sarahell, Tuesday, 19 May 2020 15:02 (six days ago) link


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